##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2009
 Commission file number: 001-33787
 QUEST ENERGY PARTNERS, L.P.
  Delaware(State or other jurisdiction 
of incorporation or organization)
    
    26-0518546(I.R.S. Employer
Identification No.)
 210 Park Avenue, Suite 2750, Oklahoma City, OK 73102  (Address of principal executive offices) (Zip Code)
 405-600-7704  (Registrants telephone number, including area code)
 o þ
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



QUEST ENERGY PARTNERS, L.P.
 FORM 10-Q
 FOR THE QUARTER ENDED MARCH 31, 2009
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    F-1Condensed Consolidated
Balance Sheets as of March 31, 2009 and December 31, 2008
    
    
    F-1Condensed Consolidated
Statements of Operations for the Three Months Ended March 31, 2009 and 2008
    
    
    F-2Condensed Consolidated
Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008
    
    
    F-3Condensed Consolidated
Statement of Partners Equity/(Deficit) for the Three Months Ended March 31, 2009
    
    
    F-4Notes to Condensed
Consolidated Financial Statements
    
    
    F-5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    2Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    11Item 4. Controls and Procedures
    
    
    13PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    17Item 1A. Risk Factors
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    17SIGNATURES
    
    
    18EX-31.1EX-31.2EX-32.1EX-32.2
  1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 QUEST ENERGY PARTNERS, L.P
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except unit data)
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,508
    
    
    $
    3,706Restricted cash
    
    
    87
    
    
    
    112Accounts receivable  trade, net
    
    
    14,558
    
    
    
    11,696Other receivables
    
    
    2,762
    
    
    
    2,590Other current assets
    
    
    1,415
    
    
    
    2,031Inventory
    
    
    8,757
    
    
    
    8,782Current derivative financial instrument assets
    
    
    57,272
    
    
    
    42,995Total current assets
    
    
    100,359
    
    
    
    71,912Property and equipment, net
    
    
    16,787
    
    
    
    17,367Oil and gas properties under full cost method of accounting, net
    
    
    45,704
    
    
    
    151,120Other assets, net
    
    
    3,607
    
    
    
    4,167Long-term derivative financial instrument assets
    
    
    48,954
    
    
    
    30,836Total assets
    
    $
    215,411
    
    
    $
    275,402LIABILITIES AND PARTNERS EQUITY/(DEFICIT)Current liabilities:Accounts payable
    
    $
    7,642
    
    
    $
    7,380Revenue payable
    
    
    3,881
    
    
    
    3,221Accrued expenses
    
    
    821
    
    
    
    1,770Due to affiliates
    
    
    8,498
    
    
    
    4,697Current portion of long-term debt
    
    
    37,753
    
    
    
    41,882Current derivative financial instrument liabilities
    
    
    7
    
    
    
    12Total current liabilities
    
    
    58,602
    
    
    
    58,962Long-term derivative financial instrument liabilities
    
    
    14,000
    
    
    
    4,230Asset retirement obligations
    
    
    4,724
    
    
    
    4,592Long-term debt
    
    
    189,090
    
    
    
    189,090Commitments and contingenciesPartners equity:Common
unitholders  12,331,521 issued and outstanding at March 31, 2009 and December 31, 2008 (9,100,000  public;
3,231,521  affiliate)
    
    
    6,212
    
    
    
    45,832Subordinated unitholder  affiliate; 8,857,981 units issued
and outstanding at March 31, 2009 and December 31, 2008
    
    
    (54,379
    )
    
    
    (25,857
    )General Partner  affiliate; 431,827 units issued and
outstanding at March 31, 2009 and December 31, 2008
    
    
    (2,838
    )
    
    
    (1,447
    )Total
partners equity/(deficit)
    
    
    (51,005
    )
    
    
    18,528Total liabilities and partners equity
    
    $
    215,411
    
    
    $
    275,402
  F-1




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except unit and per unit data)
 (Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008Revenue:Oil and gas sales
    
    $
    22,222
    
    
    $
    38,314Total revenues
    
    
    22,222
    
    
    
    38,314Costs and expenses:Oil and gas production
    
    
    7,541
    
    
    
    11,645Transportation expense
    
    
    10,287
    
    
    
    7,404General and administrative
    
    
    3,061
    
    
    
    3,098Depreciation, depletion and amortization
    
    
    11,338
    
    
    
    10,700Impairment of oil and gas properties
    
    
    95,169
    
    
    
    Total costs and expenses
    
    
    127,396
    
    
    
    32,847Operating income (loss)
    
    
    (105,174
    )
    
    
    5,467Other income (expense):Gain (loss) from derivative financial instruments
    
    
    39,464
    
    
    
