1362705--2/27/2009--Constellation_Energy_Partners

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{operation, natural, condition}

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Risks Related to Our Business Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our financial condition or results of operations and, as a result, our ability to pay distributions to our unitholders. Our identified drilling location inventories are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling, resulting in temporarily lower cash from operations, which may impact our ability to pay distributions. Unless we replace the reserves that we produce, our existing reserves and production will decline, which would adversely affect our cash from operations and our ability to make cash distributions to our unitholders. Our estimated reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves. Continued declines in oil and natural gas prices may result in additional write-downs of our asset carrying values. Due to our lack of asset and geographic diversification, adverse developments in our core operating areas would reduce our ability to make distributions to our unitholders. Seasonal weather conditions adversely affect our ability to conduct exploration and production activities. Certain of our undeveloped leasehold acreage is subject to leases that may expire in the near future. Shortages of drilling rigs, supplies, oilfield services, equipment and crews could delay our operations and reduce our cash available for distribution. Locations that we decide to drill may not yield oil and natural gas in commercially viable quantities. We may be unable to compete effectively with larger companies, which may adversely affect our ability to generate sufficient revenue to allow us to pay distributions to our unitholders. Our acquisition activities will subject us to certain risks. Risks Related to Financing and Credit Environment borrowing base at the current level of $265 million at future redeterminations, renewing or replacing our existing reserve-based credit facilities before they mature, or maintaining or obtaining additional credit at similar terms, which could adversely affect our operations and our ability to pay distributions to our unitholders. Our reserve-based credit facilities may restrict us from borrowing to pay distributions on our outstanding units. Economic conditions and instability in the financial markets could negatively impact our business. We will be required to make substantial capital expenditures to increase our asset base. If we are unable to obtain needed capital or financing on satisfactory terms, our ability to make cash distributions may be diminished or our financial leverage could increase. We are exposed to credit risk in the ordinary course of our business activities. We depend on certain key customers for sales of our oil and natural gas. To the extent these and other customers reduce the volumes of natural gas they purchase from us and are not replaced by new customers, our revenues and cash available for distribution could decline. Our future debt levels may limit our flexibility to obtain additional financing and pursue other business opportunities. We may incur substantial additional debt in the future to enable us to pursue our business plan and to pay distributions to our unitholders. Increases in inflation, or expectations of increases in inflation or stagflation, could increase our costs and adversely affect our business and operating results. An increase in interest rates may cause the market price of our common units to decline and increase our borrowing costs. Risks Related to Our Distribution to Unitholders The amount of cash that we have available for distribution to our unitholders depends primarily upon our cash flow and not our profitability. We may not have sufficient cash from operations to pay our quarterly distributions following establishment of cash reserves and payment of fees and expenses, and future distributions to our unitholders may fluctuate from quarter to quarter or be suspended. Oil and natural gas prices are very volatile, and if commodity prices decline significantly for a temporary or prolonged period, our cash from operations will decline and we may have to lower our quarterly distribution or may not be able to pay distributions at all. Our operations require substantial capital expenditures, which will reduce our cash available for distribution. Each quarter we are required to deduct estimated maintenance capital expenditures from operating surplus, which may result in less cash available for distribution to unitholders than if actual maintenance capital expenditures were deducted. Our hedging activities could result in financial losses or could reduce our income, which may adversely affect our ability to pay distributions to our unitholders. If we do not make acquisitions on economically acceptable terms, our future growth and ability to sustain or increase distributions will be limited. Risks Related to Our Structure and Our Relationship with Constellation Constellation and its affiliates own an interest in us through their ownership of our Class A and common units. CEPH may sell common units in the future, which could reduce the market price of our outstanding common units. Constellation s interests in us may be transferred to a third party without common unitholder consent. Constellation s announcement that it intends to sell its upstream gas assets, which may include its ownership interests in us, could result in the loss of our sponsor, a reduction of services provided to us by Constellation under our management services agreement, or a termination of such agreement, and the loss of Constellation as a potential source for our growth. We have relied on third parties, including CEPM, for our management. If CEPM or these third parties fail to or inadequately perform, or if we cannot enter into other management contracts on satisfactory terms, our costs will increase and reduce our cash from operations and our ability to make cash distributions. Expense reimbursements due to CEPM under our management services agreement will reduce cash available for distribution to our unitholders. Members of our board of managers, our executive officers and Constellation and its affiliates, including CEPH and CEPM, may have conflicts of interest with us. Our limited liability company agreement limits the remedies available to our unitholders in the event they have a claim relating to conflicts of interest or the resolution of such a conflict of interest. If