The following management discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, appearing elsewhere in this report, as well as the Consolidated Financial Statements, Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations presented in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission. For a description of oil and natural gas terms, see such Annual Report.

Overview

We are a growth-oriented publicly traded limited partnership engaged in the following three businesses:

• Midstream Business-gathering, compressing, treating, processing and transporting of natural gas; fractionating and transporting of natural gas liquids ("NGLs"); and the marketing of natural gas, condensate and NGLs;

• Upstream Business-acquiring, developing and producing oil and natural gas property interests; and

• Minerals Business-acquiring and managing fee mineral and royalty interests, either through direct ownership or through investment in other partnerships.

We report on our businesses in six accounting segments (see Note 13).

We conduct, evaluate and report on our Midstream Business within three distinct segments-the Texas Panhandle Segment, the East Texas/Louisiana Segment (previously known prior to the filing of our Annual Report as our Southeast Texas and North Louisiana Segment), and South Texas Segment. Our Texas Panhandle Segment consists of gathering and processing assets in the Texas Panhandle. Our East Texas/Louisiana Segment consists of gathering and processing assets in East Texas/Louisiana. Our South Texas Segment consists of gathering systems and related compression and processing facilities in South Texas.

We conduct, evaluate and report our Upstream Business as one segment. Our Upstream Segment includes operated wells in Escambia County, Alabama and two treating facilities, one natural gas processing plant and related gathering systems that are inextricably intertwined with ownership and operation of the wells. The Upstream Segment also includes operated and non-operated wells that are primarily located in Rains, Van Zandt, Henderson, Shelby, Panola, Ward, Crane, Pecos and Atascosa Counties, Texas.

We conduct, evaluate, and report our Minerals Business as one segment. Our Minerals Segment consists of fee mineral, royalty and overriding royalty interests located in multiple producing trends in the United States. A significant portion of the mineral interests that we own are managed by a non-affiliated private partnership (the "Minerals Manager") that controls the executive rights associated with the minerals. We acquired our interest in these minerals by participating as a co-investor when the Minerals Manager acquired its interest. As part of that transaction, we also owned a minority interest in a partnership ("Ivory Acquisition Partners") that owned an interest in the same minerals that we purchased and hold directly. Ivory Acquisition Partners is controlled by the Minerals Manager, and it was specified at the time of the acquisition of these minerals that our interest in Ivory Acquisition Partners would revert to the Minerals Manager if certain payout hurdles were reached. The hurdles have been reached and we no longer have an interest in Ivory Acquisition Partners. The impact of this reversion on the financial statements is discussed under "Corporate Segment - Other Income and Expenses."

We also own a minority interest in another non-affiliated partnership ("Ivory Working Interest Partners") that is controlled by the Minerals Manager. Ivory Working Interest Partners owns non-operating working interests in certain wells that are drilled on those minerals that are managed by the Minerals Manager. Ivory Working Interest Partners owns these non-operated working interests by virtue of the terms of certain leases negotiated by the Minerals Manager. We believe that Ivory Working Interest Partners will continue to participate in the drilling of new wells as a non-operating working interest owner. In general, Ivory Working Interest Partners attempts to fund its activities from its internal cash flow; however, it has the right to retain cash derived from the payment of royalties, bonus and delay rentals related to the mineral interests that it manages to fund its activities of Ivory Working Interest Partners, to the extent necessary and approved by the partners.

Our final reporting segment is our Corporate Segment, in which we account for our commodity hedging activity and our general corporate costs.

We have an experienced management team dedicated to growing, operating and maximizing the profitability of our assets. Our management team is experienced in gathering and processing natural gas, operation of oil and natural gas properties and assets, and management of royalties and minerals.

Hurricanes Ike and Gustav

Hurricane Ike, which made landfall in Texas on September 13, 2008, caused no material damage to our offices, facilities or assets; however, the storm did cause temporary operational disruption to our operations located in East Texas, North Louisiana and South Texas due to third party downstream infrastructure issues. Operations were either temporarily interrupted or curtailed during and immediately after the storm due to power disruptions suffered by third parties causing natural gas and natural gas liquids supply and market issues. All of our operations returned to pre-hurricane levels within ten days after the storm. Our assets were not impacted by Hurricane Gustav.