    (44,239
    )Other income (expense)
    
    
    50
    
    
    
    69Interest expense
    
    
    (3,906
    )
    
    
    (2,062
    )Total other income (expense)
    
    
    35,608
    
    
    
    (46,232
    )Net loss
    
    $
    (69,566
    )
    
    $
    (40,765
    )General partners interest in net loss
    
    $
    (1,391
    )
    
    $
    (815
    )Limited partners interest in net loss
    
    $
    (68,175
    )
    
    $
    (39,950
    )Net loss per limited partner unit: (basic and diluted)
    
    $
    (3.22
    )
    
    $
    (1.89
    )Weighted average limited partner units outstanding:Common units (basic and diluted)
    
    
    12,316,521
    
    
    
    12,306,796Subordinated units (basic and diluted)
    
    
    8,857,981
    
    
    
    8,857,981
  F-2




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QUEST ENERGY PARTNERS, L.P.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (69,566
    )
    
    $
    (40,765
    )Adjustments to reconcile net loss to net cash flows from operating activitiesDepreciation, depletion and amortization
    
    
    11,338
    
    
    
    10,700Impairment of oil and gas properties
    
    
    95,169
    
    
    
    Unit-based compensation
    
    
    33
    
    
    
    12Change in fair value of derivative financial
instruments
    
    
    (22,630
    )
    
    
    43,028Amortization of deferred loan costs
    
    
    313
    
    
    
    120Bad debt expense
    
    
    
    
    
    
    26Change in assets and liabilities:Accounts receivable
    
    
    (2,862
    )
    
    
    3Other receivables
    
    
    662
    
    
    
    Other current assets
    
    
    617
    
    
    
    623Other assets
    
    
    258
    
    
    
    (13
    )Due from affiliates
    
    
    3,329
    
    
    
    (6,507
    )Accounts payable
    
    
    380
    
    
    
    185Revenue payable
    
    
    660
    
    
    
    251Accrued expenses
    
    
    (949
    )
    
    
    2,592Other long-term liabilities
    
    
    
    
    
    
    354Other
    
    
    3
    
    
    
    Net cash flows from operating activities
    
    
    16,755
    
    
    
    10,609Cash flows from investing activities:Change in restricted cash
    
    
    25
    
    
    
    Equipment,
development and leasehold additions
    
    
    (840
    )
    
    
    (34,514
    )Net cash flows from investing activities
    
    
    (815
    )
    
    
    (34,514
    )Cash flows from financing activities:Repayments of note borrowings
    
    
    (4,127
    )
    
    
    (224
    )Proceeds from revolver note
    
    
    
    
    
    
    29,000Contributions(distributions)
    
    
    
    
    
    
    375Distributions to unitholders
    
    
    
    
    
    
    (4,411
    )Syndication costs
    
    
    
    
    
    
    (265
    )Refinancing costs
    
    
    (11
    )
    
    
    Net cash flows from financing activities
    
    
    (4,138
    )
    
    
    24,475Net increase in cash and cash equivalents
    
    
    11,802
    
    
    
    570Cash and cash equivalents, beginning of period
    
    
    3,706
    
    
    
    169Cash and cash equivalents, end of period
    
    $
    15,508
    
    
    $
    739
  F-3




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QUEST ENERGY PARTNERS, L.P.
 
 CONDENSED CONSOLIDATED STATEMENT OF PARTNERS EQUITY/(DEFICIT)
 FOR THE THREE MONTHS ENDED MARCH 31, 2009
 (Amounts subsequent to December 31, 2008 are unaudited)
 (in thousands, except unit data)
 Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    General
    
    
    General
    
    
    TotalUnits
    
    
    Common
    
    
    Subordinated
    
    
    Subordinated
    
    
    Partner
    
    
    Partner
    
    
    PartnersIssued
    
    
    Unitholders
    
    
    Units
    
    
    Unitholders
    
    
    Units
    
    
    Interest
    
    
    Equity/(Deficit)Balance, December 31, 2008
    
    
    12,331,521
    
    
    $
    45,832
    
    
    
    8,857,981
    
    
    $
    (25,857
    )
    
    
    431,827
    
    
    $
    (1,447
    )
    
    $
    18,528Net loss
    
    
    
    
    
    
    (39,653
    )
    
    
    
    
    
    
    (28,522
    )
    
    
    
    
    
    
    (1,391
    )
    
    
    (69,566
    )Unit-based compensation
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Balance, March 31, 2009
    
    
    12,331,521
    
    
    $
    6,212
    
    
    
    8,857,981
    
    
    $
    (54,379
    )
    
