10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___to ___

Commission File Number: 001-16295

ENCORE ACQUISITION COMPANY

(Exact name of registrant as specified in its charter)

Delaware	75-2759650
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

777 Main Street, Suite 1400, Fort Worth, Texas	76102
(Address of principal executive offices)	(Zip Code)

(817) 877-9955
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ            Accelerated filer o            Non-accelerated filer o

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

Number of shares of common stock, $0.01 par value, outstanding as of August 1, 2007 53,186,851

ENCORE ACQUISITION COMPANY

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006		1
Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006		2
Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2007		3
Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006		4
Notes to Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
Item 4. Controls and Procedures		40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		41
Item 1A. Risk Factors		41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 4. Submission of Matters to a Vote of Security Holders		41
Item 6. Exhibits		42
Signature		43
First Amended and Restated Agreement of Limited Partnership
Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership
Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
Section 1350 Certification (Principal Executive Officer)
Section 1350 Certification (Principal Financial Officer)
Statement Showing Computation of Ratios of Earnings to Fixed Charges

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     Certain information included in this Quarterly Report on Form 10-Q (the “Report”) and other materials filed with the Securities and Exchange Commission (“SEC”), or in other written or oral statements made or to be made by us, other than statements of historical fact, are forward-looking statements as defined by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements give our current expectations or forecasts of future events. You can identify our forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” and other words and terms of similar meaning. Our actual results may differ significantly from the results discussed in the forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, the matters discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 and in our other filings with the SEC. If one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. We undertake no responsibility to update forward-looking statements for changes related to these or any other factors that may occur subsequent to this filing for any reason.

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ENCORE ACQUISITION COMPANY

GLOSSARY OF CERTAIN TERMS

     The following are abbreviations and definitions of certain terms used in this Report:

• Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.

• Bbl/D. One Bbl per day.

• BOE. One barrel of oil equivalent, calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil.

• BOE/D. One BOE per day.

• Encore or the Company. Encore Acquisition Company, a Delaware corporation, together with its subsidiaries.

• Gross Wells. The total number of wells in which we own a working interest.

• High-Pressure Air Injection (“HPAI”). HPAI involves utilizing compressors to force air under high pressure into previously produced oil and natural gas formations in order to displace remaining resident hydrocarbons and force them under pressure to a common lifting point for production.

• LIBOR. London Interbank Offered Rate.

• MBbls. One thousand Bbls.

• Mcf. One thousand cubic feet of natural gas.

• Mcf/D. One Mcf per day.

• Net Wells. Gross wells multiplied by the percentage of the working interest owned by us.

• NYMEX. New York Mercantile Exchange.

• Proved Developed Reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.

• Proved Reserves. The estimated quantities of oil, natural gas, and natural gas liquids that geological and engineering data demonstrate with reasonable certainty are recoverable in future years from known reservoirs under existing economic and operating conditions.

See the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 for definitions of additional terms that may be used in this Report.

ii

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENCORE ACQUISITION COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	June 30,			December 31,
	2007			2006
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,938		$	763
Accounts receivable		114,770			81,470
Inventory		21,235			18,170
Derivatives		19,552			17,349
Deferred taxes		18,713			24,978
Prepaid expenses		5,272			2,988
Assets held for sale		3,205			—
Total current assets		187,685			145,718
Properties and equipment, at cost — successful efforts method:
Proved properties, including wells and related equipment		2,636,785			2,033,914
Unproved properties		51,482			47,548
Accumulated depletion, depreciation, and amortization		(394,367	)		(364,780	)
		2,293,900			1,716,682
Other property and equipment		19,772			18,231
Accumulated depreciation		(9,065	)		(7,791	)
		10,707			10,440
Goodwill		60,606			60,606
Derivatives		29,078			40,715
Long-term receivables		44,748			19,642
Other		34,672			13,097
Total assets	$	2,661,396		$	2,006,900
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	30,812		$	18,204
Accrued liabilities:
Lease operations expense		12,675			8,582
Development capital		36,833			44,492
Interest		14,435			11,273
Production, ad valorem, and severance taxes		19,400			10,915
Oil purchases		6,493			11,191
Derivatives		53,220			60,448
Other		24,142			21,358
Total current liabilities		198,010			186,463
Derivatives		28,741			38,688
Future abandonment cost		27,758			19,205
Deferred taxes		278,823			282,825
Long-term debt		1,300,962			661,696
Other		1,290			1,158
Total liabilities		1,835,584			1,190,035
Commitments and contingencies (see Note 14)
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $.01 par value, 144,000,000 shares authorized, 53,186,851 and 53,028,866 issued and outstanding, respectively		532			531
Additional paid-in capital		464,246			457,201
Treasury stock, at cost, of 21,288 and 17,809 shares, respectively		(546	)		(457	)
Retained earnings		380,353			394,917
Accumulated other comprehensive loss		(18,773	)		(35,327	)
Total stockholders’ equity		825,812			816,865
Total liabilities and stockholders’ equity	$	2,661,396		$	2,006,900

The accompanying notes are an integral part of these consolidated financial statements.

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ENCORE ACQUISITION COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenues:
Oil	$	135,596		$	92,434		$	218,219		$	168,549
Natural gas		45,131			39,343			78,109			76,873
Marketing		8,916			25,716			23,857			60,032
Total revenues		189,643			157,493			320,185			305,454
Expenses:
Production:
Lease operations		37,552			23,118			68,072			45,854
Production, ad valorem, and severance taxes		19,232			12,580			31,747			24,822
Depletion, depreciation, and amortization		52,318			27,988			87,346			55,008
Exploration		3,415			4,016			14,936			6,025
General and administrative		6,188			5,421			13,548			11,949
Marketing		8,507			24,914			23,518			57,660
Derivative fair value loss		6,766			10,794			52,380			13,100
Other operating		4,751			1,068			7,316			2,596
Total expenses		138,729			109,899			298,863			217,014
Operating income		50,914			47,594			21,322			88,440
Other income (expenses):
Interest		(27,820	)		(10,718	)		(44,107	)		(22,505	)
Other		601			428			1,032			549
Total other income (expenses)		(27,219	)		(10,290	)		(43,075	)		(21,956	)
Income (loss) before income taxes		23,695			37,304			(21,753	)		66,484
Income tax benefit (provision)		(8,524	)		(15,069	)		7,496			(26,313	)
Net income (loss)	$	15,171		$	22,235		$	(14,257	)	$	40,171
Net income (loss) per common share:
Basic	$	0.29		$	0.42		$	(0.27	)	$	0.79
Diluted	$	0.28		$	0.42		$	(0.27	)	$	0.78
Weighted average common shares outstanding:
Basic		53,143			52,631			53,111			50,724
Diluted		54,020			53,532			53,111			51,663

The accompanying notes are an integral part of these consolidated financial statements.

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ENCORE ACQUISITION COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Issued																	Accumulated
	Shares of					Additional			Shares of									Other			Total
	Common			Common		Paid-in			Treasury			Treasury			Retained			Comprehensive			Stockholders’
	Stock			Stock		Capital			Stock			Stock			Earnings			Loss			Equity
Balance at December 31, 2006		53,047		$	531	$	457,201			(18	)	$	(457	)	$	394,917		$	(35,327	)	$	816,865
Exercise of stock options and vesting of restricted stock		179			1		1,042			—			—			—			—			1,043
Purchase of treasury stock		—			—		—			(21	)		(546	)		—			—			(546	)
Cancellation of treasury stock		(18	)		—		(150	)		18			457			(307	)		—			—
Non-cash stock-based compensation		—			—		6,153			—			—			—			—			6,153
Components of comprehensive income:
Net loss		—			—		—			—			—			(14,257	)		—			(14,257	)
Amortization of deferred hedge losses, net of tax of $10,240		—			—		—			—			—			—			16,554			16,554
Total comprehensive income																						2,297
Balance at June 30, 2007		53,208		$	532	$	464,246			(21	)	$	(546	)	$	380,353		$	(18,773	)	$	825,812

The accompanying notes are an integral part of these consolidated financial statements.

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ENCORE ACQUISITION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six months ended
	June 30,
	2007			2006
Cash flows from operating activities:
Net income (loss)	$	(14,257	)	$	40,171
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation, and amortization		87,346			55,008
Non-cash exploration expense		13,870			2,580
Deferred taxes		(7,745	)		25,211
Non-cash stock-based compensation expense		5,480			4,853
Non-cash derivative		65,038			19,099
Loss on disposition of assets		2,282			472
Other		2,589			2,954
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		(42,735	)		2,205
Current derivatives		(15,303	)		—
Other current assets		(8,554	)		(5,464	)
Long-term derivatives		(19,828	)		(2,840	)
Other assets		(2,200	)		(2,019	)
Accounts payable		4,468			(1,428	)
Other current liabilities		11,127			(2,067	)
Other noncurrent liabilities		(253	)		(7,259	)
Net cash provided by operating activities		81,325			131,476
Cash flows from investing activities:
Proceeds from disposition of assets		291,454			536
Purchases of other property and equipment		(1,614	)		(2,515	)
Acquisition of oil and natural gas properties		(779,576	)		(15,917	)
Development of oil and natural gas properties		(187,227	)		(146,959	)
Net advances to working interest partners		(24,158	)		(1,178	)
Other		—			(342	)
Net cash used in investing activities		(701,121	)		(166,375	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs		—			126,890
Exercise of stock options and vesting of restricted stock, net of treasury stock purchases		497			2,822
Proceeds from long-term debt		1,131,500			104,000
Payments on long-term debt		(492,500	)		(184,000	)
Debt issuance costs		(11,481	)		(200	)
Change in cash overdrafts		8,140			(15,606	)
Payment of deferred hedge premiums		(12,185	)		—
Other		—			2
Net cash provided by financing activities		623,971			33,908
Increase (decrease) in cash and cash equivalents		4,175			(991	)
Cash and cash equivalents, beginning of period		763			1,654
Cash and cash equivalents, end of period	$	4,938		$	663

The accompanying notes are an integral part of these consolidated financial statements.

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ENCORE ACQUISITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. About Encore

     Encore is engaged in the acquisition and development of oil and natural gas reserves from onshore fields in the United States. Since 1998, the Company has acquired producing properties with proven reserves and leasehold acreage and grown the production and proven reserves by drilling, exploring, reengineering or expanding existing waterflood projects, and applying tertiary recovery techniques. Encore’s properties – and oil and natural gas reserves – are located in four core areas: the Cedar Creek Anticline (“CCA”) in the Williston Basin of Montana and North Dakota; the Permian Basin of West Texas and southeastern New Mexico; the Rockies, which includes non-CCA assets in the Williston, Big Horn, and Powder River Basins of Wyoming, Montana, and North Dakota and the Paradox Basin of southeastern Utah; and the Mid-Continent area, which includes the Arkoma and Anadarko Basins of Oklahoma, the North Louisiana Salt Basin, the East Texas Basin, and the Barnett Shale of northern Texas.

Note 2. Basis of Presentation

     The Company’s consolidated financial statements include the accounts of wholly-owned and majority-owned subsidiaries and a variable interest entity for which the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated in consolidation.

     In the opinion of management, the accompanying unaudited consolidated financial statements of Encore include all adjustments necessary to present fairly, in all material respects, its financial position as of June 30, 2007, results of operations for the three and six months ended June 30, 2007 and 2006, and cash flows for the six months ended June 30, 2007 and 2006. All adjustments are of a normal recurring nature. These interim results are not necessarily indicative of results for an entire year.

     Certain amounts and disclosures have been condensed or omitted from these consolidated financial statements pursuant to the rules and regulations of the SEC. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s 2006 Annual Report on Form 10-K.

Variable Interest Entity

     On April 11, 2007, the Company completed the purchase of certain oil and natural gas properties and related assets in the Williston Basin of Montana and North Dakota from certain subsidiaries of Anadarko Petroleum Corporation (“Anadarko”). Prior to closing, Encore assigned all of its rights and duties under the purchase and sale agreement to Encore Operating, L.P., a Texas limited partnership and indirect wholly-owned guarantor subsidiary of Encore, which further assigned all of its rights and duties under the purchase and sale agreement to Encore Exchange, LLC, a Delaware limited liability company unaffiliated with Encore or Encore Operating, L.P. (“Encore Exchange”).

     The Williston Basin acquisition was structured to qualify as the first step of a reverse like-kind exchange under Section 1031 of the Internal Revenue Code of 1986, as amended, and I.R.S. Revenue Procedure 2000-37. The Williston Basin assets were acquired by Encore Exchange as an “exchange accommodation titleholder”. Encore Exchange held the assets pursuant to a qualified exchange accommodation agreement until the second step of the like-kind exchange was completed. During the period the assets were held by Encore Exchange, Encore Operating, L.P. operated the Williston Basin assets pursuant to a management agreement with Encore Exchange. The second step of the like-kind exchange was completed in July 2007 upon the completion of the disposition of certain of Encore’s Mid-Continent properties. See “Note 3. Acquisitions and Dispositions” for additional discussion of the disposition of the Mid-Continent properties.

     In connection with the like-kind exchange described above, Encore (through Encore Operating, L.P.) loaned an amount equal to the purchase price to Encore Exchange. Based on the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities”, the Company determined that Encore Exchange is a variable interest entity for which Encore is the primary beneficiary. Accordingly, Encore Exchange has been consolidated with Encore since April 11, 2007. As of June 30, 2007, Encore Exchange had total assets of approximately $5.4 million. Subsequent to June 30, 2007, these assets were sold and the like-kind exchange completed. Encore Exchange is currently in the process of being dissolved.

Reclassifications

     Certain amounts in prior periods have been reclassified to conform to the current period presentation. Specifically, the

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ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

Company reclassified the net gain/loss from the purchases and sales of third-party oil volumes from “Oil revenues” to “Marketing revenues” and “Marketing expense” and reclassified the related marketing transportation costs from “Other operating expense” to “Marketing expense” in the accompanying Consolidated Statements of Operations. These are changes in presentation only and do not affect previously reported net income or earnings per share for either period. The following table details the affected line items from the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2006:

	Three months ended		Six months ended
	June 30, 2006		June 30, 2006
	(in thousands)
As Reported:
Oil revenues	$	94,128	$	172,814
Marketing revenues	$	—	$	—
Marketing expenses	$	—	$	—
Other operating expenses	$	1,960	$	4,489
As Reclassified:
Oil revenues	$	92,434	$	168,549
Marketing revenues	$	25,716	$	60,032
Marketing expenses	$	24,914	$	57,660
Other operating expenses	$	1,068	$	2,596

New Accounting Pronouncements

Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”)

     In September 2006, the FASB issued SFAS 157. SFAS 157 standardizes the definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures related to the use of fair value measures in financial statements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Encore does not expect the implementation of SFAS 157 to have a material impact on its results of operations or financial condition.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS 159”)

     In February 2007, the FASB issued SFAS 159. SFAS 159 permits entities to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis. This statement allows entities to measure eligible items at fair value at specified election dates, with resulting changes in fair value reported in earnings. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Encore does not expect the implementation of SFAS 159 to have a material impact on its results of operations or financial condition.

FASB Staff Position (“FSP”) on FASB Interpretation (“FIN”) 39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN 39-1”)

     In April 2007, the FASB issued FSP FIN 39-1. FSP FIN 39-1 amends FIN 39, “Offsetting of Amounts Related to Certain Contracts” (“FIN 39”), to permit a reporting entity that is party to a master netting arrangement to offset the fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with FIN 39. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007. Encore does not expect the implementation of FSP FIN 39-1 to have a material impact on its results of operations or financial condition.

FSP FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP FIN 48-1”)

     In May 2007, the FASB issued FSP FIN 48-1, which amends FIN No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”), to provide guidance on how an entity should determine whether a tax

6

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 clarifies that a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits if the taxing authority has completed all of its required or expected examination procedures, the enterprise does not intend to appeal or litigate any aspect of the tax position, and it is considered remote that the taxing authority would reexamine the tax position. This guidance is effective upon initial adoption of FIN 48, which was adopted by Encore on January 1, 2007. Encore retrospectively adopted the provisions of FSP FIN 48-1 effective January 1, 2007, which did not have an impact on its results of operations or financial condition.

Note 3. Acquisitions and Dispositions

Acquisitions

     On January 23, 2007, the Company entered into a purchase and sale agreement with certain subsidiaries of Anadarko to acquire oil and natural gas properties and related assets in the Williston Basin of Montana and North Dakota. The closing of the Williston Basin acquisition occurred on April 11, 2007 after which time the operations have been included with those of the Company.

     The total purchase price for the Williston Basin assets was approximately $393.7 million, including transaction costs of $1.2 million. Based on currently available information, the calculation of the total purchase price and the estimated allocation to the fair value of the Williston Basin assets acquired and liabilities assumed from Anadarko are as follows as of June 30, 2007 (in thousands):

Calculation of total purchase price:
Cash paid to Anadarko	$	392,467
Estimated transaction costs		1,200
Total purchase price	$	393,667
Allocation of purchase price to the fair value of net assets acquired:
Proved properties, including wells and related equipment	$	379,956
Unproved properties		16,134
Other		4,178
Total assets acquired		400,268
Current liabilities		(3,095	)
Future abandonment cost		(3,506	)
Total liabilities assumed		(6,601	)
Fair value of net assets acquired	$	393,667

     At June 30, 2007, the Company was awaiting final post close on the Williston Basin acquisition, which will contain certain customary purchase price adjustments.

     On January 16, 2007, the Company entered into a purchase and sale agreement with certain subsidiaries of Anadarko to acquire oil and natural gas properties and related assets in the Big Horn Basin of Wyoming and Montana, which included oil and natural gas properties and related assets in or near the Elk Basin field in Park County, Wyoming and Carbon County, Montana and oil and natural gas properties and related assets in the Gooseberry field in Park County, Wyoming. The closing of the Big Horn Basin acquisition occurred on March 7, 2007 after which time the operations have been included with those of the Company. Prior to closing, Encore assigned the rights and duties under the purchase and sale agreement relating to the Elk Basin assets to Encore Energy Partners Operating LLC (“EEPO”), a Delaware limited liability company and indirect wholly-owned non-guarantor subsidiary of Encore, and the rights and duties under the purchase and sale agreement relating to the Gooseberry assets to Encore Operating, L.P. At closing, EEPO paid the sellers approximately $328.4 million for the Elk Basin assets, and Encore Operating, L.P. paid the sellers approximately $63.7 million for the Gooseberry assets.

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ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

     The total purchase price for the Big Horn Basin assets was approximately $393.3 million, including transaction costs of approximately $1.2 million. Based on currently available information, the calculation of the total purchase price and the estimated allocation to the fair value of the Big Horn Basin assets acquired and liabilities assumed from Anadarko are as follows as of June 30, 2007 (in thousands):

Calculation of total purchase price:
Cash paid to Anadarko	$	392,085
Estimated transaction costs		1,200
Total purchase price	$	393,285
Allocation of purchase price to the fair value of net assets acquired:
Proved properties, including wells and related equipment	$	392,375
Intangibles		7,656
Other		2,524
Total assets acquired		402,555
Current liabilities		(2,297	)
Future abandonment cost		(6,973	)
Total liabilities assumed		(9,270	)
Fair value of net assets acquired	$	393,285

     At June 30, 2007, the Company was awaiting final post close on the Big Horn Basin acquisition, which will contain certain customary purchase price adjustments. The properties and equipment amount in the Big Horn Basin purchase price allocation includes the fair value of proved leasehold costs, lease and well equipment (including flue gas reinjection facilities used to maintain reservoir pressure by compressing and reinjecting the natural gas produced), and an oil pipeline and natural gas pipeline used primarily to transport production from the acquired fields. NGLs are produced as a byproduct of the flue gas tertiary recovery project and are sold at market prices. The revenues generated by these hydrocarbon liquids are included in “Oil revenues” in the accompanying Consolidated Statements of Operations. Third party revenues and expenses related to the pipelines are included in “Marketing revenues” and “Marketing expense”, respectively, in the accompanying Consolidated Statements of Operations.

     Encore financed the Big Horn Basin and Williston Basin acquisitions through borrowings under its revolving credit facilities. The operating results related to the Big Horn Basin and Williston Basin assets are included in Encore’s operating results from the date of closing forward. As of December 31, 2006, estimated total proved reserves associated with the Big Horn Basin and Williston Basin acquisitions were 38,934 MBOE, 92 percent of which were oil and 90 percent of which were proved developed.

     See “Note 8. Debt” for additional discussion of the Company’s revolving credit facilities. See “Note 13. Financial Statements of Subsidiary Guarantors” below for a discussion of the Company’s guarantor and non-guarantor subsidiaries.

Dispositions

     On June 29, 2007, the Company completed the sale of certain oil and natural gas properties in the Mid-Continent for net proceeds of approximately $293.6 million and recorded a loss on sale of $2.3 million. The disposed properties included certain properties in the Anadarko and Arkoma fields. The Company retained a material oil and natural gas interest in the Anadarko and Arkoma fields and remains active in those areas. Subsequent to June 30, 2007, additional Mid-Continent properties that were subject to exercises of preferential rights were sold for net cash proceeds of $5.5 million. Assets held for sale related to these properties were $3.2 million as of June 30, 2007. Proceeds from the Mid-Continent disposition were used to reduce outstanding borrowings under the Company’s revolving credit facilities. As of December 31, 2006, estimated total proved reserves associated with the Mid-Continent disposition were 17,416 MBOE, 92 percent of which were natural gas and 75 percent of which were proved developed.

Pro Forma

     The following unaudited pro forma combined condensed financial data for the three and six months ended June 30, 2007 and 2006 was derived from the historical financial statements of Encore and from the accounting records of Anadarko to give

8

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

effect to the Big Horn Basin and Williston Basin asset acquisitions and the Mid-Continent disposition as if they had occurred on January 1, 2006. The unaudited pro forma combined condensed financial information has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the Big Horn and Williston acquisitions and the Mid-Continent disposition taken place as of the dates indicated and are not intended to be a projection of future results.

	Three months ended				Six months ended
	June 30,				June 30,
	2007		2006		2007			2006
	(in thousands, except per share amounts)
Pro forma total revenues	$	172,186	$	198,204	$	327,763		$	376,068
Pro forma net income (loss)	$	15,079	$	24,484	$	(10,824	)	$	42,447
Pro forma net income (loss) per common share:
Basic	$	0.28	$	0.47	$	(0.20	)	$	0.84
Diluted	$	0.28	$	0.46	$	(0.20	)	$	0.82

Note 4. Inventory

     Inventory is comprised principally of materials and supplies and oil in pipelines, which are stated at the lower of cost (determined on an average basis) or market. Oil produced at the lease which resides unsold in pipelines is carried at an amount equal to its operating costs to produce. Oil in pipelines purchased from third parties is carried at average purchase price. The Company’s inventory consisted of the following as of the dates indicated:

	June 30,		December 31,
	2007		2006
	(in thousands)
Materials and supplies	$	12,738	$	11,784
Oil in pipelines		8,497		6,386
Total inventory	$	21,235	$	18,170

Note 5. Proved Properties

     Amounts shown in the accompanying Consolidated Balance Sheets as “Proved properties” include leasehold costs and wells and related equipment, both completed and in process, and consisted of the following as of the dates indicated:

	June 30,		December 31,
	2007		2006
	(in thousands)
Proved leasehold costs	$	1,298,310	$	796,932
Wells and related equipment — Completed		1,305,869		1,200,938
Wells and related equipment — In process		32,606		36,044
Total proved properties	$	2,636,785	$	2,033,914

Note 6. Derivative Financial Instruments

     The Company had $50.4 million of deferred premiums payable recorded at June 30, 2007, of which $22.8 million is considered long-term and is recorded in “Derivatives” in the non-current liabilities section of the accompanying Consolidated Balance Sheet and $27.6 million is considered current and is recorded in “Derivatives” in the current liabilities section of the accompanying Consolidated Balance Sheet. The premiums relate to various oil and natural gas floor contracts and are payable on a monthly basis from July 2007 to January 2010. The Company recorded these amounts at their net present value at the time the contract was entered into and accretes that value up to the eventual settlement price by recording interest expense each period.

9

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

Commodity Contracts – Mark-to-Market Accounting: Previously designated as hedges

     Prior to July 2006, the Company used hedge accounting for certain of its derivative contracts, whereby the effective portion of changes in the fair value of the contract was deferred in accumulated other comprehensive loss (“AOCL”) included in stockholders’ equity in the accompanying Consolidated Balance Sheets rather than recognized in earnings. In the third quarter of 2006, the Company elected to discontinue hedge accounting prospectively for all remaining commodity derivatives which were previously accounted for as hedges. While this change has no effect on cash flows, results of operations are affected by mark-to-market gains and losses, which fluctuate with the swings in oil and natural gas prices. The deferred loss in AOCL at the time of dedesignation is being amortized to oil and natural gas revenues over the original term of the contracts. The amortization of these amounts is included in oil and natural gas revenues with the revenues from the hedged production. All mark-to-market gains and losses from July 2006 forward are recognized in earnings through “Derivative fair value loss” in the accompanying Consolidated Statements of Operations rather than deferring such amounts in AOCL.

     The following tables summarize the Company’s open commodity derivative instruments as of June 30, 2007:

Oil Derivative Instruments

	Daily		Average		Daily			Average		Daily		Average		Asset (Liability)
	Floor		Floor		Short Floor			Short Floor		Swap		Swap		Fair Market
Period	Volume		Price		Volume			Price		Volume		Price		Value
	(Bbl)		(per Bbl)		(Bbl)			(per Bbl)		(Bbl)		(per Bbl)		(in thousands)
July — Dec. 2007		14,500	$	56.72		—		$	—		3,000	$	36.75	$	(17,410	)
Jan. — June 2008		18,500		62.84		(4,000	)		50.00		1,000		58.59		7,571
July — Dec. 2008		14,500		63.62		(4,000	)		50.00		—		—		10,403
Jan. — Dec. 2009		6,000		68.83		(5,000	)		50.00		1,000		68.70		9,691
														$	10,255

Natural Gas Derivative Instruments

	Daily		Average		Daily		Average		Daily		Average		Asset
	Floor		Floor		Cap		Cap		Swap		Swap		Fair Market
Period	Volume		Price		Volume		Price		Volume		Price		Value
	(Mcf)		(per Mcf)		(Mcf)		(per Mcf)		(Mcf)		(per Mcf)		(in thousands)
July — Dec. 2007		36,500	$	6.85		2,000	$	9.85		10,000	$	4.99	$	1,782
Jan. — Dec. 2008		24,000		6.58		2,000		9.85		—		—		4,265
Jan. — Dec. 2009		4,000		7.70		2,000		9.85		—		—		754
													$	6,801

Commodity Contracts – Mark-to-Market Accounting: Floor Spreads

     In order to partially finance the cost of premiums on certain purchased floors, the Company may sell floors with a strike price below the strike price of the purchased floor. Together the two floors, known as a floor spread or put spread, have a lower premium cost than a traditional floor contract but provide price protection only down to the strike price of the short floor. During 2006, the Company entered into floor spreads with a $70 per Bbl purchased floor and a $50 per Bbl short floor for 4,000 Bbls/D in 2008 and 5,000 Bbls/D in 2009. As with the Company’s other derivative contracts, these are marked-to-market each quarter through “Derivative fair value loss” in the accompanying Consolidated Statements of Operations. In the above table, the purchased floor component of these floor spreads has been included with the Company’s other floor contracts and the short floor component is shown separately as negative volumes.

10

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

Commodity Contracts – Current Period Impact

     As a result of derivative transactions for oil and natural gas, the Company recognized a pre-tax reduction in oil and natural gas revenues of approximately $13.4 million and $14.8 million during the three months ended June 30, 2007 and 2006, respectively, and $26.8 million and $31.3 million during the six months ended June 30, 2007 and 2006, respectively. The Company also recognized derivative fair value gains and losses related to (i) changes in the market value since the date of dedesignation of derivative contracts which were previously designated as hedges, (ii) changes in the market value of certain other commodity derivatives that were never designated as hedges, (iii) settlements on derivative contracts not designated as hedges, and (iv) ineffectiveness of derivative contracts designated as hedges prior to July 2006. The following table summarizes the components of derivative fair value loss for the three and six months ended June 30, 2007 and 2006:

	Three months ended						Six months ended
	June 30,						June 30,
	2007			2006			2007			2006
	(in thousands)
Ineffectiveness on designated cash flow hedges	$	—		$	(1,091	)	$	—		$	1,748
Mark-to-market loss on commodity contracts not designated as hedges		10,315			12,368			64,125			13,461
Settlements on commodity contracts		(3,549	)		(483	)		(11,745	)		(2,109	)
Total derivative fair value loss	$	6,766		$	10,794		$	52,380		$	13,100

Commodity Contracts – Future Period Impact

     At June 30, 2007 and December 31, 2006, AOCL consisted entirely of deferred losses on commodity derivatives, net of tax, of $18.8 million and $35.3 million, respectively.

     During the twelve months ending June 30, 2008, the Company expects to reclassify the remaining $29.7 million of deferred losses associated with its dedesignated commodity contracts from AOCL to oil and natural gas revenues. The Company also expects to reclassify the remaining $10.9 million of net deferred tax assets from AOCL to income tax benefit during the twelve months ending June 30, 2008.

Note 7. Asset Retirement Obligations

     The Company’s primary asset retirement obligations relate to future plugging and abandonment expenses on oil and natural gas properties and related facilities disposal. The Company does not include a market risk premium in its risk estimates because a reliable estimate cannot be determined. As of June 30, 2007, the Company had $5.5 million held in an escrow account from which funds are released only for reimbursement of plugging and abandonment expenses on its Bell Creek property. This amount is included in “Other assets” in the accompanying Consolidated Balance Sheet. The following table summarizes the changes in the Company’s future abandonment liability, the long-term portion of which is recorded in “Future abandonment cost” on the accompanying Consolidated Balance Sheets, for the six months ended June 30, 2007 (in thousands):

Future abandonment liability at January 1, 2007	$	19,841
Wells drilled		59
Accretion of discount		531
Plugging and abandonment costs incurred		(253	)
Revision of estimates		(604	)
Disposition of properties		(959	)
Acquisition of properties		10,448
Future abandonment liability at June 30, 2007	$	29,063

11

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

Note 8. Debt

     The Company’s long-term debt consisted of the following as of the dates indicated:

	June 30,		December 31,
	2007		2006
	(in thousands)
Revolving credit facilities	$	707,000	$	68,000
6 1/4% Notes		150,000		150,000
6% Notes, net of unamortized discount of $4,670 and $4,892, respectively		295,330		295,108
7 1/4% Notes, net of unamortized discount of $1,368 and $1,412, respectively		148,632		148,588
Total	$	1,300,962	$	661,696

Revolving Credit Facilities

     Encore Acquisition Company Senior Secured Credit Agreement

     On March 7, 2007, Encore entered into a five-year amended and restated credit agreement (the “Encore Credit Agreement”) with a bank syndicate comprised of Bank of America, N.A. and other lenders, which amended and restated Encore’s Amended and Restated Credit Agreement dated as of August 19, 2004, as amended.

     The Encore Credit Agreement provides for revolving credit loans to be made to Encore from time to time and letters of credit to be issued from time to time for the account of Encore or any of its restricted subsidiaries. The aggregate amount of the commitments of the lenders under the Encore Credit Agreement is $1.25 billion. Availability under the Encore Credit Agreement is subject to a borrowing base, which was $900 million at June 30, 2007. The borrowing base is redetermined semi-annually and upon requested special redeterminations.

     The Encore Credit Agreement matures on March 7, 2012. Encore’s obligations under the Encore Credit Agreement are secured by a first-priority security interest in Encore’s and its restricted subsidiaries’ proved oil and natural gas reserves and in the equity interests of Encore’s restricted subsidiaries. In addition, Encore’s obligations under the Encore Credit Agreement are guaranteed by its restricted subsidiaries.

     Loans under the Encore Credit Agreement are subject to varying rates of interest based on (i) the total amount outstanding in relation to the borrowing base and (ii) whether the loan is a Eurodollar loan or a base rate loan. Eurodollar loans bear interest at the Eurodollar rate plus the applicable margin indicated in the following table, and base rate loans bear interest at the base rate plus the applicable margin indicated in the following table:

	Applicable Margin for			Applicable Margin for
Ratio of Total Outstandings to Borrowing Base	Eurodollar Loans			Base Rate Loans
Less than .50 to 1		1.000	%		0.000	%
From .50 to 1 but less than .75 to 1		1.250	%		0.000	%
From .75 to 1 but less than .90 to 1		1.500	%		0.250	%
Greater than or equal to .90 to 1		1.750	%		0.500	%

     The “Eurodollar rate” for any interest period (either one, two, three or six months, as selected by Encore) is the rate per year equal to LIBOR, as published by Reuters or another source designated by Bank of America, N.A., for deposits in dollars for a similar interest period. The “base rate” is calculated as the higher of (i) the annual rate of interest announced by Bank of America, N.A. as its “prime rate” and (ii) the federal funds effective rate plus 0.5 percent.

     As of June 30, 2007, the aggregate principal amount of loans outstanding under the Encore Credit Agreement was $592 million and the aggregate face amount of outstanding letters of credit was $20 million, all of which related to the Company’s joint development agreement with ExxonMobil Corporation (“ExxonMobil”) (see Note 14 for additional discussion of this agreement). Any outstanding letters of credit reduce the availability under the Encore Credit Agreement. Borrowings under the Encore Credit Agreement may be repaid from time to time without penalty.

     The Encore Credit Agreement contains covenants that include, among others:

• a prohibition against incurring debt, subject to permitted exceptions;

• a prohibition against paying dividends or making distributions, purchasing or redeeming capital stock, or prepaying indebtedness, subject to permitted exceptions;

12

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

	indebtedness, subject to permitted exceptions;
•	a restriction on creating liens on Encore’s and its restricted subsidiaries’ assets, subject to permitted exceptions;
•	restrictions on merging and selling assets outside the ordinary course of business;
•	restrictions on use of proceeds, investments, transactions with affiliates, or change of principal business;
•	a provision limiting oil and natural gas hedging transactions (other than puts) to a volume not exceeding 75 percent of anticipated production from proved producing reserves;
•	a requirement that Encore maintain a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0; and
•	a requirement that Encore maintain a ratio of consolidated EBITDA (as defined in the Encore Credit Agreement) to the sum of consolidated net interest expense plus letter of credit fees of not less than 2.5 to 1.0.

     The Encore Credit Agreement contains customary events of default. If an event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require Bank of America, N.A. to declare all amounts outstanding under the Encore Credit Agreement to be immediately due and payable. The Company was in compliance with all of the debt covenants under the Encore Credit Agreement as of June 30, 2007.

     Encore incurs a commitment fee on the unused portion of the Encore Credit Agreement determined based on the ratio of amounts outstanding under the Encore Credit Agreement to the borrowing base in effect on such date. The following table summarizes the calculation of the commitment fee under the Encore Credit Agreement:

	Commitment
Ratio of Total Outstandings to Borrowing Base	Fee Percentage
Less than .50 to 1		0.250	%
From .50 to 1 but less than .75 to 1		0.300	%
From .75 to 1 but less than .90 to 1		0.375	%
Greater than or equal to .90 to 1		0.375	%

     Encore Energy Partners Operating LLC Credit Agreement

     On March 7, 2007, EEPO entered into a five-year credit agreement (the “EEPO Credit Agreement”) with a bank syndicate comprised of Bank of America, N.A. and other lenders. The EEPO Credit Agreement provides for revolving credit loans to be made to EEPO from time to time and letters of credit to be issued from time to time for the account of EEPO or any of its restricted subsidiaries.

     The aggregate amount of the commitments of the lenders under the EEPO Credit Agreement is $300 million. Availability under the EEPO Credit Agreement is subject to a borrowing base, which was $115 million at June 30, 2007, and EEPO has the option of borrowing up to $10 million in excess of the borrowing base for a certain period of time following the closing date. The borrowing base is redetermined semi-annually and upon requested special redeterminations.

     The EEPO Credit Agreement matures on March 7, 2012. EEPO’s obligations under the EEPO Credit Agreement are secured by a first-priority security interest in EEPO’s and its restricted subsidiaries’ proved oil and natural gas reserves and in the equity interests of EEPO and its restricted subsidiaries. In addition, EEPO’s obligations under the EEPO Credit Agreement are guaranteed by its direct parent, Encore Energy Partners LP, a Delaware limited partnership (the “Partnership”), and EEPO’s restricted subsidiaries. Obligations under the EEPO Credit Agreement are non-recourse to Encore and its restricted subsidiaries.

     Loans under the EEPO Credit Agreement are subject to varying rates of interest based on the same provisions as the Encore Credit Agreement.

     As of June 30, 2007, the aggregate principal amount of loans outstanding under the EEPO Credit Agreement was $115 million and there were no outstanding letters of credit. Any outstanding letters of credit reduce the availability under the EEPO Credit Agreement. Borrowings under the EEPO Credit Agreement may be repaid from time to time without penalty.

     The EEPO Credit Agreement contains covenants that include, among others:

• a prohibition against incurring debt, subject to permitted exceptions;

13

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

• a prohibition against paying dividends or making distributions prior to the IPO Effective Date (as defined in the EEPO Credit Agreement), purchasing or redeeming capital stock, or prepaying indebtedness, subject to permitted exceptions;

• a restriction on creating liens on the assets of the Partnership, EEPO and its restricted subsidiaries, subject to permitted exceptions;

• restrictions on merging and selling assets outside the ordinary course of business;

• restrictions on use of proceeds, investments, transactions with affiliates, or change of principal business;

• a provision limiting oil and natural gas hedging transactions (other than puts) to a volume not exceeding 75 percent of anticipated production from proved producing reserves;

• a requirement that EEPO maintain a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0;

• a requirement that EEPO maintain a ratio of consolidated EBITDA (as defined in the EEPO Credit Agreement) to the sum of consolidated net interest expense plus letter of credit fees of not less than 2.5 to 1.0; and

• a requirement that EEPO maintain a ratio of consolidated funded debt (excluding certain related party debt) to consolidated adjusted EBITDA (as defined in the EEPO Credit Agreement) of not more than 3.5 to 1.0.

     The EEPO Credit Agreement contains customary events of default. If an event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require Bank of America, N.A. to declare all amounts outstanding under the EEPO Credit Agreement to be immediately due and payable. At June 30, 2007, EEPO was in violation of the EEPO Credit Agreement covenant that requires it to maintain a ratio of consolidated EBITDA (as defined in the EEPO Credit Agreement) to the sum of consolidated net interest expense plus letter of credit fees of not less than 2.5 to 1.0. EEPO requested and obtained a waiver from the bank syndicate for the June 30, 2007 violation. Amounts outstanding under the EEPO Credit Agreement have continued to be classified as long-term debt in the accompanying Consolidated Balance Sheet as Encore has the ability and intent to refinance borrowings, on a long-term basis, should any amounts become due and payable within the next twelve months under the EEPO Credit Agreement. EEPO was in compliance with all other debt covenants under the EEPO Credit Agreement as of June 30, 2007.

     EEPO incurs a commitment fee on the unused portion of the EEPO Credit Agreement determined based on the same provisions as the Encore Credit Agreement.

Note 9. Income Taxes

     The components of the income tax benefit (provision) were as follows for the six months ended June 30, 2007 and 2006:

	Six months ended
	June 30,
	2007			2006
	(in thousands)
Federal:
Current	$	(249	)	$	(1,102	)
Deferred		7,747			(22,194	)
Total federal		7,498			(23,296	)
State, net of federal benefit/expense:
Current		—			—
Deferred		(2	)		(3,017	)
Total state		(2	)		(3,017	)
Income tax benefit (provision)	$	7,496		$	(26,313	)

     The following table reconciles income tax benefit (provision) with income tax at the Federal statutory rate for the six months ended June 30, 2007 and 2006:

14

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

	Six months ended
	June 30,
	2007			2006
	(in thousands)
Income (loss) before income taxes	$	(21,753	)	$	66,484
Tax at statutory rate	$	7,614		$	(23,269	)
State income taxes, net of federal benefit/expense		519			(1,550	)
Enactment of the Texas margin tax		—			(1,295	)
Change in estimated future tax rate		(542	)		—
Permanent and other		(95	)		(199	)
Income tax benefit (provision)	$	7,496		$	(26,313	)

     On January 1, 2007, the Company adopted the provisions of FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Subject to statutory exceptions that allow for a possible extension of the assessment period, the Company is no longer subject to U.S. federal, state, and local income tax examinations for years prior to 2003.

     The Company has performed its evaluation of tax positions and has determined that the adoption of FIN 48 did not have a material impact on the Company’s financial condition, results of operations, or cash flows. This evaluation is a review of the appropriate recognition threshold for each tax position recognized in the Company’s financial statements. The evaluation included, but was not limited to: (1) a review of documentation of tax positions taken on previous returns including an assessment of whether the Company followed industry practice or the applicable requirements under the tax code, (2) a review of open tax returns (on a jurisdiction by jurisdiction basis) as well as supporting documentation used to support those tax returns, (3) a review of the results of past tax examinations, (4) a review of whether tax returns have been filed in all appropriate jurisdictions, (5) a review of existing permanent and temporary differences, and (6) consideration of any tax planning strategies that may have been used to support realization of deferred tax assets. Based on this evaluation, the Company did not identify any tax positions that did not meet the “highly certain positions” threshold. As a result, no additional tax expense, interest, or penalties have been accrued as a result of the review.

     The Company includes interest assessed by the taxing authorities in “Interest expense” and penalties related to income taxes in “Other expense” on its Consolidated Statements of Operations. For the six months ended June 30, 2007 and 2006, the Company recorded only a nominal amount of interest and penalties on certain tax positions.