Acquisitions

Historically, we have grown through acquisitions. Going forward, we will continue to assess acquisition opportunities, regardless of whether such opportunity is in the midstream, upstream, or minerals business, for their potential accretive value. Our ability to complete acquisitions will depend on our ability to finance the acquisitions, either through the issuance of additional securities, debt or equity, or the incurrence of additional debt under our credit facilities, on terms acceptable to us.

Stanolind Acquisition - On April 30, 2008, we completed the acquisition of all of the outstanding capital stock of Stanolind Oil and Gas Corp. ("Stanolind"), for an aggregate purchase price of $81.8 million, subject to working capital and other purchase price adjustments (the "Acquisition"). One or more Natural Gas Partners private equity funds owned a majority of the equity interests in Stanolind. We funded the transaction from existing cash from operations, as well as with borrowings under our existing secured revolving credit facility. Stanolind operated crude oil and natural gas producing properties in the Permian Basin of West Texas, primarily in Ward, Crane and Pecos Counties.

Below is a summary of the important acquisition transactions we completed during the year ended December 31, 2007.

Montierra Acquisition - On April 30, 2007, we completed the acquisition (by direct acquisition or acquisition of certain entities) of certain fee minerals, royalties, working interest properties and certain investments in partnerships from Montierra Minerals & Production, L.P. and NGP-VII Income Co-Investment Opportunities, L.P. (the "Montierra Acquisition").

Laser Acquisition - On May 3, 2007, we acquired all of the non-corporate interests of Laser Midstream Energy, LP and certain subsidiaries (the "Laser Acquisition").

MacLondon Acquisition - On June 18, 2007, we completed the acquisition of certain fee mineral and royalties owned by MacLondon Energy, L.P.

EAC Acquisition - On July 31, 2007, we completed the acquisition of Escambia Asset Co., LLC and Escambia Operating Co., LLC (the "EAC Acquisition").

Redman Acquisition - On July 31, 2007, we completed the acquisition of Redman Energy Holdings, L.P. and Redman Energy Holdings II, L.P. (Natural Gas Partners VII, L.P. and Natural Gas Partners VIII, L.P. portfolio companies, respectively) and certain assets owned by NGP Income Co-Investment Opportunities Fund II, L.P. (a Natural Gas Partners affiliate) (the "Redman Acquisition").

Prior to the above 2007 acquisitions, the Partnership was solely a midstream company. The Montierra and MacLondon acquisitions provided the Partnership's entry into the minerals business and the EAC and Redman acquisitions provided the Partnership's entry into the upstream business.

Recent Acquisition

On October 1, 2008, we completed the acquisition of 100% of the outstanding units of Millennium Midstream Partners, L.P. ("MMP"), and thereby acquired control of its operating subsidiaries, for an aggregate purchase price of $225.9 million, comprised of approximately, $181.5 million in cash and 4,000,000 (recorded value of $44.4 million) common units, subject to post-closing purchase price adjustments. The cash portion of the consideration was funded through borrowings of $176.4 million

under our secured revolving credit facility made prior to September 30, 2008 and cash on hand. MMP is in the natural gas gathering and processing business, with assets located in East, Central and West Texas and South Louisiana. With respect to the South Louisiana assets acquired in the Millennium acquisition, the Yscloskey and North Terrebonne facilities were flooded with three to four feet of water as a result of the storm surges caused by Hurricanes Ike and/or Gustav.. We have filed claims for, and expect to receive payment on our business interruption insurance coverage related to Hurricane Ike and Gustav's damage to these two facilities. The timing of collection of such insurance claims is unknown at this time. The expected timing for the facilities to be brought back on line is currently late November 2008. The former owners of MMP provided us idemnity coverage for Hurricane Ike and Gustav, to the extent losses are not covered by insurance, and there is an escrow of 2,036,364 common units and $0.6 million of cash available for us to recover against for this purpose.