    
    431,827
    
    
    $
    (2,838
    )
    
    $
    (51,005
    )
  F-4




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QUEST ENERGY PARTNERS, L.P.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Basis of Presentation
     Going Concern
           Recent Accounting Pronouncements
 Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities Earnings per Share.
 F-5




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QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Disclosures about Derivative Instruments and
Hedging Activities-an amendment of FASB Statement No. 133
 Application of the Two-Class Method under FASB Statement No.
128 to Master Limited Partnerships
 Modernization of Oil and Gas Reporting
 Subsequent
Events
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles  A Replacement of FASB Statement No. 162.
 2. Acquisition
 PetroEdge 
  F-6




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QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Pro Forma Summary Data Related to Acquisition (Unaudited)
  Pro forma revenue
    
    $
    41,664Pro forma net income (loss)
    
    $
    (44,254
    )Pro forma net income (loss) per limited
partner unit  basic and diluted
    
    $
    (2.05
    )
 3. Long-Term Debt
  March 31,
    
    
    December 31,2009
    
    
    2008Borrowings under bank senior credit facilitiesQuest Cherokee Credit Agreement
    
    $
    189,000
    
    
    $
    189,000Second Lien Loan Agreement
    
    
    37,400
    
    
    
    41,200Notes payable to banks and finance companies
    
    
    443
    
    
    
    772Total debt
    
    
    226,843
    
    
    
    230,972Less current maturities included in current liabilities
    
    
    37,753
    
    
    
    41,882Total long-term debt
    
    $
    189,090
    
    
    $
    189,090
 Credit Facilities
   F-7




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QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
    pari passu
        F-8




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QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 4. Derivative Financial Instruments
   Accounting for Derivative Instruments and Hedging Activities
 F-9




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QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Fair Value of Derivative Financial Instruments
 March 31,
    
    
    December 31,Derivative Financial Instruments
    
    Balance Sheet location
    
    
    2009
    
    
    2008Commodity contracts
    
    Derivative financial instruments  Current assets
    
    $
    57,272
    
    
    $
    42,995Commodity contracts
    
    Derivative financial instruments  Long-term assets
    
    
    48,954
    
    
    
    30,836Commodity contracts
    
    Derivative financial instruments  Current liabilities
    
    
    (7
    )
    
    
    (12
    )Commodity contracts
    
    Derivative financial instruments  Long-term liabilities
    
    
    (14,000
    )
    
    
    (4,230
    )Net
derivative assets
    
    
    
    
    
    $
    92,219
    
    
    $
    69,589
 The Effect of Derivative Financial Instruments
 Three months endedMarch 31,Derivative Financial Instruments
    
    Statement of Operations location
    
    
    2009
    
    
    2008Commodity contractsGain (loss) from derivative financial instruments
    
    $
    39,464
    
    
    $
    (44,239
    )
  Three Months EndedMarch 31,2009
    
    
    2008Realized gains (losses)
    
    $
    16,834
    
    
    $
    (1,211
    )Unrealized gains (losses)
    
    
    22,630
    
    
    
    (43,028
    )Gain (loss)
from derivative financial instruments
    
    $
    39,464
    
    
    $
    (44,239
    )
  F-10




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Remainder of
    
    Year Ending December 31,2009
    
    2010
    
    2011
    
    2012
    
    Total($ in thousands, except volumes and per unit data)Natural Gas Swaps:Contract volumes (Mmbtu)
    
    
    11,022,000
    
    
    
    12,499,060
    
    
    
    2,000,004
    
    
    
    2,000,004
    
    
    
    27,521,068Weighted-average fixed price
per Mmbtu
    
    $
    7.78
    
    
    $
    7.42
    
    
    $
    8.00
    
    
    $
    8.11
    
    
    $
    7.66Fair value, net
    
    $
    44,207
    
    
    $
    26,266
    
    
    $
    3,374
    
    
    $
    2,785
    
    
    $
    76,632Natural Gas Collars:Contract volumes (Mmbtu)
    
    
    562,500
    
    
    
    630,000
    
    
    
    3,549,996
    
    
    
    3,000,000
    
    
    
    7,742,496Weighted-average fixed price
per Mmbtu:Floor
    
    $
    11.00
    
    
    $
    10.00
    
    
    $
    7.39
    
    
    $
    7.00
    
    
    $
    7.71Ceiling
    
    $
    15.00
    
    
    $
    13.11
    
    
    $
    9.88
    
    
    $
    9.60
    
    
    $
    10.41Fair value, net
    
    $
    3,672
    
    
    $
    2,445
    
    
    $
    5,142
    
    
    $
    2,721
    
    
    $
    13,980Total Natural Gas Contracts:Contract volumes (Mmbtu)
    