Note 10. Earnings Per Share (“EPS”)

     The following table reflects EPS computations for the three and six months ended June 30, 2007 and 2006:

	Three months ended				Six months ended
	June 30,				June 30,
	2007		2006		2007			2006
			(in thousands, except per share data)
Numerator:
Net income (loss)	$	15,171	$	22,235	$	(14,257	)	$	40,171
Denominator:
Denominator for basic EPS:
Weighted average shares outstanding		53,143		52,631		53,111			50,724
Effect of dilutive options and diluted restricted stock (a)		877		901		—			939
Denominator for diluted EPS		54,020		53,532		53,111			51,663
Net income (loss) per common share:
Basic	$	0.29	$	0.42	$	(0.27	)	$	0.79
Diluted	$	0.28	$	0.42	$	(0.27	)	$	0.78

15

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

(a) Options to purchase 98,562 shares and 107,360 shares of common stock were outstanding but not included in the above calculation of diluted EPS for the three months ended June 30, 2007 and 2006, respectively, because their effect would have been antidilutive. Options to purchase 1,463,487 shares of common stock were outstanding but not included in the above calculation of diluted EPS for the six months ended June 30, 2007 because their effect would have been antidilutive. The effect of dilutive options and diluted restricted stock for the six months ended June 30, 2006 is an average of the effect of the dilutive options and diluted restricted stock for the first two quarters.

Note 11. Incentive Stock Plan

     During 2000, the Company’s Board of Directors (the “Board”) and stockholders approved the 2000 Incentive Stock Plan (the “Plan”). The Plan was amended and restated effective March 18, 2004. The purpose of the Plan is to attract, motivate, and retain selected employees of the Company and to provide the Company with the ability to provide incentives more directly linked to the profitability of the business and increases in shareholder value. All directors and full-time regular employees of the Company and its subsidiaries and affiliates are eligible to be granted awards under the Plan. The total number of shares of common stock reserved for issuance pursuant to the Plan is 4,500,000. As of June 30, 2007, there were 814,424 shares available for issuance under the Plan. Shares delivered or withheld for payment of the exercise price of an option, shares withheld for payment of tax withholding, or shares subject to options or other awards that expire or are terminated and restricted shares that are forfeited will again become available for issuance under the Plan. The Plan provides for the granting of cash awards, incentive stock options, non-qualified stock options, restricted stock, and stock appreciation rights at the discretion of the Compensation Committee of the Board. The Board also has a Restricted Stock Award Committee having Jon S. Brumley, the Company’s Chief Executive Officer and President, as its sole member. The Restricted Stock Award Committee may grant certain awards of restricted stock to non-executive employees at its discretion.

     The Plan contains the following individual limits:

• an employee may not be granted awards covering or relating to more than 225,000 shares of common stock in any calendar year;

• a non-employee director may not be granted awards covering or relating to more than 15,000 shares of common stock in any calendar year; and

• an employee may not receive awards consisting of cash (including cash awards that are granted as performance awards) in respect of any calendar year having a value determined on the grant date in excess of $1.0 million.

     All options that have been granted under the Plan have a strike price equal to the fair market value of the Company’s common stock on the date of grant. Additionally, all options have a ten-year life and vest equally over a three-year period. Restricted stock granted under the Plan vests over varying periods from one to five years, subject to performance-based vesting for certain members of senior management.

     The compensation cost related to the Plan that has been recorded in the accompanying Consolidated Statements of Operations for the six months ended June 30, 2007 and 2006 was $5.5 million and $4.9 million, respectively. The income tax benefit related to the Plan that has been recorded in the accompanying Consolidated Statements of Operations for the six months ended June 30, 2007 and 2006 was $2.0 million and $1.8 million, respectively. During the six months ended June 30, 2007 and 2006, the Company also capitalized $0.7 million and $0.4 million, respectively, of non-cash stock-based compensation cost as a component of “Properties and equipment” in the accompanying Consolidated Balance Sheets. Non-cash stock-based compensation expense has been allocated to lease operations expense, general and administrative expense, and exploration expense based on the allocation of the respective employees’ cash compensation.

Stock Options

     The fair value of each option award granted during the six months ended June 30, 2007 and 2006 was estimated on the date of grant using the Black-Scholes option valuation model based on the assumptions noted in the following table. The expected volatility is based on the historical volatility of the Company’s stock for a period of time commensurate with the expected term of the award. For options granted in the six months ended June 30, 2007 and 2006, the Company used the “simplified” method prescribed by SEC Staff Accounting Bulletin No. 107 to estimate the expected term of the options, which is calculated as the average midpoint between each vesting date and the life of the option. The risk-free rate is based on the U.S Treasury yield curve in effect at the time of grant for periods commensurate with the expected terms of the options.

16

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

	Six months ended June 30,
	2007			2006
Expected volatility		35.7	%		42.8	%
Expected dividend yield		0.0	%		0.0	%
Expected term (in years)		6.0			6.0
Risk-free interest rate		4.8	%		4.6	%

     The following table summarizes the change in the number of outstanding options and the related weighted average strike prices during the six months ended June 30, 2007:

						Weighted
				Weighted		Average		Aggregate
	Number of			Average		Remaining		Intrinsic
	Options			Strike Price		Contractual Term		Value
								(in thousands)
Outstanding at January 1, 2007		1,337,118		$	14.44
Granted		200,059			25.73
Forfeited		(12,690	)		28.96
Exercised		(61,000	)		13.33
Outstanding at June 30, 2007		1,463,487			15.91		6.1	$	17,733
Exercisable at June 30, 2007		1,172,788			13.15		5.3		17,289

     The weighted average fair value per share of individual options granted during the six months ended June 30, 2007 and 2006 was $11.16 and $14.96, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2007 and 2006 was $0.8 million and $2.3 million, respectively. During the six months ended June 30, 2007 and 2006, the Company received proceeds from the exercise of stock options of $0.8 million and $2.1 million, respectively, and realized tax benefits related to stock options of $0.3 million and $0.9 million, respectively. At June 30, 2007, the Company had $2.7 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 2.3 years.

Restricted Stock

     During the six months ended June 30, 2007 and 2006, the Company recognized expense related to restricted stock of $4.5 million and $4.2 million, respectively, and realized tax benefits related to restricted stock of $1.7 million and $1.6 million, respectively. A summary of the status of the Company’s unvested restricted stock outstanding as of June 30, 2007, and changes during the six months then ended, is presented below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Outstanding at January 1, 2007		828,619		$	26.17
Granted		342,133			25.90
Vested		(118,273	)		25.40
Forfeited		(36,459	)		26.51
Outstanding at June 30, 2007		1,016,020			26.16

     As of June 30, 2007, there were 840,830 shares of unvested restricted stock outstanding, dependent only on the passage of time and continued employment for vesting, 164,658 shares of which were granted during the six months ended June 30, 2007. Additionally, as of June 30, 2007, there were 175,190 shares of unvested restricted stock outstanding that not only depend on the passage of time and continued employment, but on certain performance measures for vesting, all of which were granted during the six months ended June 30, 2007.

     As of June 30, 2007, there was $14.8 million of total unrecognized compensation cost related to unvested, outstanding

17

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

restricted stock, which is expected to be recognized over a weighted average period of 3.0 years. During the six months ended June 30, 2007 and 2006, there were 118,273 shares and 27,909 shares, respectively, of restricted stock that vested and employees elected to satisfy minimum tax withholding obligations related to these shares by allowing the Company to withhold 5,545 shares and 6,553 shares of common stock, respectively. These shares are treated as treasury stock by the Company until the shares are formally retired and have been reflected as such in the accompanying consolidated financial statements.

Note 12. Comprehensive Income

     Components of comprehensive income, net of related tax, are as follows:

	Three months ended					Six months ended
	June 30,					June 30,
	2007		2006			2007			2006
			(in thousands)
Net income (loss)	$	15,171	$	22,235		$	(14,257	)	$	40,171
Amortization of deferred loss on commodity derivatives		8,373		11,304			16,554			19,554
Amortization of deferred gain on interest rate swap		—		(15	)		—			(29	)
Comprehensive income	$	23,544	$	33,524		$	2,297		$	59,696

Note 13. Financial Statements of Subsidiary Guarantors

     Effective February 2007, the Company formed certain non-guarantor subsidiaries in anticipation of forming a master limited partnership (“MLP”). See “Note 16. MLP” for additional discussion. As of June 30, 2007, certain of the Company’s wholly- owned subsidiaries were subsidiary guarantors of the Company’s outstanding notes. The subsidiary guarantees are full and unconditional, and joint and several. The subsidiary guarantors may, without restriction, transfer funds to the Company in the form of cash dividends, loans, and advances. In accordance with SEC rules, the Company has prepared condensed consolidating financial statements in order to quantify the assets and results of operations of the subsidiary guarantors. The following Condensed Consolidating Balance Sheet as of June 30, 2007, Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2007, and Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 2007 present consolidating financial information for Encore Acquisition Company (“Parent”) on a stand alone, unconsolidated basis, and its combined guarantor and combined non-guarantor subsidiaries. The guarantor subsidiaries are EAP Energy, Inc., EAP Properties Inc., EAP Operating Inc., EAP Energy Services, L.P., Encore Operating, L.P., and Encore Operating Louisiana, LLC. The non-guarantor subsidiaries are EEPO, Encore Partners GP Holdings LLC, Encore Energy Partners LP, Encore Partners LP Holdings LLC, Encore Energy Partners GP LLC, and Encore Clear Fork Pipeline LLC. All intercompany investments in, loans due to/from, subsidiary equity, income and expenses between the Parent, the guarantor subsidiaries, and non-guarantor subsidiaries are shown prior to final consolidation with the Parent and then eliminated to arrive at consolidated totals per the accompanying consolidated financial statements of Encore. Prior to February 2007, all of the Company’s subsidiaries were subsidiary guarantors of the Company’s outstanding senior notes. Therefore, comparative condensed consolidating financial statements are not presented as of December 31, 2006 or for the three and six months ended June 30, 2006.

     Income taxes in the Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) are shown as an expense of the Parent as the Company files a consolidated return. Additionally, the Company’s net current deferred tax asset and net long-term deferred tax liability have been included in the balance sheet of the Parent in the Condensed Consolidating Balance Sheet.

18

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2007
(in thousands)

			Guarantor			Non-Guarantor						Consolidated
	Parent		Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	3,590		$	1,348		$	—		$	4,938
Other current assets		113,993		153,631			16,448			(101,325	)		182,747
Total current assets		113,993		157,221			17,796			(101,325	)		187,685
Properties and equipment, at cost - successful efforts method:
Proved properties, including wells and related equipment		—		2,309,293			327,492			—			2,636,785
Unproved properties		—		51,482			—			—			51,482
Accumulated depletion, depreciation, and amortization		—		(384,466	)		(9,901	)		—			(394,367	)
		—		1,976,309			317,591			—			2,293,900
Other property and equipment, net		—		10,642			65			—			10,707
Other assets, net		136,397		262,340			17,649			(247,282	)		169,104
Investment in subsidiaries		2,052,359		—			—			(2,052,359	)		—
Total assets	$	2,302,749	$	2,406,512		$	353,101		$	(2,400,966	)	$	2,661,396
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities	$	12,152	$	274,727		$	127,456		$	(216,325	)	$	198,010
Deferred taxes		278,823		—			—			—			278,823
Long-term debt		1,185,962		123,641			123,641			(132,282	)		1,300,962
Other liabilities		—		49,146			8,643			—			57,789
Total liabilities		1,476,937		447,514			259,740			(348,607	)		1,835,584
Commitments and contingencies (see Note 14)
Total stockholders’ equity		825,812		1,958,998			93,361			(2,052,359	)		825,812
Total liabilities and stockholders’ equity	$	2,302,749	$	2,406,512		$	353,101		$	(2,400,966	)	$	2,661,396

19

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2007
(in thousands)

				Guarantor			Non-Guarantor						Consolidated
	Parent			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues:
Oil	$	—		$	119,508		$	16,088		$	—		$	135,596
Natural gas		—			44,950			181			—			45,131
Marketing		—			5,302			3,614			—			8,916
Total revenues		—			169,760			19,883			—			189,643
Expenses:
Production:
Lease operations		—			34,202			3,350			—			37,552
Production, ad valorem, and severance taxes		—			17,139			2,093			—			19,232
Depletion, depreciation, and amortization		—			44,924			7,394			—			52,318
Exploration		—			3,415			—			—			3,415
General and administrative		13			5,552			623			—			6,188
Marketing		—			5,232			3,275			—			8,507
Derivative fair value loss		—			3,952			2,814			—			6,766
Other operating		42			4,550			159			—			4,751
Total expenses		55			118,966			19,708			—			138,729
Operating income (loss)		(55	)		50,794			175			—			50,914
Other income (expenses):
Interest		(10,219	)		(18,599	)		(5,342	)		6,340			(27,820	)
Equity income (loss) from subsidiaries		30,773			—			—			(30,773	)		—
Other		3,196			3,718			27			(6,340	)		601
Total other income (expenses)		23,750			(14,881	)		(5,315	)		(30,773	)		(27,219	)
Income (loss) before income taxes		23,695			35,913			(5,140	)		(30,773	)		23,695
Income tax provision		(8,524	)		—			—			—			(8,524	)
Net income (loss)		15,171			35,913			(5,140	)		(30,773	)		15,171
Amortization of deferred hedge losses, net of tax		8,373			—			—			—			8,373
Comprehensive income (loss)	$	23,544		$	35,913		$	(5,140	)	$	(30,773	)	$	23,544

20

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2007
(in thousands)

				Guarantor			Non-Guarantor						Consolidated
	Parent			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues:
Oil	$	—		$	197,888		$	20,331		$	—		$	218,219
Natural gas		—			77,779			330			—			78,109
Marketing		—			19,005			4,852			—			23,857
Total revenues		—			294,672			25,513			—			320,185
Expenses:
Production:
Lease operations		—			63,754			4,318			—			68,072
Production, ad valorem, and severance taxes		—			29,017			2,730			—			31,747
Depletion, depreciation, and amortization		—			77,445			9,901			—			87,346
Exploration		—			14,936			—			—			14,936
General and administrative		37			12,700			811			—			13,548
Marketing		—			19,163			4,355			—			23,518
Derivative fair value loss		—			45,883			6,497			—			52,380
Other operating		83			7,050			183			—			7,316
Total expenses		120			269,948			28,795			—			298,863
Operating income (loss)		(120	)		24,724			(3,282	)		—			21,322
Other income (expenses):
Interest		(41,304	)		(3,641	)		(6,444	)		7,282			(44,107	)
Equity income (loss) from subsidiaries		16,046			—			—			(16,046	)		—
Other		3,625			4,662			27			(7,282	)		1,032
Total other income (expenses)		(21,633	)		1,021			(6,417	)		(16,046	)		(43,075	)
Income (loss) before income taxes		(21,753	)		25,745			(9,699	)		(16,046	)		(21,753	)
Income tax benefit (provision)		7,496			—			—			—			7,496
Net income (loss)		(14,257	)		25,745			(9,699	)		(16,046	)		(14,257	)
Amortization of deferred hedge losses, net of tax		16,554			—			—			—			16,554
Comprehensive income (loss)	$	2,297		$	25,745		$	(9,699	)	$	(16,046	)	$	2,297

21

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2007
(in thousands)

				Guarantor			Non-Guarantor						Consolidated
	Parent			Subsidiaries			Subsidiaries			Eliminations			Total
Cash flows from operating activities:
Net cash provided by operating activities	$	—		$	79,732		$	1,593		$	—		$	81,325
Cash flows from investing activities:
Proceeds from disposition of assets		—			291,454			—			—			291,454
Acquisition of oil and natural gas properties		—			(452,361	)		(327,215	)		—			(779,576	)
Development of oil and natural gas properties		—			(187,227	)		—			—			(187,227	)
Intercompany loans		(120,000	)		(120,000	)		—			240,000			—
Investments in subsidiaries		(379,542	)		—			—			379,542			—
Other		—			(25,701	)		(71	)		—			(25,772	)
Net cash provided by (used in) investing activities		(499,542	)		(493,835	)		(327,286	)		619,542			(701,121	)
Cash flows from financing activities:
Exercise of stock options and vesting of restricted stock, net of treasury stock purchases		497			—			—			—			497
Proceeds from long-term debt		1,001,000			120,000			250,500			(240,000	)		1,131,500
Payments on long-term debt		(477,000	)		—			(15,500	)		—			(492,500	)
Net equity contributions		—			285,884			93,658			(379,542	)		—
Other		(24,955	)		11,046			(1,617	)		—			(15,526	)
Net cash provided by (used in) financing activities		499,542			416,930			327,041			(619,542	)		623,971
Increase in cash and cash equivalents		—			2,827			1,348			—			4,175
Cash and cash equivalents, beginning of period		—			763			—			—			763
Cash and cash equivalents, end of period	$	—		$	3,590		$	1,348		$	—		$	4,938

Note 14. Commitments and Contingencies

Litigation

     The Company is a party to ongoing legal proceedings in the ordinary course of business. Management does not believe the result of these proceedings will have a material adverse effect on the Company.

ExxonMobil

     In March 2006, Encore entered into a joint development agreement with ExxonMobil to develop legacy natural gas fields in West Texas. Under the terms of the agreement, Encore will have the opportunity to develop approximately 100,000 gross acres. Encore will earn 30 percent of ExxonMobil’s working interest and 22.5 percent of ExxonMobil’s net revenue interest in each well drilled. Encore will operate each well during the drilling and completion phase, after which ExxonMobil will assume operational control of the well.

     Encore will earn the right to participate in all fields by drilling a total of 24 commitment wells. During the commitment phase, ExxonMobil will have the option to receive non-recourse advanced funds from Encore attributable to ExxonMobil’s 70 percent working interest in each commitment well. Once a commitment well is producing, ExxonMobil will repay 95 percent of the advanced funds plus accrued interest assessed on the unpaid balance through Encore’s monthly receipt of future proceeds of oil and natural gas sales. As an alternative to receiving advanced funds during the commitment phase, ExxonMobil can elect to pay their share of capital costs for each well. After Encore has fulfilled its obligations under the commitment phase, Encore will be entitled to a 30 percent working interest in future drilling locations. Encore will have the right to propose and drill wells for as long as Encore is engaged in continuous drilling operations.

     During the six months ended June 30, 2007 and the year ended December 31, 2006, we advanced $26.4 million and $22.4 million, respectively, to ExxonMobil for its portion of capital related to drilling commitment wells, of which $45.6 million and $21.0 million remained outstanding at June 30, 2007 and December 31, 2006, respectively. At June 30, 2007, $2.5 million is included in “Accounts receivable” and $43.1 million is included in “Long-term receivables” on the accompanying Consolidated

22

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

Balance Sheets based on when Encore expects repayment. At December 31, 2006, $3.0 million is included in “Accounts receivable” and $18.0 million is included in “Long-term receivables” on the accompanying Consolidated Balance Sheets. As of June 30, 2007, Encore had 7 additional wells to drill in order to fulfill its drilling obligation under the joint development agreement.

Note 15. Related Party Transactions

     The Company paid $1.1 million and $1.6 million to affiliates of Hanover Compressor Company (“Hanover”) during the six months ended June 30, 2007 and 2006, respectively, for compressors and field compression services. Mr. I. Jon Brumley, the Company’s Chairman of the Board, also serves as a director of Hanover.

     The Company also received $18.7 million and $3.8 million from affiliates of Tesoro Corporation (“Tesoro”) during the six months ended June 30, 2007 and 2006, respectively, related to its working interest in wells operated by Encore. Mr. John V. Genova, a member of the Board, is employed by Tesoro.

Note 16. MLP

     On January 17, 2007, the Company announced an intention to form an MLP that will engage in an initial public offering of common units representing limited partner interests. The MLP was formed on February 13, 2007 and owns certain oil and gas properties and related assets in the Big Horn Basin of Wyoming and Montana. At the time of the initial public offering, the Company plans to contribute to the MLP certain of its legacy oil and gas properties in the Permian Basin of West Texas. Any sale of securities in the MLP would be registered under the Securities Act of 1933, and such units would only be offered and sold by means of a prospectus. This Report does not constitute an offer to sell or the solicitation of any offer to buy any securities of the MLP, and there will not be any sale of any such securities in any state in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of such state.

     In May 2007, the board of directors of Encore Energy Partners GP LLC, a wholly owned subsidiary of Encore, issued 550,000 management incentive units to the executive officers of Encore Energy Partners GP LLC. A management incentive unit is a limited partner interest in the MLP that entitles the holder to an initial quarterly distribution of $0.35 (or $1.40 on an annualized basis) to the extent paid to the MLP’s common unitholders and to increasing distributions upon the achievement of 10 percent compounding increases in the MLP’s distribution rate to common unitholders subject to a maximum limit of 5.1 percent on the aggregate distributions payable to holders of management incentive units. A management incentive unit is also convertible into common units upon the occurrence of certain events subject to a maximum limit of 5.1 percent on the aggregate number of common units issuable to holders of management incentive units. The holders of the management incentive units do not receive any cash distributions until the MLP's initial public offering is completed.

     Upon completion of the MLP's initial public offering, the management incentive units will partially vest, at which point the MLP will recognize an expense for the estimated fair value of the vested portion of the units. The MLP will recognize additional expenses over at least the following two-year period as the management incentive units continue to vest.

Note 17. Subsequent Events

     Subsequent to June 30, 2007, the Company entered into a costless collar with a $65.00 per Bbl floor and a $79.05 per Bbl ceiling for 500 Bbls/D in 2010 and a floor with a $65.00 per Bbl strike price for 500 Bbls/D in 2010. The Company paid a premium of $1.0 million in connection with the floor contract.

23

ENCORE ACQUISITION COMPANY

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This document contains forward-looking statements, which give our current expectations or forecasts of future events. Actual results may differ materially from those discussed in our forward-looking statements due to many factors, including, but not limited to, those set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in “Item 1. Financial Statements” of this Report and in “Item 8. Financial Statements and Supplementary Data” of our 2006 Annual Report on Form 10-K.

Introduction

     In this management’s discussion and analysis of financial condition and results of operations, the following will be discussed and analyzed:

• Second Quarter 2007 Highlights

• Results of Operations

– Comparison of Quarter Ended June 30, 2007 to Quarter Ended June 30, 2006

– Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006

• Capital Resources

• Capital Commitments

• Liquidity

• Contingencies

• Critical Accounting Policies and Estimates

• New Accounting Pronouncements

Second Quarter 2007 Highlights

     Our financial and operating results for the quarter ended June 30, 2007 included the following:

• During the second quarter of 2007, our oil and natural gas revenues were $180.7 million. This represents a 37 percent increase over the $131.8 million of oil and natural gas revenues reported in the second quarter of 2006. Our revenues increased as a result of increased production volumes and higher realized average prices.

• Our realized average oil price for the second quarter of 2007, including the effects of commodity derivative contracts, increased $0.93 per Bbl to $51.92 per Bbl as compared to $50.99 per Bbl in the second quarter of 2006. Our realized average natural gas price for the second quarter of 2007, including the effects of commodity derivative contracts, decreased $0.06 per Mcf to $6.52 per Mcf as compared to $6.58 per Mcf in the second quarter of 2006.

• Production volumes for the second quarter of 2007 increased to 41,384 BOE/D as compared to 30,867 BOE/D for the second quarter of 2006. The rise in production volumes was primarily attributable to our Big Horn Basin and Williston Basin acquisitions and our development programs. Oil represented 69 percent and 65 percent of our total production volumes in the second quarter of 2007 and 2006, respectively.

• We reported net income of $15.2 million, or $0.28 per diluted share, in the second quarter of 2007, as compared to net income of $22.2 million, or $0.42 per diluted share, for the second quarter of 2006. The decrease in net income was primarily due to pretax increases in interest expense of $17.1 million as a result of higher debt levels used to fund the

24

ENCORE ACQUISITION COMPANY

	Big Horn Basin and Williston Basin acquisitions and in depletion, depreciation, and amortization (“DD&A”) of $24.3 million as a result of higher rates associated with these acquisitions.
•	We invested $480.5 million in oil and natural gas activities during the second quarter of 2007 (excluding related asset retirement obligations of $0.2 million). Of this amount, we invested $94.0 million in development, exploitation, HPAI expansion, and exploration activities, which yielded 51 gross (16.7 net) productive wells, and $386.4 million in acquisitions, primarily related to the Williston Basin acquisition. We operated between 10 and 12 drilling rigs during the second quarter of 2007, including 4 to 5 rigs related to our West Texas joint development agreement.
•	On January 23, 2007, we entered into a purchase and sale agreement with certain subsidiaries of Anadarko to acquire oil and natural gas properties and related assets in the Williston Basin of Montana and North Dakota. The closing of the Williston Basin acquisition occurred on April 11, 2007. The purchase price for the Williston Basin assets was approximately $393.7 million, including transaction costs of approximately $1.2 million.
•	On June 29, 2007, we completed the sale of certain oil and natural gas properties in the Mid-Continent for net proceeds of approximately $293.6 million and recorded a loss on sale of $2.3 million. Subsequent to June 30, 2007, additional Mid-Continent properties that were subject to exercises of preferential rights were sold for net cash proceeds of $5.5 million. Proceeds from the Mid-Continent disposition were used to reduce outstanding borrowings under our revolving credit facilities.

Results of Operations

Comparison of Quarter Ended June 30, 2007 to Quarter Ended June 30, 2006

     Oilandnaturalgas revenuesandproduction. The following table illustrates the primary components of oil and natural gas revenues for the three months ended June 30, 2007 and 2006, as well as each quarter’s respective oil and natural gas production volumes:

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	Three months ended June 30,						Increase / (Decrease)
	2007			2006
	(in thousands, except per unit and per day amounts)
Revenues:
Oil wellhead	$	146,420		$	105,765		$	40,655
Oil hedges		(10,824	)		(13,331	)		2,507
Total oil revenues	$	135,596		$	92,434		$	43,162		47	%
Natural gas wellhead	$	47,704		$	40,758		$	6,946
Natural gas hedges		(2,573	)		(1,415	)		(1,158	)
Total natural gas revenues	$	45,131		$	39,343		$	5,788		15	%
Combined wellhead	$	194,124		$	146,523		$	47,601
Combined hedges		(13,397	)		(14,746	)		1,349
Total combined oil and natural gas revenues	$	180,727		$	131,777		$	48,950		37	%
Revenues:
Oil wellhead ($/Bbl)	$	56.07		$	58.34		$	(2.27	)
Oil hedges ($/Bbl)		(4.15	)		(7.35	)		3.20
Total oil revenues ($/Bbl)	$	51.92		$	50.99		$	0.93		2	%
Natural gas wellhead ($/Mcf)	$	6.89		$	6.82		$	0.07
Natural gas hedges ($/Mcf)		(0.37	)		(0.24	)		(0.13	)
Total natural gas revenues ($/Mcf)	$	6.52		$	6.58		$	(0.06	)	-1	%
Combined wellhead ($/BOE)	$	51.55		$	52.16		$	(0.61	)
Combined hedges ($/BOE)		(3.56	)		(5.25	)		1.69
Total combined oil and natural gas revenues ($/BOE)	$	47.99		$	46.91		$	1.08		2	%
Total production volumes:
Oil (Bbls)		2,611			1,813			798		44	%
Natural gas (Mcf)		6,927			5,977			950		16	%
Combined (BOE)		3,766			2,809			957		34	%
Daily production volumes:
Oil (Bbls/D)		28,696			19,920			8,776		44	%
Natural gas (Mcf/D)		76,123			65,682			10,441		16	%
Combined (BOE/D)		41,384			30,867			10,517		34	%
Average NYMEX prices:
Oil (per Bbl)	$	65.03		$	70.70		$	(5.67	)	-8	%
Natural gas (per Mcf)	$	7.66		$	6.65		$	1.01		15	%

     Oil revenues increased $43.2 million from $92.4 million in the second quarter of 2006 to $135.6 million in the second quarter of 2007. The increase is primarily due to an increase in oil production volumes of 798 MBbls, which contributed approximately $46.6 million in additional oil revenues. The increase in oil production volumes is primarily the result of our Big Horn Basin and Williston Basin acquisitions and our development programs. Due to a decrease in commodity derivative contract costs included in oil revenues, our average realized oil price increased $0.93 per Bbl despite the decrease in our wellhead price. Our lower average oil wellhead price resulted in a decrease of $5.9 million in oil revenues, or $2.27 per Bbl, while commodity derivative contract costs decreased $2.5 million, or $3.20 per Bbl. Our average oil wellhead price decreased $2.27 per Bbl in the second quarter of 2007 over the second quarter of 2006 as a result of decreases in the overall market price for oil as reflected in the decrease in the average NYMEX price from $70.70 per Bbl in the second quarter of 2006 to $65.03 per Bbl in the second quarter of 2007. Our oil production volumes would have been 27,809 Bbls/D and 19,431 Bbls/D for the three months ended June 30, 2007 and 2006, respectively, excluding volumes associated with our Mid-Continent disposition.

     Our oil wellhead revenue was reduced by $6.1 million and $6.6 million in the three months ended June 30, 2007 and 2006, respectively, for the net profits interests payments related to our CCA properties.

     Natural gas revenues increased $5.8 million from $39.3 million in the second quarter of 2006 to $45.1 million in the second quarter of 2007. The increase is primarily due to an increase in production volumes of 950 Mcf, which contributed

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approximately $6.5 million in additional natural gas revenues. The increase in natural gas production volumes is the result of our development programs on the West Texas joint development agreement with ExxonMobil and in the Mid-Continent area. Due to an increase in commodity derivative contract costs included in natural gas revenues, our average realized natural gas price decreased $0.06 per Mcf despite the increase in our wellhead price. Our higher average natural gas wellhead price resulted in an increase of $0.5 million in natural gas revenues, or $0.07 per Mcf, while commodity derivative contract costs increased $1.2 million, or $0.13 per Mcf. Our average natural gas wellhead price increased $0.07 per Mcf in the second quarter of 2007 over the second quarter of 2006 as a result of increases in the overall market price for natural gas as reflected in the increase in the average NYMEX price from $6.65 per Mcf in the second quarter of 2006 to $7.66 per Mcf in the second quarter of 2007. Our natural gas production volumes would have been 54,196 Mcf/D and 49,383 Mcf/D for the three months ended June 30, 2007 and 2006, respectively, excluding volumes associated with our Mid-Continent disposition.

     The table below illustrates the relationship between oil and natural gas wellhead prices as a percentage of average NYMEX prices for the three months ended June 30, 2007 and 2006. Management uses the wellhead to NYMEX margin analysis to analyze trends in our oil and natural gas revenues.

	Three months ended June 30,
	2007			2006
Oil wellhead ($/Bbl)	$	56.07		$	58.34
Average NYMEX ($/Bbl)	$	65.03		$	70.70
Differential to NYMEX	$	(8.96	)	$	(12.36	)
Oil wellhead to NYMEX percentage		86	%		83	%
Natural gas wellhead ($/Mcf)	$	6.89		$	6.82
Average NYMEX ($/Mcf)	$	7.66		$	6.65
Differential to NYMEX	$	(0.77	)	$	0.17
Natural gas wellhead to NYMEX percentage		90	%		103	%

     In the second quarter of 2007, our oil wellhead price as a percentage of the average NYMEX price increased to 86 percent from 83 percent in the second quarter of 2006. The differential was due to market conditions in the Rocky Mountain refining area, which has adversely affected the oil wellhead price we receive on our CCA and Williston Basin production. Production increases from competing Canadian and Rocky Mountain producers, in conjunction with limited refining and pipeline capacity in the Rocky Mountain area, created steep pricing discounts in the second quarter of 2006, but have since tightened. The oil differential in the second quarter of 2007 negatively impacted oil revenues by approximately $23.4 million as compared to approximately $22.4 million in the second quarter of 2006. We expect our oil wellhead differentials to remain approximately constant or to widen slightly in the third quarter of 2007 as compared to the second quarter of 2007.

     In the second quarter of 2007, our natural gas wellhead price as a percentage of the average NYMEX price fell to 90 percent from 103 percent in the second quarter of 2006. The differential widened because the price received for natural gas in CCA did not correlate well with NYMEX during the quarter due to market conditions in the Rockies. The natural gas differential in the second quarter of 2007 negatively impacted natural gas revenues by approximately $5.3 million as compared with a favorable impact of approximately $1.0 million in the second quarter of 2006. We expect our natural gas wellhead differentials to remain approximately constant or to widen slightly in the third quarter of 2007 as compared to the second quarter of 2007.

     Marketingrevenuesandexpenses. In 2006, we began purchasing third-party oil Bbls from a counterparty other than to whom the Bbls were sold for aggregation and sale with our own equity production in various markets. These purchases are for strategic purposes to assist us in marketing our production by decreasing our dependence on individual markets. These activities allow us to aggregate larger volumes, facilitate our efforts to maximize the prices we receive for production, provide for a greater allocation of future pipeline capacity in the event of curtailments, and enable us to reach other markets.

     In March 2007, we acquired a gas pipeline from Anadarko as part of the Big Horn Basin acquisition for which natural gas volumes are purchased from one counterparty at the inlet to the pipeline and sold to another counterparty at the end of the pipeline.

     The following table summarizes our marketing activities for the three months ended June 30, 2007 and 2006:

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	Three months ended June 30,
	2007			2006
	(in thousands, except per BOE amounts)
Marketing revenues	$	8,916		$	25,716
Marketing expenses		(8,507	)		(24,914	)
Marketing, net	$	409		$	802
Marketing revenues per BOE	$	2.37		$	9.16
Marketing expenses per BOE		(2.26	)		(8.87	)
Marketing, net per BOE	$	0.11		$	0.29

     Expenses. The following table summarizes our expenses, excluding marketing expenses shown above, for the three months ended June 30, 2007 and 2006:

	Three months ended June 30,				Increase / (Decrease)
	2007		2006
Expenses (in thousands):
Production:
Lease operations	$	37,552	$	23,118	$	14,434
Production, ad valorem, and severance taxes		19,232		12,580		6,652
Total production expenses		56,784		35,698		21,086		59	%
Other:
Depletion, depreciation, and amortization		52,318		27,988		24,330
Exploration		3,415		4,016		(601	)
General and administrative		6,188		5,421		767
Derivative fair value loss		6,766		10,794		(4,028	)
Other operating		4,751		1,068		3,683
Total operating		130,222		84,985		45,237		53	%
Interest		27,820		10,718		17,102
Income tax provision		8,524		15,069		(6,545	)
Total expenses	$	166,566	$	110,772	$	55,794		50	%
Expenses (per BOE):
Production:
Lease operations	$	9.97	$	8.23	$	1.74
Production, ad valorem, and severance taxes		5.11		4.48		0.63
Total production expenses		15.08		12.71		2.37		19	%
Other:
Depletion, depreciation, and amortization		13.89		9.96		3.93
Exploration		0.91		1.43		(0.52	)
General and administrative		1.64		1.93		(0.29	)
Derivative fair value loss		1.80		3.84		(2.04	)
Other operating		1.26		0.38		0.88
Total operating		34.58		30.25		4.33		14	%
Interest		7.39		3.82		3.57
Income tax provision		2.26		5.36		(3.10	)
Total expenses	$	44.23	$	39.43	$	4.80		12	%

     Productionexpenses. Total production expenses increased $21.1 million from $35.7 million in the second quarter of 2006 to $56.8 million in the second quarter of 2007. This increase resulted from an increase in total production volumes, as well as a

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$2.37 increase in production expenses per BOE. Our production margin (defined as oil and natural gas revenues less production expenses) for the second quarter of 2007 increased by 29 percent ($27.9 million) as compared to the second quarter of 2006. Total production expenses per BOE increased by 19 percent while total oil and natural gas revenues per BOE increased by only two percent. On a per BOE basis, our production margin decreased four percent to $32.91 per BOE as compared to $34.20 per BOE for the second quarter of 2006.

     The production expense attributable to lease operations expense (“LOE”) increased $14.4 million from $23.1 million in the second quarter of 2006 to $37.6 million in the second quarter of 2007, primarily as a result of an increase in production volumes, which contributed approximately $7.9 million of additional LOE, and an increase in the average per BOE rate, which contributed approximately $6.6 million of additional LOE. The increase in production volumes is the result of our Big Horn Basin and Williston Basin acquisitions. The increase in our average LOE per BOE rate of $1.74 was attributable to:

• increases in prices paid to oilfield service companies and suppliers due to a current higher price environment;

• increased operational activity to maximize production;

• HPAI expensed at the CCA; and

• higher salary levels for engineers and other technical professionals.

     The production expense attributable to production, ad valorem, and severance taxes (“production taxes”) increased $6.7 million from $12.6 million in the second quarter of 2006 to $19.2 million in the second quarter of 2007. The increase is due to higher wellhead revenues. As a percentage of oil and natural gas revenues (excluding the effects of commodity derivative contracts), production taxes increased to 9.9 percent in the second quarter of 2007 as compared to 8.6 percent in the second quarter of 2006 as a result of higher rates in the states where the properties associated with the Williston Basin acquisition are located. The effect of commodity derivative contracts is excluded from oil and natural gas revenues in the calculation of these percentages because this method more closely reflects the method used to calculate actual production taxes paid to taxing authorities.

     DD&Aexpense. DD&A expense increased $24.3 million from $28.0 million in the second quarter of 2006 to $52.3 million in the second quarter of 2007 due to a higher per BOE rate and increased production volumes. The per BOE rate in the second quarter of 2007 increased $3.93 as compared to the second quarter of 2006 due to the higher cost basis of our recently acquired Big Horn Basin and Williston Basin properties, development of proved undeveloped reserves and higher finding, development, and acquisition costs resulting from increases in rig rates, oilfield services costs, and acquisition costs. These factors resulted in additional DD&A expense of approximately $14.8 million. The increase in production volumes resulted in approximately $9.5 million of additional DD&A expense.

     Explorationexpense.Exploration expense decreased $0.6 million in the second quarter of 2007 as compared to the second quarter of 2006. During the second quarter of 2007, we did not expense any exploratory dry holes. During the second quarter of 2006, we expensed 5 exploratory dry holes totaling $2.0 million. In addition, impairment of unproved acreage in the second quarter of 2007 increased $1.6 million as compared to the second quarter of 2006 as we added additional leasehold costs and refined our estimated success rate in certain areas. The following table details our exploration-related expenses for the three months ended June 30, 2007 and 2006:

	Three months ended June 30,				Increase /
	2007		2006		(Decrease)
	(in thousands)
Dry holes	$	539	$	1,998	$	(1,459	)
Geological and seismic		94		847		(753	)
Delay rentals		163		129		34
Impairment of unproved acreage		2,619		1,042		1,577
Total	$	3,415	$	4,016	$	(601	)

     G&Aexpense. G&A expense increased $0.8 million from $5.4 million in the second quarter of 2006 to $6.2 million in the second quarter of 2007. The overall increase is primarily the result of increased staffing to manage our larger asset base, higher activity levels, and increased personnel costs due to intense competition for human resources within the industry.

     Derivativefairvalueloss.To increase clarity in our fina ncial statements by accounting for all contracts under the same method, we elected to discontinue hedge accounting prospectively for all of our remaining commodity derivatives beginning in

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July 2006. While this change has no effect on our cash flows, results of operations are affected by mark-to-market gains and losses, which fluctuate with the changes in oil and natural gas prices.

     During the second quarter of 2007, we recorded a $6.8 million derivative fair value loss as compared to $10.8 million in the second quarter of 2006, the components of which were as follows:

	Three months ended June 30,						Increase /
	2007			2006			(Decrease)
	(in thousands)
Ineffectiveness on designated cash flow hedges	$	—		$	(1,091	)	$	1,091
Mark-to-market loss on undesignated derivative contracts		10,315			12,368			(2,053	)
Settlements on commodity contracts		(3,549	)		(483	)		(3,066	)
Total derivative fair value loss	$	6,766		$	10,794		$	(4,028	)

     Other operating expense. Other operating expense increased $3.7 million from $1.1 million in the second quarter of 2006 to $4.8 million in the second quarter of 2007. The increase is primarily due to a $2.3 million loss on the sale of the Mid-Continent properties and increases in third-party transportation costs attributable to moving our CCA production into markets outside the immediate area of the production.

     Interest expense. Interest expense increased $17.1 million in the second quarter of 2007 as compared to the second quarter of 2006. The increase is primarily due to additional debt used to finance the Big Horn Basin and Williston Basin acquisitions. The weighted average interest rate for all long-term debt for the second quarter of 2007 was 7.0 percent as compared to 7.1 percent for the second quarter of 2006.

     The following table illustrates the components of interest expense for the three months ended June 30, 2007 and 2006:

	Three months ended June 30,				Increase /
	2007		2006		(Decrease)
	(in thousands)
6 1/4% Notes	$	2,425	$	2,420	$	5
6% Notes		4,627		4,620		7
7 1/4% Notes		2,747		2,748		(1	)
Revolving credit facilities		17,396		488		16,908
Other		625		442		183
Total	$	27,820	$	10,718	$	17,102

     Income taxes. During the second quarter of 2007, we recorded an income tax provision of $8.5 million as compared to $15.1 million in the second quarter of 2006. Our effective tax rate decreased in the second quarter of 2007 to 36.0 percent from 40.4 percent in the second quarter of 2006 due to a 2007 change in the apportionment of state net deferred tax liabilities and the 2006 enactment of a Texas franchise tax reform measure. The disposition of oil and natural gas properties in the Mid-Continent during the second quarter of 2007 resulted in a revaluation of state net deferred tax liabilities due to a larger apportionment of future taxable income to states with lower tax rates. The expense related to the state net deferred liability adjustment decreased the current quarter’s tax provision for the second quarter of 2007 by $0.4 million.