Recent Transactions

On October 31, 2008, we reset two existing crude oil swap transactions. The first swap was reset from $73.90 to $100 per barrel on 80,000 barrels per month for the months of November and December, 2008. The second swap was reset from $80.25 to $100 per barrel on 50,000 barrels per month for calendar year 2009. The total cost of these reset swaps was $15.9 million. The strike prices of these swaps were reset to stabilize overall cash flows for the balance the months of November and December, 2008 and all of 2009 and to provide further assurance of our ability to maintain our current rate of distribution in the face of declining commodity prices and industry activity.

Presentation of Financial Information

For a description of the presentation of our financial information in this report, please see Note 1 to the unaudited condensed consolidated financial statements.

How We Evaluate Our Operations

Our management uses a variety of financial and operational measurements to analyze our performance. We view these measurements as important factors affecting our profitability and review these measurements on a monthly basis for consistency and trend analysis. These measures include volumes, margin and operating expenses on a segment basis and Adjusted EBITDA (more fully described later under "Non-GAAP Financial Measures") on a company-wide basis.

General Trends and Outlook

We expect our business to continue to be affected by the key trends as discussed in our Annual Report on Form 10-K for the year ended December 31, 2007. More significantly, recent events impacting the world's economy and financial systems, including but not limited to, a generalized stagnation in the world's banking system and access to credit markets, precipitous drops in the value of almost all asset classes including equity, bonds, real estate, and other investment vehicles, significant drops in commodity prices including the prices for crude oil, natural gas, NGL's, condensate and sulfur, among others, as well as the generalized expectation of a prolonged period of recession, will play an important role in the performance and growth perspectives for our business. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our actual results may vary materially from our expected results.

Cautionary Note Regarding Forward-Looking Statements

Certain matters discussed in this report, excluding historical information, include certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements using words such as "anticipate," "believe," "intend," "project," "plan," "continue," "estimate," "forecast," "may," "will," or similar expressions help identify forward-looking statements. Although we believe such forward-looking statements are based on reasonable assumptions and current expectations and projections about future events, no assurance can be given that these objectives will be reached. Actual results may differ materially from any results projected, forecasted, estimated or expressed in forward-looking statements because many of the factors which determine these results are subject to uncertainties and risks, difficult to predict, and beyond management's control. For additional discussion of risks, uncertainties and assumptions, see our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on April 1, 2008.

Summary of Consolidated Operating Results

  Below is a summary table of our consolidated operating results for the three
and nine months ended September 30, 2008 and September 30, 2007,
respectively. Operating results for our individual operating segments are
presented in tables in this Item 2.

                                                          Three Months Ended            Nine Months Ended
                                                             September 30,                September 30,
                                                          2008          2007            2008           2007
                                                                           ($ in thousands)
Revenue:
Natural gas, natural gas liquids, oil, condensate and
sulfur sales                                            $ 421,346     $ 254,084     $  1,230,134     $ 555,826
Gathering compression, processing and treating fees        12,513         8,103           27,741        19,269
Minerals and royalty income                                17,393         6,009           34,606         9,201
Realized commodity derivative gains (losses)              (24,105 )        (177 )        (64,388 )       4,324
Unrealized commodity derivative gains (losses) ...        255,956         8,865          (33,381 )     (30,533 )
Other                                                         428           (20 )            610           (20 )
Total revenue                                             683,531       276,864        1,195,322       558,067
Cost of natural gas and natural gas liquids               316,788       196,839          946,177       451,840
Expenses:
Operating and maintenance                                  21,475        16,883           54,772        36,015
Taxes other than income                                     5,365         2,746           14,975         4,364
General and administrative                                  9,893         7,196           31,161        16,587
Other operating expense                                     3,920           220           10,134         1,931
Depreciation, depletion, and amortization                  28,597        25,105           80,799        50,883
Total costs and expenses                                  386,038       248,989        1,138,018       561,620
Operating income (loss)                                   297,493        27,875           57,304        (3,553 )
Other income (expense):
Interest income                                               212           231              673           530
Other income                                                  434           767            2,867           879
Interest expense, net                                      (7,498 )     (10,633 )        (23,576 )     (27,031 )
Unrealized interest rate derivatives losses                  (501 )      (8,429 )           (472 )      (3,555 )
Realized interest rate derivative gains (losses)...        (2,358 )         327           (4,903 )         967
Other expense                                                (205 )        (415 )           (652 )      (1,545 )
Total other expense                                        (9,916 )     (18,152 )        (26,063 )     (29,755 )
Income (loss) before taxes                                287,577         9,723           31,241       (33,308 )
Income tax (benefit) provision                               (494 )         352           (1,482 )         772
Net income/(loss)                                       $ 288,071     $   9,371     $     32,723     $ (34,080 )
Adjusted EBITDA(a)                                      $  75,481     $  45,155     $    185,765     $  81,407