    
    11,584,500
    
    
    
    13,129,060
    
    
    
    5,550,000
    
    
    
    5,000,004
    
    
    
    35,263,564Weighted-average fixed price
per Mmbtu
    
    $
    7.94
    
    
    $
    6.59
    
    
    $
    7.61
    
    
    $
    7.44
    
    
    $
    7.31Fair value, net
    
    $
    47,879
    
    
    $
    28,711
    
    
    $
    8,516
    
    
    $
    5,506
    
    
    $
    90,612Crude Oil Swaps:Contract volumes (Bbl)
    
    
    27,000
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    57,000Weighted-average fixed price per Bbl
    
    $
    90.07
    
    
    $
    87.50
    
    
    $
    
    
    
    $
    
    
    
    $
    88.72Fair value, net
    
    $
    924
    
    
    $
    683
    
    
    $
    
    
    
    $
    
    
    
    $
    1,607Total
fair value, net
    
    $
    48,803
    
    
    $
    29,394
    
    
    $
    8,516
    
    
    $
    5,506
    
    
    $
    92,219
 F-11




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Year Ending December 31,2009
    
    2010
    
    2011
    
    Thereafter
    
    Total($ in thousands, except volumes and per unit data)Natural Gas Swaps:Contract volumes (Mmbtu)
    
    
    14,629,200
    
    
    
    12,499,060
    
    
    
    2,000,004
    
    
    
    2,000,004
    
    
    
    31,128,268Weighted-average fixed price
per Mmbtu
    
    $
    7.78
    
    
    $
    7.42
    
    
    $
    8.00
    
    
    $
    8.11
    
    
    $
    7.67Fair value, net
    
    $
    38,107
    
    
    $
    14,071
    
    
    $
    2,441
    
    
    $
    2,335
    
    
    $
    56,954Natural Gas Collars:Contract volumes (Mmbtu)
    
    
    750,000
    
    
    
    630,000
    
    
    
    3,549,996
    
    
    
    3,000,000
    
    
    
    7,929,996Weighted-average fixed price
per Mmbtu:Floor
    
    $
    11.00
    
    
    $
    10.00
    
    
    $
    7.39
    
    
    $
    7.03
    
    
    $
    7.79Ceiling
    
    $
    15.00
    
    
    $
    13.11
    
    
    $
    9.88
    
    
    $
    7.39
    
    
    $
    9.52Fair value, net
    
    $
    3,630
    
    
    $
    1,875
    
    
    $
    3,144
    
    
    $
    2,074
    
    
    $
    10,723Total Natural Gas Contracts:Contract volumes (Mmbtu)
    
    
    15,379,200
    
    
    
    13,129,060
    
    
    
    5,550,000
    
    
    
    5,000,004
    
    
    
    39,058,264Weighted-average fixed price
per Mmbtu
    
    $
    7.94
    
    
    $
    7.55
    
    
    $
    7.61
    
    
    $
    7.44
    
    
    $
    7.70Fair value, net
    
    $
    41,737
    
    
    $
    15,946
    
    
    $
    5,585
    
    
    $
    4,409
    
    
    $
    67,677Crude Oil Swaps:Contract volumes (Bbl)
    
    
    36,000
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    66,000Weighted-average fixed price per Bbl
    
    $
    90.07
    
    
    $
    87.50
    
    
    $
    
    
    
    $
    
    
    
    $
    88.90Fair value, net
    
    $
    1,246
    
    
    $
    666
    
    
    $
    
    
    
    $
    
    
    
    $
    1,912Total
fair value, net
    
    $
    42,983
    
    
    $
    16,612
    
    
    $
    5,585
    
    
    $
    4,409
    
    
    $
    69,589
 5. Fair Value Measurements
    
 F-12




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 
 
   Netting andLevel
    
    
    Level
    
    
    Level
    
    
    Cash
    
    
    Total Net FairMarch 31, 2009
    
    1
    
    
    2
    
    
    3
    
    
    Collateral*
    
    
    ValueDerivative financial instruments  assets
    
    $
    
    
    
    $
    9,322
    
    
    $
    96,904
    
    
    $
    
    
    
    $
    106,226Derivative financial instruments  liabilities
    
    $
    
    
    
    $
    (145
    )
    
    $
    (13,862
    )
    
    $
    
    
    
    $
    (14,007
    )Total
    
    $
    
    
    
    $
    9,177
    
    
    $
    83,042
    
    
    $
    
    
    
    $
    92,219December 31, 2008Derivative financial instruments  assets
    
    $
    
    
    