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Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006

     Oil and natural gas revenues and production. The following table illustrates the primary components of oil and natural gas revenues for the six months ended June 30, 2007 and 2006, as well as each period’s respective oil and natural gas production volumes:

	Six months ended June 30,						Increase / (Decrease)
	2007			2006
	(in thousands, except per unit and per day amounts)
Revenues:
Oil wellhead	$	239,867		$	193,873		$	45,994
Oil hedges		(21,648	)		(25,324	)		3,676
Total oil revenues	$	218,219		$	168,549		$	49,670		29	%
Natural gas wellhead	$	83,255		$	82,804		$	451
Natural gas hedges		(5,146	)		(5,931	)		785
Total natural gas revenues	$	78,109		$	76,873		$	1,236		2	%
Combined wellhead	$	323,122		$	276,677		$	46,445
Combined hedges		(26,794	)		(31,255	)		4,461
Total combined oil and natural gas revenues	$	296,328		$	245,422		$	50,906		21	%
Revenues:
Oil wellhead ($/Bbl)	$	53.10		$	52.71		$	0.39
Oil hedges ($/Bbl)		(4.79	)		(6.89	)		2.10
Total oil revenues ($/Bbl)	$	48.31		$	45.82		$	2.49		5	%
Natural gas wellhead ($/Mcf)	$	6.39		$	6.85		$	(0.46	)
Natural gas hedges ($/Mcf)		(0.39	)		(0.49	)		0.10
Total natural gas revenues ($/Mcf)	$	6.00		$	6.36		$	(0.36	)	-6	%
Combined wellhead ($/BOE)	$	48.30		$	48.61		$	(0.31	)
Combined hedges ($/BOE)		(4.01	)		(5.49	)		1.48
Total combined oil and natural gas revenues ($/BOE)	$	44.29		$	43.12		$	1.17		3	%
Total production volumes:
Oil (Bbls)		4,517			3,678			839		23	%
Natural gas (Mcf)		13,036			12,084			952		8	%
Combined (BOE)		6,690			5,692			998		18	%
Daily production volumes:
Oil (Bbls/D)		24,957			20,319			4,638		23	%
Natural gas (Mcf/D)		72,022			66,765			5,257		8	%
Combined (BOE/D)		36,961			31,447			5,514		18	%
Average NYMEX prices:
Oil (per Bbl)	$	61.65		$	67.09		$	(5.44	)	-8	%
Natural gas (per Mcf)	$	7.42		$	7.28		$	0.14		2	%

     Oil revenues increased $49.7 million from $168.5 million in the first six months of 2006 to $218.2 million in the first six months of 2007. The increase is primarily due to an increase in oil production volumes of 839 MBbls, which contributed approximately $44.3 million in additional oil revenues, and higher average realized oil prices, which contributed approximately $5.4 million in additional oil revenues. The increase in oil production volumes is primarily the result of our Big Horn Basin and Williston Basin acquisitions and our development programs. Our realized average oil price increased as our wellhead price increased and commodity derivative contract costs included in oil revenues decreased. Our higher average oil wellhead price resulted in $1.7 million of additional oil revenues, or $0.39 per Bbl, and commodity derivative contract costs decreased $3.7 million, or $2.10 per Bbl. Our average oil wellhead price increased $0.39 per Bbl in the first six months of 2007 over the first six months of 2006 as a result of the tightening of our oil differential. Our oil production volumes would have been 24,182 Bbls/D and 19,963 Bbls/D for the six months ended June 30, 2007 and 2006, respectively, excluding volumes associated with our Mid-Continent disposition.

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     Our oil wellhead revenue was reduced by $10.2 million and $12.2 million in the six months ended June 30, 2007 and 2006, respectively, for the net profits interests payments related to our CCA properties.

     Natural gas revenues increased $1.2 million from $76.9 million for the six months ended June 30, 2006 to $78.1 million for the six months ended June 30, 2007. The increase is primarily due to an increase in production volumes of 952 Mcf, which contributed approximately $6.5 million in additional natural gas revenues, partially offset by lower average realized natural gas prices, which reduced revenues by approximately $5.3 million. The increase in natural gas production volumes is the result of our West Texas joint development program with ExxonMobil and our development program in the Mid-Continent area. Due to a decrease in our natural gas wellhead price, our realized average natural gas price decreased $0.36 per Mcf despite a decrease in commodity derivative contract costs included in natural gas revenues. Our lower average natural gas wellhead price resulted in a decrease of $6.1 million in natural gas revenues, or $0.46 per Mcf, while commodity derivative contract costs decreased $0.8 million, or $0.10 per Mcf. Our average natural gas wellhead price decreased $0.46 per Mcf in the first six months of 2007 over the first six months of 2006 as a result of a widening of our natural gas differential. Our natural gas production volumes would have been 51,201 Mcf/D and 50,315 Mcf/D for the six months ended June 30, 2007 and 2006, respectively, excluding volumes associated with our Mid-Continent disposition.

     The table below illustrates the relationship between oil and natural gas wellhead prices as a percentage of average NYMEX prices for the six months ended June 30, 2007 and 2006. Management uses the wellhead to NYMEX margin analysis to analyze trends in our oil and natural gas revenues.

	Six months ended June 30,
	2007			2006
Oil wellhead ($/Bbl)	$	53.10		$	52.71
Average NYMEX ($/Bbl)	$	61.65		$	67.09
Differential to NYMEX	$	(8.55	)	$	(14.38	)
Oil wellhead to NYMEX percentage		86	%		79	%
Natural gas wellhead ($/Mcf)	$	6.39		$	6.85
Average NYMEX ($/Mcf)	$	7.42		$	7.28
Differential to NYMEX	$	(1.03	)	$	(0.43	)
Natural gas wellhead to NYMEX percentage		86	%		94	%

     In the first six months of 2007, our oil wellhead price as a percentage of the average NYMEX price increased to 86 percent from 79 percent in the first six months of 2006. The differential was due to market conditions in the Rocky Mountain refining area, which has adversely affected the oil wellhead price we receive on our CCA and Williston Basin production. Production increases from competing Canadian and Rocky Mountain producers, in conjunction with limited refining and pipeline capacity in the Rocky Mountain area, created steep pricing discounts in the first six months of 2006, but have since tightened. The oil differential in the first six months of 2007 negatively impacted oil revenues by approximately $38.6 million as compared to approximately $52.9 million in the first six months of 2006.

     In the first six months of 2007, our natural gas wellhead price as a percentage of the average NYMEX price decreased to 86 percent from 94 percent in the first six months of 2006. The differential widened because the price received for natural gas in CCA did not correlate well with NYMEX in the first six months of 2007 due to market conditions in the Rockies. The natural gas differential in the first six months of 2007 negatively impacted natural gas revenues by approximately $13.4 million as compared to approximately $5.2 million in the first six months of 2006.

     Marketing revenues and expenses. The following table summarizes our marketing activities for the six months ended June 30, 2007 and 2006:

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	Six months ended June 30,
	2007			2006
	(in thousands, except per BOE amounts)
Marketing revenues	$	23,857		$	60,032
Marketing expenses		(23,518	)		(57,660	)
Marketing, net	$	339		$	2,372
Marketing revenues per BOE	$	3.57		$	10.55
Marketing expenses per BOE		(3.52	)		(10.13	)
Marketing, net per BOE	$	0.05		$	0.42

     Expenses. The following table summarizes our expenses, excluding marketing expenses shown above, for the six months ended June 30, 2007 and 2006:

	Six months ended June 30,					Increase / (Decrease)
	2007			2006
Expenses (in thousands):
Production:
Lease operations	$	68,072		$	45,854	$	22,218
Production, ad valorem, and severance taxes		31,747			24,822		6,925
Total production expenses		99,819			70,676		29,143		41	%
Other:
Depletion, depreciation, and amortization		87,346			55,008		32,338
Exploration		14,936			6,025		8,911
General and administrative		13,548			11,949		1,599
Derivative fair value loss		52,380			13,100		39,280
Other operating		7,316			2,596		4,720
Total operating		275,345			159,354		115,991		73	%
Interest		44,107			22,505		21,602
Income tax provision (benefit)		(7,496	)		26,313		(33,809	)
Total expenses	$	311,956		$	208,172	$	103,784		50	%
Expenses (per BOE):
Production:
Lease operations	$	10.18		$	8.06	$	2.12
Production, ad valorem, and severance taxes		4.75			4.36		0.39
Total production expenses		14.93			12.42		2.51		20	%
Other:
Depletion, depreciation, and amortization		13.06			9.66		3.40
Exploration		2.23			1.06		1.17
General and administrative		2.03			2.10		(0.07	)
Derivative fair value loss		7.83			2.30		5.53
Other operating		1.09			0.46		0.63
Total operating		41.17			28.00		13.17		47	%
Interest		6.59			3.95		2.64
Income tax provision (benefit)		(1.12	)		4.62		(5.74	)
Total expenses	$	46.64		$	36.57	$	10.07		28	%

     Production expenses. Total production expenses increased $29.1 million from $70.7 million in the first six months of 2006 to $99.8 million in the first six months of 2007. This increase resulted from an increase in total production volumes, as well as a

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$2.51 increase in production expenses per BOE. Our production margin for the first six months of 2007 increased by 12 percent ($21.8 million) as compared to the first six months of 2006. Total production expenses per BOE increased by 20 percent while total oil and natural gas revenues per BOE increased by only three percent. On a per BOE basis, our production margin decreased four percent to $29.36 per BOE as compared to $30.70 per BOE for the first six months of 2006.

     The production expense attributable to LOE increased $22.2 million from $45.9 million in the first six months of 2006 to $68.1 million in the first six months of 2007, primarily as a result of an increase in the average per BOE rate, which contributed approximately $14.2 million of additional LOE, and an increase in production volumes, which contributed approximately $8.0 million of additional LOE. The increase in production volumes is the result of our Big Horn Basin and Williston Basin acquisitions. The increase in our average LOE per BOE rate of $2.12 was attributable to:

• increases in prices paid to oilfield service companies and suppliers due to a current higher price environment;

• increased operational activity to maximize production;

• HPAI expensed at the CCA; and

• higher salary levels for engineers and other technical professionals.

     The production expense attributable to production taxes increased $6.9 million from $24.8 million for the six months ended June 30, 2006 to $31.7 million for the six months ended June 30, 2007. The increase is due to higher wellhead revenues. As a percentage of oil and natural gas revenues (excluding the effects of commodity derivative contracts), production taxes increased to 9.8 percent in the first six months of 2007 as compared to 9.0 percent in the first six months of 2006 as a result of higher rates in the states where the properties associated with the Big Horn Basin and Williston Basin acquisitions are located.

     DD&A expense. DD&A expense increased $32.3 million from $55.0 million for the six months ended June 30, 2006 to $87.3 million for the six months ended June 30, 2007 due to a higher per BOE rate and increased production volumes. The per BOE rate in the first six months of 2007 increased $3.40 as compared to the first six months of 2006 due to the higher cost basis of our recently acquired Big Horn Basin and Williston Basin properties, development of proved undeveloped reserves and higher finding, development, and acquisition costs resulting from increases in rig rates, oilfield services costs, and acquisition costs. These factors resulted in additional DD&A expense of approximately $22.7 million. The increase in production volumes resulted in approximately $9.6 million of additional DD&A expense.

     Exploration expense. Exploration expense increased $8.9 million in the first six months of 2007 as compared to the first six months of 2006. During the first six months of 2007, we expensed 3 exploratory dry holes totaling $9.0 million. During the first six months of 2006, we expensed 7 exploratory dry holes totaling $2.6 million. In addition, impairment of unproved acreage in the first six months of 2007 increased $3.0 million as compared to the first six months of 2006 as we added additional leasehold costs and refined our estimated success rate in certain areas. The following table details our exploration-related expenses for the six months ended June 30, 2007 and 2006:

	Six months ended June 30,				Increase /
	2007		2006		(Decrease)
	(in thousands)
Dry holes	$	9,020	$	2,580	$	6,440
Geological and seismic		725		1,252		(527	)
Delay rentals		341		355		(14	)
Impairment of unproved acreage		4,850		1,838		3,012
Total	$	14,936	$	6,025	$	8,911

     G&A expense. G&A expense increased $1.6 million from $11.9 million in the first six months of 2006 to $13.5 million in the first six months of 2007. The overall increase is primarily the result of increased staffing to manage our larger asset base, higher activity levels, and increased personnel costs due to intense competition for human resources within the industry.

     Derivative fair value loss. During the six months ended June 30, 2007, we recorded a $52.4 million derivative fair value loss as compared to $13.1 million in the six months ended June 30, 2006, the components of which were as follows:

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	Six months ended June 30,						Increase /
	2007			2006			(Decrease)
	(in thousands)
Ineffectiveness on designated cash flow hedges	$	—		$	1,748		$	(1,748	)
Mark-to-market loss on undesignated derivative contracts		64,125			13,461			50,664
Settlements on commodity contracts		(11,745	)		(2,109	)		(9,636	)
Total derivative fair value loss	$	52,380		$	13,100		$	39,280

     Other operating expense. Other operating expense increased $4.7 million from $2.6 million in the first six months of 2006 to $7.3 million in the first six months of 2007. The increase is primarily due to a $2.3 million loss on the sale of the Mid-Continent properties and increases in third-party transportation costs attributable to moving our CCA production into markets outside the immediate area of the production.

     Interest expense. Interest expense increased $21.6 million in the first six months of 2007 as compared to the first six months of 2006. The increase is primarily due to additional debt used to finance the Big Horn Basin and Williston Basin acquisitions. The weighted average interest rate for all long-term debt for the first six months of 2007 was 7.0 percent as compared to 7.1 percent for the same period of 2006.

     The following table illustrates the components of interest expense for the six months ended June 30, 2007 and 2006:

	Six months ended June 30,				Increase /
	2007		2006		(Decrease)
	(in thousands)
6 1/4% Notes	$	4,850	$	4,840	$	10
6% Notes		9,255		9,171		84
7 1/4% Notes		5,493		5,493		—
Revolving credit facilities		23,022		2,223		20,799
Other		1,487		778		709
Total	$	44,107	$	22,505	$	21,602

     Income taxes. During the first six months of 2007, we recorded an income tax benefit of $7.5 million, or an effective rate of 34.5 percent, as compared to an income tax provision of $26.3 million, or an effective rate of 39.6 percent, for the same period of 2006. This is due to a pre-tax loss in the first six months of 2007 as compared to pre-tax income in the first six months of 2006. The decrease in the effective rate is due to a 2007 change in the apportionment of state net deferred tax liabilities and the 2006 enactment of a Texas franchise tax reform measure. Asset acquisitions and dispositions in the first six months of 2007 resulted in a revaluation of state net deferred tax liabilities due to a larger apportionment of future taxable income to states with higher tax rates. The expense related to the state net deferred liability adjustment reduced the benefit resulting from the pre-tax loss for the six months ended June 30, 2007 by $0.5 million. Our estimated annual effective tax rate was 39.5 percent for the six months ended June 30, 2007.

     On January 1, 2007, we adopted the provisions of FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We have performed an evaluation of tax positions and have determined that the adoption of FIN 48 did not have a material impact on our financial condition, results of operations, or cash flows.

Capital Resources

     Our primary capital resources are as follows:

• Cash flows from operating activities;

• Cash flows from financing activities; and

• Current capitalization.

     Cash flows from operating activities. Cash provided by operating activities decreased $50.2 million from $131.5 million for the first six months of 2006 to $81.3 million for the first six months of 2007. The decrease was primarily due to

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an increase in our net derivative liabilities as a result of increases in our commodity derivative positions and the forward price curve, and an increase in accounts receivable as a result of increased oil and natural gas sales, partially offset by an increase in our production margin.

     Cash flows from financing activities. Our cash flows from financing activities consist primarily of proceeds from and payments on long-term debt and net proceeds received from the sale of additional common stock. During the six months ended June 30, 2007, we received net cash of $624.0 million from financing activities, including net borrowings on our revolving credit facilities of $639 million.

     We periodically draw on our revolving credit facilities to fund acquisitions and other capital commitments. Historically, we have repaid large balances on our revolving credit facilities with proceeds from the issuance of senior subordinated notes in order to extend the maturity date of the debt and fix the interest rate. Our total borrowings less repayments on our revolving credit facilities, as described above, resulted in a net increase in outstanding borrowings under our revolving credit facilities of $639 million from $68 million at December 31, 2006 to $707 million at June 30, 2007, primarily due to borrowings used to finance the Big Horn Basin and Williston Basin acquisitions partially offset with repayments from the net proceeds received from the Mid-Continent disposition.

     During the six months ended June 30, 2006, we received net cash of $33.9 million from financing activities. This consisted primarily of net proceeds from the issuance of 4 million shares of common stock in April 2006, which was used to repay $80 million outstanding under our revolving credit facility.

     Current capitalization. At June 30, 2007, we had total assets of $2.7 billion and total capitalization was $2.1 billion, of which 39 percent was represented by stockholders’ equity and 61 percent by long-term debt. At December 31, 2006, we had total assets of $2.0 billion and total capitalization was $1.5 billion, of which 55 percent was represented by stockholders’ equity and 45 percent by long-term debt. The percentages of our capitalization represented by stockholders’ equity and long-term debt could vary in the future if debt is used to finance future capital projects or potential acquisitions.

Capital Commitments

     Our primary needs for cash are as follows:

• Cash flows from investing activities including:

- Development, exploitation, and exploration of existing oil and natural gas properties;

- Acquisitions of oil and natural gas properties and leasehold acreage;

• Funding of necessary working capital; and

• Contractual obligations.

     Cash flows from investing activities. Cash used in investing activities increased $534.7 million from $166.4 million in the first six months of 2006 to $701.1 million in the first six months of 2007. The increase was primarily due to a $763.7 million increase in amounts paid for the acquisition of oil and natural gas properties, primarily due to the Big Horn and Williston Basin acquisitions, partially offset by a $290.9 million increase in amounts received for the disposition of oil and natural gas properties, primarily due to the Mid-Continent disposition.

     Development, exploitation, and exploration of existing oil and natural gas properties. The following table summarizes our costs incurred (excluding asset retirement obligations) related to development, exploitation, and exploration activities during the three and six months ended June 30, 2007 and 2006:

	Three months ended June 30,				Six months ended June 30,
	2007		2006		2007		2006
			(in thousands)
Development and exploitation	$	74,339	$	63,010	$	136,521	$	95,895
Exploration		19,005		16,909		50,223		38,633
HPAI		680		7,878		1,996		14,459
Total	$	94,024	$	87,797	$	188,740	$	148,987

     Development and exploitation. Our expenditures for development and exploitation investments primarily relate to drilling development and infill wells, workovers of existing wells, and field related facilities. Our development and exploitation capital

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for the three months ended June 30, 2007 included a total of 44 gross (13.5 net) successful wells and 1 gross (0.9 net) development dry holes. Our development and exploitation capital for the first half of 2007 included a total of 88 gross (36.0 net) successful wells and 2 gross and (1.4 net) development dry holes.

     We currently have 8 operated rigs drilling on the onshore continental United States with 2 rigs in the Mid-Continent, 1 rig in the Northern region, 1 rig in the New Mexico region and 4 rigs in West Texas.

     Exploration. Our expenditures for exploration investments primarily relate to drilling exploratory wells, seismic costs, delay rentals, and geological and geophysical costs. In the second quarter of 2007, our exploration capital yielded 7 gross (3.3 net) successful wells and no exploratory dry holes. During the six months ended June 30, 2007, our exploration capital yielded 28 gross (10.4 net) exploratory wells that were productive and 3 gross (1.5 net) exploratory dry holes.

     HPAI. During the three months ended June 30, 2007 and 2006, we invested $0.7 million and $7.9 million on the HPAI programs in the Pennel, Coral Creek, and Little Beaver units of the CCA. For the six months ended June 30, 2007 and 2006, we invested $2.0 million and $14.5 million on the HPAI programs.

     Acquisitions of oil and natural gas properties and leasehold acreage. The following table summarizes our costs incurred (excluding asset retirement obligations) for oil and natural gas property acquisitions during the three and six months ended June 30, 2007 and 2006:

	Three months ended June 30,				Six months ended June 30,
	2007		2006		2007		2006
			(in thousands)
Acquisitions of proved property	$	365,909	$	3,545	$	761,885	$	4,052
Acquisitions of leasehold acreage		20,528		4,683		23,783		11,865
Total	$	386,437	$	8,228	$	785,668	$	15,917

     Acquisitions. On March 7, 2007, we acquired oil and natural gas properties in the Big Horn Basin for a purchase price of approximately $393.3 million, including $1.2 million of transaction costs, $392.4 million of which related to proved properties. On April 11, 2007, we acquired oil and natural gas properties in the Williston Basin for a purchase price of approximately $393.7 million, including $1.2 million of transaction costs, $380.0 million of which related to proved properties.

     Leasehold acreage costs. During the three and six months ended June 30, 2007, our capital expenditures for leasehold acreage totaled $20.5 million and $23.8 million, respectively. Of these amounts, $16.1 million related to the Williston Basin acquisition and the remainder related to the acquisition of unproved acreage in various areas. During the three and six months ended June 30, 2006, our capital expenditures for leasehold acreage totaled $4.7 million and $11.9 million, respectively, all of which related to the acquisition of unproved acreage in various areas.

     Funding of necessary working capital. At June 30, 2007, our working capital (defined as total current assets less total current liabilities) was negative $10.3 million while at December 31, 2006 our working capital was negative $40.7 million, an improvement of $30.4 million. The improvement is primarily attributable to an increase in accounts receivable as a result of increased oil and natural gas sales.

     For the remainder of 2007, we expect working capital to remain negative. Negative working capital is expected mainly due to fair values of our commodity derivative contracts (the settlements of which will be offset by cash flows from the sale of production mitigated against price risk under those contracts) and deferred commodity derivative contract premiums. We anticipate cash reserves to be close to zero because we intend to use any excess cash to fund capital obligations and pay down any outstanding borrowings under our revolving credit facilities. We do not plan to pay cash dividends in the foreseeable future. Our production volumes and the overall 2007 commodity prices and our related differentials for oil and natural gas will be the largest variables affecting working capital. Our operating cash flow is determined in large part by production volumes and commodity prices. Assuming moderate to high commodity prices and constant or increasing production volumes, our operating cash flow should remain positive in 2007.

     The Board has approved a capital budget of approximately $370 million for 2007. The level of these and other future expenditures is largely discretionary, and the amount of funds devoted to any particular activity may increase or decrease

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significantly, depending on available opportunities, timing of projects, and market conditions. We plan to finance our ongoing expenditures using internally generated cash flow, cash on hand, and borrowings under our revolving credit facilities.

     Contractual obligations. The following table illustrates our contractual obligations and commercial commitments outstanding at June 30, 2007:

Contractual Obligations	Payments Due by Period
and Commitments	Total		2007		2008 - 2009		2010 - 2011		Thereafter
	(in thousands)
6 1/4% Notes (a)	$	215,626	$	4,688	$	18,750	$	18,750	$	173,438
6% Notes (a)		453,000		9,000		36,000		36,000		372,000
7 1/4% Notes (a)		264,188		5,438		21,750		21,750		215,250
Revolving credit facilities (a)		944,391		25,435		101,739		101,739		715,478
Derivative obligations (b)		73,137		33,270		39,011		856		—
Development commitments (c)		124,835		78,146		46,689		—		—
Operating leases and commitments (d)		15,157		1,344		5,347		4,569		3,897
Asset retirement obligations (e)		138,345		653		2,611		2,611		132,470
Total	$	2,228,679	$	157,974	$	271,897	$	186,275	$	1,612,533

(a)	Amounts included in the table above include both principal and projected interest payments. Please read Note 8 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding our long-term debt.
(b)	Derivative obligations represent net liabilities for derivatives that were valued as of June 30, 2007. With the exception of $50.4 million of deferred premiums on derivative contracts, the ultimate settlement amounts of the remaining portions of our derivative obligations are unknown because they are subject to continuing market risk. Please read “Item 3. Quantitative and Qualitative Disclosures about Market Risk” and Note 6 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding our derivative obligations.
(c)	Development commitments include: authorized purchases for work in process of $41.2 million; future minimum payments for drilling rig operations of $76.6 million; and $7.0 million for minimum capital obligations associated with the remaining 7 commitment wells to be drilled under the ExxonMobil joint development agreement. Also at June 30, 2007, we had $111.1 million of authorized purchases not placed to vendors (authorized AFEs), which were not accrued and are excluded from the above table but are budgeted for and expected to be made unless circumstances change.
(d)	Operating leases and commitments include office space and equipment obligations that have non-cancelable lease terms in excess of one year of $13.5 million and future minimum payments for other operating commitments of $1.7 million.
(e)	Asset retirement obligations represent the undiscounted future plugging and abandonment expenses on oil and natural gas properties and related facilities disposal at the completion of field life. Please read Note 7 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding our asset retirement obligations.

     Other contingencies and commitments. In order to facilitate ongoing sales of our oil production in the CCA, we ship a portion of our production in pipelines downstream and sell to purchasers at major U.S. market hubs. From time to time, shipping delays, purchaser stipulations, or other conditions may require that we sell our oil production in periods subsequent to the period in which it is produced. In such case, the deferred sale would have an adverse effect in the period of production on reported production volumes, oil and natural gas revenues, and costs as measured on a unit-of-production basis.

     The marketing of our CCA oil production is mainly dependent on transportation through the Bridger, Poplar, and Butte pipelines to markets in the Guernsey, Wyoming area. Recently, alternative transportation routes and markets have been developed by moving a portion of the crude oil production through Enbridge to the Clearbrook, Minnesota hub. In addition, new markets to the west have been identified and a portion of our crude oil is being moved that direction through the Rocky Mountain Pipeline. To a lesser extent, our production also depends on transportation through Platte Pipeline to Wood River, Illinois as well as other pipelines connected to the Guernsey, Wyoming area. While shipments on Platte Pipeline are currently oversubscribed and subject to apportionment since December 2005, we were allocated transportation effective January 1, 2007. However, further restrictions on available capacity to transport oil through any of the above mentioned pipelines, or any other pipelines, or any refinery upsets could have a material adverse effect on our production volumes and the prices we receive for our production.

     We expect the differential between the NYMEX price of crude oil and the wellhead price we receive to remain approximately constant or to slightly widen in the third quarter of 2007 as compared to the second quarter of 2007. In recent years, production increases from competing Canadian and Rocky Mountain producers, in conjunction with limited refining and pipeline capacity from the Rocky Mountain area, have gradually widened this differential. We cannot accurately predict crude oil differentials. Natural gas differentials are expected to remain approximately constant or to widen slightly in the third quarter

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of 2007 as compared to the second quarter of 2007. Increases in the differential between the NYMEX price for oil and natural gas and the wellhead price we receive could have a material adverse effect on our results of operations, financial position, and cash flows.

Liquidity

     Cash on hand, internally generated cash flows, and the borrowing capacity under our revolving credit facilities are our major sources of liquidity. We also have the ability to adjust our level of capital expenditures. We may use other sources of capital, including the issuance of additional debt or equity securities, to fund any major acquisitions we might secure in the future and to maintain our financial flexibility.

     Internally generated cash flows. Our internally generated cash flows, results of operations, and financing for our operations are dependent on oil and natural gas prices. Realized oil and natural gas prices for the first six months of 2007 decreased by eight percent and increased by two percent, respectively, as compared to the first six months of 2006. These prices have historically fluctuated widely in response to changing market forces. For the first six months of 2007, approximately 68 percent of our production was oil. As we previously discussed, our oil wellhead differentials during the first six months of 2007 tightened as compared to the first six months of 2006, favorably impacting the amount of oil revenues we received on our oil production. To the extent oil and natural gas prices decline or we experience significant widening of our wellhead differentials, our earnings, cash flows from operations, and availability under our revolving credit facilities may be adversely impacted. Prolonged periods of low oil and natural gas prices or sustained wider than historical wellhead differentials could cause us to not be in compliance with financial covenants under our revolving credit facilities and thereby affect our liquidity. We believe that our internally generated cash flows and unused availability under our revolving credit facilities are sufficient to fund our planned capital expenditures for the foreseeable future.

     Revolving credit facilities. Our principal source of short-term liquidity is our revolving credit facilities, which mature on March 7, 2012.

     On March 7, 2007, we entered into the Encore Credit Agreement with a bank syndicate comprised of Bank of America, N.A. and other lenders. The Encore Credit Agreement amended and restated our Amended and Restated Credit Agreement dated as of August 19, 2004, as amended. The borrowing base is redetermined semi-annually and upon requested special redeterminations and may be increased or decreased, up to a maximum of $1.25 billion. The borrowing base on June 30, 2007 was $900 million.

     Also on March 7, 2007, EEPO entered into the EEPO Credit Agreement with a bank syndicate comprised of Bank of America, N.A. and other lenders. The EEPO Credit Agreement provides for revolving credit loans to be made to EEPO from time to time and letters of credit to be issued from time to time for the account of EEPO or any of its restricted subsidiaries. The borrowing base is redetermined semi-annually and upon requested special redeterminations and may be increased or decreased, up to a maximum of $300 million. The borrowing base on June 30, 2007 was $115 million, and EEPO has the option of borrowing up to $10 million in excess of the borrowing base for a certain period of time following the closing date of the MLP.

     On June 30, 2007, we had $707 million outstanding and $298 million available to borrow under our revolving credit facilities. On August 1, 2007, we had $720.5 million outstanding and $284.5 million available to borrow under our revolving credit facilities. Please read Note 8 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding our revolving credit facilities.

     Debt covenants. At June 30, 2007, EEPO was in violation of the EEPO Credit Agreement covenant that requires it to maintain a ratio of consolidated EBITDA (as defined in the EEPO Credit Agreement) to the sum of consolidated net interest expense plus letter of credit fees of not less than 2.5 to 1.0. EEPO requested and obtained a waiver from the bank syndicate for the June 30, 2007 violation. Amounts outstanding under the EEPO Credit Agreement have continued to be classified as long-term debt in the accompanying Consolidated Balance Sheet as we have the ability and intent to refinance borrowings, on a long-term basis, should any amounts become due and payable within the next twelve months under the EEPO Credit Agreement. We were in compliance with all of our other debt covenants at June 30, 2007.

     Letters of credit. As of June 30, 2007, we had $20 million in outstanding letters of credit all of which relate to the ExxonMobil joint development agreement. As of August 1, 2007, we had $20 million in outstanding letters of credit all of which relate to the ExxonMobil joint development agreement.

Critical Accounting Policies and Estimates

     On January 1, 2007, we adopted the provisions of FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes

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recognized in a company’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. See Note 9 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for more information.

     Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our 2006 Annual Report on Form 10-K for more information.

New Accounting Pronouncements

     The effects of new accounting pronouncements are discussed in Note 2 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The information included in “Quantitative and Qualitative Disclosures about Market Risk” in our 2006 Annual Report on Form 10-K is incorporated herein by reference. Such information includes a description of our potential exposure to market risks, including commodity price risk and interest rate risk.

Commodity Price Sensitivity

     Our outstanding derivative contracts as of June 30, 2007 are discussed in Note 6 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements.” As of June 30, 2007, the fair market value of our oil derivative contracts was a net $10.3 million asset and the fair market value of our natural gas derivative contracts was a net $6.8 million asset. Based on our open commodity derivative positions at June 30, 2007, a $1.00 per Bbl and $1.00 per Mcf increase in the NYMEX prices for oil and natural gas would result in a decrease to our net derivative fair value asset of approximately $10.2 million, while a $1.00 decrease in the respective NYMEX prices for oil and natural gas would result in an increase to our net derivative fair value asset of approximately $18.3 million.

Interest Rate Sensitivity

     At June 30, 2007, we had total long-term debt of $1.3 billion, which is recorded net of discount of $6.0 million. Of this amount, $150 million bears interest at a fixed rate of 6 1/4 percent, $300 million bears interest at a fixed rate of 6 percent, and $150 million bears interest at a fixed rate of 7 1/4 percent. The remaining outstanding long-term debt balance of $707 million is under our revolving credit facilities and is subject to floating market rates of interest that are linked to LIBOR.

     At this level of floating rate debt, if LIBOR increased one percent, we would incur an additional $7.1 million of interest expense per year, and if the rate decreased one percent, we would incur $7.1 million less. Additionally, if LIBOR increased one percent, we estimate the fair value of our fixed rate debt at June 30, 2007 would decrease from $543.6 million to $509.4 million, and if the rate decreased one percent, we estimate the fair value would increase to $580.8 million.

Item 4. Controls and Procedures

     In accordance with the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2007. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2007 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

     There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     We are a party to ongoing legal proceedings in the ordinary course of business. Management does not believe the result of these legal proceedings will have a material adverse effect on us.

Item 1A. Risk Factors

     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition, and/or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

     The following table summarizes purchases of our common stock during the second quarter of 2007:

					Total Number of		Maximum Number
					Shares Purchased		of Shares That May
	Total Number				as Part of Publicly		Yet Be Purchased
	of Shares		Average Price		Announced Plans		Under the Plans or
Month	Purchased		Paid per Share		or Programs		Programs
April		—	$	—		—	NA
May		—		—		—	NA
June (a)		5,545		27.80		—	NA
Total		5,545		27.80		—	NA

(a) We do not have a formal common stock repurchase program. During the second quarter of 2007, certain employees surrendered shares of common stock to pay income tax withholding obligations in conjunction with vesting of restricted shares.

Item 4. Submission of Matters to a Vote of Security Holders

     Our annual meeting of stockholders was held Thursday, May 3, 2007. The items submitted to stockholders for vote were the election of eight nominees to serve on the Board during 2007 and until our next annual meeting and to ratify the appointment of the independent registered public accounting firm for 2007. Notice of the meeting and proxy information was distributed to stockholders prior to the meeting in accordance with law. There were no solicitations in opposition to the nominees. Out of a total of 54,179,572 shares of our common stock outstanding and entitled to vote, 50,959,314 shares (94.1 percent) were present at the meeting in person or by proxy.

Election of Directors

     There were eight nominees for election to serve as our directors. The vote tabulation with respect to each nominee to the Board was as follows:

NOMINEE	FOR		WITHHELD
I. Jon Brumley		50,250,218		709,096
Jon S. Brumley		50,645,855		313,459
John A. Bailey		50,831,128		128,186
Martin C. Bowen		50,796,878		162,436
Ted Collins, Jr.		45,363,918		5,595,396
Ted A. Gardner		50,831,128		128,186
John V. Genova		50,831,168		128,146
James A. Winne III		50,747,610		211,704

41

ENCORE ACQUISITION COMPANY

Appointment of Independent Registered Public Accounting Firm

     The Board recommended that our stockholders ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm. The vote tabulation with respect to the ratification of the appointment of the independent registered public accounting firm was as follows:

FOR	AGAINST		ABSTAIN
50,856,253		58,016		45,045

Item 6. Exhibits

Exhibits

2.1	Purchase and Sale Agreement dated May 16, 2007 between Crow Creek and Encore Operating, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K, filed with the SEC on July 6, 2007).
3.1	Second Amended and Restated Certificate of Incorporation of the Company (incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001, filed with the SEC on November 7, 2001).
3.1.2	Certificate of Amendment to Second Amended and Restated Certificate of Incorporation of the Company (incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005, filed with the SEC on May 5, 2005).
3.2	Second Amended and Restated Bylaws of the Company (incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001, filed with the SEC on November 7, 2001).
10.1*	First Amended and Restated Agreement of Limited Partnership of Encore Energy Partners LP, dated as of May 10, 2007.
10.2*	Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership of Encore Energy Partners LP, dated as of July 3, 2007.
31.1*	Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer).
31.2*	Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer).
32.1*	Section 1350 Certification (Principal Executive Officer).
32.2*	Section 1350 Certification (Principal Financial Officer).
99.1*	Statement showing computation of ratios of earnings to fixed charges.

* Filed herewith.

42

ENCORE ACQUISITION COMPANY

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ENCORE ACQUISITION COMPANY
Date: August 9, 2007	/s/ Robert C. Reeves
	Robert C. Reeves
	Senior Vice President, Chief Financial Officer, and Treasurer

43

EX-10.1

Exhibit 10.1

FIRST AMENDED AND RESTATED

AGREEMENT OF LIMITED PARTNERSHIP

OF

ENCORE ENERGY PARTNERS LP

TABLE OF CONTENTS

ARTICLE I
DEFINITIONS
Section 1.1	Definitions	1
Section 1.2	Construction	17
ARTICLE II
ORGANIZATION
Section 2.1	Formation	18
Section 2.2	Name	18
Section 2.3	Registered Office; Registered Agent; Principal Office; Other Offices	18
Section 2.4	Purpose and Business	19
Section 2.5	Powers	19
Section 2.6	Power of Attorney	19
Section 2.7	Term	21
Section 2.8	Title to Partnership Assets	21
Section 2.9	Certain Undertakings Relating to the Separateness of the Partnership	21
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1	Limitation of Liability	22
Section 3.2	Management of Business	23
Section 3.3	Outside Activities of the Limited Partners	23
Section 3.4	Rights of Limited Partners	23
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF
PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
Section 4.1	Certificates	24
Section 4.2	Mutilated, Destroyed, Lost or Stolen Certificates	24
Section 4.3	Record Holders	25
Section 4.4	Transfer Generally	26
Section 4.5	Registration and Transfer of Limited Partner Interests	26
Section 4.6	Transfer of the General Partner’s General Partner Interest	27
Section 4.7	Restrictions on Transfers	28
Section 4.8	Eligible Holder Certifications; Non-Eligible Holders	29
Section 4.9	Redemption of Partnership Interests of Non-Eligible Holders	30

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF
PARTNERSHIP INTERESTS
Section 5.1	Organizational Contributions	31
Section 5.2	Contributions by the General Partner and its Affiliates	32
Section 5.3	[Reserved]	32
Section 5.4	Interest and Withdrawal	32
Section 5.5	Capital Accounts	32
Section 5.6	Issuances of Additional Partnership Securities	35
Section 5.7	Limited Preemptive Right	36
Section 5.8	Splits and Combinations	36
Section 5.9	Fully Paid and Non-Assessable Nature of Limited Partner Interests	37
Section 5.10	Rights of Holders of Management Incentive Units	37
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1	Allocations for Capital Account Purposes	42
Section 6.2	Allocations for Tax Purposes	47
Section 6.3	Requirement and Characterization of Distributions; Distributions to Record Holders	50
Section 6.4	Special Provisions Relating to the Holders of Management Incentive Units	50
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1	Management	51
Section 7.2	Certificate of Limited Partnership	53
Section 7.3	Restrictions on the General Partner’s Authority	53
Section 7.4	Reimbursement of the General Partner	54
Section 7.5	Outside Activities	54
Section 7.6	Loans from the General Partner; Loans or Contributions from the Partnership or Group Members	56
Section 7.7	Indemnification	56
Section 7.8	Liability of Indemnitees	58
Section 7.9	Resolution of Conflicts of Interest; Standards of Conduct and Modification of Duties	59
Section 7.10	Other Matters Concerning the General Partner	60
Section 7.11	Purchase or Sale of Partnership Securities	61
Section 7.12	[Reserved]	61
Section 7.13	Reliance by Third Parties	61

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

ii

ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1	Records and Accounting	62
Section 8.2	Fiscal Year	62
Section 8.3	[Reserved]	62
ARTICLE IX
TAX MATTERS
Section 9.1	Tax Returns and Information	62
Section 9.2	Tax Elections	62
Section 9.3	Tax Controversies	63
Section 9.4	Withholding	63
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1	Admission of Initial Limited Partners	63
Section 10.2	Admission of Substituted Limited Partners	63
Section 10.3	Admission of Successor General Partner	64
Section 10.4	Admission of Additional Limited Partners	64
Section 10.5	Amendment of Agreement and Certificate of Limited Partnership	65
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1	Withdrawal of the General Partner	65
Section 11.2	Removal of the General Partner	67
Section 11.3	Interest of Departing General Partner and Successor General Partner	67
Section 11.4	Withdrawal of Limited Partners	69
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1	Dissolution	69
Section 12.2	Continuation of the Business of the Partnership After Dissolution	70
Section 12.3	Liquidator	70
Section 12.4	Liquidation	71
Section 12.5	Cancellation of Certificate of Limited Partnership	71
Section 12.6	Return of Contributions	72
Section 12.7	Waiver of Partition	72

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

iii

Section 12.8	Capital Account Restoration	72
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT;
MEETINGS; RECORD DATE
Section 13.1	Amendments to be Adopted Solely by the General Partner	72
Section 13.2	Amendment Procedures	74
Section 13.3	Amendment Requirements	74
Section 13.4	Special Meetings	75
Section 13.5	Notice of a Meeting	75
Section 13.6	Record Date	75
Section 13.7	Adjournment	76
Section 13.8	Waiver of Notice; Approval of Meeting; Approval of Minutes	76
Section 13.9	Quorum and Voting	76
Section 13.10	Conduct of a Meeting	77
Section 13.11	Action Without a Meeting	77
Section 13.12	Right to Vote and Related Matters	78
ARTICLE XIV
MERGER OR CONVERSION
Section 14.1	Authority	78
Section 14.2	Procedure for Merger, Consolidation or Conversion	78
Section 14.3	Approval by Limited Partners	80
Section 14.4	Certificate of Merger or Conversion	81
Section 14.5	Amendment of Partnership Agreement	81
Section 14.6	Effect of Merger, Consolidation or Conversion	81
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1	Right to Acquire Limited Partner Interests	82
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1	Addresses and Notices; Written Communications	84
Section 16.2	Further Action	84
Section 16.3	Binding Effect	84
Section 16.4	Integration	85
Section 16.5	Creditors	85
Section 16.6	Waiver	85

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

iv

Section 16.7	Counterparts	85
Section 16.8	Applicable Law	85
Section 16.9	Invalidity of Provisions	85
Section 16.10	Consent of Partners	85
Section 16.11	Facsimile Signatures	86
Section 16.12	Third-Party Beneficiaries	86

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

v

FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF ENCORE ENERGY PARTNERS LP

     THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ENCORE ENERGY PARTNERS LP dated as of May 10, 2007, is entered into by and among Encore Energy Partners GP LLC, a Delaware limited liability company, as the General Partner, and the other parties hereto, as limited partners, and amends and restates in its entirety the Agreement of Limited Partnership of Encore Energy Partners LP dated as of February 13, 2007. In consideration of the covenants, conditions and agreements contained herein, the parties hereto hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Definitions.