(a) See "Non-GAAP Financial Measures" and Reconciliation of 'Adjusted EBITDA' to net cash flows provided by operating activities and net income (loss)" within Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for a definition and reconciliation to GAAP.

For the three months ended September 30, 2008, based on operating income of our non-Corporate segments, our midstream business comprised approximately 41.6% of our business (with the Texas Panhandle Segment accounting for 29.7% of our business, the South Texas Segment accounting for 2.4% of our business, and the East Texas/Louisiana Segment accounting for 9.5% of our business), our upstream business comprised approximately 40.0% of our business, and our minerals business comprised approximately 18.4% of our business. For the nine months ended September 30, 2008, based on operating income of our non-Corporate segments, our midstream business comprised approximately 45.0% of our business (with the Texas Panhandle Segment accounting for 33.0% of our business, the South Texas Segment accounting for 2.5% of our business, and the East Texas/Louisiana Segment accounting for 9.5% of our business), our upstream business comprised approximately 41.4% of our business, and our minerals business comprised approximately 13.6% of our business. We intend to acquire and construct additional assets in both our midstream and upstream businesses, and we intend to continue to seek attractive acquisitions for our minerals business.

Midstream Business (Three Segments)

Texas Panhandle Segment

                                                             Three Months Ended                 Nine Months Ended
                                                                September 30,                     September 30,
                                                            2008             2007             2008             2007
                                                                    ($ in thousands, except for price data)
Revenue:
Sales of natural gas, NGLs, oil and condensate          $    179,608     $    128,008     $    514,450     $    328,672
Gathering and treating services                                2,671            2,234            7,664            6,536
Other                                                              -              (20 )              -              (20 )
Total revenue                                                182,279          130,222          522,114          335,188
Cost of natural gas and natural gas liquids                  138,428           96,872          398,828          258,577
Operating costs and expenses:
Operating                                                      9,190            9,603           25,653           25,608
Depreciation and amortization                                 10,984           10,466           32,587           30,231
Total operating costs and expenses                            20,174           20,069           58,240           55,839
Operating income                                        $     23,677     $     13,281     $     65,046     $     20,772
Capital Expenditures                                    $      7,152     $      7,158     $     20,607     $     29,731

Realized average prices:
Oil and condensate (per Bbl)                            $     106.43     $      63.41     $     105.03     $      54.62
Natural gas (per Mcf)                                   $       8.81     $       5.45     $       8.85     $       6.02
NGLs (per Bbl)                                          $      66.36     $      53.34     $      67.62     $      48.72

Production volumes:
Gathering volumes (Mcf/d)(a)                                 159,254          164,544          154,190          147,523
NGLs and condensate (net equity gallons)                  22,752,290       23,644,648       64,287,333       65,278,803
Natural gas short position (MMbtu/d)(a)                       (4,150 )         (6,330 )         (5,458 )         (7,389 )

(a) Gathering volumes (Mcf/d) and natural gas short position (MMbtu/d) are calculated by taking the total volume and then dividing by the number of days in the respective period.