    $
    8,866
    
    
    $
    64,883
    
    
    $
    (4,160
    )
    
    $
    69,589Derivative financial instruments  liabilities
    
    $
    
    
    
    $
    (224
    )
    
    $
    (3,936
    )
    
    $
    4,160
    
    
    $
    Total
    
    $
    
    
    
    $
    8,642
    
    
    $
    60,947
    
    
    $
    
    
    
    $
    69,589
 
 *
    
    Amounts represent the effect of legally enforceable master netting
agreements between us and our counterparties and the payable or
receivable for cash collateral held or placed with the same
counterparties.     F-13




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Three Months EndedMarch 31,2009Balance at beginning of period
    
    $
    60,947Realized and unrealized gains included in earnings
    
    
    39,516Purchases, sales, issuances, and settlements
    
    
    (17,421
    )Transfers into and out of Level 3
    
    
    Balance as of March 31, 2009
    
    $
    83,042
 6. Asset Retirement Obligations
  Three Months EndedMarch 31,2009Asset retirement obligations at beginning of period
    
    $
    4,592Liabilities incurred
    
    
    Liabilities settled
    
    
    Accretion
    
    
    132Revisions in estimated cash flows
    
    
    Asset retirement obligations at end of period
    
    $
     4,724
 7. Equity Compensation Plans
  8. Net Income Per Limited Partner Unit
 Participating Securities and the Two-Class Method under Financial Accounting Standards Board
 Statement No. 128,
   F-14




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Three months endedMarch 31,2009
    
    2008Net income
(loss)
    
    $
    (69,566
    )
    
    $
    (40,765
    )Less: General Partner 2.0% ownership
    
    
    (1,392
    )
    
    
    (815
    )Net income
(loss) available to limited partners
    
    $
    (68,174
    )
    
    $
    (39,950
    )Basic and diluted weighted average number of units:Common units
    
    
    12,316,521
    
    
    
    12,306,796Subordinated units
    
    
    8,857,981
    
    
    
    8,857,981Unvested unit-based awards participating
    
    
    
    
    
    
    15,824Basic and diluted weighted average number of units
    
    
    21,174,502
    
    
    
    21,180,601Basic and
diluted net income (loss) per limited partner unit:
    
    $
    (3.22
    )
    
    $
    (1.89
    )
    Note 9. Impairment of Oil and Gas Properties
    10. Commitments and Contingencies
 Litigation
  Federal Derivative Case
 William Dean Enders,
derivatively on behalf of nominal defendant Quest Energy Partners,
L.P. v. Jerry D. Cash, David E. Grose, David C. Lawler, Gary Pittman, Mark Stansberry, J. Philip
McCormick, Douglas Brent Mueller, Mid Continent Pipe & Equipment, LLC, Reliable Pipe & Equipment,
LLC, RHB Global, LLC, RHB, Inc., Rodger H. Brooks, Murrell, Hall, McIntosh & Co. PLLP, and Eide
Bailly LLP , Case No. CIV-09-752-F, U.S. District Court for the Western District of Oklahoma, filed
July 17, 2009
  Personal Injury Litigation
 St.
Paul Surplus Lines Insurance Company v. Quest Cherokee Oilfield
Service, LLC, et al., CJ-2009-1078, District Court of Tulsa County, State of Oklahoma, filed February 11, 2009
 Trigoso Trigoso
 Billy Bob Willis, et al. v. Quest Resource Corporation, et al., Case No. CJ-09-00063, District
Court of Nowata County, State of Oklahoma, filed April 28, 2009
 et al.
 Litigation Related to Oil and Gas Leases
 Edward E. Birk, et ux., and Brian L. Birk, et ux., v. Quest Cherokee, LLC, Case No. 09-CV-27, District Court of Neosho County, State of Kansas, filed April 23, 2009
 F-15




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 th nd
 Robert C. Aker, et al.
v. Quest Cherokee, LLC, et al., Case No. 3-09CV101, U.S. District Court for the Western
District of Pennsylvania, filed April 16, 2009
 et al.
 Larry Reitz, et al. v. Quest Resource Corporation, et al., Case No. CJ-09-00076, District
Court of Nowata County, State of Oklahoma, filed May 15, 2009
 et al.
 Kim E. Kuhn, Scott Tomlinson, Todd Tomlinson, Charles Willier, Brian Sefcik v. Quest Cherokee, LLC, Case No. 2009 CV 43, District Court of Wilson County, State of Kansas, filed July 27, 2009
   F-16