     The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

     “Additional Book Basis” means the portion of any remaining Carrying Value of an Adjusted Property that is attributable to positive adjustments made to such Carrying Value as a result of Book-Up Events. For purposes of determining the extent that Carrying Value constitutes Additional Book Basis:

          (a) Any negative adjustment made to the Carrying Value of an Adjusted Property as a result of either a Book-Down Event or a Book-Up Event shall first be deemed to offset or decrease that portion of the Carrying Value of such Adjusted Property that is attributable to any prior positive adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.

          (b) If Carrying Value that constitutes Additional Book Basis is reduced as a result of a Book-Down Event and the Carrying Value of other property is increased as a result of such Book-Down Event, an allocable portion of any such increase in Carrying Value shall be treated as Additional Book Basis; provided, that the amount treated as Additional Book Basis pursuant hereto as a result of such Book-Down Event shall not exceed the amount by which the Aggregate Remaining Net Positive Adjustments after such Book-Down Event exceeds the remaining Additional Book Basis attributable to all of the Partnership’s Adjusted Property after such Book-Down Event (determined without regard to the application of this clause (b) to such Book-Down Event).

     “Additional Book Basis Derivative Items” means any Book Basis Derivative Items that are computed with reference to Additional Book Basis. To the extent that the Additional Book Basis attributable to all of the Partnership’s Adjusted Property as of the beginning of any taxable period exceeds the Aggregate Remaining Net Positive Adjustments as of the beginning of such period (the “Excess Additional Book Basis”), the Additional Book Basis Derivative Items for such period shall be reduced by the amount that bears the same ratio to the amount of Additional

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

Book Basis Derivative Items determined without regard to this sentence as the Excess Additional Book Basis bears to the Additional Book Basis as of the beginning of such period.

     “Additional Limited Partner” means a Person admitted to the Partnership as a Limited Partner pursuant to Section 10.4 and who is shown as such on the books and records of the Partnership.

     “Adjusted Capital Account” means the Capital Account maintained for each Partner as of the end of each fiscal year of the Partnership, (a) increased by any amounts that such Partner is obligated to restore under the standards set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b) decreased by (i) the amount of all deductions in respect of depletion that, as of the end of such fiscal year, are reasonably expected to be made to such Partner’s Capital Account in respect of the oil and gas properties of the Partnership, (ii) the amount of all losses and deductions that, as of the end of such fiscal year, are reasonably expected to be allocated to such Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury Regulation Section 1.751-1(b)(2)(ii), and (iii) the amount of all distributions that, as of the end of such fiscal year, are reasonably expected to be made to such Partner in subsequent years in accordance with the terms of this Agreement or otherwise to the extent they exceed offsetting increases to such Partner’s Capital Account that are reasonably expected to occur during (or prior to) the year in which such distributions are reasonably expected to be made (other than increases as a result of a minimum gain chargeback pursuant to Section 6.1(d)(i) or 6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The “Adjusted Capital Account” of a Partner in respect of the General Partner Interest, a Common Unit, a Management Incentive Unit or any other Partnership Interest shall be the amount that such Adjusted Capital Account would be if such General Partner Interest, Common Unit, Management Incentive Unit or other Partnership Interest were the only interest in the Partnership held by such Partner from and after the date on which such General Partner Interest, Common Unit, Management Incentive Unit or other Partnership Interest was first issued.

     “Administrative Services Agreement” means the Administrative Services Agreement, dated as of March 7, 2007, among the General Partner, the Partnership, the Operating Company and Encore Operating, L.P., as it may be amended, supplemented or restated from time to time.

     “Adjusted Property” means any property the Carrying Value of which has been adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).

     “Affiliate” means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the Person in question. As used herein, the term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

     “Aggregate Remaining Net Positive Adjustments” means, as of the end of any taxable period, the sum of the Remaining Net Positive Adjustments of all the Partners.

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

2

     “Agreed Allocation” means any allocation, other than a Required Allocation, of an item of income, gain, loss or deduction pursuant to the provisions of Section 6.1, including a Curative Allocation (if appropriate to the context in which the term “Agreed Allocation” is used).

     “Agreed Value” of any Contributed Property means the fair market value of such property or other consideration at the time of contribution as determined by the General Partner. The General Partner shall use such method as it determines to be appropriate to allocate the aggregate Agreed Value of Contributed Properties contributed to the Partnership in a single or integrated transaction among each separate property on a basis proportional to the fair market value of each Contributed Property.

     “Agreement” means this First Amended and Restated Agreement of Limited Partnership of Encore Energy Partners LP, as it may be amended, supplemented or restated from time to time.

     “Assignee” means a Person to whom one or more Limited Partner Interests have been transferred in a manner permitted under this Agreement and who has executed and delivered a Transfer Application, including a Eligible Holder Certification, as required by this Agreement, but who has not been admitted as a Substituted Limited Partner.

     “Associate” means, when used to indicate a relationship with any Person, (a) any corporation or organization of which such Person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock or other voting interest; (b) any trust or other estate in which such Person has at least a 20% beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same principal residence as such Person.

     “Available Cash” means, with respect to any Quarter ending prior to the Liquidation Date:

          (a) all cash and cash equivalents of the Partnership Group on hand on the date of determination of Available Cash with respect to such Quarter, less

          (b) the amount of any cash reserves established by the General Partner to (i) provide for the proper conduct of the business of the Partnership Group (including reserves for future capital expenditures and for anticipated future credit needs of the Partnership Group) subsequent to such Quarter, (ii) comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which any Group Member is a party or by which it is bound or its assets are subject or (iii) provide funds for distributions under Section 6.3 in respect of any one or more of the next four Quarters; provided, however, that disbursements made by a Group Member or cash reserves established, increased or reduced after the end of such Quarter but on or before the date of determination of Available Cash with respect to such Quarter shall be deemed to have been made, established, increased or reduced, for purposes of determining Available Cash, within such Quarter if the General Partner so determines.

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

3

     Notwithstanding the foregoing, “Available Cash” with respect to the Quarter in which the Liquidation Date occurs and any subsequent Quarter shall equal zero.

     “Board of Directors” means the board of directors or managers of a corporation or limited liability company or the board of directors or board of managers of the general partner of a limited partnership, as applicable.

     “Book Basis Derivative Items” means any item of income, deduction, gain, loss, Simulated Depletion, Simulated Gain or Simulated Loss included in the determination of Net Income or Net Loss that is computed with reference to the Carrying Value of an Adjusted Property (e.g., depreciation, Simulated Depletion, or gain, loss, Simulated Gain or Simulated Loss, with respect to an Adjusted Property).

     “Book-Down Event” means an event that triggers a negative adjustment to the Capital Accounts of the Partners pursuant to Section 5.5(d).

     “Book-Tax Disparity” means with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner’s share of the Partnership’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner’s Capital Account balance as maintained pursuant to Section 5.5 and the hypothetical balance of such Partner’s Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles.

     “Book-Up Event” means an event that triggers a positive adjustment to the Capital Accounts of the Partners pursuant to Section 5.5(d).

     “Business Day” means Monday through Friday of each week, except that a legal holiday recognized as such by the government of the United States of America or the States of New York or Texas shall not be regarded as a Business Day.

     “Capital Account” means the capital account maintained for a Partner pursuant to Section 5.5. The “Capital Account” of a Partner in respect of a General Partner Interest, a Common Unit, a Management Incentive Unit or any other Partnership Interest shall be the amount that such Capital Account would be if such General Partner Interest, Common Unit, Management Incentive Unit or other Partnership Interest were the only interest in the Partnership held by such Partner from and after the date on which such General Partner Interest, Common Unit, Management Incentive Unit or other Partnership Interest was first issued.

     “Capital Contribution” means any cash, cash equivalents or the Net Agreed Value of Contributed Property (which, in the case of a Capital Contribution by the General Partner pursuant to Section 5.2(b) may include Units (other than General Partner Units) owned by the General Partner) that a Partner contributes to the Partnership pursuant to this Agreement.

     “Carrying Value” means (a) with respect to a Contributed Property, the Agreed Value of such property reduced (but not below zero) by all depreciation, depletion (including Simulated

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

4

Depletion), amortization and cost recovery deductions charged to the Partners’ and Assignees’ Capital Accounts in respect of such Contributed Property, and (b) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner.

     “Cause” means a court of competent jurisdiction has entered a final, non-appealable judgment finding the General Partner liable for actual fraud or willful misconduct in its capacity as a general partner of the Partnership.

     “Certificate” means (a) a certificate (i) substantially in the form of Exhibit A to this Agreement, (ii) issued in global form in accordance with the rules and regulations of the Depositary or (iii) in such other form as may be adopted by the General Partner, issued by the Partnership evidencing ownership of one or more Common Units or (b) a certificate, in such form as may be adopted by the General Partner, issued by the Partnership evidencing ownership of one or more other Partnership Securities.

     “Certificate of Limited Partnership” means the Certificate of Limited Partnership of the Partnership filed with the Secretary of State of the State of Delaware as referenced in Section 7.2, as such Certificate of Limited Partnership may be amended, supplemented or restated from time to time.

     “Change-in-Control” means (a) a “Change in Control” as defined in Parent’s 2000 Incentive Stock Plan, as such plan may be amended, supplemented or restated from time to time, (b) any Person or group, other than Parent or its Affiliates, becomes the beneficial owner, by way of merger, consolidation, recapitalization, reorganization or otherwise, of 50% or more of the combined voting power of the equity interests in the General Partner or the Partnership, (c) the Limited Partners approve, in one or a series of transactions, a plan of complete liquidation of the Partnership, (d) the sale or other disposition by either the General Partner or the Partnership of all or substantially all of its assets in one or more transactions to any person other than the General Partner or an Affiliate of the General Partner, (e) a transaction resulting in a Person other than Encore Energy Partners GP LLC or one of its Affiliates being the general partner of the Partnership, or (f) a transaction resulting in the general partner of the Partnership ceasing to be an Affiliate of Parent.

     “Closing Date” means May 10, 2007.

     “Closing Price” means, in respect of any class of Limited Partner Interests, as of the date of determination, the last sale price on such day, regular way, or in case no such sale takes place on such day, the average of the closing bid and asked prices on such day, regular way, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal National Securities Exchange (other than the NASDAQ Global Select Market) on which the respective Limited Partner Interests are listed or admitted to trading or, if such Limited Partner Interests are not listed or admitted to trading on any National Securities Exchange (other than the NASDAQ Global Select Market), the last quoted price on such day or,

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

5

if not so quoted, the average of the high bid and low asked prices on such day in the over-the-counter market, as reported by the NASDAQ Global Select Market or such other system then in use, or, if on any such day such Limited Partner Interests of such class are not quoted by any such organization, the average of the closing bid and asked prices on such day as furnished by a professional market maker making a market in such Limited Partner Interests of such class selected by the General Partner, or if on any such day no market maker is making a market in such Limited Partner Interests of such class, the fair value of such Limited Partner Interests on such day as determined by the General Partner.

     “Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of any successor law.

     “Combined Interest” has the meaning assigned to such term in Section 11.3(a).

     “Commission” means the United States Securities and Exchange Commission.

     “Common Unit” means a Partnership Interest representing a fractional part of the Partnership Interests of all Limited Partners and Assignees, and having the rights and obligations specified with respect to Common Units in this Agreement.

     “Common Unit Equivalents” means the number of Common Units which a Management Incentive Unit is considered to represent under Section 5.10(d).

     “Conflicts Committee” means a committee of the Board of Directors of the General Partner composed entirely of two or more directors who are not (a) security holders, officers or employees of the General Partner, (b) officers, directors or employees of any Affiliate of the General Partner or (c) holders of any ownership interest in the Partnership Group other than Common Units and who also meet the independence standards required of directors who serve on an audit committee of a board of directors established by the Securities Exchange Act and the rules and regulations of the Commission thereunder and by the National Securities Exchange on which the Common Units are listed or admitted to trading.

     “Continuous Employment” means continued employment by Parent (or any successor), any subsidiary of Parent (or any successor), the Partnership, the General Partner or any Affiliate of the Partnership or the General Partner.

     “Contributed Property” means each property or other asset, in such form as may be permitted by the Delaware Act, but excluding cash, contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 5.5(d), such property shall no longer constitute a Contributed Property, but shall be deemed an Adjusted Property.

     “Conversion Notice” has the meaning assigned to such term in Section 5.10.

     “Curative Allocation” means any allocation of an item of income, gain, deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

6

     “Current Market Price” means, in respect of any class of Limited Partner Interests, as of the date of determination, the average of the daily Closing Prices per Limited Partner Interest of such class for the 20 consecutive Trading Days immediately prior to such date.

     “Delaware Act” means the Delaware Revised Uniform Limited Partnership Act, 6 Del C. Section 17-101, et seq., as amended, supplemented or restated from time to time, and any successor to such statute.

     “Departing General Partner” means a former General Partner from and after the effective date of any withdrawal or removal of such former General Partner pursuant to Section 11.1 or 11.2.

     “Depositary” means, with respect to any Units issued in global form, The Depository Trust Company and its successors and permitted assigns.

     “Economic Risk of Loss” has the meaning set forth in Treasury Regulation Section 1.752-2(a).

     “Eligible Holder” means a person or entity qualified to hold an interest in oil and gas leases on federal lands. As of the date hereof, Eligible Holder means: (1) a citizen of the United States; (2) a corporation organized under the laws of the United States or of any state thereof; (3) a public body, including a municipality; or (4) an association of United States citizens, such as a partnership or limited liability company, organized under the laws of the United States or of any state thereof, but only if such association does not have any direct or indirect foreign ownership, other than foreign ownership of stock in a parent corporation organized under the laws of the United States or of any state thereof. For the avoidance of doubt, onshore mineral leases or any direct or indirect interest therein may be acquired and held by aliens only through stock ownership, holding or control in a corporation organized under the laws of the United States or of any state thereof.

     “Eligible Holder Certification” means a properly completed certificate in such form as may be specified by the General Partner by which an Assignee or a Limited Partner certifies that he (and if he is a nominee holding for the account of another Person, that to the best of his knowledge such other Person) is an Eligible Holder.

     “Executive” means any of I. Jon Brumley, Jon S. Brumley, Robert C. Reeves, L. Ben Nivens or John W. Arms or their Permitted Transferees.

     “Event of Withdrawal” has the meaning assigned to such term in Section 11.1(a).

     “Fifth Target Distribution” has the meaning assigned to such term in Section 5.10(d)(v).

     “First Conversion Milestone” has the meaning assigned to such term in Section 5.10(e)(i).

     “First Target Distribution” has the meaning assigned to such term in Section 5.10(d)(i).

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     “Fourth Conversion Milestone” has the meaning assigned to such term in Section 5.10(e)(i).

     “Fourth Target Distribution” has the meaning assigned to such term in Section 5.10(d)(iv).

     “General Partner” means Encore Energy Partners GP LLC, a Delaware limited liability company, and its successors and permitted assigns that are admitted to the Partnership as general partner of the Partnership, in its capacity as general partner of the Partnership (except as the context otherwise requires).

     “General Partner Interest” means the ownership interest of the General Partner in the Partnership (in its capacity as a general partner without reference to any Limited Partner Interest held by it), which is evidenced by General Partner Units, and includes any and all benefits to which the General Partner is entitled as provided in this Agreement, together with all obligations of the General Partner to comply with the terms and provisions of this Agreement.

     “General Partner Unit” means a fractional part of the General Partner Interest having the rights and obligations specified with respect to the General Partner Interest. A General Partner Unit is not a Unit. The initial number of General Partner Units held by the General Partner is 221,013.

     “Grantee” has the meaning assigned to such term in Section 5.10(f)(i).

     “Group” means a Person that with or through any of its Affiliates or Associates has any agreement, contract, arrangement, understanding or relationship for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent given to such Person in response to a proxy or consent solicitation made to 10 or more Persons), exercising investment power or disposing of any Partnership Interests with any other Person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, Partnership Interests.

     “Group Member” means a member of the Partnership Group.

     “Group Member Agreement” means the partnership agreement of any Group Member, other than the Partnership, that is a limited or general partnership, the limited liability company agreement of any Group Member that is a limited liability company, the certificate of incorporation and bylaws or similar organizational documents of any Group Member that is a corporation, the joint venture agreement or similar governing document of any Group Member that is a joint venture and the governing or organizational or similar documents of any other Group Member that is a Person other than a limited or general partnership, limited liability company, corporation or joint venture, as such may be amended, supplemented or restated from time to time.

     “Indemnitee” means (a) the General Partner, (b) any Departing General Partner, (c) any Person who is or was an Affiliate of the General Partner or any Departing General Partner, (d) any Person who is or was a member, partner, director, officer, fiduciary or trustee of any Group Member, the General Partner or any Departing General Partner or any Affiliate of any Group

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Member, the General Partner or any Departing General Partner, (e) any Person who is or was serving at the request of the General Partner or any Departing General Partner or any Affiliate of the General Partner or any Departing General Partner as an officer, director, member, partner, fiduciary or trustee of another Person; provided that a Person shall not be an Indemnitee by reason of providing, on a fee-for-services basis, trustee, fiduciary or custodial services, and (f) any Person the General Partner designates as an “Indemnitee” for purposes of this Agreement.

     “Initial Limited Partners” means the parties to this Agreement other than the General Partner.

     “IPO Closing Date” means the first date on which the Common Units are initially offered and sold by the Partnership to the public.

     “Limited Partner” means, unless the context otherwise requires, (a) the Organizational Limited Partner prior to its withdrawal from the Partnership, each Initial Limited Partner, each Substituted Limited Partner, each Additional Limited Partner and any Departing General Partner upon the change of its status from General Partner to Limited Partner pursuant to Section 11.3, in each case, in such Person’s capacity as a limited partner of the Partnership; provided, however, that when the term “Limited Partner” is used herein in the context of any vote or other approval, including Articles XIII and XIV, such term shall not, solely for such purpose, include any holder of a Management Incentive Unit (solely with respect to its Management Incentive Units and not with respect to any other Limited Partner Interest held by such Person) except as may otherwise be required by law or (b) solely for purposes of Articles V, VI, VII, IX and XII, each Assignee.

     “Limited Partner Interest” means the ownership interest of a Limited Partner or Assignee in the Partnership, which may be evidenced by Common Units, Management Incentive Units, or other Partnership Securities or a combination thereof or interest therein, and includes any and all benefits to which such Limited Partner or Assignee is entitled as provided in this Agreement, together with all obligations of such Limited Partner or Assignee to comply with the terms and provisions of this Agreement; provided, however, that when the term “Limited Partner Interest” is used herein in the context of any vote or other approval, including Articles XIII and XIV, such term shall not, solely for such purpose, include a Management Incentive Unit except as may otherwise be required by law.

     “Liquidation Date” means (a) in the case of an event giving rise to the dissolution of the Partnership of the type described in clauses (a) and (b) of the first sentence of Section 12.2, the date on which the applicable time period during which the holders of Outstanding Units have the right to elect to continue the business of the Partnership has expired without such an election being made, and (b) in the case of any other event giving rise to the dissolution of the Partnership, the date on which such event occurs.

     “Liquidator” means one or more Persons selected by the General Partner to perform the functions described in Section 12.4 as liquidating trustee of the Partnership within the meaning of the Delaware Act.

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     “Management Incentive Unit” means a Partnership Security representing a fractional part of the Partnership Interests of all Limited Partners and having the rights and obligations specified with respect to Management Incentive Units in this Agreement.

     “Merger Agreement” has the meaning assigned to such term in Section 14.1.

     “National Securities Exchange” means an exchange registered with the Commission under Section 6(a) of the Securities Exchange Act, and any successor to such statute.

     “Net Agreed Value” means, (a) in the case of any Contributed Property, the Agreed Value of such property reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (b) in the case of any property distributed to a Partner or Assignee by the Partnership, the Partnership’s Carrying Value of such property (as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is distributed, reduced by any indebtedness either assumed by such Partner or Assignee upon such distribution or to which such property is subject at the time of distribution, in either case, as determined under Section 752 of the Code.

     “Net Income” means, for any taxable year, the excess, if any, of the Partnership’s items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year over the Partnership’s items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year. The items included in the calculation of Net Income shall be determined in accordance with Section 5.5(b) and shall include Simulated Gains, Simulated Losses and Simulated Depletion, but shall not include any items specially allocated under Section 6.1(d); provided, that the determination of the items that have been specially allocated under Section 6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.

     “Net Loss” means, for any taxable year, the excess, if any, of the Partnership’s items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year over the Partnership’s items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year. The items included in the calculation of Net Loss shall be determined in accordance with Section 5.5(b) and shall include Simulated Gains, Simulated Losses and Simulated Depletion, but shall not include any items specially allocated under Section 6.1(d); provided, that the determination of the items that have been specially allocated under Section 6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.

     “Net Positive Adjustments” means, with respect to any Partner, the excess, if any, of the total positive adjustments over the total negative adjustments made to the Capital Account of such Partner pursuant to Book-Up Events and Book-Down Events.

     “Net Termination Gain” means, for any taxable year, the sum, if positive, of all items of income, gain, loss or deduction recognized by the Partnership after the Liquidation Date. The items included in the determination of Net Termination Gain shall be determined in accordance

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with Section 5.5(b) and shall include Simulated Gains, Simulated Losses and Simulated Depletion, but shall not include any items of income, gain or loss specially allocated under Section 6.1(d).

     “Net Termination Loss” means, for any taxable year, the sum, if negative, of all items of income, gain, loss or deduction recognized by the Partnership after the Liquidation Date. The items included in the determination of Net Termination Loss shall be determined in accordance with Section 5.5(b) and shall include Simulated Gains, Simulated Losses and Simulated Depletion, but shall not include any items of income, gain or loss specially allocated under Section 6.1(d).

     “Non-Eligible Holder” means a Person whom the General Partner has determined does not constitute an Eligible Holder and as to whose Partnership Interest the General Partner has become the Substituted Limited Partner, pursuant to Section 4.8.

     “Non-Recourse Built-in Gain” means with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or pledge securing a Non-Recourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Sections 6.2(d)(i)(A), 6.2(d)(ii)(A) and 6.2(d)(iii) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration.

     “Non-Recourse Deductions” means any and all items of loss, deduction or expenditure (including any expenditure described in Section 705(a)(2)(B) of the Code), Simulated Depletion or Simulated Loss that, in accordance with the principles of Treasury Regulation Section 1.704-2(b), are attributable to a Non-Recourse Liability.

     “Non-Recourse Liability” has the meaning set forth in Treasury Regulation Section 1.752-1(a)(2).

     “Notice of Election to Purchase” has the meaning assigned to such term in Section 15.1(b).

     “Operating Company” means Encore Energy Partners Operating LLC, a Delaware limited liability company, and any successors thereto.

     “Opinion of Counsel” means a written opinion of counsel (who may be regular counsel to the Partnership or the General Partner or any of its Affiliates) acceptable to the General Partner.

     “Organizational Limited Partner” means Encore Partners LP Holdings LLC, a Delaware limited liability company, in its capacity as the organizational limited partner of the Partnership pursuant to this Agreement.

     “Outstanding” means, with respect to Partnership Securities, all Partnership Securities that are issued by the Partnership and reflected as outstanding on the Partnership’s books and records as of the date of determination; provided, however, that if at any time any Person or Group (other than the General Partner or its Affiliates) beneficially owns 20% or more of the Outstanding Partnership Securities of any class then Outstanding, all Partnership Securities

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owned by such Person or Group shall not be voted on any matter and shall not be considered to be Outstanding when sending notices of a meeting of Limited Partners to vote on any matter (unless otherwise required by law), calculating required votes, determining the presence of a quorum or for other similar purposes under this Agreement, except that Units so owned shall be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such Units shall not, however, be treated as a separate class of Partnership Securities for purposes of this Agreement); provided, further, that the foregoing limitation shall not apply to (i) any Person or Group who acquired 20% or more of the Outstanding Partnership Securities of any class then Outstanding directly from the General Partner or its Affiliates, (ii) any Person or Group who acquired 20% or more of the Outstanding Partnership Securities of any class then Outstanding directly or indirectly from a Person or Group described in clause (i) provided that the General Partner shall have notified such Person or Group in writing that such limitation shall not apply, or (iii) any Person or Group who acquired 20% or more of any Partnership Securities issued by the Partnership with the prior approval of the Board of Directors of the General Partner.

     “Parent” means Encore Acquisition Company and its successors and permitted assigns.

     “Partner Non-Recourse Debt” has the meaning set forth in Treasury Regulation Section 1.704-2(b)(4).

     “Partner Non-Recourse Debt Minimum Gain” has the meaning set forth in Treasury Regulation Section 1.704-2(i)(2).

     “Partner Non-Recourse Deductions” means any and all items of loss, deduction or expenditure (including any expenditure described in Section 705(a)(2)(B) of the Code), Simulated Depletion or Simulated Loss that, in accordance with the principles of Treasury Regulation Section 1.704-2(i), are attributable to a Partner Non-Recourse Debt.

     “Partners” means the General Partner and the Limited Partners.

     “Partnership” means Encore Energy Partners LP, a Delaware limited partnership.

     “Partnership Group” means the Partnership and its Subsidiaries treated as a single consolidated entity.

     “Partnership Interest” means an interest in the Partnership, which shall include the General Partner Interest and Limited Partner Interests.

     “Partnership Minimum Gain” means that amount determined in accordance with the principles of Treasury Regulation Section 1.704-2(d).

     “Partnership Security” means any class or series of equity interest in the Partnership (but excluding any options, rights, warrants and appreciation rights relating to an equity interest in the Partnership), including Common Units, Management Incentive Units and General Partner Units.

     “Percentage Interest” means as of any date of determination (a) as to the General Partner (in its capacity as General Partner without reference to any Limited Partner Interests held by it) with respect to General Partner Units and as to any Unitholder or Assignee with respect to

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Common Units, the product obtained by multiplying (i) 100% less the percentage applicable to clause (b) below by (ii) the quotient obtained by dividing (A) the number of General Partner Units held by the General Partner, the number of Common Units held by such Unitholder or Assignee, or the number of Common Unit Equivalents held by such Unitholder or Assignee, as the case may be, by (B) the total number of Outstanding Common Units, the total number of Outstanding Common Unit Equivalents and General Partner Units, and (b) as to the holders of other Partnership Securities issued by the Partnership in accordance with Section 5.6, the percentage established as a part of such issuance.

     “Permitted Transferee” means (i) the Partnership and (ii) an Executive’s Relatives, any trust of which there are no principal beneficiaries other than such Executive or one or more of such Executive’s Relatives, or a corporation, partnership, limited liability company or other Person of which there are no owners other than such Executive, one or more of such Executive’s Relatives or another entity of which there are no other owners other than such Executive or one or more of such Executive’s Relatives (provided that each such transferee agrees to be bound by the terms of this Agreement as if it were an original party hereto and further agrees that it shall not thereafter transfer such Management Incentive Units to any Person to whom such transferor would not be permitted to transfer such Management Incentive Units pursuant to the terms of this Agreement).

     “Person” means an individual or a corporation, firm, limited liability company, partnership, joint venture, trust, unincorporated organization, association, government agency or political subdivision thereof or other entity.

     “Plan of Conversion” has the meaning assigned to such term in Section 14.1.

     “Pro Rata” means (a) when used with respect to Units or any class thereof, apportioned equally among all designated Units in accordance with their relative Percentage Interests, (b) when used with respect to Partners and Assignees or Record Holders, apportioned among all Partners and Assignees or Record Holders in accordance with their relative Percentage Interests, and (c) when used with respect to holders of Management Incentive Units, apportioned equally among all holders of Management Incentive Units in accordance with the relative number or percentage of Management Incentive Units held by each such holder.

     “Purchase Date” means the date determined by the General Partner as the date for purchase of all Outstanding Limited Partner Interests of a certain class (other than Limited Partner Interests owned by the General Partner and its Affiliates) pursuant to Article XV.

     “Quarter” means, unless the context requires otherwise, a fiscal quarter of the Partnership, or, with respect to the fiscal quarter of the Partnership which includes the IPO Closing Date, the portion of such fiscal quarter after the IPO Closing Date.

     “Recapture Income” means any gain recognized by the Partnership (computed without regard to any adjustment required by Section 734 or Section 743 of the Code) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset.

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     “Record Date” means the date established by the General Partner or otherwise in accordance with this Agreement for determining (a) the identity of the Record Holders entitled to notice of, or to vote at, any meeting of Limited Partners or entitled to vote by ballot or give approval of Partnership action in writing without a meeting or entitled to exercise rights in respect of any lawful action of Limited Partners or (b) the identity of Record Holders entitled to receive any report or distribution or to participate in any offer.

     “Record Holder” means (a) the Person in whose name a Common Unit is registered on the books of the Transfer Agent as of the opening of business on a particular Business Day, or (b) with respect to other Partnership Interests, the Person in whose name any such other Partnership Interest is registered on the books that the General Partner has caused to be kept as of the opening of business on such Business Day.

     “Redeemable Interests” means any Partnership Interests for which a redemption notice has been given, and has not been withdrawn, pursuant to Section 4.9.

     “Relatives” means, collectively, an Executive’s spouse, parents, children, grandchildren, siblings, mothers and fathers-in-law, sons and daughters-in-law, and brothers and sisters-in-law.

     “Remaining Net Positive Adjustments” means as of the end of any taxable period, (a) with respect to the Unitholders holding Common Units, the excess of (i) the Net Positive Adjustments of the Unitholders holding Common Units as of the end of such period over (ii) the sum of those Partners’ Share of Additional Book Basis Derivative Items for each prior taxable period, (b) with respect to the General Partner (as holder of the General Partner Interest), the excess of (i) the Net Positive Adjustments of the General Partner as of the end of such period over (ii) the sum of the General Partner’s Share of Additional Book Basis Derivative Items with respect to the General Partner Interest for each prior taxable period, and (c) with respect to the holders of Management Incentive Units, the excess of (a) the Net Positive Adjustments of the holders of Management Incentive Units as of the end of such period over (b) the sum of the Share of Additional Book Basis Derivative Items of the holders of the Management Incentive Units for each prior taxable period.

     “Required Allocations” means (a) any limitation imposed on any allocation of Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and (b) any allocation of an item of income, gain, loss, deduction, Simulated Depletion or Simulated Loss pursuant to Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).

     “Residual Gain” or “Residual Loss” means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of a Contributed Property or Adjusted Property, to the extent such item of gain or loss or Simulated Depletion or Simulated Loss is not allocated pursuant to Section 6.2(d)(i)(A) or 6.2(d)(ii)(A), respectively, to eliminate Book-Tax Disparities.

     “Second Conversion Milestone” has the meaning assigned to such term in Section 5.10(e)(i).

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     “Second Target Distribution” has the meaning assigned to such term in Section 5.10(d)(ii).

     “Securities Act” means the Securities Act of 1933, as amended, supplemented or restated from time to time and any successor to such statute.

     “Securities Exchange Act” means the Securities Exchange Act of 1934, as amended, supplemented or restated from time to time and any successor to such statute.

     “Seventh Target Distribution” has the meaning assigned to such term in Section 5.10(d)(vii).

     “Share of Additional Book Basis Derivative Items” means in connection with any allocation of Additional Book Basis Derivative Items for any taxable period, (a) with respect to the Unitholders holding Common Units, the amount that bears the same ratio to such Additional Book Basis Derivative Items as the Unitholders’ Remaining Net Positive Adjustments as of the end of such period bears to the Aggregate Remaining Net Positive Adjustments as of that time, (b) with respect to the General Partner (as holder of the General Partner Interest), the amount that bears the same ratio to such Additional Book Basis Derivative Items as the General Partner’s Remaining Net Positive Adjustments as of the end of such period bears to the Aggregate Remaining Net Positive Adjustment as of that time, and (c) with respect to the Partners holding Management Incentive Units, the amount that bears the same ratio to such Additional Book Basis Derivative Items as the Remaining Net Positive Adjustments of the Partners holding the Management Incentive Units as of the end of such period bears to the Aggregate Remaining Net Positive Adjustments as of that time.

     “Sharing Percentage” means as of any date of determination (a) as to the General Partner (in its capacity as General Partner without reference to any Limited Partner Interests held by it) with respect to General Partner Units and as to any Unitholder or Assignee with respect to Common Units, the product obtained by multiplying (i) 100% less the percentage applicable to clause (b) below by (ii) the quotient obtained by dividing (A) the number of General Partner Units held by the General Partner or the number of Common Units held by such Unitholder or Assignee, as the case may be, by (B) the total number of Outstanding Common Units and General Partner Units, and (b) as to the holders of other Partnership Securities issued by the Partnership in accordance with Section 5.6, the percentage established as a part of such issuance. The Management Incentive Units will be disregarded in the computation of “Sharing Percentage.”

     “Simulated Basis” means the Carrying Value of any oil and gas property (as defined in Section 614 of the Code).

     “Simulated Depletion” means, with respect to an oil and gas property (as defined in Section 614 of the Code), a depletion allowance computed in accordance with federal income tax principles (as if the Simulated Basis of the property was its adjusted tax basis) and in the manner specified in Treasury Regulation § 1.704-1(b)(2)(iv)(k)(2). For purposes of computing Simulated Depletion with respect to any property, the Simulated Basis of such property shall be

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deemed to be the Carrying Value of such property, and in no event shall such allowance for Simulated Depletion, in the aggregate, exceed such Simulated Basis.

     “Simulated Gain” means the excess of the amount realized from the sale or other disposition of an oil or gas property over the Carrying Value of such property.

     “Simulated Loss” means the excess of the Carrying Value of an oil or gas property over the amount realized from the sale or other disposition of such property.

     “Sixth Target Distribution” has the meaning assigned to such term in Section 5.10(d)(vi).

     “Special Approval” means approval by a majority of the members of the Conflicts Committee acting in good faith.

     “Stated Distribution” means $0.35 per Common Unit or such other amount determined by the Conflicts Committee upon reissuance of a Management Incentive Unit as contemplated by Section 5.10(f)(iii).

     “Subsidiary” means, with respect to any Person, (a) a corporation of which more than 50% of the voting power of shares entitled (without regard to the occurrence of any contingency) to vote in the election of directors or other governing body of such corporation is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person or a combination thereof, (b) a partnership (whether general or limited) or limited liability company in which such Person or a Subsidiary of such Person is, at the date of determination, a general or limited partner of such partnership or member of such limited liability company, but only if more than 50% of the partnership interests of such partnership or membership interests of such limited liability company (considering all of the partnership interests or membership interests as a single class) is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person, or a combination thereof, or (c) any other Person (other than a corporation, a partnership or a limited liability company) in which such Person, one or more Subsidiaries of such Person, or a combination thereof, directly or indirectly, at the date of determination, has (i) at least a majority ownership interest or (ii) the power to elect or direct the election of a majority of the directors or other governing body of such Person.

     “Substituted Limited Partner” means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 10.2 in place of and with all the rights of a Limited Partner and who is shown as a Limited Partner on the books and records of the Partnership.

     “Surviving Business Entity” has the meaning assigned to such term in Section 14.2(b)(ii).

     “Target Distribution” means the First Target Distribution, the Second Target Distribution, the Third Target Distribution, the Fourth Target Distribution, the Fifth Target Distribution, the Sixth Target Distribution or the Seventh Target Distribution, as the case may be.

     “Third Conversion Milestone” has the meaning assigned to such term in Section 5.10(e)(i).

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     “Third Target Distribution” has the meaning assigned to such term in Section 5.10(d)(iii).

     “Trading Day” means, for the purpose of determining the Current Market Price of any class of Limited Partner Interests, a day on which the principal National Securities Exchange on which such class of Limited Partner Interests is listed is open for the transaction of business or, if Limited Partner Interests of a class are not listed on any National Securities Exchange, a day on which banking institutions in New York City generally are open.

     “transfer” has the meaning assigned to such term in Section 4.4(a).

     “Transfer Agent” means such bank, trust company or other Person (including the General Partner or one of its Affiliates) as shall be appointed from time to time by the General Partner to act as registrar and transfer agent for the Common Units; provided, that if no Transfer Agent is specifically designated for any other Partnership Securities, the General Partner shall act in such capacity.

     “Transfer Application” means an application and agreement for transfer of Units in the form set forth on the back of a Certificate or in a form substantially to the same effect in a separate instrument.

     “Unit” means a Partnership Security that is designated as a “Unit” and shall include Common Units and Management Incentive Units but shall not include the General Partner Interest.

     “Unitholders” means the holders of Units.

     “Unit Majority” means at least a majority of the Outstanding Common Units.

     “Unrealized Gain” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the fair market value of such property as of such date (as determined under Section 5.5(d)) over (b) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 5.5(d) as of such date).

     “Unrealized Loss” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 5.5(d) as of such date) over (b) the fair market value of such property as of such date (as determined under Section 5.5(d)).

     “U.S. GAAP” means United States generally accepted accounting principles consistently applied.

     “Withdrawal Opinion of Counsel” has the meaning assigned to such term in Section 11.1(b).

Section 1.2 Construction.

     Unless the context requires otherwise: (a) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns,

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pronouns and verbs shall include the plural and vice versa; (b) references to Articles and Sections refer to Articles and Sections of this Agreement; (c) the terms “include”, “includes”, “including” and words of like import shall be deemed to be followed by the words “without limitation”; and (d) the terms “hereof”, “herein” and “hereunder” refer to this Agreement as a whole and not to any particular provision of this Agreement. The table of contents and headings contained in this Agreement are for reference purposes only, and shall not affect in any way the meaning or interpretation of this Agreement.

ARTICLE II

ORGANIZATION

Section 2.1 Formation.

     The General Partner and the Organizational Limited Partners have previously formed the Partnership as a limited partnership pursuant to the provisions of the Delaware Act and hereby amend and restate the original Agreement of Limited Partnership of Encore Energy Partners LP in its entirety. This amendment and restatement shall become effective on the date of this Agreement. Except as expressly provided to the contrary in this Agreement, the rights, duties (including fiduciary duties), liabilities and obligations of the Partners and the administration, dissolution and termination of the Partnership shall be governed by the Delaware Act. All Partnership Interests shall constitute personal property of the owner thereof for all purposes.

Section 2.2 Name.

     The name of the Partnership shall be “Encore Energy Partners LP” The Partnership’s business may be conducted under any other name or names as determined by the General Partner, including the name of the General Partner. The words “Limited Partnership,” “LP,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary for the purpose of complying with the laws of any jurisdiction that so requires. The General Partner may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners.

Section 2.3 Registered Office; Registered Agent; Principal Office; Other Offices

     Unless and until changed by the General Partner, the registered office of the Partnership in the State of Delaware shall be located at 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office shall be The Corporation Trust Company. The principal office of the Partnership shall be located at 777 Main Street, Suite 1400, Fort Worth, Texas 76102 or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner shall determine necessary or appropriate. The address of the General Partner shall be 777 Main Street, Suite 1400, Fort Worth, Texas 76102 or such other place as the General Partner may from time to time designate by notice to the Limited Partners.

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Section 2.4 Purpose and Business.

     The purpose and nature of the business to be conducted by the Partnership shall be to (a) engage directly in, or enter into or form, hold and dispose of any corporation, partnership, joint venture, limited liability company or other arrangement to engage indirectly in, any business activity that is approved by the General Partner and that lawfully may be conducted by a limited partnership organized pursuant to the Delaware Act and, in connection therewith, to exercise all of the rights and powers conferred upon the Partnership pursuant to the agreements relating to such business activity, and (b) do anything necessary or appropriate to the foregoing, including the making of capital contributions or loans to a Group Member; provided, however, that the General Partner shall not cause the Partnership to engage, directly or indirectly, in any business activity that the General Partner determines would cause the Partnership to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes. To the fullest extent permitted by law, the General Partner shall have no duty or obligation to propose or approve, and may decline to propose or approve, the conduct by the Partnership of any business free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner or Assignee and, in declining to so propose or approve, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity.

Section 2.5 Powers.

     The Partnership shall be empowered to do any and all acts and things necessary or appropriate for the furtherance and accomplishment of the purposes and business described in Section 2.4 and for the protection and benefit of the Partnership.

Section 2.6 Power of Attorney.