the holders of our common units vote to eliminate the special voting rights of the holders of our Class A units, our Class A units will convert into common units on a one-for-one basis and CEPM will have the option of converting the management incentive interests into common units at their fair market value, which may be dilutive to the common unitholders. Our limited liability company agreement prohibits a unitholder (other than CEPM, CEPH and their affiliates) who acquires 15% or more of our common units without the approval of our board of managers from engaging in a business combination with us for three years. This provision could discourage a change of control that our unitholders may favor, which could negatively affect the price of our common units. Our reserve-based credit facilities have restrictive covenants related to our relationship with Constellation. We have no control over Constellation s actions related to selling their units or terminating the management services agreement. If these events occur, we may have an event of default under our reserve-based credit facilities. Our limited liability agreement restricts the voting rights of unitholders owning 20% or more of our common units. Our limited liability company agreement provides for a limited call right that may require unitholders to sell their common units at an undesirable time or price. We may issue additional units without unitholder approval, which would dilute existing unitholders ownership interests. Our limited liability company agreement limits and modifies our managers and officers fiduciary duties. Because we are a limited liability company, unitholders may have liability to repay distributions. The market price of our common units could be volatile due to a number of factors, many of which are beyond our control. Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to entity-level taxation by individual states. If the IRS were to treat us as a corporation for federal income tax purposes or we were to become subject to entity-level taxation for state tax purposes, taxes paid, if any, would reduce the amount of cash available for distribution. The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis. Unitholders may be required to pay taxes on income from us even if they do not receive any cash distributions from us. We will be considered to have terminated for tax purposes due to a sale or exchange of 50% or more of our interests within a twelve-month period. A successful IRS contest of the federal income tax positions we take may adversely affect the market for our common units, and the costs of any contest will reduce cash available for distribution. Tax-exempt entities and foreign persons face unique tax issues from owning common units that may result in adverse tax consequences to them. We will treat each purchaser of our common units as having the same tax benefits without regard to the common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units. Tax gain or loss on the disposition of our common units could be more or less than expected because prior distributions in excess of allocations of income will decrease a unitholder s tax basis in his common units. Unitholders may be subject to state and local taxes and return filing requirements. We have adopted certain valuation methodologies that may result in a shift of income, gain, loss and deduction between the holder s of management incentive interests and the common unitholders. The Internal Revenue Service ( IRS ) may challenge this treatment, which could adversely affect the value of our common units. We prorate our items of income, gain, loss and deduction between transferors and transferees of common units each month based upon the ownership of the common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The IRS may challenge this treatment, which could change the allocation of income, gain, loss and deduction among the unitholders. A unitholder whose common units are loaned to a short seller to cover a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition. Risks Related to Environmental Issues and Compliance We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting our operations. Because we handle oil, natural gas, and other petroleum products in our business, we may incur significant costs and liabilities in the future resulting from a failure to comply with new or existing environmental regulations. We may incur significant costs and liabilities in the future resulting from an accidental release of hazardous substances into the environment. Our operations expose us to significant costs and liabilities with respect to environmental and operational safety matters. The coalbeds from which we produce natural gas frequently contain water that may hamper our ability to produce natural gas in commercial quantities or adversely affect our profitability. We may face unanticipated water disposal costs. Risks Related to the NPI Since the Trust was terminated in January 2008, the gas purchase contract with the Trust also terminated. If it were determined that the payment by us to the Trust in respect of the NPI has ceased to be calculated under the sharing arrangement, or that the previous calculations of the NPI payments were incorrect, our royalty obligations under the NPI could increase, which could adversely affect our results of operations and our ability to pay cash distributions. The gas purchase contract on which the NPI is based contains a minimum price arrangement, which could have the effect of requiring a higher royalty payment in respect of the NPI than would be the case if the gas purchase contract did not have the minimum price arrangement. If the applicable index price falls below the minimum price, it could adversely affect our financial condition and results of operations and, as a result, our ability to pay cash distributions. Assuming the sharing arrangement does not terminate, the gas purchase contract on which the NPI is based contains a sharing arrangement in the event the applicable spot index price for natural gas exceeds the sharing price, as calculated under the gas purchase contract. If the applicable spot index price for natural gas falls below the sharing price, it would have the effect of reducing the revenue we retain upon resale of the gas produced from the Trust Wells and could adversely affect our financial condition and results of operations and, as a result, our ability to pay cash distributions.

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1362705--2/27/2009--Constellation_Energy_Partners_LLC