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Personal Injury Litigation
 Segundo Francisco
Trigoso and Dana Jara De Trigoso v. Quest Cherokee Oilfield Service,
LLC, CJ-2007-11079, in the District Court of
Oklahoma County, State of Oklahoma, filed December 27, 2007
  Berenice Urias v. Quest Cherokee, LLC, et al. , CV-2008-238C in the Fifth Judicial District,
County of Lea, State of New Mexico (Second Amended Complaint filed September 24, 2008)
  Litigation Related to Oil and Gas Leases
  Housel v. Quest Cherokee,
LLC, Case No. 06-CV-26-I, District Court of Montgomery County, State of Kansas, filed March 2, 2006
 Roger Dean Daniels v. Quest Cherokee, LLC, Case No. 06-CV-61, District Court of
Montgomery County, State of Kansas, filed May 5, 2006 (currently on appeal)
 Carol R. Knisely, et al. v. Quest Cherokee, LLC, Case No. 07-CV-58-I, District Court
of Montgomery County, State of Kansas, filed April 16, 2007
 Quest Cherokee, LLC v. David W. Hinkle, et al., Case No. 2006-CV-74, District Court
of Labette County, State of Kansas, filed September 5, 2006
 Scott Tomlinson, et al. v. Quest Cherokee, LLC, Case No. 2007-CV-45, District Court
of Wilson County, State of Kansas, filed August 29, 2007
 Ilene T. Bussman et al. v. Quest Cherokee, LLC, Case No. 07-CV-106-PA, District
Court of Labette County, State of Kansas, filed November 26, 2007
 Gary Dale Palmer, et al. v. Quest Cherokee, LLC, Case No. 07-CV-107-PA, District
Court of Labette County, State of Kansas, filed November 26, 2007
 Richard L. Bradford, et al. v. Quest Cherokee, LLC, Case No. 2008-CV-67, District
Court of  Neosho County, State of Kansas, filed September 18, 2008 (settled and dismissed)
 Richard
Winder v. Quest Cherokee, LLC, Case Nos. 07-CV-141 and
08-CV-20, District Court of Neosho County, State of Kansas, filed December 7, 2007, and February 27, 2008
 F-17




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Central
Natural Resources, Inc. v. Quest Cherokee, LLC, et al., Case No. 04-C-100-PA, District Court of Labette County, State of Kansas, filed on September 1, 2004
  Central
Natural Resources, Inc. v. Quest Cherokee, LLC, et al .,
Case No. CJ-06-07, District Court of Craig County, State of Oklahoma, filed January 17, 2006
  Other
 Well Refined Drilling Co. v. Quest Cherokee, LLC, Case No. 2007-CV-91, District Court
of Neosho County, State of Kansas, filed July 19, 2007; and Well Refined Drilling Co. v. Quest
Cherokee, LLC, Case No. 2007-CV-46, District Court of Wilson County, State of Kansas, filed
September 4, 2007
  F-18




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Barbara Cox v. Quest Cherokee, LLC ,
Case No. CIV-08-0546, U.S. District Court for the District of New Mexico, filed April 18, 2008
  Environmental
Matters
  Financial Advisor Contract
  11. Related Party Transactions
 Settlement Agreements
    F-19




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Merger Agreement and Support Agreement
   F-20




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
 Forward-looking statements
  
    
    our future financial and operating performance and results;
    
    our business strategy;
    
    market prices;
    
    our future derivative financial instrument activities; and
    
    our plans and forecasts.
   
    
    fluctuations in prices of oil and natural gas;
    
    imports of foreign oil and natural gas, including liquefied natural gas;
    
    future capital requirements and availability of financing;
    
    continued disruption of credit and capital markets and the ability of
financial institutions to honor their commitments;
    
    estimates of reserves and economic assumptions;
    
    geological concentration of our reserves;
    
    risks associated with drilling and operating wells;
 2




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##### Table of Contents




    
    risks associated with the operation of natural gas pipelines and gathering systems;
    
    discovery, acquisition, development and replacement of oil and natural gas reserves;
    
    cash flow and liquidity;
    
    timing and amount of future production of oil and natural gas;
    
    availability of drilling and production equipment;
    
    marketing of oil and natural gas;
    
    developments in oil-producing and natural gas-producing countries;
    
    title to our properties;
    
    litigation;
    
    competition;
    
    general economic conditions, including costs associated with drilling and operations of our properties;
    
    environmental or other governmental regulations, including legislation
to reduce emissions of greenhouse gases;
    
    receipt and collectability of amounts owed to us by purchasers of our
production and counterparties to our derivative financial instruments;
    
    decisions whether or not to enter into derivative financial instruments;
    
    events similar to those of September 11, 2001;
    
    actions of third party co-owners of interests in properties in which we also own an interest; and
    
    fluctuations in interest rates.
  3




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##### Table of Contents



Overview of Our Company
  Operating Highlights
  
    
    Increased natural gas production by approximately 445,000 Mcf from the prior year quarter.
    