     (a) Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner and, if a Liquidator shall have been selected pursuant to Section 12.3, the Liquidator (and any successor to the Liquidator by merger, transfer, assignment, election or otherwise) and each of their authorized officers and attorneys-in-fact, as the case may be, with full power of substitution, as his true and lawful agent and attorney-in-fact, with full power and authority in his name, place and stead, to:

     (i) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (A) all certificates, documents and other instruments (including this Agreement and the Certificate of Limited Partnership and all amendments or restatements hereof or thereof) that the General Partner or the Liquidator determines to be necessary or appropriate to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (B) all certificates, documents and other instruments that the General Partner or the Liquidator determines to be necessary or appropriate to reflect, in accordance with its terms, any amendment, change, modification or restatement of this Agreement; (C) all certificates, documents and other instruments

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(including conveyances and a certificate of cancellation) that the General Partner or the Liquidator determines to be necessary or appropriate to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement; (D) all certificates, documents and other instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article IV, X, XI or XII; (E) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of any class or series of Partnership Securities issued pursuant to Section 5.6; and (F) all certificates, documents and other instruments (including agreements and a certificate of merger) relating to a merger, consolidation or conversion of the Partnership pursuant to Article XIV; and

     (ii) execute, swear to, acknowledge, deliver, file and record all ballots, consents, approvals, waivers, certificates, documents and other instruments that the General Partner or the Liquidator determines to be necessary or appropriate to (A) make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Partners hereunder or is consistent with the terms of this Agreement or (B) effectuate the terms or intent of this Agreement; provided, that when required by Section 13.3 or any other provision of this Agreement that establishes a percentage of the Limited Partners or of the Limited Partners of any class or series required to take any action, the General Partner and the Liquidator may exercise the power of attorney made in this Section 2.6(a)(ii) only after the necessary vote, consent or approval of the Limited Partners or of the Limited Partners of such class or series, as applicable.

Nothing contained in this Section 2.6(a) shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article XIII or as may be otherwise expressly provided for in this Agreement.

     (b) The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and, to the maximum extent permitted by law, not be affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner’s or Assignee’s Partnership Interest and shall extend to such Limited Partner’s or Assignee’s heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or the Liquidator acting in good faith pursuant to such power of attorney; and each such Limited Partner or Assignee, to the maximum extent permitted by law, hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the General Partner or the Liquidator taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator may request in order to effectuate this Agreement and the purposes of the Partnership.

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Section 2.7 Term.

     The term of the Partnership commenced upon the filing of the Certificate of Limited Partnership in accordance with the Delaware Act and shall continue in existence until the dissolution of the Partnership in accordance with the provisions of Article XII. The existence of the Partnership as a separate legal entity shall continue until the cancellation of the Certificate of Limited Partnership as provided in the Delaware Act.

Section 2.8 Title to Partnership Assets.

     Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner or Assignee, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner, one or more of its Affiliates or one or more nominees, as the General Partner may determine. The General Partner hereby declares and warrants that any Partnership assets for which record title is held in the name of the General Partner or one or more of its Affiliates or one or more nominees shall be held by the General Partner or such Affiliate or nominee for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use reasonable efforts to cause record title to such assets (other than those assets in respect of which the General Partner determines that the expense and difficulty of conveyancing makes transfer of record title to the Partnership impracticable) to be vested in the Partnership as soon as reasonably practicable; provided, further, that, prior to the withdrawal or removal of the General Partner or as soon thereafter as practicable, the General Partner shall use reasonable efforts to effect the transfer of record title to the Partnership and, prior to any such transfer, will provide for the use of such assets in a manner satisfactory to the General Partner. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which record title to such Partnership assets is held.

Section 2.9 Certain Undertakings Relating to the Separateness of the Partnership.

     (a) Separateness Generally. The Partnership shall conduct its business and operations separate and apart from those of any other Person (other than the General Partner) in accordance with this Section 2.9.

     (b) Separate Records. The Partnership shall maintain (i) its books and records, (ii) its accounts, and (iii) its financial statements, separate from those of any other Person, except its consolidated Subsidiaries.

     (c) Separate Assets. The Partnership shall not commingle or pool its funds or other assets with those of any other Person, except its consolidated Subsidiaries, and shall maintain its assets in a manner that is not costly or difficult to segregate, ascertain or otherwise identify as separate from those of any other Person.

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     (d) Separate Name. The Partnership shall (i) conduct its business in its own name, (ii) use separate stationery, invoices, and checks, (iii) correct any known misunderstanding regarding its separate identity, and (iv) generally hold itself out as a separate entity.

     (e) Separate Credit. The Partnership shall not (i) pay its own liabilities from a source other than its own funds, (ii) guarantee or become obligated for the debts of any other Person, except its Subsidiaries, (iii) hold out its credit as being available to satisfy the obligations of any other Person, except its Subsidiaries, (iv) acquire obligations or debt securities of the General Partner or its Affiliates (other than the Partnership or its Subsidiaries), or (v) pledge its assets for the benefit of any Person or make loans or advances to any Person, except its Subsidiaries; provided that the Partnership may engage in any transaction described in clauses (ii)—(v) of this Section 2.9(e) if prior Special Approval has been obtained for such transaction and either (A) the Conflicts Committee has determined, or has obtained reasonable written assurance from a nationally recognized firm of independent public accountants or a nationally recognized investment banking or valuation firm, that the borrower or recipient of the credit extension is not then insolvent and will not be rendered insolvent as a result of such transaction or (B) in the case of transactions described in clause (iv), such transaction is completed through a public auction or a National Securities Exchange.

     (f) Separate Formalities. The Partnership shall (i) observe all partnership formalities and other formalities required by its organizational documents, the laws of the jurisdiction of its formation, or other laws, rules, regulations and orders of governmental authorities exercising jurisdiction over it, (ii) engage in transactions with the General Partner and its Affiliates (other than another Group Member) in conformity with the requirements of Section 7.9, and (iii) promptly pay, from its own funds, and on a current basis, its allocable share of general and administrative expenses, capital expenditures, and costs for shared services performed by Affiliates of the General Partner (other than another Group Member). Each material contract between the Partnership or another Group Member, on the one hand, and the Affiliates of the General Partner (other than a Group Member), on the other hand, shall be in writing.

     (g) No Effect. Failure by the General Partner or the Partnership to comply with any of the obligations set forth above shall not affect the status of the Partnership as a separate legal entity, with its separate assets and separate liabilities. The General Partner and the Partnership may be consolidated for financial reporting purposes with Encore Acquisition Company and its subsidiaries; provided, however, that such consolidation shall not affect the status of the Partnership as a separate legal entity with its separate assets and separate liabilities.

ARTICLE III

RIGHTS OF LIMITED PARTNERS

Section 3.1 Limitation of Liability.

     The Limited Partners and the Assignees shall have no liability under this Agreement except as expressly provided in this Agreement or the Delaware Act.

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Section 3.2 Management of Business.

     No Limited Partner or Assignee, in its capacity as such, shall participate in the operation, management or control (within the meaning of the Delaware Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. Any action taken by any Affiliate of the General Partner or any officer, director, employee, manager, member, general partner, agent or trustee of the General Partner or any of its Affiliates, or any officer, director, employee, manager, member, general partner, agent or trustee of a Group Member, in its capacity as such, shall not be deemed to be participation in the control of the business of the Partnership by a limited partner of the Partnership (within the meaning of Section 17-303(a) of the Delaware Act) and shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement.

Section 3.3 Outside Activities of the Limited Partners.

     Subject to the provisions of Section 7.5, any Limited Partner or Assignee shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities in direct competition with the Partnership Group. Neither the Partnership nor any of the other Partners or Assignees shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee.

Section 3.4 Rights of Limited Partners.

     (a) In addition to other rights provided by this Agreement or by applicable law, and except as limited by Section 3.4(b), each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a Limited Partner in the Partnership, upon reasonable written demand stating the purpose of such demand, and at such Limited Partner’s own expense:

     (i) to obtain true and full information regarding the status of the business and financial condition of the Partnership;

     (ii) promptly after its becoming available, to obtain a copy of the Partnership’s federal, state and local income tax returns for each year;

     (iii) to obtain a current list of the name and last known business, residence or mailing address of each Partner;

     (iv) to obtain a copy of this Agreement and the Certificate of Limited Partnership and all amendments thereto, together with copies of the executed copies of all powers of attorney pursuant to which this Agreement, the Certificate of Limited Partnership and all amendments thereto have been executed;

     (v) to obtain true and full information regarding the amount of cash and a description and statement of the Net Agreed Value of any other Capital Contribution by

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each Partner and that each Partner has agreed to contribute in the future, and the date on which each became a Partner; and

     (vi) to obtain such other information regarding the affairs of the Partnership as is just and reasonable.

     (b) The General Partner may keep confidential from the Limited Partners and Assignees, for such period of time as the General Partner deems reasonable, (i) any information that the General Partner reasonably believes to be in the nature of trade secrets or (ii) other information the disclosure of which the General Partner in good faith believes (A) is not in the best interests of the Partnership Group, (B) could damage the Partnership Group or its business or (C) that any Group Member is required by law or by agreement with any third party to keep confidential (other than agreements with Affiliates of the Partnership the primary purpose of which is to circumvent the obligations set forth in this Section 3.4).

ARTICLE IV

CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS

Section 4.1 Certificates.

     Upon the Partnership’s issuance of Common Units to any Person, the Partnership shall issue, upon the request of such Person, one or more Certificates in the name of such Person evidencing the number of such Units being so issued. In addition, (a) upon the General Partner’s request, the Partnership shall issue to it one or more Certificates in the name of the General Partner evidencing its General Partner Interest and (b) upon the request of any Person owning Management Incentive Units or any other Partnership Securities other than Common Units, the Partnership shall issue to such Person one or more certificates evidencing such Management Incentive Units or other Partnership Securities other than Common Units. Certificates shall be executed on behalf of the Partnership by the Chairman of the Board, Chief Executive Officer, President or any Executive Vice President, Senior Vice President or Vice President and the Chief Financial Officer or the Secretary or any Assistant Secretary of the General Partner. No Common Unit Certificate shall be valid for any purpose until it has been countersigned by the Transfer Agent; provided, however, that if the General Partner elects to issue Common Units in global form, the Common Unit Certificates shall be valid upon receipt of a certificate from the Transfer Agent certifying that the Common Units have been duly registered in accordance with the directions of the Partnership. Subject to the requirements of Section 6.4, the Partners holding Certificates evidencing Management Incentive Units may exchange such Certificates for Certificates evidencing Common Units on or after the date on which such Management Incentive Units are converted into Common Units pursuant to the terms of Section 5.10.

Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates.

     (a) If any mutilated Certificate is surrendered to the Transfer Agent, the appropriate officers of the General Partner on behalf of the Partnership shall execute, and the Transfer Agent

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shall countersign and deliver in exchange therefor, a new Certificate evidencing the same number and type of Partnership Securities as the Certificate so surrendered.

     (b) The appropriate officers of the General Partner on behalf of the Partnership shall execute and deliver, and the Transfer Agent shall countersign, a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate:

     (i) makes proof by affidavit, in form and substance satisfactory to the General Partner, that a previously issued Certificate has been lost, destroyed or stolen;

     (ii) requests the issuance of a new Certificate before the General Partner has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim;

     (iii) if requested by the General Partner, delivers to the General Partner a bond, in form and substance satisfactory to the General Partner, with surety or sureties and with fixed or open penalty as the General Partner may direct to indemnify the Partnership, the Partners, the General Partner and the Transfer Agent against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and

     (iv) satisfies any other reasonable requirements imposed by the General Partner.

     If a Limited Partner or Assignee fails to notify the General Partner within a reasonable period of time after he has notice of the loss, destruction or theft of a Certificate, and a transfer of the Limited Partner Interests represented by the Certificate is registered before the Partnership, the General Partner or the Transfer Agent receives such notification, the Limited Partner or Assignee shall be precluded from making any claim against the Partnership, the General Partner or the Transfer Agent for such transfer or for a new Certificate.

     (c) As a condition to the issuance of any new Certificate under this Section 4.2, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Transfer Agent) reasonably connected therewith.

Section 4.3 Record Holders.

     The Partnership shall be entitled to recognize the Record Holder as the Partner or Assignee with respect to any Partnership Interest and, accordingly, shall not be bound to recognize any equitable or other claim to, or interest in, such Partnership Interest on the part of any other Person, regardless of whether the Partnership shall have actual or other notice thereof, except as otherwise provided by law or any applicable rule, regulation, guideline or requirement of any National Securities Exchange on which such Partnership Interests are listed or admitted to trading. Without limiting the foregoing, when a Person (such as a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing) is acting as nominee, agent or in some other representative capacity for another Person in acquiring and/or holding Partnership Interests, as between the Partnership on the one hand, and such other Persons on the

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other, such representative Person (a) shall be the Partner or Assignee (as the case may be) of record and beneficially, (b) must execute and deliver a Transfer Application and (c) shall be bound by this Agreement and shall have the rights and obligations of a Partner or Assignee (as the case may be) hereunder and as, and to the extent, provided for herein.

Section 4.4 Transfer Generally.

     (a) The term “transfer,” when used in this Agreement with respect to a Partnership Interest, shall be deemed to refer to a transaction (i) by which the General Partner assigns its General Partner Interest to another Person or by which a holder of Management Incentive Units assigns its Management Incentive Units to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise or (ii) by which the holder of a Limited Partner Interest (other than a Management Incentive Unit) assigns such Limited Partner Interest to another Person who is or becomes a Limited Partner or an Assignee, and includes a sale, assignment, gift, exchange or any other disposition by law or otherwise, including any transfer upon foreclosure of any pledge, encumbrance, hypothecation or mortgage.

     (b) No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article IV. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article IV shall be null and void.

     (c) Nothing contained in this Agreement shall be construed to prevent a disposition by any stockholder, member, partner or other owner of the General Partner of any or all of the shares of stock, membership interests, partnership interests or other ownership interests in the General Partner.

Section 4.5 Registration and Transfer of Limited Partner Interests.

     (a) The General Partner shall keep or cause to be kept on behalf of the Partnership a register in which, subject to such reasonable regulations as it may prescribe and subject to the provisions of Section 4.5(b), the Partnership will provide for the registration and transfer of Limited Partner Interests. The Transfer Agent is hereby appointed registrar and transfer agent for the purpose of registering Common Units and transfers of such Common Units as herein provided. The Partnership shall not recognize transfers of Certificates evidencing Limited Partner Interests unless such transfers are effected in the manner described in this Section 4.5. Upon surrender of a Certificate for registration of transfer of any Limited Partner Interests evidenced by a Certificate, and subject to the provisions of Section 4.5(b), the appropriate officers of the General Partner on behalf of the Partnership shall execute and deliver, and in the case of Common Units, the Transfer Agent shall countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder’s instructions, one or more new Certificates evidencing the same aggregate number and type of Limited Partner Interests as was evidenced by the Certificate so surrendered.

     (b) Except as otherwise provided in Section 4.8, the General Partner shall not recognize any transfer of Limited Partner Interests until the Certificates evidencing such Limited

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     Partner Interests are surrendered for registration of transfer and such Certificates are accompanied by a Transfer Application properly completed and duly executed by the transferee (or the transferee’s attorney-in-fact duly authorized in writing). No charge shall be imposed by the General Partner for such transfer; provided, that as a condition to the issuance of any new Certificate under this Section 4.5, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed with respect thereto. No distributions or allocations will be made in respect of the Limited Partner Interests until a properly completed Transfer Application has been delivered.

     (c) Limited Partner Interests may be transferred only in the manner described in this Section 4.5. The transfer of any Limited Partner Interests and the admission of any new Limited Partner shall not constitute an amendment to this Agreement.

     (d) Until admitted as a Substituted Limited Partner pursuant to Section 10.2, the Record Holder of a Limited Partner Interest shall be an Assignee in respect of such Limited Partner Interest. Limited Partners may include custodians, nominees or any other individual or entity in its own or any representative capacity.

     (e) A transferee of a Limited Partner Interest who has completed and delivered a Transfer Application shall be deemed to have (i) requested admission as a Substituted Limited Partner, (ii) agreed to comply with and be bound by and to have executed this Agreement, (iii) represented and warranted that such transferee has the right, power and authority and, if an individual, the capacity to enter into this Agreement, (iv) granted the powers of attorney set forth in this Agreement and (v) given the consents and approvals and made the waivers contained in this Agreement.

     (f) The General Partner and its Affiliates shall have the right at any time to transfer their Common Units to one or more Persons.

     (g) Notwithstanding the foregoing, no Executive may transfer any Management Incentive Unit, except to a Permitted Transferee, without the prior written consent of the General Partner, and any such purported transfer in conflict with the foregoing is void.

Section 4.6 Transfer of the General Partner’s General Partner Interest.

     (a) Subject to Section 4.6(c) below, prior to December 31, 2016, the General Partner shall not transfer all or any part of its General Partner Interest to a Person unless such transfer (i) has been approved by the prior written consent or vote of the holders of at least a majority of the Outstanding Common Units (excluding Common Units held by the General Partner and its Affiliates) or (ii) is of all, but not less than all, of its General Partner Interest to (A) an Affiliate of the General Partner (other than an individual) or (B) another Person (other than an individual) in connection with the merger or consolidation of the General Partner with or into such other Person or the transfer by the General Partner of all or substantially all of its assets to such other Person.

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     (b) Subject to Section 4.6(c) below, on or after December 31, 2016, the General Partner may at its option transfer all or any of its General Partner Interest without Unitholder approval.

     (c) Notwithstanding anything herein to the contrary, no transfer by the General Partner of all or any part of its General Partner Interest to another Person shall be permitted unless (i) the transferee agrees to assume the rights and duties of the General Partner under this Agreement and to be bound by the provisions of this Agreement, (ii) the Partnership receives an Opinion of Counsel that such transfer would not result in the loss of limited liability under Delaware law of any Limited Partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not already so treated or taxed) and (iii) such transferee also agrees to purchase all (or the appropriate portion thereof, if applicable) of the partnership or membership interest of the General Partner as the general partner or managing member, if any, of each other Group Member. In the case of a transfer pursuant to and in compliance with this Section 4.6, the transferee or successor (as the case may be) shall, subject to compliance with the terms of Section 10.3, be admitted to the Partnership as the General Partner immediately prior to the transfer of the General Partner Interest, and the business of the Partnership shall continue without dissolution.

Section 4.7 Restrictions on Transfers.

     (a) Except as provided in Section 4.7(c) below, and notwithstanding the other provisions of this Article IV, no transfer of any Partnership Interests shall be made if such transfer would (i) violate the then applicable federal or state securities laws or rules and regulations of the Commission, any state securities commission or any other governmental authority with jurisdiction over such transfer, (ii) terminate the existence or qualification of the Partnership under the laws of the jurisdiction of its formation, or (iii) cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not already so treated or taxed).

     (b) The General Partner may impose restrictions on the transfer of Partnership Interests if it receives an Opinion of Counsel that such restrictions are necessary to avoid a significant risk of the Partnership becoming taxable as a corporation or otherwise becoming taxable as an entity for federal income tax purposes. The General Partner may impose such restrictions by amending this Agreement; provided, however, that any amendment that would result in the delisting or suspension of trading of any class of Limited Partner Interests on the principal National Securities Exchange on which such class of Limited Partner Interests is then listed or admitted to trading must be approved, prior to such amendment being effected, by the holders of at least a majority of the Outstanding Limited Partner Interests of such class.

     (c) Nothing contained in this Article IV, or elsewhere in this Agreement, shall preclude the settlement of any transactions involving Partnership Interests entered into through the facilities of any National Securities Exchange on which such Partnership Interests are listed or admitted to trading.

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     (d) Each certificate evidencing Partnership Interests shall bear a conspicuous legend in substantially the following form:

     THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF ENCORE ENERGY PARTNERS LP THAT THIS SECURITY MAY NOT BE SOLD, OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION OVER SUCH TRANSFER, (B) TERMINATE THE EXISTENCE OR QUALIFICATION OF ENCORE ENERGY PARTNERS LP UNDER THE LAWS OF THE STATE OF DELAWARE, OR (C) CAUSE ENCORE ENERGY PARTNERS LP TO BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION OR OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL INCOME TAX PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR TAXED). ENCORE ENERGY PARTNERS GP LLC, THE GENERAL PARTNER OF ENCORE ENERGY PARTNERS LP, MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE TRANSFER OF THIS SECURITY IF IT RECEIVES AN OPINION OF COUNSEL THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID A SIGNIFICANT RISK OF ENCORE ENERGY PARTNERS LP BECOMING TAXABLE AS A CORPORATION OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR FEDERAL INCOME TAX PURPOSES. THE RESTRICTIONS SET FORTH ABOVE SHALL NOT PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING THIS SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY NATIONAL SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR ADMITTED TO TRADING.

Section 4.8 Eligible Holder Certifications; Non-Eligible Holders.

     (a) If a transferee of a Limited Partner Interest fails to furnish a properly completed Eligible Holder Certification in a Transfer Application or if, upon receipt of such Eligible Holder Certification or otherwise, the General Partner determines that such transferee is not an Eligible Holder, the Limited Partner Interests owned by such transferee shall be subject to redemption in accordance with the provisions of Section 4.9.

     (b) The General Partner may request any Limited Partner or Assignee to furnish to the General Partner, within 30 days after receipt of such request, an executed Eligible Holder Certification or such other information concerning his nationality, citizenship or other related

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status (or, if the Limited Partner or Assignee is a nominee holding for the account of another Person, the nationality, citizenship or other related status of such Person) as the General Partner may request. If a Limited Partner or Assignee fails to furnish to the General Partner within the aforementioned 30-day period such Eligible Holder Certification or other requested information or if upon receipt of such Eligible Holder Certification or other requested information the General Partner determines that a Limited Partner or Assignee is not an Eligible Holder, the Limited Partner Interests owned by such Limited Partner or Assignee shall be subject to redemption in accordance with the provisions of Section 4.9. In addition, the General Partner may require that the status of any such Limited Partner or Assignee be changed to that of a Non-Eligible Holder and, thereupon, the General Partner shall be substituted for such Non-Eligible Holder as the Limited Partner in respect of the Non-Eligible Holder’s Limited Partner Interests.

     (c) The General Partner shall, in exercising voting rights in respect of Limited Partner Interests held by it on behalf of Non-Eligible Holders, distribute the votes in the same ratios as the votes of Partners (including the General Partner) in respect of Limited Partner Interests other than those of Non-Eligible Holders are cast, either for, against or abstaining as to the matter.

     (d) Upon dissolution of the Partnership, a Non-Eligible Holder shall have no right to receive a distribution in kind pursuant to Section 12.4 but shall be entitled to the cash equivalent thereof, and the Partnership shall provide cash in exchange for an assignment of the Non-Eligible Holder’s share of any distribution in kind. Such payment and assignment shall be treated for Partnership purposes as a purchase by the Partnership from the Non-Eligible Holder of its Limited Partner Interest (representing its right to receive its share of such distribution in kind).

     (e) At any time after a Non-Eligible Holder can and does certify that it has become an Eligible Holder, a Non-Eligible Holder may, upon application to the General Partner, request admission as a Substituted Limited Partner with respect to any Limited Partner Interests of such Non-Eligible Holder not redeemed pursuant to Section 4.9, and upon admission of such Non-Eligible Holder pursuant to Section 10.2, the General Partner shall cease to be deemed to be the Limited Partner in respect of the Non-Eligible Holder’s Limited Partner Interests.

Section 4.9 Redemption of Partnership Interests of Non-Eligible Holders.

     (a) If at any time a Limited Partner or Assignee fails to furnish an Eligible Holder Certification or other information requested within the 30-day period specified in Section 4.8(b), or if upon receipt of such Eligible Holder Certification or other information the General Partner determines, with the advice of counsel, that a Limited Partner or Assignee is not an Eligible Holder, the Partnership may, unless the Limited Partner or Assignee establishes to the satisfaction of the General Partner that such Limited Partner or Assignee is an Eligible Holder or has transferred his Partnership Interests to a Person who is an Eligible Holder and who furnishes an Eligible Holder Certification to the General Partner prior to the date fixed for redemption as provided below, redeem the Limited Partner Interest of such Limited Partner or Assignee as follows:

     (i) The General Partner shall, not later than the 30th day before the date fixed for redemption, give notice of redemption to the Limited Partner or Assignee, at his last address designated on the records of the Partnership or the Transfer Agent, by registered

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or certified mail, postage prepaid. The notice shall be deemed to have been given when so mailed. The notice shall specify the Redeemable Interests, the date fixed for redemption, the place of payment, that payment of the redemption price will be made upon surrender of the Certificate evidencing the Redeemable Interests and that on and after the date fixed for redemption no further allocations or distributions to which the Limited Partner or Assignee would otherwise be entitled in respect of the Redeemable Interests will accrue or be made.

     (ii) The aggregate redemption price for Redeemable Interests shall be an amount equal to the Current Market Price (the date of determination of which shall be the date fixed for redemption) of Limited Partner Interests of the class to be so redeemed multiplied by the number of Limited Partner Interests of each such class included among the Redeemable Interests. The redemption price shall be paid, as determined by the General Partner, in cash or by delivery of a promissory note of the Partnership in the principal amount of the redemption price, bearing interest at the rate of 5% annually and payable in three equal annual installments of principal together with accrued interest, commencing one year after the redemption date.

     (iii) Upon surrender by or on behalf of the Limited Partner or Assignee, at the place specified in the notice of redemption, of the Certificate evidencing the Redeemable Interests, duly endorsed in blank or accompanied by an assignment duly executed in blank, the Limited Partner or Assignee or his duly authorized representative shall be entitled to receive the payment therefor.

     (iv) After the redemption date, Redeemable Interests shall no longer constitute issued and Outstanding Limited Partner Interests.

     (b) The provisions of this Section 4.9 shall also be applicable to Limited Partner Interests held by a Limited Partner or Assignee as nominee of a Person determined to be other than an Eligible Holder.

     (c) Nothing in this Section 4.9 shall prevent the recipient of a notice of redemption from transferring his Limited Partner Interest before the redemption date if such transfer is otherwise permitted under this Agreement. Upon receipt of notice of such a transfer, the General Partner shall withdraw the notice of redemption, provided the transferee of such Limited Partner Interest certifies to the satisfaction of the General Partner in a Transfer Application that he is an Eligible Holder. If the transferee fails to make such certification, such redemption shall be effected from the transferee on the original redemption date.

ARTICLE V

CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS

Section 5.1 Organizational Contributions.

     Each party holds the Partnership Interests set forth opposite its named below:

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Name	Partnership Interest
Encore Energy Partners GP LLC	221,013 General Partner Units
Encore Partners LP Holdings LLC	10,279,639 Common Units
I. Jon Brumley	143,000 Management Incentive Units
Jon S. Brumley	143,000 Management Incentive Units
Robert C. Reeves	110,000 Management Incentive Units
L. Ben Nivens	77,000 Management Incentive Units
John W. Arms	77,000 Management Incentive Units

Section 5.2 Contributions by the General Partner and its Affiliates.

     Upon the issuance of any additional Limited Partner Interests by the Partnership, the General Partner may, in exchange for a proportionate number of General Partner Units, make additional Capital Contributions in an amount equal to the product obtained by multiplying (i) the quotient determined by dividing (A) the General Partner’s Percentage Interest by (B) 100 less the General Partner’s Percentage Interest times (ii) the amount contributed to the Partnership by the Limited Partners in exchange for such additional Limited Partner Interests. Except as set forth in Article XII, the General Partner shall not be obligated to make any additional Capital Contributions to the Partnership.

Section 5.3 [Reserved]

Section 5.4 Interest and Withdrawal.

     No interest shall be paid by the Partnership on Capital Contributions. No Partner or Assignee shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon termination of the Partnership may be considered as such by law and then only to the extent provided for in this Agreement. Except to the extent expressly provided in this Agreement, no Partner or Assignee shall have priority over any other Partner or Assignee either as to the return of Capital Contributions or as to profits, losses or distributions. Any such return shall be a compromise to which all Partners and Assignees agree within the meaning of Section 17-502(b) of the Delaware Act.

Section 5.5 Capital Accounts.

     (a) The Partnership shall maintain for each Partner (or a beneficial owner of Partnership Interests held by a nominee in any case in which the nominee has furnished the identity of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method acceptable to the General Partner) owning a Partnership Interest a separate Capital Account with respect to such Partnership Interest in accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions made to the Partnership with respect to such Partnership Interest and (ii) all items of Partnership income and gain (including Simulated Gain and income and gain exempt from tax) computed in accordance with Section 5.5(b) and allocated with respect to such Partnership Interest pursuant to Section 6.1, and decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed distributions of cash or property made with respect to

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such Partnership Interest and (y) all items of Partnership deduction and loss (including Simulated Depletion and Simulated Loss) computed in accordance with Section 5.5(b) and allocated with respect to such Partnership Interest pursuant to Section 6.1.

     (b) For purposes of computing the amount of any item of income, gain, loss, deduction, Simulated Depletion, Simulated Gain or Simulated Loss which is to be allocated pursuant to Article VI and is to be reflected in the Partners’ Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes (including any method of depreciation, cost recovery or amortization used for that purpose), provided, that:

     (i) Solely for purposes of this Section 5.5, the Partnership shall be treated as owning directly its proportionate share (as determined by the General Partner based upon the provisions of the applicable Group Member Agreement or governing, organizational or similar documents) of all property owned by any other Group Member that is classified as a partnership for federal income tax purposes and any other partnership, limited liability company, unincorporated business or other entity classified as a partnership for federal income tax purposes of which a Group Member is, directly or indirectly, a partner.

     (ii) All fees and other expenses incurred by the Partnership to promote the sale of (or to sell) a Partnership Interest that can neither be deducted nor amortized under Section 709 of the Code, if any, shall, for purposes of Capital Account maintenance, be treated as an item of deduction at the time such fees and other expenses are incurred and shall be allocated among the Partners pursuant to Section 6.1.

     (iii) Except as otherwise provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership and, as to those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without regard to the fact that such items are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment in the Capital Accounts shall be treated as an item of gain or loss.

     (iv) Any income, gain, loss, Simulated Gain or Simulated Loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership’s Carrying Value with respect to such property as of such date.

     (v) In accordance with the requirements of Section 704(b) of the Code, any deductions for depreciation, cost recovery, amortization or Simulated Depletion attributable to any Contributed Property shall be determined as if the adjusted basis of such property on the date it was acquired by the Partnership were equal to the Agreed

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Value of such property. Upon an adjustment pursuant to Section 5.5(d) to the Carrying Value of any Partnership property subject to depreciation, cost recovery, amortization or Simulated Depletion, any further deductions for such depreciation, cost recovery, amortization or Simulated Depletion attributable to such property shall be determined as if the adjusted basis of such property were equal to the Carrying Value of such property immediately following such adjustment.

     (vi) If the Partnership’s adjusted basis in a depreciable or cost recovery property is reduced for federal income tax purposes pursuant to Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction shall, solely for purposes hereof, be deemed to be an additional depreciation or cost recovery deduction in the year such property is placed in service and shall be allocated among the Partners pursuant to Section 6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code shall, to the extent possible, be allocated in the same manner to the Partners to whom such deemed deduction was allocated.

     (c) A transferee of a Partnership Interest shall succeed to a pro rata portion of the Capital Account of the transferor relating to the Partnership Interest so transferred.

     (d) (i) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for cash or Contributed Property, the issuance of Partnership Interests as consideration for the provision of services or the conversion of the General Partner’s Combined Interest to Common Units pursuant to Section 11.3(b), the Capital Account of all Partners and the Carrying Value of each Partnership property immediately prior to such issuance shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property immediately prior to such issuance and had been allocated to the Partners at such time pursuant to Section 6.1(c) in the same manner as any item of gain, loss, Simulated Gain or Simulated Loss actually recognized during such period would have been allocated. In determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) immediately prior to the issuance of additional Partnership Interests shall be determined by the General Partner using such method of valuation as it may adopt; provided, however, that the General Partner, in arriving at such valuation, must take fully into account the fair market value of the Partnership Interests of all Partners at such time. The General Partner shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines) to arrive at a fair market value for individual properties.

     (ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed distribution to a Partner of any Partnership property (other than a distribution of cash that is not in redemption or retirement of a Partnership Interest), the Capital Accounts of all Partners and the Carrying Value of all Partnership property shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized in a sale of such property immediately prior to such distribution for an amount equal to its fair market value, and had been allocated to the Partners, at such time, pursuant to Section 6.1(c) in the same manner as

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any item of gain, loss, Simulated Gain or Simulated Loss actually recognized during such period would have been allocated. In determining such Unrealized Gain or Unrealized Loss the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) immediately prior to a distribution shall (A) in the case of an actual distribution that is not made pursuant to Section 12.4 or in the case of a deemed distribution, be determined and allocated in the same manner as that provided in Section 5.5(d)(i) or (B) in the case of a liquidating distribution pursuant to Section 12.4, be determined and allocated by the Liquidator using such method of valuation as it may adopt.

Section 5.6 Issuances of Additional Partnership Securities.

     (a) The Partnership may issue additional Partnership Securities and options, rights, warrants and appreciation rights relating to the Partnership Securities for any Partnership purpose at any time and from time to time to such Persons for such consideration and on such terms and conditions as the General Partner shall determine, all without the approval of any Limited Partners.

     (b) Each additional Partnership Security authorized to be issued by the Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or one or more series of any such classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of Partnership Securities), as shall be fixed by the General Partner, including (i) the right to share in Partnership profits and losses or items thereof; (ii) the right to share in Partnership distributions; (iii) the rights upon dissolution and liquidation of the Partnership; (iv) whether, and the terms and conditions upon which, the Partnership may or shall be required to redeem the Partnership Security (including sinking fund provisions); (v) whether such Partnership Security is issued with the privilege of conversion or exchange and, if so, the terms and conditions of such conversion or exchange; (vi) the terms and conditions upon which each Partnership Security will be issued, evidenced by certificates and assigned or transferred; (vii) the method for determining the Percentage Interest as to such Partnership Security; and (viii) the right, if any, of each such Partnership Security to vote on Partnership matters, including matters relating to the relative rights, preferences and privileges of such Partnership Security.

     (c) The General Partner shall take all actions that it determines to be necessary or appropriate in connection with (i) each issuance of Partnership Securities and options, rights, warrants and appreciation rights relating to Partnership Securities pursuant to this Section 5.6, (ii) the conversion of the General Partner Interest (represented by General Partner Units) or any Management Incentive Units into Units pursuant to the terms of this Agreement, (iii) the admission of Additional Limited Partners and (iv) all additional issuances of Partnership Securities. The General Partner shall determine the relative rights, powers and duties of the holders of the Units or other Partnership Securities being so issued. The General Partner shall do all things necessary to comply with the Delaware Act and is authorized and directed to do all things that it determines to be necessary or appropriate in connection with any future issuance of Partnership Securities or in connection with the conversion of the General Partner Interest or any Management Incentive Units into Units pursuant to the terms of this Agreement, including compliance with any statute, rule, regulation or guideline of any federal, state or other

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governmental agency or any National Securities Exchange on which the Units or other Partnership Securities are listed or admitted to trading.

     (d) The Partnership shall not issue fractional Units upon any distribution, subdivision or combination of Units. If a distribution, subdivision or combination of Units would result in the issuance of fractional Units but for the provisions of this Section 5.6(d), each fractional Unit shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to the next higher Unit).

Section 5.7 Limited Preemptive Right.

     Except as provided in this Section 5.7 and in Section 5.2, no Person shall have any preemptive, preferential or other similar right with respect to the issuance of any Partnership Security, whether unissued, held in the treasury or hereafter created. The General Partner shall have the right, which it may from time to time assign in whole or in part to any of its Affiliates, to purchase Partnership Securities from the Partnership whenever, and on the same terms that, the Partnership issues Partnership Securities to Persons other than the General Partner and its Affiliates, to the extent necessary to maintain the Percentage Interests of the General Partner and its Affiliates equal to that which existed immediately prior to the issuance of such Partnership Securities.

Section 5.8 Splits and Combinations.

     (a) Subject to Section 5.6(d), the Partnership may make a Pro Rata distribution of Partnership Securities to all Record Holders or may effect a subdivision or combination of Partnership Securities so long as, after any such event, each Partner shall have the same Percentage Interest in the Partnership as before such event, and any amounts calculated on a per Unit basis or stated as a number of Units are proportionately adjusted.

     (b) Whenever such a distribution, subdivision or combination of Partnership Securities is declared, the General Partner shall select a Record Date as of which the distribution, subdivision or combination shall be effective and shall send notice thereof at least 20 days prior to such Record Date to each Record Holder as of a date not less than 10 days prior to the date of such notice. The General Partner also may cause a firm of independent public accountants selected by it to calculate the number of Partnership Securities to be held by each Record Holder after giving effect to such distribution, subdivision or combination. The General Partner shall be entitled to rely on any certificate provided by such firm as conclusive evidence of the accuracy of such calculation.

     (c) Promptly following any such distribution, subdivision or combination, the Partnership may issue Certificates to the Record Holders of Partnership Securities as of the applicable Record Date representing the new number of Partnership Securities held by such Record Holders, or the General Partner may adopt such other procedures that it determines to be necessary or appropriate to reflect such changes. If any such combination results in a smaller total number of Partnership Securities Outstanding, the Partnership shall require, as a condition to the delivery to a Record Holder of such new Certificate, the surrender of any Certificate held by such Record Holder immediately prior to such Record Date.

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Section 5.9 Fully Paid and Non-Assessable Nature of Limited Partner Interests.

     All Limited Partner Interests issued pursuant to, and in accordance with the requirements of, this Article V shall be fully paid and non-assessable Limited Partner Interests in the Partnership, except as such non-assessability may be affected by Section 17-607 of the Delaware Act.

Section 5.10 Rights of Holders of Management Incentive Units.

     (a) Vesting. If an Executive remains in Continuous Employment, the Management Incentive Units held by such Executive shall vest in three equal installments as follows: 33 1/3 percent on each of the IPO Closing Date, the first anniversary of the IPO Closing Date and the second anniversary of the IPO Closing Date. If an Executive ceases to be in Continuous Employment, any unvested Management Incentive Units shall be immediately forfeited to the Partnership, except as expressly provided otherwise below.

     (b) Voting and Other Rights. An Executive shall not be entitled to any voting rights or any Sharing Percentage with respect to a Management Incentive Unit, but for all other purposes an Executive shall have all of the rights and obligations of a Limited Partner holding Common Units hereunder.

     (c) Termination of Employment; Forfeiture.

     (i) Upon termination of an Executive’s Continuous Employment as a result of the death of such Executive, the conditions in Section 5.10(a) shall be deemed satisfied with respect to the Executive’s Management Incentive Units, and the restrictions on such units shall lapse and such units shall vest in the Executive’s legal representative, beneficiary or heir.

     (ii) Upon termination of an Executive’s Continuous Employment as a result of the disability of such Executive, the Management Incentive Units held by such Executive shall continue to be subject to the restrictions set forth herein, which restrictions shall lapse and such units shall vest in the Executive. The disability of an Executive shall mean (1) the total disability of the Executive as determined in accordance with Parent’s long-term disability insurance benefit plan or (2) the total and permanent disability as determined by the Board of Directors of the General Partner in its sole discretion.

     (iii) Upon termination of an Executive’s Continuous Employment for any reason other than as described in subsections (i) and (ii) above, all Management Incentive Units held by such Executive as to which the restrictions thereon shall not have previously lapsed shall be immediately forfeited to the Partnership.

     (d) Common Unit Equivalents. For purposes of determining the right of a Management Incentive Unit to distributions under Section 6.3, each Management Incentive Unit will be considered to equal a number of Common Unit Equivalents determined as follows:

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     (i) if distributions of Available Cash per Common Unit with respect to a Quarter are less than the Stated Distribution multiplied by 1.1 (the “First Target Distribution”), each Management Incentive Unit shall represent 1.0000 Common Unit Equivalents with respect to such Quarter;

     (ii) if distributions of Available Cash per Common Unit with respect to a Quarter are equal to or greater than the First Target Distribution but less than the First Target Distribution multiplied by 1.1 (the “Second Target Distribution”), each Management Incentive Unit shall represent 1.2500 Common Unit Equivalents with respect to such Quarter;

     (iii) if distributions of Available Cash per Common Unit with respect to a Quarter are equal to or greater than the Second Target Distribution but less than the Second Target Distribution multiplied by 1.1 (the “Third Target Distribution”), each Management Incentive Unit shall represent 1.5625 Common Unit Equivalents with respect to such Quarter;

     (iv) if distributions of Available Cash per Common Unit with respect to a Quarter are equal to or greater than the Third Target Distribution but less than the Third Target Distribution multiplied by 1.1 (the “Fourth Target Distribution”), each Management Incentive Unit shall represent 1.9531 Common Unit Equivalents with respect to such Quarter;

     (v) if distributions of Available Cash per Common Unit with respect to a Quarter are equal to or greater than the Fourth Target Distribution but less than the Fourth Target Distribution multiplied by 1.1 (the “Fifth Target Distribution”), each Management Incentive Unit shall represent 2.4414 Common Unit Equivalents with respect to such Quarter;

     (vi) if distributions of Available Cash per Common Unit with respect to a Quarter are equal to or greater than the Fifth Target Distribution but less than the Fifth Target Distribution multiplied by 1.1 (the “Sixth Target Distribution”), each Management Incentive Unit shall represent 3.0518 Common Unit Equivalents with respect to such Quarter;

     (vii) if distributions of Available Cash per Common Unit with respect to a Quarter are equal to or greater than the Sixth Target Distribution but less than the Sixth Target Distribution multiplied by 1.1 (the “Seventh Target Distribution”), each Management Incentive Unit shall represent 3.8147 Common Unit Equivalents with respect to such Quarter; and

     (viii) if distributions of Available Cash per Common Unit with respect to a Quarter are equal to or greater than the Seventh Target Distribution, each Management Incentive Unit shall represent 4.7684 Common Unit Equivalents.

     For purposes of this Section 5.10, the determination of Available Cash per Common Unit will be tentatively determined based upon the number of Common Units represented by

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the then Outstanding number of Management Incentive Units under this (d) with respect to the previous Quarter (as adjusted for any conversions in the current Quarter). If the computation of the Available Cash per Common Unit under the previous sentence causes the number of Common Unit Equivalents to increase or decrease under the terms of this Section 5.10(d), the Available Cash per Common Unit will be recomputed using the increased or decreased number of Common Unit Equivalents. If the recomputation of the Available Cash per Common Unit taking into account the increased or decreased Common Unit Equivalents is less than (or greater than) the applicable Target Distribution that caused the Common Unit Equivalents to tentatively increase (or decrease), the Common Unit Equivalents will be the same as those Outstanding for the previous Quarter (or, if applicable, the Common Unit Equivalents associated with the level of Target Distribution which is supported following recomputation).