Revenue and Cost of Natural Gas and Natural Gas Liquids. For the three and nine months ended September 30, 2008, the revenues minus cost of natural gas and natural gas liquids for our Texas Panhandle Segment operations totaled $43.9 million and $123.3 million compared to $33.4 and $76.6 million for the three and nine months ended September 30, 2007. There were two primary contributors to this increase: (i) higher NGL and condensate pricing, as compared to pricing in 2007, and (ii) a lower natural gas short position as compared to 2007.

The higher 2008 gathering volumes during the nine month period compared to 2007 was primarily due to a full nine months of Red Deer Plant operations in 2008 compared to only three months in 2007 and the colder than normal weather in that area along with the downtime to repair the Arrington plant during 2007, which reduced gathering volumes during the three and nine months ended September 30, 2007. The lower gathering volumes during the three months ended September 30, 2008 compared to the same period in 2007 are primarily due to the continued decline of volumes on the West Panhandle system and reduced drilling activity during the first nine months of 2008 that was not sufficient to replace the West Panhandle System decline and the natural decline in the East Panhandle System.

The drilling activity in the West Panhandle System is not sufficient to offset the natural declines experienced on the System. While our contract mix in the West Panhandle System provides us with a higher equity share of the production, the overall decline will continue, and we expect to recover smaller amounts of equity production in the future on the West Panhandle System. The East Panhandle System continues to experience drilling activity in the

active Granite Wash drilling play located in Roberts and Hemphill Counties, Texas. The liquids content of the natural gas is lower in the East Panhandle System and our contract mix provides us with a smaller share of equity production as compared to the West Panhandle System. Due to this difference in contract mix and liquid content between our West and East Panhandle Systems, while we have grown aggregate volumes during the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007, our equity share of liquids production would have been less through the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. Our current goal is to grow volumes aggressively in the East Panhandle System to offset the decline in volumes and our share of equity production in the West Panhandle System. The start-up of the Red Deer Plant in June 2007 provided an additional 20 MMcf/d of processing capacity in our East Panhandle System that was immediately utilized by our customers. We expanded our Red Deer facility during the nine months ended September 30, 2008 to handle additional volumes of 3 MMcf/d, bringing total capacity to 23 MMcf/d. We completed the consolidation of the Stinnett Plant to the Cargray Plant during the three months ending September 30, 2008, and we are in the process of relocating the cryogenic Stinnett Plant to replace the older technology Arringtion Plant which will result in additional processing capacity on the East Panhandle System and better NGL recovery from the processed natural gas.

Operating Expenses. Operating expenses, including taxes other than income, for three and nine months ended September 30, 2008 were $9.2 million and $25.7 million compared to $9.6 million and $25.6 million for the three and nine months ended September 30, 2007. The three and nine months ended September 30, 2007 included additional maintenance costs for repairing the Arrington plant. The major items impacting the $0.1 million increase in operating expense for the nine months ended September 30, 2008 were a combination of the operations of the Red Deer Plant, which was brought on line in June 2007, and higher materials, supplies and labor costs.

Depreciation and Amortization. Depreciation and amortization expenses for three and nine months ended September 30, 2008 were $11.0 million and $32.6 million compared to $10.5 million and $30.2 million for the three and nine months ended September 30, 2007. The major items impacting the $0.5 million and $2.4 million increases was placing the Red Deer Plant into service and beginning the depreciation expense associated with the other capital expenditure projects put into service.

Capital Expenditures. Capital expenditures for the three and nine months ended September 30, 2008 were $7.2 million and $20.6 million as compared to $7.2 million and $29.7 million for the three and nine months ended September 30, 2007. During the nine months ended September 30, 2008, of our capital spending in this segment, we spent $14.2 million on growth capital and $6.4 million on maintenance capital. We classify capital expenditures as either maintenance capital which represents routine well connects and capitalized maintenance activities or as growth capital which represents organic growth projects. Our decrease of $9.1 million in capital spending for the nine month period of 2008 was driven by less growth capital due to expenditures in 2007 on the new Red Deer Plant, which was off set by capital expenditures related to our Stinnett - Cargray plant consolidation projects during 2008, which were completed in July 2008.

East Texas/Louisiana Segment

                                                            Three Months Ended                Nine Months Ended
                                                               September 30,                    September 30,
. . .