    Increased oil production by approximately 9,000 Bbls from the prior year quarter.
    
    Increased total production by approximately 499,000 Mcfe from the prior year quarter.
    
    Reduced production costs by $1.10 per Mcfe from the prior year quarter.
 Financial Highlights
  
    
    Reduced total debt by $4.1 million since December 31, 2008.
    
    Increased cash and cash equivalents by $11.8 million since December 31, 2008.
 Recent Developments
 Global Financial Crisis and Impact on Capital Markets and Commodity Prices
    4




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##### Table of Contents



Suspension of Distributions
   Settlement Agreements
    Recombination
     5




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##### Table of Contents



Credit Agreement Amendments
 pari passu
   Results of Operations
  Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008
 Overview.
 Three Months EndedMarch 31,
    
    Increase/2009
    
    2008
    
    (Decrease)Oil and gas sales
    
    $
    22,222
    
    
    $
    38,314
    
    
    $
    (16,092
    )
    
    
    (42.0
    )%Oil and gas production costs
    
    $
    7,541
    
    
    $
    11,645
    
    
    $
    (4,104
    )
    
    
    (35.2
    )%Transportation expense
    
    $
    10,287
    
    
    $
    7,404
    
    
    $
    2,883
    
    
    
    38.9
    %Depreciation, depletion and amortization
    
    $
    11,338
    
    
    $
    10,700
    
    
    $
    638
    
    
    
    6.0
    %General and administrative expenses
    
    $
    3,061
    
    
    $
    3,098
    
    
    $
    (37
    )
    
    
    (1.2
    )%Impairment
of oil and gas  properties
    
    $
    95,169
    
    
    $
    
    
    
    $
    95,169
    
    
    
    100
    %Gain (loss) from derivative financial instruments
    
    $
    39,464
    
    
    $
    (44,239
    )
    
    $
    83,703
    
    
    
    189.2
    %Interest expense
    
    $
    3,906
    
    
    $
    2,062
    
    
    $
    1,844
    
    
    
    89.4
    %
 6




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##### Table of Contents



Production.
 Three Months EndedMarch 31,
    
    Increase/2009
    
    2008
    
    (Decrease)Production Data:Natural gas production (Mmcf)
    
    
    5,411
    
    
    
    4,966
    
    
    
    445
    
    
    
    9.0
    %Oil production (Mbbl)
    
    
    20
    
    
    
    11
    
    
    
    9
    
    
    
    81.8
    %Total production (Mmcfe)
    
    
    5,531
    
    
    
    5,032
    
    
    
    499
    
    
    
    9.9
    %Average daily production (Mmcfe/d)
    
    
    61.5
    
    
    
    55.3
    
    
    
    6.2
    
    
    
    11.2
    %Average Sales Price per Unit:Natural gas (Mcf)
    
    $
    3.83
    
    
    $
    7.49
    
    
    $
    (3.66
    )
    
    
    (48.9
    )%Oil (Bbl)
    
    $
    75.05
    
    
    $
    98.12
    
    
    $
    (23.07
    )
    
    
    (23.5
    )%Natural gas equivalent (Mcfe)
    
    $
    4.02
    
    
    $
    7.61
    
    
    $
    (3.59
    )
    
    
    (47.2
    )%Average Unit Costs per Mcfe:Production costs
    
    $
    1.36
    
    
    $
    2.31
    
    
    $
    (0.95
    )
    
    
    (41.1
    )%Transportation expense
    
    $
    1.86
    
    
    $
    1.47
    
    
    $
    0.39
    
    
    
    26.5
    %Depreciation, depletion and amortization
    
    $
    2.04
    
    
    $
    2.13
    
    
    $
    (0.09
    )
    
    
    (4.2
    )%
 Oil and Gas Sales.
 Oil and Gas Operating Expenses.
   Depreciation, Depletion and Amortization.
 General and Administrative Expense.
 7




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##### Table of Contents



Gain (loss) from Derivative Financial Instruments.
 Interest
Expense.
 Liquidity and Capital Resources
 Cash
Flows
 Overview
   Cash Flows from Operating Activities.
 Cash
Flows from Investing Activities.
 8




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##### Table of Contents



Capital
expenditures;
 Three Months
Ended March 31, 2009Leasehold acquisition
    
    $
    759Development
    
    
    16Other items
    
    
    65Total
    
    $
    840
 Cash Flows from
Financing Activities.
 Working
Capital Deficit.
 Credit
Agreements
     pari passu
 9