     (e) Conversion of Management Incentive Units. Management Incentive Units shall convert into Common Units as provided in this Section 5.10(e). Immediately upon the conversion of a Management Incentive Unit into a Common Unit pursuant to this Section 5.10(e), the Executive shall possess all of the rights and obligations of a Unitholder holding a Common Unit hereunder. Common Units received upon conversion of Management Incentive Units shall be fully vested, regardless of the vesting schedule set forth in Section 5.10(a). Notwithstanding the foregoing, a Management Incentive Unit that has converted into a Common Unit pursuant to this Section 5.10(e) shall be subject to the provisions of Section 6.1(d)(x) and Section 6.4.

     (i) If the Partnership makes distributions of Available Cash per Common Unit with respect to four consecutive Quarters in an amount equal to or greater than the Fourth Target Distribution multiplied by four (the “First Conversion Milestone”), the Fifth Target Distribution multiplied by four (the “Second Conversion Milestone”), the Sixth Target Distribution multiplied by four (the “Third Conversion Milestone”) or the Seventh Target Distribution multiplied by four (the “Fourth Conversion Milestone”), then, at any time and from time to time for so long as the Partnership makes distributions of Available Cash per Common Unit in an amount equal to or greater than the First Conversion Milestone, the Second Conversion Milestone, the Third Conversion Milestone or the Fourth Conversion Milestone, an Executive shall be entitled to convert such Executive’s Management Incentive Units, in whole or in part and whether vested or unvested, into Common Units at a conversion ratio equal to 2.4414, 3.0518, 3.8147 or 4.7864 Common Units per Management Incentive Unit, respectively. If an Executive desires to convert Management Incentive Units as provided in the immediately preceding sentence, then such Executive shall deliver to the General Partner a written notice of conversion (a “Conversion Notice”) together with any Certificates representing such Management Incentive Units duly endorsed for transfer. Upon receipt of the Conversion Notice and any Certificates representing such Management Incentive Units duly endorsed for transfer, an Executive shall be deemed to be the holder of record of the number of Common Units issuable upon conversion, notwithstanding that the Certificates representing such Common Units shall not then actually be delivered to such person. Upon conversion, each Management Incentive Unit shall be canceled by the General Partner, subject to the provisions of Section 5.10(f).

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     (ii) If the Partnership makes distributions of Available Cash per Common Unit with respect to any four consecutive Quarters in an amount equal to or greater than the Seventh Target Distribution multiplied by four, then, at the discretion of the Conflicts Committee, all or any portion of the Management Incentive Units may be converted into Common Units at a conversion ratio equal to 4.7684 Common Units per Management Incentive Unit. As soon as practicable after such conversion, the Executives shall deliver to the General Partner all Certificates representing such Management Incentive Units duly endorsed for transfer. Upon receipt of the Certificates representing such Management Incentive Units, if any, each Executive shall be deemed to be the holder of record of the number of Common Units issuable upon conversion of such Executive’s Management Incentive Units, notwithstanding that Certificates representing such Common Units shall not then actually be delivered to such person. Upon conversion, each Management Incentive Unit shall be canceled by the General Partner, subject to the provisions of Section 5.10(f).

     (iii) If an Executive ceases Continuous Employment other than by reason of death or disability, then the Board of Directors of the General Partner may, in its sole discretion, elect to convert all or a portion of the Management Incentive Units held by such Executive into Common Units at a conversion ratio equal the number of Common Unit Equivalents then represented by a Management Incentive Unit pursuant to Section 5.10(d).

     (iv) If an Executive ceases Continuous Employment due to death or disability (as described in Section 5.10(c)(i) or (ii)), all of the Management Incentive Units held by such Executive shall be automatically converted into Common Units at a conversion ratio equal the number of Common Unit Equivalents then represented by a Management Incentive Unit pursuant to Section 5.10(d).

     (v) All Management Incentive Units shall be fully vested and, at the election of the Executive, shall be convertible into Common Units at any time and from time to time following a Change-in-Control at a conversion ratio equal the number of Common Unit Equivalents represented by a Management Incentive Unit pursuant to Section 5.10(d) at the time of the Executive’s election.

     (f) Reissuance of Management Incentive Units. Management Incentive Units that have been forfeited or converted as provided in this Section 5.10 may be reissued, with the approval of the Conflicts Committee, as set forth in this Section 5.10(f):

     (i) In the event any Management Incentive Units are forfeited to the Partnership as provided in Section 5.10(a) or Section 5.10(c)(iii), then the General Partner may, with the approval of the Conflicts Committee, reissue such Management Incentive Units to one or more Persons (a “Grantee”). In the event of any such reissuance, such Management Incentive Units shall have all of the rights and obligations under this Agreement as if such Management Incentive Units had been continuously held by the Grantee, subject to any vesting or other restrictions imposed by the Conflicts Committee.

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     (ii) In the event any Management Incentive Units are converted to Common Units as provided in Sections 5.10(e)(i), 5.10(e)(iii) or 5.10(e)(iv), then the General Partner may, with the approval of the Conflicts Committee, reissue the Management Incentive Units that were so converted to one or more Grantees. In the event of any such reissuance, such Management Incentive Units shall have all of the rights and obligations under this Agreement as if such Management Incentive Units had been continuously held by the Grantee, subject to any vesting or other restrictions and restrictions on conversion privileges imposed by the Conflicts Committee.

     (iii) In the event the Management Incentive Units are converted to Common Units as provided in Section 5.10(e)(ii), then the General Partner may, with the approval of the Conflicts Committee, reissue the Management Incentive Units that were so converted to one or more Grantees. In the event of any such reissuance, (i) the Stated Distribution with respect to such reissued Management Incentive Units shall be determined by the Conflicts Committee and (ii) the Management Incentive Units shall be subject to any vesting or other restrictions imposed by the Conflicts Committee.

     (g) Deemed Distributions; Conversion Ratio Adjustments. For purposes of this Section 5.10, distributions of Available Cash with respect to a Quarter shall be deemed to have been made when the Board of Directors of the General Partner determines that such distributions shall be payable to holders of Common Units. If a conversion event described in Section 5.10(e) occurs during the period between the end of a Quarter and the date when the Board of Directors of the General Partner determines the amount of the distribution of Available Cash with respect to such Quarter, then the Board of Directors of the General Partner may determine that Management Incentive Units represent a greater or lesser number of Common Unit Equivalents based on the expected distribution of Available Cash with respect to such Quarter.

     (h) Delivery of Certificates. The issuance or delivery of Certificates representing Common Units upon the conversion of Management Incentive Units shall be made without charge to an Executive or for any tax in respect of the issuance or delivery of such Certificates or the securities represented thereby, and such Certificates shall be issued or delivered in the respective names of, or in such names as may be directed by, such Executive; provided, however, that the Partnership shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such Certificate in a name other than that of the Executive, and the Partnership shall not be required to issue or deliver such Certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Partnership the amount of such tax or shall have established to the reasonable satisfaction of the Partnership that such tax has been paid; provided, further, however, that the Partnership shall not be required to issue or deliver any such Certificates to the extent such action would be in violation of federal or state securities laws.

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ARTICLE VI

ALLOCATIONS AND DISTRIBUTIONS

Section 6.1 Allocations for Capital Account Purposes.

     For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership’s items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss (computed in accordance with Section 5.5(b)) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below.

     (a) Net Income. After giving effect to the special allocations set forth in Section 6.1(d) and any allocations to other Partnership Securities, Net Income for each taxable year and all items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss taken into account in computing Net Income for such taxable year shall be allocated to the Partners in accordance with their respective Sharing Percentages.

     (b) Net Losses. After giving effect to the special allocations set forth in Section 6.1(d) and any allocations to other Partnership Securities, Net Losses for each taxable period and all items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss taken into account in computing Net Losses for such taxable period shall be allocated to the Partners in accordance with their respective Sharing Percentages; provided that Net Losses shall not be allocated pursuant to this Section 6.1(b) to the extent that such allocation would cause any Limited Partner to have a deficit balance in its Adjusted Capital Account at the end of such taxable year (or increase any existing deficit balance in its Adjusted Capital Account), instead any such Net Losses shall be allocated to the General Partner.

     (c) Net Termination Gains and Losses. After giving effect to the special allocations set forth in Section 6.1(d), all items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss taken into account in computing Net Termination Gain or Net Termination Loss for such taxable period shall be allocated in the same manner as such Net Termination Gain or Net Termination Loss is allocated hereunder. All allocations under this Section 6.1(c) shall be made after Capital Account balances have been adjusted by all other allocations provided under this Section 6.1 and after all distributions of Available Cash provided under Section 6.3 have been made; provided, however, that solely for purposes of this Section 6.1(c), Capital Accounts shall not be adjusted for distributions made pursuant to Section 12.4.

     (i) If a Net Termination Gain is recognized (or deemed recognized pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated among the Partners in the following manner (and the Capital Accounts of the Partners shall be increased by the amount so allocated in each of the following subclauses, in the order listed, before an allocation is made pursuant to the next succeeding subclause):

     (A) First, to each Partner having a deficit balance in its Capital Account, in the proportion that such deficit balance bears to the total deficit balances in the Capital Accounts of all Partners, until each such Partner has been

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allocated Net Termination Gain equal to any such deficit balance in its Capital Account; and

     (B) Second, 100% to all Partners in accordance with their Percentage Interests.

     (ii) If a Net Termination Loss is recognized (or deemed recognized pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated among the Partners in the following manner:

     (A) First, 100% to all Partners in the proportions of their relative Capital Accounts per Unit and per General Partner Unit, until the Capital Account in respect of each Common Unit then Outstanding, in respect of each Management Incentive Unit then Outstanding and each General Partner Unit then Outstanding have all been reduced to zero; and

     (B) Second, the balance, if any, 100% to the General Partner.

     (d) Special Allocations. Notwithstanding any other provision of this Section 6.1, the following special allocations shall be made for such taxable period:

     (i) Partnership Minimum Gain Chargeback. Notwithstanding any other provision of this Section 6.1, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable period, each Partner shall be allocated items of Partnership income, gain and Simulated Gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision. For purposes of this Section 6.1(d), each Partner’s Adjusted Capital Account balance shall be determined, and the allocation of income, gain and Simulated Gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(d) with respect to such taxable period (other than an allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section 6.1(d)(i) is intended to comply with the Partnership Minimum Gain chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith.

     (ii) Chargeback of Partner Non-Recourse Debt Minimum Gain. Notwithstanding the other provisions of this Section 6.1 (other than Section 6.1(d)(i)), except as provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net decrease in Partner Non-Recourse Debt Minimum Gain during any Partnership taxable period, any Partner with a share of Partner Non-Recourse Debt Minimum Gain at the beginning of such taxable period shall be allocated items of Partnership income, gain and Simulated Gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any successor provisions. For purposes of this Section 6.1(d), each Partner’s Adjusted Capital Account balance shall be determined, and the allocation of income, gain and Simulated Gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(d), other than Section 6.1(d)(i) and other than an allocation

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pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii), with respect to such taxable period. This Section 6.1(d)(ii) is intended to comply with the chargeback of items of income and gain requirement in Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

     (iii) Priority Allocations. All or any portion of the remaining items of Partnership gross income or gain for the taxable period, if any, shall be allocated to the holders of Management Incentive Units in proportion to and to the extent of the excess of (A) the cumulative amount of all distributions made to such holder of Management Incentive Units with respect to each Management Incentive Unit held by such holder from the Closing Date to a date 45 days after the end of the current taxable year, over (B) the aggregate amount of such items allocated with respect to such Management Incentive Unit held by such holder pursuant to this Section 6.1(d)(iii) for the current taxable year and all previous taxable years.

     (iv) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income, gain and Simulated Gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations promulgated under Section 704(b) of the Code, the deficit balance, if any, in its Adjusted Capital Account created by such adjustments, allocations or distributions as quickly as possible unless such deficit balance is otherwise eliminated pursuant to Section 6.1(d)(i) or (ii).

     (v) Gross Income Allocations. In the event any Partner has a deficit balance in its Capital Account at the end of any Partnership taxable period in excess of the sum of (A) the amount such Partner is required to restore pursuant to the provisions of this Agreement and (B) the amount such Partner is deemed obligated to restore pursuant to Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially allocated items of Partnership income, gain and Simulated Gain in the amount of such excess as quickly as possible; provided, that an allocation pursuant to this Section 6.1(d)(v) shall be made only if and to the extent that such Partner would have a deficit balance in its Capital Account as adjusted after all other allocations provided for in this Section 6.1 have been tentatively made as if this Section 6.1(d)(v) were not in this Agreement.

     (vi) Non-Recourse Deductions. Non-Recourse Deductions for any taxable period shall be allocated to the Partners in accordance with their respective Sharing Percentages. If the General Partner determines that the Partnership’s Non-Recourse Deductions should be allocated in a different ratio to satisfy the safe harbor requirements of the Treasury Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the other Partners, to revise the prescribed ratio to the numerically closest ratio that does satisfy such requirements.

     (vii) Partner Non-Recourse Deductions. Partner Non-Recourse Deductions for any taxable period shall be allocated 100% to the Partner that bears the Economic Risk of

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Loss with respect to the Partner Non-Recourse Debt to which such Partner Non-Recourse Deductions are attributable in accordance with Treasury Regulation Section 1.704-2(i). If more than one Partner bears the Economic Risk of Loss with respect to a Partner Non-Recourse Debt, such Partner Non-Recourse Deductions attributable thereto shall be allocated between or among such Partners in accordance with the ratios in which they share such Economic Risk of Loss.

     (viii) Non-Recourse Liabilities. For purposes of Treasury Regulation Section 1.752-3(a)(3), the Partners agree that Non-Recourse Liabilities of the Partnership in excess of the sum of (A) the amount of Partnership Minimum Gain and (B) the total amount of Non-Recourse Built-in Gain shall be allocated among the Partners in accordance with their respective Sharing Percentages.

     (ix) Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain or Simulated Gain (if the adjustment increases the basis of the asset) or loss or Simulated Loss (if the adjustment decreases such basis), and such item of gain, loss, Simulated Gain or Simulated Loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Treasury Regulations.

     (x) Economic Uniformity. With respect to any taxable period ending upon, or after, the date a Conversion Notice is given by a holder of Management Incentive Units pursuant to Section 5.10, items of Partnership income and gain shall be allocated 100% to each Partner holding such to be converted Management Incentive Units until each such Partner has been allocated an amount of Partnership income or gain that increases the Capital Account maintained with respect to each to be converted Management Incentive Unit to an amount equal to the product of (1) the number of Common Units into which such to be converted Management Incentive Units are to be converted and (2) the then existing Capital Account for each Common Unit. The purpose for this allocation is to establish uniformity between the Capital Accounts underlying converted Management Incentive Units and the Capital Accounts underlying Common Units held by Persons other than the General Partner and its Affiliates (excluding the Executives) immediately prior to the conversion of Management Incentive Units into Common Units.

     (xi) Curative Allocation.

     (A) Notwithstanding any other provision of this Section 6.1, other than the Required Allocations, the Required Allocations shall be taken into account in making the Agreed Allocations so that, to the extent possible, the net amount of items of income, gain, loss, deduction, Simulated Depletion, Simulated Gain and Simulated Loss allocated to each Partner pursuant to the Required Allocations and the Agreed Allocations, together, shall be equal to the net amount of such items that would have been allocated to each such Partner under the Agreed Allocations

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had the Required Allocations and the related Curative Allocation not otherwise been provided in this Section 6.1. Notwithstanding the preceding sentence, Required Allocations relating to (1) Non-Recourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partnership Minimum Gain and (2) Partner Non-Recourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partner Non-Recourse Debt Minimum Gain. Allocations pursuant to this Section 6.1(d)(xi)(A) shall only be made with respect to Required Allocations to the extent the General Partner determines that such allocations will otherwise be inconsistent with the economic agreement among the Partners. Further, allocations pursuant to this Section 6.1(d)(xi)(A) shall be deferred with respect to allocations pursuant to clauses (1) and (2) hereof to the extent the General Partner determines that such allocations are likely to be offset by subsequent Required Allocations.

     (B) The General Partner shall, with respect to each taxable period, (1) apply the provisions of Section 6.1(d)(xi)(A) in whatever order is most likely to minimize the economic distortions that might otherwise result from the Required Allocations, and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among the Partners in a manner that is likely to minimize such economic distortions.

     (xii) Corrective Allocations. In the event of any allocation of Additional Book Basis Derivative Items or any Book-Down Event or any recognition of a Net Termination Loss, the following rules shall apply:

     (A) In the case of any allocation of Additional Book Basis Derivative Items (other than an allocation of Unrealized Gain or Unrealized Loss under Section 5.5(d) hereof), the General Partner shall allocate additional items of income and gain away from the holders of Management Incentive Units to the Unitholders and the General Partner, or additional items of deduction and loss away from the Unitholders and the General Partner to the holders of Management Incentive Units, to the extent that the Additional Book Basis Derivative Items allocated to the Unitholders or the General Partner exceed their Share of Additional Book Basis Derivative Items. For this purpose, the Unitholders and the General Partner shall be treated as being allocated Additional Book Basis Derivative Items to the extent that such Additional Book Basis Derivative Items have reduced the amount of income that would otherwise have been allocated to the Unitholders or the General Partner under the Partnership Agreement (e.g., Additional Book Basis Derivative Items taken into account in computing cost of goods sold would reduce the amount of book income otherwise available for allocation among the Partners). Any allocation made pursuant to this Section 6.1(d)(xii)(A) shall be made after all of the other Agreed Allocations have been made as if this Section 6.1(d)(xii) were not in this Agreement and, to the extent necessary, shall require the reallocation of items that have been allocated pursuant to such other Agreed Allocations.

     (B) In the case of any negative adjustments to the Capital Accounts of the Partners resulting from a Book-Down Event or from the recognition of a Net

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Termination Loss, such negative adjustment (1) shall first be allocated, to the extent of the Aggregate Remaining Net Positive Adjustments, in such a manner, as determined by the General Partner, that to the extent possible the aggregate Capital Accounts of the Partners will equal the amount that would have been the Capital Account balance of the Partners if no prior Book-Up Events had occurred, and (2) any negative adjustment in excess of the Aggregate Remaining Net Positive Adjustments shall be allocated pursuant to Section 6.1(c) hereof.

     (C) In making the allocations required under this Section 6.1(d)(xii), the General Partner may apply whatever conventions or other methodology it determines will satisfy the purpose of this Section 6.1(d)(xii).

Section 6.2 Allocations for Tax Purposes.

     (a) Except as otherwise provided herein, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Section 6.1.

     (b) The deduction for depletion with respect to each separate oil and gas property (as defined in Section 614 of the Code) shall be computed for federal income tax purposes separately by the Partners rather than by the Partnership in accordance with Section 613A(c)(7)(D) of the Code. Except as provided in Section 6.2(c)(iii), for purposes of such computation (before taking into account any adjustments resulting from an election made by the Partnership under Section 754 of the Code), the adjusted tax basis of each oil and gas property (as defined in Section 614 of the Code) shall be allocated among the Partners in accordance with their respective Sharing Percentages.

     Each Partner shall separately keep records of his share of the adjusted tax basis in each oil and gas property, allocated as provided above, adjust such share of the adjusted tax basis for any cost or percentage depletion allowable with respect to such property, and use such adjusted tax basis in the computation of its cost depletion or in the computation of his gain or loss on the disposition of such property by the Partnership.

     (c) Except as provided in Section 6.2(c)(iii), for the purposes of the separate computation of gain or loss by each Partner on the sale or disposition of each separate oil and gas property (as defined in Section 614 of the Code), the Partnership’s allocable share of the “amount realized” (as such term is defined in Section 1001(b) of the Code) from such sale or disposition shall be allocated for federal income tax purposes among the Partners as follows:

     (i) first, to the extent such amount realized constitutes a recovery of the Simulated Basis of the property, to the Partners in the same proportion as the depletable basis of such property was allocated to the Partners pursuant to Section 6.2(b) (without regard to any special allocation of basis under Section 6.2(c)(iii);

     (ii) second, the remainder of such amount realized, if any, to the Partners so that, to the maximum extent possible, the amount realized allocated to each Partner under

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this Section 6.2(c)(ii) will equal such Partner’s share of the Simulated Gain recognized by the Partnership from such sale or disposition.

     (iii) The Partners recognize that with respect to Contributed Property and Adjusted Property there will be a difference between the Carrying Value of such property at the time of contribution or revaluation, as the case may be, and the adjusted tax basis of such property at that time. All items of tax depreciation, cost recovery, amortization, adjusted tax basis of depletable properties, amount realized and gain or loss with respect to such Contributed Property and Adjusted Property shall be allocated among the Partners to take into account the disparities between the Carrying Values and the adjusted tax basis with respect to such properties in accordance with the principles of Treasury Regulation Section 1.704-3(d).

     (iv) Any elections or other decisions relating to such allocations shall be made by the Board of Directors in any manner that reasonably reflects the purpose and intention of the Agreement.

     (d) In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, other than oil and gas properties pursuant to Section 6.2(c), items of income, gain, loss, depreciation, amortization and cost recovery deductions shall be allocated for federal income tax purposes among the Partners as follows:

     (i) (A) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners in the manner provided under Section 704(c) of the Code that takes into account the variation between the Agreed Value of such property and its adjusted basis at the time of contribution; and (B) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1.

     (ii) (A) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 6.2(d)(i)(A); and (B) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1.

     (iii) The General Partner shall apply the principles of Treasury Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.

     (e) For the proper administration of the Partnership and for the preservation of uniformity of the Limited Partner Interests (or any class or classes thereof), the General Partner shall (i) adopt such conventions as it deems appropriate in determining the amount of depreciation, amortization and cost recovery deductions; (ii) make special allocations for federal

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income tax purposes of income (including gross income) or deductions; and (iii) amend the provisions of this Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury Regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity of the Limited Partner Interests (or any class or classes thereof). The General Partner may adopt such conventions, make such allocations and make such amendments to this Agreement as provided in this Section 6.2(e) only if such conventions, allocations or amendments would not have a material adverse effect on the Partners, the holders of any class or classes of Limited Partner Interests issued and Outstanding or the Partnership, and if such allocations are consistent with the principles of Section 704 of the Code.

     (f) The General Partner may determine to depreciate or amortize the portion of an adjustment under Section 743(b) of the Code attributable to unrealized appreciation in any Adjusted Property (to the extent of the unamortized Book-Tax Disparity) using a predetermined rate derived from the depreciation or amortization method and useful life applied to the Partnership’s common basis of such property, despite any inconsistency of such approach with Treasury Regulation Section 1.167(c)-l(a)(6), Treasury Regulation Section 1.197-2(g)(3), the legislative history of Section 743 of the Code or any successor regulations thereto. If the General Partner determines that such reporting position cannot reasonably be taken, the General Partner may adopt depreciation and amortization conventions under which all purchasers acquiring Limited Partner Interests in the same month would receive depreciation and amortization deductions, based upon the same applicable rate as if they had purchased a direct interest in the Partnership’s property. If the General Partner chooses not to utilize such aggregate method, the General Partner may use any other depreciation and amortization conventions to preserve the uniformity of the intrinsic tax characteristics of any Limited Partner Interests, so long as such conventions would not have a material adverse effect on the Limited Partners or the Record Holders of any class or classes of Limited Partner Interests.

     (g) Any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to this Section 6.2, be characterized as Recapture Income in the same proportions and to the same extent as such Partners (or their predecessors in interest) have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income.

     (h) All items of income, gain, loss, deduction and credit recognized by the Partnership for federal income tax purposes and allocated to the Partners in accordance with the provisions hereof shall be determined without regard to any election under Section 754 of the Code that may be made by the Partnership; provided, however, that such allocations, once made, shall be adjusted (in the manner determined by the General Partner) to take into account those adjustments permitted or required by Sections 734 and 743 of the Code.

     (i) Each item of Partnership income, gain, loss and deduction, for federal income tax purposes, shall be determined on an annual basis and prorated on a monthly basis and shall be allocated to the Partners as of the first Business Day of each month; provided, however, that gain or loss on a sale or other disposition of any assets of the Partnership or any other extraordinary item of income or loss realized and recognized other than in the ordinary course of business, as determined by the General Partner, shall be allocated to the Partners as of the first Business Day

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of the month in which such gain or loss is recognized for federal income tax purposes. The General Partner may revise, alter or otherwise modify such methods of allocation to the extent permitted or required by Section 706 of the Code and the regulations or rulings promulgated thereunder.

     (j) Allocations that would otherwise be made to a Limited Partner under the provisions of this Article VI shall instead be made to the beneficial owner of Limited Partner Interests held by a nominee in any case in which the nominee has furnished the identity of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method determined by the General Partner.

Section 6.3 Requirement and Characterization of Distributions; Distributions to Record Holders.

     (a) Except as described in Section 6.3(b), within 45 days following the end of each Quarter commencing with the Quarter ending on September 30, 2007, an amount equal to 100% of Available Cash with respect to such Quarter shall, subject to Section 17-607 of the Delaware Act, be distributed to the Partners in accordance with this Article VI by the Partnership to the Partners in accordance with their respective Percentage Interests as of the Record Date selected by the General Partner. All distributions required to be made under this Agreement shall be made subject to Section 17-607 of the Delaware Act.

     (b) The General Partner may treat taxes paid by the Partnership on behalf of, or amounts withheld with respect to, all or less than all of the Partners, as a distribution of Available Cash to such Partners. The General Partner may, but shall not be required, to distribute Available Cash with respect to any quarter ending on or prior to June 30, 2007.

     (c) Each distribution in respect of a Partnership Interest shall be paid by the Partnership, directly or through the Transfer Agent or through any other Person or agent, only to the Record Holder of such Partnership Interest as of the Record Date set for such distribution. Such payment shall constitute full payment and satisfaction of the Partnership’s liability in respect of such payment, regardless of any claim of any Person who may have an interest in such payment by reason of an assignment or otherwise.

Section 6.4 Special Provisions Relating to the Holders of Management Incentive Units.

     The holder of a Management Incentive Unit that has converted into one or more Common Units pursuant to Section 5.10 shall not be issued a Certificate representing Common Units pursuant to Section 4.1 and shall not be permitted to transfer its converted Management Incentive Units to a Person that is not a Permitted Transferee until such time as the General Partner determines, based on advice of counsel, that a converted Management Incentive Unit should have, as a substantive matter, like intrinsic economic and United States federal income tax characteristics, in all material respects, to the intrinsic economic and United States federal income tax characteristics of the Common Units held by Persons other than the General Partner and its Affiliates immediately prior to the conversion of such Management Incentive Units into Common Units. In connection with the condition imposed by this Section 6.4, the General

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Partner shall take whatever steps are required to provide economic uniformity to the converted Management Incentive Units in preparation for a transfer of such converted Management Incentive Units, including the application of Section 6.1(d)(x); provided, however, that, except for the application of Section 6.1(d)(x), the General Partner shall not take any such steps which would have a material adverse effect on the Unitholders holding Common Units.

ARTICLE VII

MANAGEMENT AND OPERATION OF BUSINESS

Section 7.1 Management.

     (a) The General Partner shall conduct, direct and manage all activities of the Partnership. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership shall be exclusively vested in the General Partner, and no Limited Partner or Assignee shall have any management power over the business and affairs of the Partnership. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or that are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 7.3, shall have full power and authority to do all things and on such terms as it determines to be necessary or appropriate to conduct the business of the Partnership, to exercise all powers set forth in Section 2.5 and to effectuate the purposes set forth in Section 2.4, including the following:

     (i) the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness, including indebtedness that is convertible into Partnership Securities, and the incurring of any other obligations;

     (ii) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership;

     (iii) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of the assets of the Partnership or the merger or other combination of the Partnership with or into another Person (the matters described in this clause (iii) being subject, however, to any prior approval that may be required by Section 7.3 and Article XIV);

     (iv) the use of the assets of the Partnership (including cash on hand) for any purpose consistent with the terms of this Agreement, including the financing of the conduct of the operations of the Partnership Group; subject to Section 7.6(a), the lending of funds to other Persons (including other Group Members); the repayment or guarantee of obligations of any Group Member; and the making of capital contributions to any Group Member;

     (v) the negotiation, execution and performance of any contracts, conveyances or other instruments (including instruments that limit the liability of the Partnership under

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contractual arrangements to all or particular assets of the Partnership, with the other party to the contract to have no recourse against the General Partner or its assets other than its interest in the Partnership, even if same results in the terms of the transaction being less favorable to the Partnership than would otherwise be the case);

     (vi) the distribution of Partnership cash;

     (vii) the selection and dismissal of employees (including employees having titles such as “president,” “vice president,” “secretary” and “treasurer”) and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring;

     (viii) the maintenance of insurance for the benefit of the Partnership Group, the Partners and Indemnitees;

     (ix) the formation of, or acquisition of an interest in, and the contribution of property and the making of loans to, any further limited or general partnerships, joint ventures, corporations, limited liability companies or other relationships (including the acquisition of interests in, and the contributions of property to, any Group Member from time to time) subject to the restrictions set forth in Section 2.4;

     (x) the control of any matters affecting the rights and obligations of the Partnership, including the bringing and defending of actions at law or in equity and otherwise engaging in the conduct of litigation, arbitration or mediation and the incurring of legal expense and the settlement of claims and litigation;

     (xi) the indemnification of any Person against liabilities and contingencies to the extent permitted by law;

     (xii) the entering into of listing agreements with any National Securities Exchange and the delisting of some or all of the Limited Partner Interests from, or requesting that trading be suspended on, any such exchange (subject to any prior approval that may be required under Section 4.7);

     (xiii) the purchase, sale or other acquisition or disposition of Partnership Securities, or the issuance of options, rights, warrants, appreciation rights and tracking and phantom interests relating to Partnership Securities;

     (xiv) the undertaking of any action in connection with the Partnership’s participation in any Group Member; and

     (xv) the entering into of agreements with any of its Affiliates to render services to a Group Member or to itself in the discharge of its duties as General Partner of the Partnership.

     (b) Notwithstanding any other provision of this Agreement, any Group Member Agreement, the Delaware Act or any applicable law, rule or regulation, each of the Partners and the Assignees and each other Person who may acquire an interest in Partnership Securities

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hereby (i) approves, ratifies and confirms the execution, delivery and performance by the parties thereto of this Agreement, the Group Member Agreement of each other Group Member and the Administrative Services Agreement; (ii) agrees that the General Partner (on its own or through any officer of the Partnership) is authorized to execute, deliver and perform the agreements referred to in clause (i) of this sentence on behalf of the Partnership without any further act, approval or vote of the Partners or the Assignees or the other Persons who may acquire an interest in Partnership Securities; and (iii) agrees that the execution, delivery or performance by the General Partner, any Group Member or any Affiliate of any of them of this Agreement or any agreement authorized or permitted under this Agreement (including the exercise by the General Partner or any Affiliate of the General Partner of the rights accorded pursuant to Article XV) shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement (or any other agreements) or of any duty stated or implied by law or equity.

Section 7.2 Certificate of Limited Partnership.

     The General Partner has caused the Certificate of Limited Partnership to be filed with the Secretary of State of the State of Delaware as required by the Delaware Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents that the General Partner determines to be necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware or any other state in which the Partnership may elect to do business or own property. To the extent the General Partner determines such action to be necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate of Limited Partnership and do all things to maintain the Partnership as a limited partnership (or a partnership or other entity in which the limited partners have limited liability) under the laws of the State of Delaware or of any other state in which the Partnership may elect to do business or own property. Subject to the terms of Section 3.4(a), the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate of Limited Partnership, any qualification document or any amendment thereto to any Limited Partner.

Section 7.3 Restrictions on the General Partner’s Authority.

     Except as provided in Articles XII and XIV, the General Partner may not sell, exchange or otherwise dispose of all or substantially all of the assets of the Partnership Group, taken as a whole, in a single transaction or a series of related transactions (including by way of merger, consolidation, other combination or sale of ownership interests of the Partnership’s Subsidiaries) without the approval of holders of a Unit Majority; provided, however, that this provision shall not preclude or limit the General Partner’s ability to mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the assets of the Partnership Group and shall not apply to any forced sale of any or all of the assets of the Partnership Group pursuant to the foreclosure of, or other realization upon, any such encumbrance. Without the approval of holders of a Unit Majority, the General Partner shall not, on behalf of the Partnership, except as permitted under Sections 4.6, 11.1 and 11.2, elect or cause the Partnership to elect a successor general partner of the Partnership.

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Section 7.4 Reimbursement of the General Partner.

     (a) Except as provided in this Section 7.4 and elsewhere in this Agreement, the General Partner shall not be compensated for its services as a general partner or managing member of any Group Member.

     (b) Subject to the limitations contained in the Administrative Services Agreement, the General Partner shall be reimbursed on a quarterly basis, or such other basis as the General Partner may determine, for (i) all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership Group (including salary, bonus, incentive compensation and other amounts paid to any Person, including Affiliates of the General Partner to perform services for the Partnership Group or for the General Partner in the discharge of its duties to the Partnership Group), and (ii) all other expenses allocable to the Partnership Group or otherwise incurred by the General Partner in connection with operating the Partnership Group’s business (including expenses allocated to the General Partner by its Affiliates). The General Partner shall determine the expenses that are allocable to the Partnership Group. Reimbursements pursuant to this Section 7.4 shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 7.7.

     (c) The General Partner, without the approval of the Limited Partners (who shall have no right to vote in respect thereof), may propose and adopt on behalf of the Partnership employee benefit plans, employee programs and employee practices (including plans, programs and practices involving the issuance of Partnership Securities or options to purchase or rights, warrants or appreciation rights or phantom or tracking interests relating to Partnership Securities), or cause the Partnership to issue Partnership Securities in connection with, or pursuant to, any employee benefit plan, employee program or employee practice maintained or sponsored by the General Partner or any of its Affiliates, in each case for the benefit of employees and directors of the General Partner or its Affiliates, or any Group Member or its Affiliates, or any of them, in respect of services performed, directly or indirectly, for the benefit of the Partnership Group. The Partnership agrees to issue and sell to the General Partner or any of its Affiliates any Partnership Securities that the General Partner or such Affiliates are obligated to provide to any employees and directors pursuant to any such employee benefit plans, employee programs or employee practices. Expenses incurred by the General Partner in connection with any such plans, programs and practices (including the net cost to the General Partner or such Affiliates of Partnership Securities purchased by the General Partner or such Affiliates from the Partnership to fulfill options or awards under such plans, programs and practices) shall be reimbursed in accordance with Section 7.4(b). Any and all obligations of the General Partner under any employee benefit plans, employee programs or employee practices adopted by the General Partner as permitted by this Section 7.4(c) shall constitute obligations of the General Partner hereunder and shall be assumed by any successor General Partner approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to all of the General Partner’s General Partner Interest pursuant to Section 4.6.

Section 7.5 Outside Activities.

     (a) After the Closing Date, the General Partner, for so long as it is the General Partner of the Partnership (i) agrees that its sole business will be to act as a general partner or

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managing member, as the case may be, of the Partnership and any other partnership or limited liability company of which the Partnership is, directly or indirectly, a partner or member and to undertake activities that are ancillary or related thereto (including being a limited partner in the Partnership) and (ii) shall not engage in any business or activity or incur any debts or liabilities except in connection with or incidental to (A) its performance as general partner or managing member, if any, of one or more Group Members, (B) the acquiring, owning or disposing of debt or equity securities in any Group Member or (C) the guarantee of, and mortgage, pledge, or encumbrance of any or all of its assets in connection with, any indebtedness of the General Partner, any of its successors or permitted assigns or any other Affiliate of the General Partner.

     (b) Subject to the terms of Section 7.5(a), each Indemnitee (other than the General Partner) shall have the right to engage in businesses of every type and description and other activities for profit and to engage in and possess an interest in other business ventures of any and every type or description, whether in businesses engaged in or anticipated to be engaged in by any Group Member, independently or with others, including business interests and activities in direct competition with the business and activities of any Group Member, and none of the same shall constitute a breach of this Agreement or any duty expressed or implied by law to any Group Member or any Partner or Assignee. None of any Group Member, any Limited Partner or any other Person shall have any rights by virtue of this Agreement, any Group Member Agreement, or the partnership relationship established hereby in any business ventures of any Indemnitee. Notwithstanding anything to the contrary in this Agreement, (i) the engaging in competitive activities by any Indemnitees (other than the General Partner) in accordance with the provisions of this Section 7.5 is hereby approved by the Partnership and all Partners, (ii) it shall be deemed not to be a breach of any fiduciary duty or any other obligation of any type whatsoever of the General Partner or of any Indemnitee for the Indemnitees (other than the General Partner) to engage in such business interests and activities in preference to or to the exclusion of the Partnership and (iii) the Indemnitees shall have no obligation hereunder or as a result of any duty expressed or implied by law to present business opportunities to the Partnership.

     (c) Subject to the terms of Section 7.5(a) and Section 7.5(b), but otherwise notwithstanding anything to the contrary in this Agreement, the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to any Indemnitee (including the General Partner) and no Indemnitee (including the General Partner) who acquires knowledge of a potential transaction, agreement, arrangement or other matter that may be an opportunity for the Partnership shall have any duty to communicate or offer such opportunity to the Partnership, and such Indemnitee (including the General Partner) shall not be liable to the Partnership, to any Limited Partner or any other Person for breach of any fiduciary or other duty by reason of the fact that such Indemnitee (including the General Partner) pursues or acquires for itself, directs such opportunity to another Person or does not communicate such opportunity or information to the Partnership; provided such Indemnitee does not engage in such business or activity as a result of or using confidential or proprietary information provided by or on behalf of the Partnership to such Indemnitee.

     (d) The General Partner and each of its Affiliates may acquire Units or other Partnership Securities in addition to those acquired on the Closing Date and, except as otherwise provided in this Agreement, shall be entitled to exercise, at their option, all rights relating to all

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Units or other Partnership Securities acquired by them. The term “Affiliates” when used in this Section 7.5(d) with respect to the General Partner shall not include any Group Member.

     (e) Notwithstanding anything to the contrary in this Agreement, to the extent that any provision of this Section 7.5 purports or is interpreted to have the effect of restricting, eliminating or otherwise modifying the fiduciary duties that might otherwise, as a result of Delaware or other applicable law, be owed by the General Partner to the Partnership and its Limited Partners, or to constitute a waiver or consent by the Limited Partners to any such fiduciary duty, such provisions in this Section 7.5 shall be deemed to have been approved by the Partners.

Section 7.6 Loans from the General Partner; Loans or Contributions from the Partnership or Group Members.

     (a) The General Partner or any of its Affiliates may lend to any Group Member, and any Group Member may borrow from the General Partner or any of its Affiliates, funds needed or desired by the Group Member for such periods of time and in such amounts as the General Partner may determine; provided, however, that in any such case the lending party may not charge the borrowing party interest at a rate greater than the rate that would be charged the borrowing party or impose terms less favorable to the borrowing party than would be charged or imposed on the borrowing party by unrelated lenders on comparable loans made on an arm’s-length basis (without reference to the lending party’s financial abilities or guarantees), all as determined by the General Partner. The borrowing party shall reimburse the lending party for any costs (other than any additional interest costs) incurred by the lending party in connection with the borrowing of such funds. For purposes of this Section 7.6(a) and Section 7.6(b), the term “Group Member” shall include any Affiliate of a Group Member that is controlled by the Group Member.

     (b) The Partnership may lend or contribute to any Group Member, and any Group Member may borrow from the Partnership, funds on terms and conditions determined by the General Partner. No Group Member may lend funds to the General Partner or any of its Affiliates (other than another Group Member).

Section 7.7 Indemnification.

     (a) To the fullest extent permitted by law but subject to the limitations expressly provided in this Agreement, all Indemnitees shall be indemnified and held harmless by the Partnership from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as an Indemnitee; provided, that the Indemnitee shall not be indemnified and held harmless if there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the matter for which the Indemnitee is seeking indemnification pursuant to this Section 7.7, the Indemnitee acted in bad faith or engaged in fraud, willful misconduct or, in the case of a criminal matter, acted with knowledge that the Indemnitee’s conduct was unlawful; provided,

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further, no indemnification pursuant to this Section 7.7 shall be available to the General Partner or its Affiliates (other than a Group Member) with respect to its or their obligations incurred pursuant to the Administrative Services Agreement (other than obligations incurred by the General Partner on behalf of the Partnership). Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, it being agreed that the General Partner shall not be personally liable for such indemnification and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate such indemnification.

     (b) To the fullest extent permitted by law, expenses (including legal fees and expenses) incurred by an Indemnitee who is indemnified pursuant to Section 7.7(a) in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Partnership prior to a determination that the Indemnitee is not entitled to be indemnified upon receipt by the Partnership of any undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 7.7.

     (c) The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, pursuant to any vote of the holders of Outstanding Limited Partner Interests, as a matter of law or otherwise, both as to actions in the Indemnitee’s capacity as an Indemnitee and as to actions in any other capacity, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee.

     (d) The Partnership may purchase and maintain (or reimburse the General Partner or its Affiliates for the cost of) insurance, on behalf of the General Partner, its Affiliates and such other Persons as the General Partner shall determine, against any liability that may be asserted against, or expense that may be incurred by, such Person in connection with the Partnership’s activities or such Person’s activities on behalf of the Partnership, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.

     (e) For purposes of this Section 7.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute “fines” within the meaning of Section 7.7(a); and action taken or omitted by it with respect to any employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the best interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose that is in the best interests of the Partnership.

     (f) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.

     (g) An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

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     (h) The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons.

     (i) No amendment, modification or repeal of this Section 7.7 or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future Indemnitee to be indemnified by the Partnership, nor the obligations of the Partnership to indemnify any such Indemnitee under and in accordance with the provisions of this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

Section 7.8 Liability of Indemnitees.

     (a) Notwithstanding anything to the contrary set forth in this Agreement, no Indemnitee shall be liable for monetary damages to the Partnership, the Limited Partners, the Assignees or any other Persons who have acquired interests in the Partnership Securities, for losses sustained or liabilities incurred as a result of any act or omission of an Indemnitee unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the matter in question, the Indemnitee acted in bad faith or engaged in fraud, willful misconduct or, in the case of a criminal matter, acted with knowledge that the Indemnitee’s conduct was criminal.

     (b) Subject to its obligations and duties as General Partner set forth in Section 7.1(a), the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents, and the General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith.

     (c) To the extent that, at law or in equity, an Indemnitee has duties (including fiduciary duties) and liabilities relating thereto to the Partnership or to the Partners, the General Partner and any other Indemnitee acting in connection with the Partnership’s business or affairs shall not be liable to the Partnership or to any Partner for its good faith reliance on the provisions of this Agreement.

     (d) Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the liability of the Indemnitees under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

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Section 7.9 Resolution of Conflicts of Interest; Standards of Conduct and Modification of Duties.

     (a) Unless otherwise expressly provided in this Agreement or any Group Member Agreement, whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership, any Group Member, any Partner or any Assignee, on the other, any resolution or course of action by the General Partner or its Affiliates in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement, of any Group Member Agreement, of any agreement contemplated herein or therein, or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is (i) approved by Special Approval, (ii) approved by the vote of a majority of the Common Units (excluding Common Units owned by the General Partner and its Affiliates), (iii) on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties or (iv) fair and reasonable to the Partnership, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership). The General Partner shall be authorized but not required in connection with its resolution of such conflict of interest to seek Special Approval of such resolution, and the General Partner may also adopt a resolution or course of action that has not received Special Approval. If Special Approval is sought, then it shall be presumed that, in making its decision, the Conflicts Committee acted in good faith, and if Special Approval is not sought and the Board of Directors of the General Partner determines that the resolution or course of action taken with respect to a conflict of interest satisfies either of the standards set forth in clauses (iii) or (iv) above, then it shall be presumed that, in making its decision, the Board of Directors acted in good faith, and in either case, in any proceeding brought by any Limited Partner or Assignee or by or on behalf of such Limited Partner or Assignee or any other Limited Partner or Assignee or the Partnership challenging such approval, the Person bringing or prosecuting such proceeding shall have the burden of overcoming such presumption.

     (b) Whenever the General Partner makes a determination or takes or declines to take any other action, or any of its Affiliates causes it to do so, in its capacity as the general partner of the Partnership as opposed to in its individual capacity, whether under this Agreement, any Group Member Agreement or any other agreement contemplated hereby or otherwise, then, unless another express standard is provided for in this Agreement, the General Partner, or such Affiliates causing it to do so, shall make such determination or take or decline to take such other action in good faith and shall not be subject to any other or different standards imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. In order for a determination or other action to be in “good faith” for purposes of this Agreement, the Person or Persons making such determination or taking or declining to take such other action must believe that the determination or other action is in the best interests of the Partnership.

     (c) Whenever the General Partner makes a determination or takes or declines to take any other action, or any of its Affiliates causes it to do so, in its individual capacity as opposed to in its capacity as the general partner of the Partnership, whether under this Agreement, any Group Member Agreement or any other agreement contemplated hereby or otherwise, then the

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General Partner, or such Affiliates causing it to do so, are entitled to make such determination or to take or decline to take such other action free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner or Assignee, and the General Partner, or such Affiliates causing it to do so, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. By way of illustration and not of limitation, whenever the phrase, “at the option of the General Partner,” or some variation of that phrase, is used in this Agreement, it indicates that the General Partner is acting in its individual capacity. For the avoidance of doubt, whenever the General Partner votes or transfers its General Partner Interest, to the extent permitted under this Agreement, or refrains from voting or transferring its General Partner Interest, it shall be acting in its individual capacity. The General Partner’s organizational documents may provide that determinations to take or decline to take any action in its individual, rather than representative, capacity may or shall be determined by its members, if the General Partner is a limited liability company, stockholders, if the General Partner is a corporation, or the members or stockholders of the General Partner’s general partner, if the General Partner is a limited partnership.

     (d) Notwithstanding anything to the contrary in this Agreement, the General Partner and its Affiliates shall have no duty or obligation, express or implied, to (i) sell or otherwise dispose of any asset of the Partnership Group other than in the ordinary course of business or (ii) permit any Group Member to use any facilities or assets of the General Partner and its Affiliates, except as may be provided in contracts entered into from time to time specifically dealing with such use. Any determination by the General Partner or any of its Affiliates to enter into such contracts shall be at its option.

     (e) Except as expressly set forth in this Agreement, neither the General Partner nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner or Assignee and the provisions of this Agreement, to the extent that they restrict, eliminate or otherwise modify the duties and liabilities, including fiduciary duties, of the General Partner or any other Indemnitee otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of the General Partner or such other Indemnitee.

     (f) The Unitholders hereby authorize the General Partner, on behalf of the Partnership as a partner or member of a Group Member, to approve of actions by the general partner or managing member of such Group Member similar to those actions permitted to be taken by the General Partner pursuant to this Section 7.9.

Section 7.10 Other Matters Concerning the General Partner.

     (a) The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.

     (b) The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it,

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and any act taken or omitted to be taken in reliance upon the advice or opinion (including an Opinion of Counsel) of such Persons as to matters that the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such advice or opinion.

     (c) The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers, a duly appointed attorney or attorneys-in-fact or the duly authorized officers of the Partnership or any Group Member.

Section 7.11 Purchase or Sale of Partnership Securities.

     The General Partner may cause the Partnership to purchase or otherwise acquire Partnership Securities. As long as Partnership Securities are held by any Group Member, such Partnership Securities shall not be considered Outstanding for any purpose, except as otherwise provided herein. The General Partner or any Affiliate of the General Partner may also purchase or otherwise acquire and sell or otherwise dispose of Partnership Securities for its own account, subject to the provisions of Articles IV and X.

Section 7.12 [Reserved]

Section 7.13 Reliance by Third Parties.

     Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner and any officer of the General Partner authorized by the General Partner to act on behalf of and in the name of the Partnership has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any authorized contracts on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner or any such officer as if it were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the General Partner or any such officer in connection with any such dealing. In no event shall any Person dealing with the General Partner or any such officer or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or any such officer or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (b) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (c) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

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ARTICLE VIII

BOOKS, RECORDS, ACCOUNTING AND REPORTS

Section 8.1 Records and Accounting.

     The General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership’s business, including all books and records necessary to provide to the Limited Partners any information required to be provided pursuant to Section 3.4(a). Any books and records maintained by or on behalf of the Partnership in the regular course of its business, including the record of the Record Holders and Assignees of Units or other Partnership Securities, books of account and records of Partnership proceedings, may be kept on, or be in the form of, computer disks, hard drives, punch cards, magnetic tape, photographs, micrographics or any other information storage device; provided, that the books and records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial reporting purposes, on an accrual basis in accordance with U.S. GAAP.

Section 8.2 Fiscal Year.

     The fiscal year of the Partnership shall be a fiscal year ending December 31. Section 8.3 [Reserved].

ARTICLE IX

TAX MATTERS

Section 9.1 Tax Returns and Information.

     The Partnership shall timely file all returns of the Partnership that are required for federal, state and local income tax purposes on the basis of the accrual method and the taxable year or years that it is required by law to adopt, from time to time, as determined by the General Partner. In the event the Partnership is required to use a taxable year other than a year ending on December 31, the General Partner shall use reasonable efforts to change the taxable year of the Partnership to a year ending on December 31. The tax information reasonably required by Record Holders for federal and state income tax reporting purposes with respect to a taxable year shall be furnished to them within 90 days of the close of the calendar year in which the Partnership’s taxable year ends. The classification, realization and recognition of income, gain, losses and deductions and other items shall be on the accrual method of accounting for federal income tax purposes.

Section 9.2 Tax Elections.

     (a) The Partnership shall make the election under Section 754 of the Code in accordance with applicable regulations thereunder, subject to the reservation of the right to seek to revoke any such election upon the General Partner’s determination that such revocation is in

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the best interests of the Limited Partners. Notwithstanding any other provision herein contained, for the purposes of computing the adjustments under Section 743(b) of the Code, the General Partner shall be authorized (but not required) to adopt a convention whereby the price paid by a transferee of a Limited Partner Interest will be deemed to be the lowest quoted closing price of the Limited Partner Interests on any National Securities Exchange on which such Limited Partner Interests are listed or admitted to trading during the calendar month in which such transfer is deemed to occur pursuant to Section 6.2(i) without regard to the actual price paid by such transferee.

     (b) Except as otherwise provided herein, the General Partner shall determine whether the Partnership should make any other elections permitted by the Code.

Section 9.3 Tax Controversies.

     Subject to the provisions hereof, the General Partner is designated as the Tax Matters Partner (as defined in the Code) and is authorized and required to represent the Partnership (at the Partnership’s expense) in connection with all examinations of the Partnership’s affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. Each Partner agrees to cooperate with the General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings.

Section 9.4 Withholding.

     Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that may be required to cause the Partnership and other Group Members to comply with any withholding requirements established under the Code or any other federal, state or local law including pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the Partnership is required or elects to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to any Partner or Assignee (including by reason of Section 1446 of the Code), the General Partner may treat the amount withheld as a distribution of cash pursuant to Section 6.3 in the amount of such withholding from such Partner.

ARTICLE X

ADMISSION OF PARTNERS

Section 10.1 Admission of Initial Limited Partners.

     The parties hereto other than the General Partner are Limited Partners of the Partnership.

Section 10.2 Admission of Substituted Limited Partners.

     By transfer of a Limited Partner Interest in accordance with Article IV, the transferor shall be deemed to have given the transferee the right to seek admission as a Substituted Limited Partner subject to the conditions of, and in the manner permitted under, this Agreement. A

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transferor of a Certificate representing a Limited Partner Interest shall, however, only have the authority to convey to a purchaser or other transferee who does not execute and deliver a Transfer Application (a) the right to negotiate such Certificate to a purchaser or other transferee and (b) the right to transfer the right to request admission as a Substituted Limited Partner to such purchaser or other transferee in respect of the transferred Limited Partner Interests. No transferor of a Limited Partner Interest or other Person shall have any obligation or responsibility to provide a Transfer Application to a transferee or assist or participate in any way with respect to the completion or delivery thereof. Each transferee of a Limited Partner Interest (including any nominee holder or an agent acquiring such Limited Partner Interest for the account of another Person) who executes and delivers a properly completed Transfer Application shall, by virtue of such execution and delivery, be an Assignee. Such Assignee shall automatically be admitted to the Partnership as a Substituted Limited Partner with respect to the Limited Partner Interests so transferred to such Person at such time as such transfer is recorded in the books and records of the Partnership, and until so recorded, such transferee shall be an Assignee. The General Partner shall periodically, but no less frequently than on the first Business Day of each calendar quarter, cause any unrecorded transfers of Limited Partner Interests with respect to which a properly completed, duly executed Transfer Application has been received to be recorded in the books and records of the Partnership. An Assignee shall have an interest in the Partnership equivalent to that of a Limited Partner with respect to allocations and distributions, including liquidating distributions, of the Partnership. With respect to voting rights attributable to Limited Partner Interests that are held by Assignees, the General Partner shall be deemed to be the Limited Partner with respect thereto and shall, in exercising the voting rights in respect of such Limited Partner Interests on any matter, vote such Limited Partner Interests at the written direction of the Assignee who is the Record Holder of such Limited Partner Interests. If no such written direction is received, such Limited Partner Interests will not be voted. An Assignee shall have no other rights of a Limited Partner.

Section 10.3 Admission of Successor General Partner.

     A successor General Partner approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to all of the General Partner Interest pursuant to Section 4.6 who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to the withdrawal or removal of the predecessor or transferring General Partner, pursuant to Section 11.1 or 11.2 or the transfer of the General Partner Interest pursuant to Section 4.6, provided, however, that no such successor shall be admitted to the Partnership until compliance with the terms of Section 4.6 has occurred and such successor has executed and delivered such other documents or instruments as may be required to effect such admission. Any such successor shall, subject to the terms hereof, carry on the business of the members of the Partnership Group without dissolution.

Section 10.4 Admission of Additional Limited Partners.

     (a) A Person (other than the General Partner, an Initial Limited Partner or a Substituted Limited Partner) who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner:

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     (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including the power of attorney granted in Section 2.6, and

     (ii) such other documents or instruments as may be required by the General Partner to effect such Person’s admission as an Additional Limited Partner.

     (b) Notwithstanding anything to the contrary in this Section 10.4, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded as such in the books and records of the Partnership, following the consent of the General Partner to such admission.

Section 10.5 Amendment of Agreement and Certificate of Limited Partnership.

     To effect the admission to the Partnership of any Partner, the General Partner shall take all steps necessary or appropriate under the Delaware Act to amend the records of the Partnership to reflect such admission and, if necessary, to prepare as soon as practicable an amendment to this Agreement and, if required by law, the General Partner shall prepare and file an amendment to the Certificate of Limited Partnership, and the General Partner may for this purpose, among others, exercise the power of attorney granted pursuant to Section 2.6.

ARTICLE XI

WITHDRAWAL OR REMOVAL OF PARTNERS

Section 11.1 Withdrawal of the General Partner.

     (a) The General Partner shall be deemed to have withdrawn from the Partnership upon the occurrence of any one of the following events (each such event herein referred to as an “Event of Withdrawal”);

     (i) The General Partner voluntarily withdraws from the Partnership by giving written notice to the other Partners;

     (ii) The General Partner transfers all of its rights as General Partner pursuant to Section 4.6;

     (iii) The General Partner is removed pursuant to Section 11.2;

     (iv) The General Partner (A) makes a general assignment for the benefit of creditors; (B) files a voluntary bankruptcy petition for relief under Chapter 7 of the United States Bankruptcy Code; (C) files a petition or answer seeking for itself a liquidation, dissolution or similar relief (but not a reorganization) under any law; (D) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the General Partner in a proceeding of the type described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks, consents to or acquiesces in the

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appointment of a trustee (but not a debtor-in-possession), receiver or liquidator of the General Partner or of all or any substantial part of its properties;

     (v) A final and non-appealable order of relief under Chapter 7 of the United States Bankruptcy Code is entered by a court with appropriate jurisdiction pursuant to a voluntary or involuntary petition by or against the General Partner; or

     (vi) (A) in the event the General Partner is a corporation, a certificate of dissolution or its equivalent is filed for the General Partner, or 90 days expire after the date of notice to the General Partner of revocation of its charter without a reinstatement of its charter, under the laws of its state of incorporation; (B) in the event the General Partner is a partnership or a limited liability company, the dissolution and commencement of winding up of the General Partner; (C) in the event the General Partner is acting in such capacity by virtue of being a trustee of a trust, the termination of the trust; (D) in the event the General Partner is a natural person, his death or adjudication of incompetency; and (E) otherwise in the event of the termination of the General Partner.

If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A), (B), (C) or (E) occurs, the withdrawing General Partner shall give notice to the Limited Partners within 30 days after such occurrence. The Partners hereby agree that only the Events of Withdrawal described in this Section 11.1 shall result in the withdrawal of the General Partner from the Partnership.

     (b) Withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall not constitute a breach of this Agreement under the following circumstances: (i) at any time during the period beginning on the Closing Date and ending at 12:00 midnight, prevailing Central Time, on December 31, 2016, the General Partner voluntarily withdraws by giving at least 90 days’ advance notice of its intention to withdraw to the Limited Partners; provided, that prior to the effective date of such withdrawal, the withdrawal is approved by Unitholders holding at least a majority of the Outstanding Common Units (excluding Common Units held by the General Partner and its Affiliates) and the General Partner delivers to the Partnership an Opinion of Counsel (“Withdrawal Opinion of Counsel”) that such withdrawal (following the selection of the successor General Partner) would not result in the loss of the limited liability of any Limited Partner or any Group Member or cause any Group Member to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not already so treated or taxed); (ii) at any time after 12:00 midnight, prevailing Central Time, on December 31, 2016, the General Partner voluntarily withdraws by giving at least 90 days’ advance notice to the Unitholders, such withdrawal to take effect on the date specified in such notice; (iii) at any time that the General Partner ceases to be the General Partner pursuant to Section 11.1(a)(ii) or is removed pursuant to Section 11.2; or (iv) notwithstanding clause (i) of this sentence, at any time that the General Partner voluntarily withdraws by giving at least 90 days’ advance notice of its intention to withdraw to the Limited Partners, such withdrawal to take effect on the date specified in the notice, if at the time such notice is given one Person and its Affiliates (other than the General Partner and its Affiliates) own beneficially or of record or control at least 50% of the Outstanding Units. The withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall also constitute the withdrawal of the General Partner as general partner or managing member, if

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any, to the extent applicable, of the other Group Members. If the General Partner gives a notice of withdrawal pursuant to Section 11.1(a)(i), the holders of a Unit Majority, may, prior to the effective date of such withdrawal, elect a successor General Partner. The Person so elected as successor General Partner shall automatically become the successor general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. If, prior to the effective date of the General Partner’s withdrawal, a successor is not selected by the Unitholders as provided herein or the Partnership does not receive a Withdrawal Opinion of Counsel, the Partnership shall be dissolved in accordance with Section 12.1. Any successor General Partner elected in accordance with the terms of this Section 11.1 shall be subject to the provisions of Section 10.3.

Section 11.2 Removal of the General Partner.

     The General Partner may be removed if such removal is approved by the Unitholders holding at least 66 2/3% of the Outstanding Units (including Units held by the General Partner and its Affiliates) voting as a single class. Any such action by such holders for removal of the General Partner must also provide for the election of a successor General Partner by the Unitholders of a Unit Majority. Such removal shall be effective immediately following the admission of a successor General Partner pursuant to Section 10.3. The removal of the General Partner shall also automatically constitute the removal of the General Partner as general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. If a Person is elected as a successor General Partner in accordance with the terms of this Section 11.2, such Person shall, upon admission pursuant to Section 10.3, automatically become a successor general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. The right of the holders of Outstanding Units to remove the General Partner shall not exist or be exercised unless the Partnership has received an opinion opining as to the matters covered by a Withdrawal Opinion of Counsel. Any successor General Partner elected in accordance with the terms of this Section 11.2 shall be subject to the provisions of Section 10.3.

Section 11.3 Interest of Departing General Partner and Successor General Partner.

     (a) In the event of (i) withdrawal of the General Partner under circumstances where such withdrawal does not violate this Agreement or (ii) removal of the General Partner by the holders of Outstanding Units under circumstances where Cause does not exist, if the successor General Partner is elected in accordance with the terms of Section 11.1 or 11.2, the Departing General Partner shall have the option, exercisable prior to the effective date of the departure of such Departing General Partner, to require its successor to purchase its General Partner Interest and its general partner interest (or equivalent interest), if any, in the other Group Members (collectively, the “Combined Interest”) in exchange for an amount in cash equal to the fair market value of such Combined Interest, such amount to be determined and payable as of the effective date of its departure. If the General Partner is removed by the Unitholders under circumstances where Cause exists or if the General Partner withdraws under circumstances where such withdrawal violates this Agreement, and if a successor General Partner is elected in accordance with the terms of Section 11.1 or 11.2 (or if the business of the Partnership is continued pursuant to Section 12.2 and the successor General Partner is not the former General

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Partner), such successor shall have the option, exercisable prior to the effective date of the departure of such Departing General Partner (or, in the event the business of the Partnership is continued, prior to the date the business of the Partnership is continued), to purchase the Combined Interest for such fair market value of such Combined Interest of the Departing General Partner. In either event, the Departing General Partner shall be entitled to receive all reimbursements due such Departing General Partner pursuant to Section 7.4, including any employee-related liabilities (including severance liabilities), incurred in connection with the termination of any employees employed by the Departing General Partner or its Affiliates (other than any Group Member) for the benefit of the Partnership or the other Group Members.

     For purposes of this Section 11.3(a), the fair market value of the Departing General Partner’s Combined Interest shall be determined by agreement between the Departing General Partner and its successor or, failing agreement within 30 days after the effective date of such Departing General Partner’s departure, by an independent investment banking firm or other independent expert selected by the Departing General Partner and its successor, which, in turn, may rely on other experts, and the determination of which shall be conclusive as to such matter. If such parties cannot agree upon one independent investment banking firm or other independent expert within 45 days after the effective date of such departure, then the Departing General Partner shall designate an independent investment banking firm or other independent expert, the Departing General Partner’s successor shall designate an independent investment banking firm or other independent expert, and such firms or experts shall mutually select a third independent investment banking firm or independent expert, which third independent investment banking firm or other independent expert shall determine the fair market value of the Combined Interest of the Departing General Partner. In making its determination, such third independent investment banking firm or other independent expert may consider the then current trading price of Units on any National Securities Exchange on which Units are then listed or admitted to trading, the value of the Partnership’s assets, the rights and obligations of the Departing General Partner and other factors it may deem relevant.

     (b) If the Combined Interest is not purchased in the manner set forth in Section 11.3(a), the Departing General Partner (or its transferee) shall become a Limited Partner and its Combined Interest shall be converted into Common Units pursuant to a valuation made by an investment banking firm or other independent expert selected pursuant to Section 11.3(a), without reduction in such Partnership Interest (but subject to proportionate dilution by reason of the admission of its successor). Any successor General Partner shall indemnify the Departing General Partner (or its transferee) as to all debts and liabilities of the Partnership arising on or after the date on which the Departing General Partner (or its transferee) becomes a Limited Partner. For purposes of this Agreement, conversion of the Combined Interest of the Departing General Partner to Common Units will be characterized as if the Departing General Partner (or its transferee) contributed its Combined Interest to the Partnership in exchange for the newly issued Common Units.

     (c) If a successor General Partner is elected in accordance with the terms of Section 11.1 or 11.2 (or if the business of the Partnership is continued pursuant to Section 12.2 and the successor General Partner is not the former General Partner) and the option described in Section 11.3(a) is not exercised by the party entitled to do so, the successor General Partner shall, at the

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effective date of its admission to the Partnership, contribute to the Partnership cash in the amount equal to the product of the (x) quotient obtained by dividing (A) the Sharing Percentage of the General Partner Interest of the Departing General Partner by (B) a percentage equal to 100% less the Sharing Percentage of the General Partner Interest of the Departing General Partner and (y) the Net Agreed Value of the Partnership’s assets on such date. In such event, such successor General Partner shall, subject to the following sentence, be entitled to its Sharing Percentage and its Percentage Interest, as the case may be, of all Partnership allocations and distributions to which the Departing General Partner was entitled. In addition, the successor General Partner shall cause this Agreement to be amended to reflect that, from and after the date of such successor General Partner’s admission, the successor General Partner’s interest in all Partnership distributions and allocations shall be its Sharing Percentage or its Percentage Interest, as the case may be.

Section 11.4 Withdrawal of Limited Partners.

     No Limited Partner shall have any right to withdraw from the Partnership; provided, however, that when a transferee of a Limited Partner’s Limited Partner Interest becomes a Record Holder of the Limited Partner Interest so transferred, such transferring Limited Partner shall cease to be a Limited Partner with respect to the Limited Partner Interest so transferred.

ARTICLE XII

DISSOLUTION AND LIQUIDATION

Section 12.1 Dissolution.

     The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the removal or withdrawal of the General Partner, if a successor General Partner is elected pursuant to Section 11.1 or 11.2, the Partnership shall not be dissolved and such successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and (subject to Section 12.2) its affairs shall be wound up, upon:

     (a) an Event of Withdrawal of the General Partner as provided in Section 11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and an Opinion of Counsel is received as provided in Section 11.1(b) or 11.2 and such successor is admitted to the Partnership pursuant to Section 10.3;

     (b) an election to dissolve the Partnership by the General Partner that is approved by the holders of a Unit Majority;

     (c) the entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Delaware Act; or

     (d) at any time there are no Limited Partners, unless the Partnership is continued without dissolution in accordance with the Delaware Act.

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Section 12.2 Continuation of the Business of the Partnership After Dissolution.

     Upon (a) dissolution of the Partnership following an Event of Withdrawal caused by the withdrawal or removal of the General Partner as provided in Section 11.1(a)(i) or (iii) and the failure of the Partners to select a successor to such Departing General Partner pursuant to Section 11.1 or 11.2, then within 90 days thereafter, or (b) dissolution of the Partnership upon an event constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or (vi), then, to the maximum extent permitted by law, within 180 days thereafter, the holders of a Unit Majority may elect to continue the business of the Partnership on the same terms and conditions set forth in this Agreement by appointing as a successor General Partner a Person approved by the holders of a Unit Majority. Unless such an election is made within the applicable time period as set forth above, the Partnership shall conduct only activities necessary to wind up its affairs. If such an election is so made, then:

     (i) the Partnership shall continue without dissolution unless earlier dissolved in accordance with this Article XII;

     (ii) if the successor General Partner is not the former General Partner, then the interest of the former General Partner shall be treated in the manner provided in Section 11.3; and

     (iii) the successor General Partner shall be admitted to the Partnership as General Partner, effective as of the Event of Withdrawal, by agreeing in writing to be bound by this Agreement; provided, that the right of the holders of a Unit Majority to approve a successor General Partner and to continue the business of the Partnership shall not exist and may not be exercised unless the Partnership has received an Opinion of Counsel that (x) the exercise of the right would not result in the loss of limited liability of any Limited Partner and (y) neither the Partnership nor any Group Member would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of such right to continue (to the extent not already so treated or taxed).

Section 12.3 Liquidator.

     Upon dissolution of the Partnership, unless the business of the Partnership is continued pursuant to Section 12.2, the General Partner shall select one or more Persons to act as Liquidator. The Liquidator (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by holders of a Unit Majority. The Liquidator (if other than the General Partner) shall agree not to resign at any time without 15 days’ prior notice and may be removed at any time, with or without cause, by notice of removal approved by holders of a Unit Majority. Upon dissolution, removal or resignation of the Liquidator, a successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within 30 days thereafter be approved by holders of a Unit Majority. The right to approve a successor or substitute Liquidator in the manner provided herein shall be deemed to refer also to any such successor or substitute Liquidator approved in the manner herein provided. Except as expressly provided in this Article XII, the Liquidator approved in the manner provided herein shall have and may exercise, without further

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authorization or consent of any of the parties hereto, all of the powers conferred upon the General Partner under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers, other than the limitation on sale set forth in Section 7.3) necessary or appropriate to carry out the duties and functions of the Liquidator hereunder for and during the period of time required to complete the winding up and liquidation of the Partnership as provided for herein.

Section 12.4 Liquidation.

     The Liquidator shall proceed to dispose of the assets of the Partnership, discharge its liabilities, and otherwise wind up its affairs in such manner and over such period as determined by the Liquidator, subject to Section 17-804 of the Delaware Act and the following:

     (a) The assets may be disposed of by public or private sale or by distribution in kind to one or more Partners on such terms as the Liquidator and such Partner or Partners may agree. If any property is distributed in kind, the Partner receiving the property shall be deemed for purposes of Section 12.4(c) to have received cash equal to its fair market value; and contemporaneously therewith, appropriate cash distributions must be made to the other Partners. The Liquidator may defer liquidation or distribution of the Partnership’s assets for a reasonable time if it determines that an immediate sale or distribution of all or some of the Partnership’s assets would be impractical or would cause undue loss to the Partners. The Liquidator may distribute the Partnership’s assets, in whole or in part, in kind if it determines that a sale would be impractical or would cause undue loss to the Partners.

     (b) Liabilities of the Partnership include amounts owed to the Liquidator as compensation for serving in such capacity (subject to the terms of Section 12.3) and amounts to Partners otherwise than in respect of their distribution rights under Article VI. With respect to any liability that is contingent, conditional or unmatured or is otherwise not yet due and payable, the Liquidator shall either settle such claim for such amount as it thinks appropriate or establish a reserve of cash or other assets to provide for its payment. When paid, any unused portion of the reserve shall be distributed as additional liquidation proceeds.

     (c) All property and all cash in excess of that required to discharge liabilities as provided in Section 12.4(b) shall be distributed to the Partners in accordance with, and to the extent of, the positive balances in their respective Capital Accounts, as determined after taking into account all Capital Account adjustments (other than those made by reason of distributions pursuant to this Section 12.4(c)) for the taxable year of the Partnership during which the liquidation of the Partnership occurs (with such date of occurrence being determined pursuant to Treasury Regulation Section 1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the end of such taxable year (or, if later, within 90 days after said date of such occurrence).

Section 12.5 Cancellation of Certificate of Limited Partnership.

     Upon the completion of the distribution of Partnership cash and property as provided in Section 12.4 in connection with the liquidation of the Partnership, the Certificate of Limited Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken.

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Section 12.6 Return of Contributions.

     The General Partner shall not be personally liable for, and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate, the return of the Capital Contributions of the Limited Partners or Unitholders, or any portion thereof, it being expressly understood that any such return shall be made solely from Partnership assets.

Section 12.7 Waiver of Partition.

     To the maximum extent permitted by law, each Partner hereby waives any right to partition of the Partnership property.

Section 12.8 Capital Account Restoration.

     No Limited Partner shall have any obligation to restore any negative balance in its Capital Account upon liquidation of the Partnership. The General Partner shall be obligated to restore any negative balance in its Capital Account upon liquidation of its interest in the Partnership by the end of the taxable year of the Partnership during which such liquidation occurs, or, if later, within 90 days after the date of such liquidation.

ARTICLE XIII

AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE

Section 13.1 Amendments to be Adopted Solely by the General Partner.

     Each Partner agrees that the General Partner, without the approval of any Partner or Assignee, may amend any provision of this Agreement and execute, swear to, acknowledge, deliver, file and record whatever documents may be required in connection therewith, to reflect:

     (a) a change in the name of the Partnership, the location of the principal place of business of the Partnership, the registered agent of the Partnership or the registered office of the Partnership;

     (b) admission, substitution, withdrawal or removal of Partners in accordance with this Agreement;

     (c) a change that the General Partner determines to be necessary or advisable to qualify or continue the qualification of the Partnership as a limited partnership or a partnership in which the Limited Partners have limited liability under the laws of any state or to ensure that the Group Members will not be treated as associations taxable as corporations or otherwise taxed as entities for federal income tax purposes;

     (d) a change that the General Partner determines, (i) does not adversely affect the Limited Partners (including any particular class of Partnership Interests as compared to other

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classes of Partnership Interests) in any material respect, (ii) to be necessary or appropriate to (A) satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute (including the Delaware Act) or (B) facilitate the trading of the Units (including the division of any class or classes of Outstanding Units into different classes to facilitate uniformity of tax consequences within such classes of Units) or comply with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are or will be listed or admitted to trading, (iii) to be necessary or advisable in connection with action taken by the General Partner pursuant to Section 5.8 or (iv) is required to effect the intent of the provisions of this Agreement or is otherwise contemplated by this Agreement;

     (e) a change in the fiscal year or taxable year of the Partnership and any other changes that the General Partner determines to be necessary or appropriate as a result of a change in the fiscal year or taxable year of the Partnership including, if the General Partner shall so determine, a change in the definition of “Quarter” and the dates on which distributions are to be made by the Partnership;

     (f) an amendment that is necessary, in the Opinion of Counsel, to prevent the Partnership, or the General Partner or its directors, officers, trustees or agents from in any manner being subjected to the provisions of the Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974, as amended, regardless of whether such are substantially similar to plan asset regulations currently applied or proposed by the United States Department of Labor;

     (g) an amendment that the General Partner determines to be necessary or appropriate in connection with the authorization of issuance of any class or series of Partnership Securities pursuant to Section 5.6;

     (h) any amendment expressly permitted in this Agreement to be made by the General Partner acting alone;

     (i) an amendment effected, necessitated or contemplated by a Merger Agreement or Plan of Conversion approved in accordance with Section 14.3;

     (j) an amendment that the General Partner determines to be necessary or appropriate to reflect and account for the formation by the Partnership of, or investment by the Partnership in, any corporation, partnership, joint venture, limited liability company or other entity, in connection with the conduct by the Partnership of activities permitted by the terms of Section 2.4;

     (k) a change that the General Partner determines to be necessary or advisable to effect the reissuance of the Management Incentive Units as contemplated by Section 5.10(f);

     (l) a merger or conveyance or conversion pursuant to Section 14.3(d); or

     (m) any other amendments substantially similar to the foregoing.

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Section 13.2 Amendment Procedures.

     Except as provided in Sections 13.1 and 13.3, all amendments to this Agreement shall be made in accordance with the following requirements. Amendments to this Agreement may be proposed only by the General Partner; provided, however, that the General Partner shall have no duty or obligation to propose any amendment to this Agreement and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner or Assignee and, in declining to propose an amendment, to the fullest extent permitted by law shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. A proposed amendment shall be effective upon its approval by the General Partner and the holders of a Unit Majority, unless a greater or different percentage is required under this Agreement or by Delaware law. Each proposed amendment that requires the approval of the holders of a specified percentage of Outstanding Units shall be set forth in a writing that contains the text of the proposed amendment. If such an amendment is proposed, the General Partner shall seek the written approval of the requisite percentage of Outstanding Units or call a meeting of the Unitholders to consider and vote on such proposed amendment. The General Partner shall notify all Record Holders upon final adoption of any such proposed amendments.

Section 13.3 Amendment Requirements.

     (a) Notwithstanding the provisions of Sections 13.1 and 13.2, no provision of this Agreement that establishes a percentage of Outstanding Units (including Units deemed owned by the General Partner and its Affiliates) required to take any action shall be amended, altered, changed, repealed or rescinded in any respect that would have the effect of reducing such voting percentage unless such amendment is approved by the written consent or the affirmative vote of holders of Outstanding Units whose aggregate Outstanding Units constitute not less than the voting requirement sought to be reduced.

     (b) Notwithstanding the provisions of Sections 13.1 and 13.2, no amendment to this Agreement may (i) enlarge the obligations of any Limited Partner without its consent, unless such shall be deemed to have occurred as a result of an amendment approved pursuant to Section 13.3(c) or (ii) enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable to, the General Partner or any of its Affiliates without its consent, which consent may be given or withheld at its option.

     (c) Except as provided in Section 14.3, and without limitation of the General Partner’s authority to adopt amendments to this Agreement without the approval of any Partners or Assignees as contemplated in Section 13.1, any amendment that would have a material adverse effect on the rights or preferences of any class of Partnership Interests in relation to other classes of Partnership Interests must be approved by the holders of not less than a majority of the Outstanding Partnership Interests of the class affected.

     (d) Notwithstanding any other provision of this Agreement, except for amendments pursuant to Section 13.1 and except as otherwise provided by Section 14.3(b), no amendments shall become effective without the approval of the holders of at least 90% of the Outstanding

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Units voting as a single class unless the Partnership obtains an Opinion of Counsel to the effect that such amendment will not affect the limited liability of any Limited Partner under applicable law.

     (e) Except as provided in Section 13.1, this Section 13.3 shall only be amended with the approval of the holders of at least 90% of the Outstanding Units.

Section 13.4 Special Meetings.

     All acts of Limited Partners to be taken pursuant to this Agreement shall be taken in the manner provided in this Article XIII. Special meetings of the Limited Partners may be called by the General Partner or by Limited Partners owning 20% or more of the Outstanding Units of the class or classes for which a meeting is proposed. Limited Partners shall call a special meeting by delivering to the General Partner one or more requests in writing stating that the signing Limited Partners wish to call a special meeting and indicating the general or specific purposes for which the special meeting is to be called. Within 60 days after receipt of such a call from Limited Partners or within such greater time as may be reasonably necessary for the Partnership to comply with any statutes, rules, regulations, listing agreements or similar requirements governing the holding of a meeting or the solicitation of proxies for use at such a meeting, the General Partner shall send a notice of the meeting to the Limited Partners either directly or indirectly through the Transfer Agent. A meeting shall be held at a time and place determined by the General Partner on a date not less than 10 days nor more than 60 days after the mailing of notice of the meeting. Limited Partners shall not vote on matters that would cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability under the Delaware Act or the law of any other state in which the Partnership is qualified to do business.

Section 13.5 Notice of a Meeting.

     Notice of a meeting called pursuant to Section 13.4 shall be given to the Record Holders of the class or classes of Units for which a meeting is proposed in writing by mail or other means of written communication in accordance with Section 16.1. The notice shall be deemed to have been given at the time when deposited in the mail or sent by other means of written communication.

Section 13.6 Record Date.

     For purposes of determining the Limited Partners entitled to notice of or to vote at a meeting of the Limited Partners or to give approvals without a meeting as provided in Section 13.11 the General Partner may set a Record Date, which shall not be less than 10 nor more than 60 days before (a) the date of the meeting (unless such requirement conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are listed or admitted to trading, in which case the rule, regulation, guideline or requirement of such National Securities Exchange shall govern) or (b) in the event that approvals are sought without a meeting, the date by which Limited Partners are requested in writing by the General Partner to give such approvals. If the General Partner does not set a Record Date, then (a) the Record Date for determining the Limited Partners entitled to notice of or to vote at a meeting of the Limited

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Partners shall be the close of business on the day next preceding the day on which notice is given, and (b) the Record Date for determining the Limited Partners entitled to give approvals without a meeting shall be the date the first written approval is deposited with the Partnership in care of the General Partner in accordance with Section 13.11.

Section 13.7 Adjournment.

     When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting and a new Record Date need not be fixed, if the time and place thereof are announced at the meeting at which the adjournment is taken, unless such adjournment shall be for more than 45 days. At the adjourned meeting, the Partnership may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in accordance with this Article XIII.

Section 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes.

     The transactions of any meeting of Limited Partners, however called and noticed, and whenever held, shall be as valid as if it had occurred at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy. Attendance of a Limited Partner at a meeting shall constitute a waiver of notice of the meeting, except when the Limited Partner attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened; and except that attendance at a meeting is not a waiver of any right to disapprove the consideration of matters required to be included in the notice of the meeting, but not so included, if the disapproval is expressly made at the meeting.

Section 13.9 Quorum and Voting.

     The holders of a majority of the Outstanding Units of the class or classes for which a meeting has been called (including Outstanding Units deemed owned by the General Partner) represented in person or by proxy shall constitute a quorum at a meeting of Limited Partners of such class or classes unless any such action by the Limited Partners requires approval by holders of a greater percentage of such Units, in which case the quorum shall be such greater percentage. At any meeting of the Limited Partners duly called and held in accordance with this Agreement at which a quorum is present, the act of Limited Partners holding Outstanding Units that in the aggregate represent a majority of the Outstanding Units entitled to vote and be present in person or by proxy at such meeting shall be deemed to constitute the act of all Limited Partners, unless a greater or different percentage is required with respect to such action under the provisions of this Agreement, in which case the act of the Limited Partners holding Outstanding Units that in the aggregate represent at least such greater or different percentage shall be required. The Limited Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Limited Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by the required percentage of Outstanding Units specified in this Agreement (including Outstanding Units deemed owned by the General Partner). In the absence of a quorum any meeting of Limited Partners may be adjourned from time to time by the affirmative vote of holders of at

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least a majority of the Outstanding Units entitled to vote at such meeting (including Outstanding Units deemed owned by the General Partner) represented either in person or by proxy, but no other business may be transacted, except as provided in Section 13.7.

Section 13.10 Conduct of a Meeting.

     The General Partner shall have full power and authority concerning the manner of conducting any meeting of the Limited Partners or solicitation of approvals in writing, including the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of Section 13.4, the conduct of voting, the validity and effect of any proxies and the determination of any controversies, votes or challenges arising in connection with or during the meeting or voting. The General Partner shall designate a Person to serve as chairman of any meeting and shall further designate a Person to take the minutes of any meeting. All minutes shall be kept with the records of the Partnership maintained by the General Partner. The General Partner may make such other regulations consistent with applicable law and this Agreement as it may deem advisable concerning the conduct of any meeting of the Limited Partners or solicitation of approvals in writing, including regulations in regard to the appointment of proxies, the appointment and duties of inspectors of votes and approvals, the submission and examination of proxies and other evidence of the right to vote, and the revocation of approvals in writing.

Section 13.11 Action Without a Meeting.

     If authorized by the General Partner, any action that may be taken at a meeting of the Limited Partners may be taken without a meeting if an approval in writing setting forth the action so taken is signed by Limited Partners owning not less than the minimum percentage of the Outstanding Units (including Units deemed owned by the General Partner) that would be necessary to authorize or take such action at a meeting at which all the Limited Partners were present and voted (unless such provision conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are listed or admitted to trading, in which case the rule, regulation, guideline or requirement of such National Securities Exchange shall govern). Prompt notice of the taking of action without a meeting shall be given to the Limited Partners who have not approved in writing. The General Partner may specify that any written ballot submitted to Limited Partners for the purpose of taking any action without a meeting shall be returned to the Partnership within the time period, which shall be not less than 20 days, specified by the General Partner. If a ballot returned to the Partnership does not vote all of the Units held by the Limited Partners, the Partnership shall be deemed to have failed to receive a ballot for the Units that were not voted. If approval of the taking of any action by the Limited Partners is solicited by any Person other than by or on behalf of the General Partner, the written approvals shall have no force and effect unless and until (a) they are deposited with the Partnership in care of the General Partner, (b) approvals sufficient to take the action proposed are dated as of a date not more than 90 days prior to the date sufficient approvals are deposited with the Partnership and (c) an Opinion of Counsel is delivered to the General Partner to the effect that the exercise of such right and the action proposed to be taken with respect to any particular matter (i) will not cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability, and (ii) is otherwise permissible under the state statutes then governing the rights, duties and liabilities of the Partnership and the Partners.

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Section 13.12 Right to Vote and Related Matters.

     (a) Only those Record Holders of the Units on the Record Date set pursuant to Section 13.6 (and also subject to the limitations contained in the definition of “Outstanding”) shall be entitled to notice of, and to vote at, a meeting of Limited Partners or to act with respect to matters as to which the holders of the Outstanding Units have the right to vote or to act. All references in this Agreement to votes of, or other acts that may be taken by, the Outstanding Units shall be deemed to be references to the votes or acts of the Record Holders of such Outstanding Units.

     (b) With respect to Units that are held for a Person’s account by another Person (such as a broker, dealer, bank, trust company or clearing corporation, or an agent of any of the foregoing), in whose name such Units are registered, such other Person shall, in exercising the voting rights in respect of such Units on any matter, and unless the arrangement between such Persons provides otherwise, vote such Units in favor of, and at the direction of, the Person who is the beneficial owner, and the Partnership shall be entitled to assume it is so acting without further inquiry. The provisions of this Section 13.12(b) (as well as all other provisions of this Agreement) are subject to the provisions of Section 4.3.

ARTICLE XIV

MERGER OR CONVERSION

Section 14.1 Authority.

     The Partnership may merge or consolidate with or into one or more corporations, limited liability companies, statutory trusts or associations, real estate investment trusts, common law trusts or unincorporated businesses, including a partnership (whether general or limited (including a limited liability partnership)), or convert into any such entity, whether such entity is formed under the laws of the State of Delaware or any other state of the United States of America, pursuant to a written agreement of merger or consolidation (“Merger Agreement”), or a written plan of conversion (“Plan of Conversion”), as the case may be, in accordance with this Article XIV.

Section 14.2 Procedure for Merger, Consolidation or Conversion.

     (a) Merger, consolidation or conversion of the Partnership pursuant to this Article XIV requires the prior consent of the General Partner; provided, however, that, to the fullest extent permitted by law, the General Partner shall have no duty or obligation to consent to any merger, consolidation or conversion of the Partnership and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner or Assignee and, in declining to consent to a merger, consolidation or conversion, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity.

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     (b) If the General Partner shall determine to consent to the merger or consolidation, the General Partner shall approve the Merger Agreement, which shall set forth:

     (i) the names and jurisdictions of formation or organization of each of the business entities proposing to merge or consolidate;

     (ii) the name and jurisdiction of formation or organization of the business entity that is to survive the proposed merger or consolidation (the “Surviving Business Entity”);

     (iii) the terms and conditions of the proposed merger or consolidation;

     (iv) the manner and basis of exchanging or converting the equity securities of each constituent business entity for, or into, cash, property or interests, rights, securities or obligations of the Surviving Business Entity; and (i) if any general or limited partner interests, securities or rights of any constituent business entity are not to be exchanged or converted solely for, or into, cash, property or interests, rights, securities or obligations of the Surviving Business Entity, the cash, property or general or limited partner interests, rights, securities or obligations of any general or limited partnership, corporation, trust, limited liability company, unincorporated business or other entity (other than the Surviving Business Entity) which the holders of such interests, securities or rights are to receive in exchange for, or upon conversion of their interests, securities or rights, and (ii) in the case of securities represented by certificates, upon the surrender of such certificates, which cash, property or interests, rights, securities or obligations of the Surviving Business Entity or any general or limited partnership, corporation, trust, limited liability company, unincorporated business or other entity (other than the Surviving Business Entity), or evidences thereof, are to be delivered;

     (v) a statement of any changes in the constituent documents or the adoption of new constituent documents (the articles or certificate of incorporation, articles of trust, declaration of trust, certificate or agreement of limited partnership, operating agreement or other similar charter or governing document) of the Surviving Business Entity to be effected by such merger or consolidation;

     (vi) the effective time of the merger, which may be the date of the filing of the certificate of merger pursuant to Section 14.4 or a later date specified in or determinable in accordance with the Merger Agreement (provided, that if the effective time of the merger is to be later than the date of the filing of such certificate of merger, the effective time shall be fixed at a date or time certain at or prior to the time of the filing of such certificate of merger and stated therein); and

     (vii) such other provisions with respect to the proposed merger or consolidation that the General Partner determines to be necessary or appropriate.

     (c) If the General Partner shall determine to consent to the conversion, the General Partner may approve and adopt a Plan of Conversion containing such terms and conditions that the General Partner determines to be necessary or appropriate.

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Section 14.3 Approval by Limited Partners.

     (a) Except as provided in Sections 14.3(d) and 14.3(e), the General Partner, upon its approval of the Merger Agreement or the Plan of Conversion, as the case may be, shall direct that the Merger Agreement or the Plan of Conversion, as applicable, be submitted to a vote of Limited Partners, whether at a special meeting or by written consent, in either case in accordance with the requirements of Article XIII. A copy or a summary of the Merger Agreement or the Plan of Conversion, as the case may be, shall be included in or enclosed with the notice of a special meeting or the written consent.

     (b) Except as provided in Sections 14.3(d) and 14.3(e), the Merger Agreement or the Plan of Conversion, as the case may be, shall be approved upon receiving the affirmative vote or consent of the holders of a Unit Majority.

     (c) Except as provided in Sections 14.3(d) and 14.3(e), after such approval by vote or consent of the Limited Partners, and at any time prior to the filing of the certificate of merger or certificate of conversion pursuant to Section 14.4, the merger, consolidation or conversion may be abandoned pursuant to provisions therefor, if any, set forth in the Merger Agreement or the Plan of Conversion, as the case may be.

     (d) Notwithstanding anything else contained in this Article XIV or in this Agreement, the General Partner is permitted, without Limited Partner approval, to convert the Partnership or any Group Member into a new limited liability entity, to merge the Partnership or any Group Member into, or convey all of the Partnership’s assets to, another limited liability entity which shall be newly formed and shall have no assets, liabilities or operations at the time of such conversion, merger or conveyance other than those it receives from the Partnership or other Group Member if (i) the General Partner has received an Opinion of Counsel that the conversion, merger or conveyance, as the case may be, would not result in the loss of the limited liability of any Limited Partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not previously treated as such), (ii) the sole purpose of such conversion, merger or conveyance is to effect a mere change in the legal form of the Partnership into another limited liability entity and (iii) the governing instruments of the new entity provide the Limited Partners and the General Partner with the same rights and obligations as are herein contained.

     (e) Additionally, notwithstanding anything else contained in this Article XIV or in this Agreement, the General Partner is permitted, without Limited Partner approval, to merge or consolidate the Partnership with or into another entity if (A) the General Partner has received an Opinion of Counsel that the merger or consolidation, as the case may be, would not result in the loss of the limited liability of any Limited Partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not previously treated as such), (B) the merger or consolidation would not result in an amendment to the Partnership Agreement, other than any amendments that could be adopted pursuant to Section 13.1, (C) the Partnership is the Surviving Business Entity in such merger or consolidation, (D) each Unit outstanding immediately prior to the effective date of the merger or consolidation is to be an identical Unit of the Partnership after the effective date of the merger or consolidation, and (E) the number of Partnership Securities to be issued by the

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Partnership in such merger or consolidation do not exceed 20% of the Partnership Securities Outstanding immediately prior to the effective date of such merger or consolidation.

Section 14.4 Certificate of Merger or Conversion.

     Upon the required approval by the General Partner and the Unitholders of a Merger Agreement or a Plan of Conversion, as the case may be, a certificate of merger or certificate of conversion, as applicable, shall be executed and filed with the Secretary of State of the State of Delaware in conformity with the requirements of the Delaware Act.

Section 14.5 Amendment of Partnership Agreement.

     Pursuant to Section 17-211(g) of the Delaware Act, an agreement of merger or consolidation approved in accordance with this Article XIV may (a) effect any amendment to this Agreement or (b) effect the adoption of a new partnership agreement for the Partnership if it is the Surviving Business Entity. Any such amendment or adoption made pursuant to this Section 14.5 shall be effective at the effective time or date of the merger or consolidation.

Section 14.6 Effect of Merger, Consolidation or Conversion.

     (a) At the effective time of the certificate of merger:

     (i) all of the rights, privileges and powers of each of the business entities that has merged or consolidated, and all property, real, personal and mixed, and all debts due to any of those business entities and all other things and causes of action belonging to each of those business entities, shall be vested in the Surviving Business Entity and after the merger or consolidation shall be the property of the Surviving Business Entity to the extent they were of each constituent business entity;

     (ii) the title to any real property vested by deed or otherwise in any of those constituent business entities shall not revert and is not in any way impaired because of the merger or consolidation;

     (iii) all rights of creditors and all liens on or security interests in property of any of those constituent business entities shall be preserved unimpaired; and

     (iv) all debts, liabilities and duties of those constituent business entities shall attach to the Surviving Business Entity and may be enforced against it to the same extent as if the debts, liabilities and duties had been incurred or contracted by it.

     (b) At the effective time of the certificate of conversion:

     (i) the Partnership shall continue to exist, without interruption, but in the organizational form of the converted entity rather than in its prior organizational form;

     (ii) all rights, title, and interests to all real estate and other property owned by the Partnership shall continue to be owned by the converted entity in its new organizational form without reversion or impairment, without further act or deed, and

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without any transfer or assignment having occurred, but subject to any existing liens or other encumbrances thereon;

     (iii) all liabilities and obligations of the Partnership shall continue to be liabilities and obligations of the converted entity in its new organizational form without impairment or diminution by reason of the conversion;

     (iv) all rights of creditors or other parties with respect to or against the prior interest holders or other owners of the Partnership in their capacities as such in existence as of the effective time of the conversion will continue in existence as to those liabilities and obligations and may be pursued by such creditors and obligees as if the conversion did not occur;

     (v) a proceeding pending by or against the Partnership or by or against any of Partners in their capacities as such may be continued by or against the converted entity in its new organizational form and by or against the prior partners without any need for substitution of parties; and

     (vi) the Partnership Securities that are to be converted into partnership interests,             shares, evidences of ownership, or other securities in the converted entity as provided in the Plan of Conversion or certificate of conversion shall be so converted, and Partners shall be entitled only to the rights provided in the Plan of Conversion or certificate of conversion.

     (c) A merger, consolidation or conversion effected pursuant to this Article shall not be deemed to result in a transfer or assignment of assets or liabilities from one entity to another.

ARTICLE XV

RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS

Section 15.1 Right to Acquire Limited Partner Interests.

     (a) Notwithstanding any other provision of this Agreement, if at any time the General Partner and its Affiliates hold more than 80% of the total Limited Partner Interests of any class then Outstanding, the General Partner shall then have the right, which right it may assign and transfer in whole or in part to the Partnership or any Affiliate of the General Partner, exercisable at its option, to purchase all, but not less than all, of such Limited Partner Interests of such class then Outstanding held by Persons other than the General Partner and its Affiliates, at the greater of (x) the Current Market Price as of the date three days prior to the date that the notice described in Section 15.1(b) is mailed and (y) the highest price paid by the General Partner or any of its Affiliates for any such Limited Partner Interest of such class purchased during the 90-day period preceding the date that the notice described in Section 15.1(b) is mailed.

     (b) If the General Partner, any Affiliate of the General Partner or the Partnership elects to exercise the right to purchase Limited Partner Interests granted pursuant to Section 15.1(a), the General Partner shall deliver to the Transfer Agent notice of such election to

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purchase (the “Notice of Election to Purchase”) and shall cause the Transfer Agent to mail a copy of such Notice of Election to Purchase to the Record Holders of Limited Partner Interests of such class (as of a Record Date selected by the General Partner) at least 10, but not more than 60, days prior to the Purchase Date. Such Notice of Election to Purchase shall also be published for a period of at least three consecutive days in at least two daily newspapers of general circulation printed in the English language and published in the Borough of Manhattan, New York. The Notice of Election to Purchase shall specify the Purchase Date and the price (determined in accordance with Section 15.1(a)) at which Limited Partner Interests will be purchased and state that the General Partner, its Affiliate or the Partnership, as the case may be, elects to purchase such Limited Partner Interests, upon surrender of Certificates representing such Limited Partner Interests in exchange for payment, at such office or offices of the Transfer Agent as the Transfer Agent may specify, or as may be required by any National Securities Exchange on which such Limited Partner Interests are listed. Any such Notice of Election to Purchase mailed to a Record Holder of Limited Partner Interests at his address as reflected in the records of the Transfer Agent shall be conclusively presumed to have been given regardless of whether the owner receives such notice. On or prior to the Purchase Date, the General Partner, its Affiliate or the Partnership, as the case may be, shall deposit with the Transfer Agent cash in an amount sufficient to pay the aggregate purchase price of all of such Limited Partner Interests to be purchased in accordance with this Section 15.1. If the Notice of Election to Purchase shall have been duly given as aforesaid at least 10 days prior to the Purchase Date, and if on or prior to the Purchase Date the deposit described in the preceding sentence has been made for the benefit of the holders of Limited Partner Interests subject to purchase as provided herein, then from and after the Purchase Date, notwithstanding that any Certificate shall not have been surrendered for purchase, all rights of the holders of such Limited Partner Interests (including any rights pursuant to Articles IV, V, VI, and XII) shall thereupon cease, except the right to receive the purchase price (determined in accordance with Section 15.1(a)) for Limited Partner Interests therefor, without interest, upon surrender to the Transfer Agent of the Certificates representing such Limited Partner Interests, and such Limited Partner Interests shall thereupon be deemed to be transferred to the General Partner, its Affiliate or the Partnership, as the case may be, on the record books of the Transfer Agent and the Partnership, and the General Partner or any Affiliate of the General Partner, or the Partnership, as the case may be, shall be deemed to be the owner of all such Limited Partner Interests from and after the Purchase Date and shall have all rights as the owner of such Limited Partner Interests (including all rights as owner of such Limited Partner Interests pursuant to Articles IV, V, VI and XII).

     (c) At any time from and after the Purchase Date, a holder of an Outstanding Limited Partner Interest subject to purchase as provided in this Section 15.1 may surrender his Certificate evidencing such Limited Partner Interest to the Transfer Agent in exchange for payment of the amount described in Section 15.1(a), therefor, without interest thereon.

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ARTICLE XVI

GENERAL PROVISIONS

Section 16.1 Addresses and Notices; Written Communications.

     (a) Any notice, demand, request, report or proxy materials required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee at the address described below. Any notice, payment or report to be given or made to a Partner or Assignee hereunder shall be deemed conclusively to have been given or made, and the obligation to give such notice or report or to make such payment shall be deemed conclusively to have been fully satisfied, upon sending of such notice, payment or report to the Record Holder of such Partnership Securities at his address as shown on the records of the Transfer Agent or as otherwise shown on the records of the Partnership, regardless of any claim of any Person who may have an interest in such Partnership Securities by reason of any assignment or otherwise. An affidavit or certificate of making of any notice, payment or report in accordance with the provisions of this Section 16.1 executed by the General Partner, the Transfer Agent or the mailing organization shall be prima facie evidence of the giving or making of such notice, payment or report. If any notice, payment or report addressed to a Record Holder at the address of such Record Holder appearing on the books and records of the Transfer Agent or the Partnership is returned by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver it, such notice, payment or report and any subsequent notices, payments and reports shall be deemed to have been duly given or made without further mailing (until such time as such Record Holder or another Person notifies the Transfer Agent or the Partnership of a change in his address) if they are available for the Partner or Assignee at the principal office of the Partnership for a period of one year from the date of the giving or making of such notice, payment or report to the other Partners and Assignees. Any notice to the Partnership shall be deemed given if received by the General Partner at the principal office of the Partnership designated pursuant to Section 2.3. The General Partner may rely and shall be protected in relying on any notice or other document from a Partner, Assignee or other Person if believed by it to be genuine.

     (b) The terms “in writing”, “written communications,” “written notice” and words of similar import shall be deemed satisfied under this Agreement by use of e-mail and other forms of electronic communication.

Section 16.2 Further Action.

     The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

Section 16.3 Binding Effect.

     This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

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Section 16.4 Integration.

     This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto.

Section 16.5 Creditors.

     None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership.

Section 16.6 Waiver.

     No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach of any other covenant, duty, agreement or condition.

Section 16.7 Counterparts.

     This Agreement may be executed in counterparts, all of which together shall constitute an agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto or, in the case of a Person acquiring a Unit, upon accepting the certificate evidencing such Unit or executing and delivering a Transfer Application as herein described, independently of the signature of any other party.

Section 16.8 Applicable Law.

     This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law.

Section 16.9 Invalidity of Provisions.

     If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

Section 16.10 Consent of Partners.

     Each Partner hereby expressly consents and agrees that, whenever in this Agreement it is specified that an action may be taken upon the affirmative vote or consent of less than all of the Partners, such action may be so taken upon the concurrence of less than all of the Partners and each Partner shall be bound by the results of such action.

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

85

Section 16.11 Facsimile Signatures.

     The use of facsimile signatures affixed in the name and on behalf of the transfer agent and registrar of the Partnership on certificates representing Common Units is expressly permitted by this Agreement.

Section 16.12 Third-Party Beneficiaries.

     Each Partner agrees that any Indemnitee shall be entitled to assert rights and remedies hereunder as a third-party beneficiary hereto with respect to those provisions of this Agreement affording a right, benefit or privilege to such Indemnitee.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

86

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

GENERAL PARTNER:
ENCORE ENERGY PARTNERS GP LLC
By:	/s/ Jon S. Brumley
	Jon S. Brumley
	Chief Executive Officer and President
LIMITED PARTNERS:
ENCORE PARTNERS LP HOLDINGS LLC
By:	/s/ Jon S. Brumley
	Jon S. Brumley
	President
/s/ I. Jon Brumley
I. Jon Brumley
/s/ Jon S. Brumley
Jon S. Brumley
/s/ Robert C. Reeves
Robert C. Reeves
/s/ L. Ben Nivens
L. Ben Nivens
/s/ John W. Arms
John W. Arms

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

87

EXHIBIT A
to the First Amended and Restated
Agreement of Limited Partnership of
Encore Energy Partners LP

Certificate Evidencing Common Units
Representing Limited Partner Interests in
Encore Energy Partners LP

No.                                           Common Units

     In accordance with Section 4.1 of the First Amended and Restated Agreement of Limited Partnership of Encore Energy Partners LP, as amended, supplemented or restated from time to time (the “Partnership Agreement”), Encore Energy Partners LP, a Delaware limited partnership (the “Partnership”), hereby certifies that                                          (the “Holder”) is the registered owner of                                          Common Units representing limited partner interests in the Partnership (the “Common Units”) transferable on the books of the Partnership, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed and accompanied by a properly executed application for transfer of the Common Units represented by this Certificate. The rights, preferences and limitations of the Common Units are set forth in, and this Certificate and the Common Units represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Partnership Agreement. Copies of the Partnership Agreement are on file at, and will be furnished without charge on delivery of written request to the Partnership at, the principal office of the Partnership located at 777 Main Street, Suite 1400, Fort Worth, Texas 76102. Capitalized terms used herein but not defined shall have the meanings given them in the Partnership Agreement.

     The Holder, by accepting this Certificate, is deemed to have (i) requested admission as, and agreed to become, a Limited Partner and to have agreed to comply with and be bound by and to have executed the Partnership Agreement, (ii) represented and warranted that the Holder has all right, power and authority and, if an individual, the capacity necessary to enter into the Partnership Agreement and is an Eligible Holder, (iii) granted the powers of attorney provided for in the Partnership Agreement and (iv) made the waivers and given the consents and approvals contained in the Partnership Agreement.

     THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF ENCORE ENERGY PARTNERS LP THAT THIS SECURITY MAY NOT BE SOLD, OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION OVER SUCH TRANSFER, (B) TERMINATE THE EXISTENCE OR QUALIFICATION OF ENCORE ENERGY PARTNERS LP UNDER THE LAWS OF THE STATE OF DELAWARE, OR (C) CAUSE ENCORE ENERGY PARTNERS LP TO BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION OR OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

A-1

INCOME TAX PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR TAXED). ENCORE ENERGY PARTNERS GP LLC, THE GENERAL PARTNER OF ENCORE ENERGY PARTNERS LP, MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE TRANSFER OF THIS SECURITY IF IT RECEIVES AN OPINION OF COUNSEL THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID A SIGNIFICANT RISK OF ENCORE ENERGY PARTNERS LP BECOMING TAXABLE AS A CORPORATION OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR FEDERAL INCOME TAX PURPOSES. THE RESTRICTIONS SET FORTH ABOVE SHALL NOT PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING THIS SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY NATIONAL SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR ADMITTED TO TRADING.

     This Certificate shall not be valid for any purpose unless it has been countersigned and registered by the Transfer Agent and Registrar.

Dated:		Encore Energy Partners LP
Countersigned and Registered by:		By:	Encore Energy Partners GP LLC,
			its General Partner
		By:
as Transfer Agent and Registrar		Name:
By:		By:
	Authorized Signature		Secretary

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

A-2

[Reverse of Certificate]

ABBREVIATIONS

     The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as follows according to applicable laws or regulations:

TEN COM -	as tenants in common
TEN ENT -	as tenants by the entireties
JT TEN -	as joint tenants with right of survivorship and not as tenants in common

UNIF GIFT MIN ACT
                     Custodian                                         
(Cust)                                        (Minor)
under Uniform Gifts to
Minors Act                     
                         (State)

     Additional abbreviations, though not in the above list, may also be used.

ASSIGNMENT OF COMMON UNITS
IN
ENCORE ENERGY PARTNERS LP

     FOR VALUE RECEIVED,                      hereby assigns, conveys, sells and transfers unto

(Please print or typewrite name

and address of Assignee)

(Please insert Social Security or other

identifying number of Assignee)

                     Common Units representing limited partner interests evidenced by this Certificate, subject to the Partnership Agreement, and does hereby irrevocably constitute and appoint                      as its attorney-in-fact with full power of substitution to transfer the same on the books of Encore Energy Partners LP.

Date:

NOTE The signature to any endorsement hereon must correspond with the name as written upon the face of this Certificate in every particular, without alteration, enlargement or change.

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

A-3

THE SIGNATURE(S) MUST BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C.
RULE 17A(d)-15

(Signature)

(Signature)

     No transfer of the Common Units evidenced hereby will be registered on the books of the Partnership, unless the Certificate evidencing the Common Units to be transferred is surrendered for registration or transfer and an Application for Transfer of Common Units has been executed by a transferee either (a) on the form set forth below or (b) on a separate application that the Partnership will furnish on request without charge. A transferor of the Common Units shall have no duty to the transferee with respect to execution of the transfer application in order for such transferee to obtain registration of the transfer of the Common Units.

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

A-4

APPLICATION FOR TRANSFER OF COMMON UNITS

     Transferees of Common Units must execute and deliver this application to Encore Energy Partners LP, c/o Encore Energy Partners GP LLC, 777 Main Street, Suite 1400, Fort Worth, Texas 76102; Attn: Chief Financial Officer, to be admitted as limited partners to Encore Energy Partners LP.

     The undersigned (“Assignee”) hereby applies for transfer to the name of the Assignee of the Common Units evidenced hereby and hereby certifies to Encore Energy Partners LP (the “Partnership”) that the Assignee (including to the best of Assignee’s knowledge, any person for whom the Assignee will hold the Common Units) is an Eligible Holder.¹

     The Assignee (a) requests admission as a Substituted Limited Partner and agrees to comply with and be bound by, and hereby executes, the First Amended and Restated Agreement of Limited Partnership of Encore Energy Partners LP, as amended, supplemented or restated to the date hereof (the “Partnership Agreement”), (b) represents and warrants that the Assignee has all right, power and authority and, if an individual, the capacity necessary to enter into the Partnership Agreement, (c) appoints the General Partner of the Partnership and, if a Liquidator shall be appointed, the Liquidator of the Partnership as the Assignee’s attorney-in-fact to execute, swear to, acknowledge and file any document, including the Partnership Agreement and any amendment thereto and the Certificate of Limited Partnership of the Partnership and any amendment thereto, necessary or appropriate for the Assignee’s admission as a Substituted Limited Partner and as a party to the Partnership Agreement, (d) gives the powers of attorney provided for in the Partnership Agreement, and (e) makes the waivers and gives the consents and approvals contained in the Partnership Agreement. Capitalized terms not defined herein have the meanings assigned to such terms in the Partnership Agreement.

Date:                                        

Social Security or other identifying number of Assignee	Signature of Assignee
Purchase Price including commissions, if any	Name and Address of Assignee

Type of Entity (check one):

o Individual o Partnership o Corporation

¹ The term Eligible Holder means a person or entity qualified to hold an interest in oil and gas leases on federal lands. As of the date hereof, Eligible Holder means: (1) a citizen of the United States; (2) a corporation organized under the laws of the United States or of any state thereof; (3) a public body, including a municipality; or (4) an association of United States citizens, such as a partnership or limited liability company, organized under the laws of the United States or of any state thereof, but only if such association does not have any direct or indirect foreign ownership, other than foreign ownership of stock in a parent corporation organized under the laws of the United States or of any state thereof. For the avoidance of doubt, onshore mineral leases or any direct or indirect interest therein may be acquired and held by aliens only through stock ownership, holding or control in a corporation organized under the laws of the United States or of any state thereof.

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

A-5

o Trust o Other (specify)

Nationality (check one):

o U.S. Citizen, Resident or Domestic Entity
o Foreign Corporation	o Non-resident Alien

     If the U.S. Citizen, Resident or Domestic Entity box is checked, the following certification must be completed.

     Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the “Code”), the Partnership must withhold tax with respect to certain transfers of property if a holder of an interest in the Partnership is a foreign person. To inform the Partnership that no withholding is required with respect to the undersigned interestholder’s interest in it, the undersigned hereby certifies the following (or, if applicable, certifies the following on behalf of the interestholder).

     Complete Either A or B:

A. Individual Interestholder

1.	I am not a non-resident alien for purposes of U.S. income taxation.
2.	My U.S. taxpayer identification number (Social Security Number) is                     .
3.	My home address is .

B. Partnership, Corporation or Other Interestholder

1.	is not a foreign corporation, foreign partnership, foreign trust (Name of Interestholder) or foreign estate (as those terms are defined in the Code and Treasury Regulations).
2.	The interestholder’s U.S. employer identification number is                                         .
3.	The interestholder’s office address and place of incorporation (if applicable) is                     .

     The interestholder agrees to notify the Partnership within ten (10) days of the date the interestholder becomes a foreign person.

     The interestholder understands that this certificate may be disclosed to the Internal Revenue Service by the Partnership and that any false statement contained herein could be punishable by fine, imprisonment or both.

     Under penalties of perjury, I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete and, if applicable, I further declare that I have authority to sign this document on behalf of:

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

A-6

Name of Interestholder

Signature and Date

Title (if applicable)

     Note: If the Assignee is a broker, dealer, bank, trust company, clearing corporation, other nominee holder or an agent of any of the foregoing, and is holding for the account of any other person, this application should be completed by an officer thereof or, in the case of a broker or dealer, by a registered representative who is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or, in the case of any other nominee holder, a person performing a similar function. If the Assignee is a broker, dealer, bank, trust company, clearing corporation, other nominee owner or an agent of any of the foregoing, the above certification as to any person for whom the Assignee will hold the Common Units shall be made to the best of the Assignee’s knowledge.

ENCORE ENERGY PARTNERS LP
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

A-7

EX-10.2

Exhibit 10.2

AMENDMENT NO. 1
TO
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
ENCORE ENERGY PARTNERS LP

      This Amendment No. 1 (this “Amendment No. 1”) to the First Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) of Encore Energy Partners LP, a Delaware limited partnership (the “Partnership”), is entered into effective as of July 3, 2007 by and among Encore Energy Partners GP LLC, a Delaware limited liability company, as the General Partner, and the other parties hereto, as limited partners. In consideration of the covenants, conditions and agreements contained herein, the parties hereto hereby agree as follows:

      Section 1. Amendments.

(a)	Section 1.1 of the Partnership Agreement is hereby amended by inserting the following in the appropriate alphabetic sequence:
	“Anniversary Date” means the first anniversary of the Conversion Date of a Management Incentive Unit.
(b)	Section 1.1 of the Partnership Agreement is hereby amended by inserting the following in the appropriate alphabetic sequence:
	“Conversion Date” means the date that a Management Incentive Unit is converted into Common Units pursuant to Section 5.10(e).
(c)	Section 1.1 of the Partnership Agreement is hereby amended by inserting the following in the appropriate alphabetic sequence:
	“Excess Allocations” has the meaning assigned to such term in Section 6.1(c)(i)(B).
(d)	Section 1.1 of the Partnership Agreement is hereby amended by inserting the following in the appropriate alphabetic sequence:
	“Excess Available Cash” has the meaning assigned to such term in Section 6.3(d).
(e)	Section 1.1 of the Partnership Agreement is hereby amended by inserting the following in the appropriate alphabetic sequence:
	“Issuance Date” means any date following the Conversion Date and prior to the Anniversary Date on which the Partnership issues additional Partnership Securities.

1

(f)	Section 1.1 of the Partnership Agreement is hereby amended by inserting the following in the appropriate alphabetic sequence:
	“MIU Allocation Limit” has the meaning assigned to such term in Section 6.1(c)(i)(B).
(g)	Section 1.1 of the Partnership Agreement is hereby amended by inserting the following in the appropriate alphabetic sequence:
	“MIU Conversion Limit” has the meaning assigned to such term in Section 5.10(e).
(h)	Section 1.1 of the Partnership Agreement is hereby amended by inserting the following in the appropriate alphabetic sequence:
	“MIU Distribution Limit” has the meaning assigned to such term in Section 6.3(d).
(i)	Section 1.1 of the Partnership Agreement is hereby amended by inserting the following in the appropriate alphabetic sequence:
	“MIU Limits” has the meaning assigned to such term in Section 5.10(i).
(j)	The definition of “Common Unit Equivalents” in Section 1.1 of the Partnership Agreement is hereby amended in its entirety to read as follows:
	“Common Unit Equivalents” means the number of Common Units which a Management Incentive Unit is considered to represent under Section 5.10(d) or, if applicable, under Section 6.3(d).
(k)	The definition of “Percentage Interest” in Section 1.1 of the Partnership Agreement is hereby amended in its entirety to read as follows:
	“Percentage Interest” means as of any date of determination (a) as to the General Partner (in its capacity as General Partner without reference to any Limited Partner Interests held by it) with respect to General Partner Units and as to any Unitholder or Assignee with respect to Common Units, the product obtained by multiplying (i) 100% less the percentage applicable to clause (b) below by (ii) the quotient obtained by dividing (A) the number of General Partner Units held by the General Partner, the number of Common Units held by such Unitholder or Assignee, or the number of Common Unit Equivalents held or, if the provisions of Section 6.3(c) apply, deemed to be held by such Unitholder or Assignee, as the case may be, by (B) the total number of Outstanding Common Units, the total number of Outstanding Common Unit Equivalents and General Partner Units, and (b) as to the holders of other Partnership Securities issued by the Partnership in accordance with Section 5.6, the percentage established as a part of such issuance; provided, that with respect to the calculations in Section 5.10(e)(vi) and

2

	Section 5.10(e)(vii), in-the-money options, rights, warrants and appreciation rights relating to Partnership Securities shall be deemed to be Outstanding in the form of the associated Partnership Securities to the extent vested.
(l)	Section 5.10(e) is hereby amended by deleting Section 5.10(e)(ii) in its entirety and substituting “[Reserved]” in lieu thereof.
(m)	Section 5.10(e) is hereby amended by inserting the following at the end thereof:

     (vi) Notwithstanding anything in this Section 5.10(e) to the contrary, in no event shall the Management Incentive Units, in the aggregate, be convertible into Common Units having a Percentage Interest of more than 5.1% (after giving effect to the conversion of such Management Incentive Units) (the “MIU Conversion Limit”). If at any time the Management Incentive Units would be convertible, except for the preceding sentence, into a number of Common Units that would exceed the MIU Conversion Limit, then the conversion ratio with respect to such Management Incentive Units shall be deemed to equal the conversion ratio that would result in the Management Incentive Units, in the aggregate, being convertible into Common Units having a Percentage Interest of 5.1% (after giving effect to the conversion of such Management Incentive Units). Any reduction in the deemed Common Unit Equivalents pursuant to the previous sentence shall be done on a pro rata basis, such that the Common Unit Equivalents associated with each Management Incentive Unit is reduced by an equal amount.

     (vii) If the number of Common Units issued upon conversion of a Management Incentive Unit is limited by the provisions of Section 5.10(e)(vi) and the Partnership issues additional Partnership Securities prior to the Anniversary Date, then the holder who converted such Management Incentive Unit shall be entitled to receive as of the first distribution of available Cash after each Issuance Date a number of additional Common Units equal to (A) the number of Common Units which such holder would have been entitled to receive for such Management Incentive Unit if such conversion had occurred on the date of the first distribution of Available Cash after each Issuance Date (after taking into consideration any limitations in Section 5.10(e)(vi)) less (B) the number of Common Units which such holder has previously received in respect of such Management Incentive Unit. The provisions of this Section 5.10(e)(vii) shall be applied to each successive issuance of Partnership Securities prior to the Anniversary Date.

(n) Section 5.10 is hereby amended by adding the following at the end thereto:

     (i) Adjustment of MIU Conversion Limit, MIU Distribution Limit and MIU Allocation Limit. In the event that Management Incentive Units are converted pursuant to Section 5.10(e) or are forfeited pursuant to Section 5.10(c), the MIU Conversion Limit, the MIU Distribution Limit and the MIU Allocation Limit (the “MIU Limits”) shall be adjusted by reducing each MIU

3

Limit by the aggregate Percentage Interest of the forfeited or converted Management Incentive Units immediately prior to the conversion or forfeiture; provided, that if Management Incentive Units are subsequently reissued after forfeiture or conversion as provided in Section 5.10(f), then the MIU Limits shall again be adjusted by increasing each MIU Limit (up to a maximum of 5.1%) by the aggregate Percentage Interest of the Management Incentive Units that were reissued immediately following such reissuance.

     (j) Fractional Common Units. The Partnership shall not issue fractional Common Units to a holder of Management Incentive Units upon any conversion of Management Incentive Units or upon the issuance of additional Common Units as contemplated by Section 5.10(e)(vii). If the conversion of Management Incentive Units or the issuance of additional Common Units as contemplated by Section 5.10(e)(vii), in the aggregate, would result in the issuance of fractional Common Units to such holder but for the provisions of this Section 5.10(j), each fractional Common Unit shall be rounded to the nearest whole Common Unit (and a 0.5 Common Unit shall be rounded to the next higher Common Unit).

(o)

Section 6.1(c)(i)(B) is hereby amended by adding at the end thereof:

; provided, however, that in no event shall the holders of Management Incentive Units be allocated, in the aggregate, Net Termination Gain in an amount in excess of the amount that, when all such Net Termination Gain is allocated to all Partners, would cause the Capital Accounts of the holders of the Management Incentive Units, in the aggregate, to exceed 5.1% of the Capital Accounts of all Partners immediately following the allocation of Net Termination Gain (the “MIU Allocation Limit”). If the holders of Management Incentive Units would be entitled, except for the preceding sentence, to be allocated Net Termination Gain in an amount in excess of the MIU Allocation Limit (“Excess Allocations”), then the holders of Management Incentive Units shall be deemed to hold, in the aggregate, such number of Common Unit Equivalents as would entitle such holders to an allocation of an amount of Net Termination Gain such that, when all such Net Termination Gain is allocated to all Partners, the Capital Accounts of the holders of the Management Incentive Units, in the aggregate, would equal 5.1% of the Capital Accounts of all Partners immediately following the allocation of Net Termination Gain, and all Excess Allocations shall instead be allocated to the Partners in accordance with their respective Percentage Interests (but ignoring the Percentage Interests of the holders of the Common Unit Equivalents). Any reduction in the Common Unit Equivalents pursuant to the previous sentence shall be done on a pro rata basis, such that the Common Unit Equivalents associated with each Management Incentive Unit is reduced by an equal amount.

4

(p)	Section 6.3 is hereby amended by deleting “Except as described in Section 6.3(b)” in the first sentence of subparagraph (a) and inserting “Except as described in Section 6.3(b) or Section 6.3(d)” in lieu thereof.
(q)	Section 6.3 is hereby amended by inserting the following at the end thereof:

     (d) Notwithstanding anything in this Agreement to the contrary, in no event shall the holders of Management Incentive Units receive, in the aggregate, distributions of Available Cash with respect to a Quarter in an amount in excess of 5.1% of all distributions of Available Cash with respect to such Quarter (the “MIU Distribution Limit”). If the holders of Management Incentive Units would be entitled, except for the preceding sentence, to receive distributions of Available Cash with respect to a Quarter in an amount in excess of the MIU Distribution Limit (“Excess Available Cash”), then with respect to such Quarter the holders of Management Incentive Units shall be deemed to hold, in the aggregate, such number of Common Unit Equivalents as would entitle such holders to 5.1% of all distributions of Available Cash with respect to such Quarter and all Excess Available Cash shall be distributed by the Partnership to the Partners in accordance with their respective Percentage Interests (but ignoring the Percentage Interests of the holders of the Common Unit Equivalents). Any reduction in the deemed Common Unit Equivalents pursuant to the previous sentence shall be done on a pro rata basis, such that the Common Unit Equivalents associated with each Management Incentive Unit is reduced by an equal amount.

     Section 2. General Authority. The appropriate officers of the General Partner are hereby authorized to make such further clarifying and conforming changes they deem necessary or appropriate, and to interpret the Partnership Agreement, to give effect to the intent and purpose of this Amendment No. 1.

     Section 3. Ratification of Partnership Agreement. Except as expressly modified and amended herein, all of the terms and conditions of the Partnership Agreement shall remain in full force and effect.

     Section 4. Governing Law. This Amendment No. 1 will be governed by and construed in accordance with the laws of the State of Delaware.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]

5

      IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of the date first written above.

GENERAL PARTNER: ENCORE ENERGY PARTNERS GP LLC
By:	/s/ Jon S. Brumley
	Jon S. Brumley
	Chief Executive Officer and President

LIMITED PARTNERS: ENCORE PARTNERS LP HOLDINGS LLC
By:	/s/ Jon S. Brumley
	Jon S. Brumley
	President

/s/ I. Jon Brumley  

I. Jon Brumley 

/s/ Jon S. Brumley  

Jon S. Brumley 

/s/ Robert C. Reeves  

Robert C. Reeves 

/s/ L Ben Nivens  

L. Ben Nivens 

/s/ John W. Arms  

John W. Arms 

6

EX-31.1

Exhibit 31.1

Rule 13a-14(a)/15d-14(a) Certification

I, Jon S. Brumley, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Encore Acquisition Company;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007	By:	/s/ Jon S. Brumley
	Jon S. Brumley
	Chief Executive Officer and President

EX-31.2

Exhibit 31.2

Rule 13a-14(a)/15d-14(a) Certification

I, Robert C. Reeves, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Encore Acquisition Company;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007	/s/ Robert C. Reeves
	Robert C. Reeves
	Senior Vice President, Chief Financial Officer, and Treasurer

EX-32.1

Exhibit 32.1

Section 1350 Certification

     In connection with the Quarterly Report of Encore Acquisition Company (the “Company”) on Form 10-Q for the period ended June 30, 2007 as filed with the Securities and Exchange Commission (“SEC”) on the date hereof (the “Report”), I, Jon S. Brumley, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;

and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition, and results of operations of the Company.

Date: August 9, 2007	By:	/s/ Jon S. Brumley
	Jon S. Brumley
	Chief Executive Officer and President

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

Note: The certification of the registrant furnished in this exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act, as amended, or otherwise subject to the liabilities of that Section. Registration Statements or other documents filed with the SEC shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing.

EX-32.2

Exhibit 32.2

Section 1350 Certification

     In connection with the Quarterly Report of Encore Acquisition Company (the “Company”) on Form 10-Q for the period ended June 30, 2007 as filed with the Securities and Exchange Commission (“SEC”) on the date hereof (the “Report”), I, Robert C. Reeves, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;

and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition, and results of operations of the Company.

Date: August 9, 2007	/s/ Robert C. Reeves
	Robert C. Reeves
	Senior Vice President, Chief Financial Officer, and Treasurer

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

Note: The certification of the registrant furnished in this exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act, as amended, or otherwise subject to the liabilities of that Section. Registration Statements or other documents filed with the SEC shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing.

EX-99.1

Exhibit 99.1

ENCORE ACQUISITION COMPANY

RATIOS OF EARNINGS TO FIXED CHARGES
(in thousands, except ratios)

	Three months ended June 30,				Six months ended June 30,
	2007		2006		2007			2006
Pretax earnings (loss)	$	23,695	$	37,304	$	(21,753	)	$	66,484
Adjustments:
Add fixed charges:
Interest expense		27,820		10,718		44,107			22,505
Rental expense attributable to interest		506		163		1,766			369
Total fixed charges		28,326		10,881		45,873			22,874
Adjusted earnings	$	52,021	$	48,185	$	24,120		$	89,358
Ratio of earnings to fixed charges		1.8		4.4		0.5			3.9

(a) For the six months ended June 30, 2007, earnings as defined were inadequate to cover fixed charges as defined by $21.8 million.