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##### Table of Contents



Contractual Obligations
  10




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##### Table of Contents



Off-balance Sheet Arrangements
  
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 Commodity Price Risk
   Remainder of
    
    Year Ending December 31,2009
    
    2010
    
    2011
    
    2012
    
    Total($ in thousands, except volumes and per unit data)Natural Gas Swaps:Contract volumes (Mmbtu)
    
    
    11,022,000
    
    
    
    12,499,060
    
    
    
    2,000,004
    
    
    
    2,000,004
    
    
    
    27,521,068Weighted-average fixed price
per Mmbtu
    
    $
    7.78
    
    
    $
    7.42
    
    
    $
    8.00
    
    
    $
    8.11
    
    
    $
    7.66Fair value, net
    
    $
    44,207
    
    
    $
    26,266
    
    
    $
    3,374
    
    
    $
    2,785
    
    
    $
    76,632Natural Gas Collars:Contract volumes (Mmbtu)
    
    
    562,500
    
    
    
    630,000
    
    
    
    3,549,996
    
    
    
    3,000,000
    
    
    
    7,742,496Weighted-average fixed price
per Mmbtu:Floor
    
    $
    11.00
    
    
    $
    10.00
    
    
    $
    7.39
    
    
    $
    7.00
    
    
    $
    7.71Ceiling
    
    $
    15.00
    
    
    $
    13.11
    
    
    $
    9.88
    
    
    $
    9.60
    
    
    $
    10.41Fair value, net
    
    $
    3,672
    
    
    $
    2,445
    
    
    $
    5,142
    
    
    $
    2,721
    
    
    $
    13,980Total Natural Gas Contracts:Contract volumes (Mmbtu)
    
    
    11,584,500
    
    
    
    13,129,060
    
    
    
    5,550,000
    
    
    
    5,000,004
    
    
    
    35,263,564
 11




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##### Table of Contents



Remainder of
    
    Year Ending December 31,2009
    
    2010
    
    2011
    
    2012
    
    Total($ in thousands, except volumes and per unit data)Weighted-average fixed price
per Mmbtu
    
    $
    7.94
    
    
    $
    6.59
    
    
    $
    7.61
    
    
    $
    7.44
    
    
    $
    7.31Fair value, net
    
    $
    47,879
    
    
    $
    28,711
    
    
    $
    8,516
    
    
    $
    5,506
    
    
    $
    90,612Crude Oil Swaps:Contract volumes (Bbl)
    
    
    27,000
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    57,000Weighted-average fixed price  per Bbl
    
    $
    90.07
    
    
    $
    87.50
    
    
    $
    
    
    
    $
    
    
    
    $
    88.72Fair value, net
    
    $
    924
    
    
    $
    683
    
    
    $
    
    
    
    $
    
    
    
    $
    1,607Total fair
value, net
    
    $
    48,803
    
    
    $
    29,394
    
    
    $
    8,516
    
    
    $
    5,506
    
    
    $
    92,219
  12




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##### Table of Contents



ITEM 4.
    
    CONTROLS AND PROCEDURES.
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
    (1)
    
    Control environment We did not maintain an effective control environment. The control
environment, which is the responsibility of senior management, sets the tone of the
organization, influences the control consciousness of its people, and is the foundation for
all other components of internal control over financial reporting. Each of these control
environment material weaknesses contributed to the material weaknesses discussed in items
(2) through (7) below. We did not maintain an effective control environment because of the
following material weaknesses:
 (a)
    
    We did not maintain a tone and control consciousness that consistently emphasized
adherence to accurate financial reporting and enforcement of our policies and
procedures. This control deficiency fostered a lack of sufficient appreciation for
internal controls over financial reporting, allowed for management override of internal
controls in certain circumstances and resulted in an ineffective process for monitoring
the adherence to our policies and procedures.(b)
    
    In addition, we did not maintain a sufficient complement of personnel with an
appropriate level of accounting knowledge, experience, and training in the application
of GAAP commensurate with our financial reporting requirements and business environment.(c)
    
    We did not maintain an effective anti-fraud program designed to detect and
prevent fraud relating to (i) an effective whistle-blower program, (ii) consistent
background checks of personnel in positions of responsibility, and (iii) an ongoing
program to manage identified fraud risks.
  13




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##### Table of Contents



(2)
    
    Internal control over financial reporting We did not maintain effective monitoring
controls to determine the adequacy of our internal control over financial reporting and
related policies and procedures because of the following material weaknesses:
 (a)
    
    Our policies and procedures with respect to the review, supervision and
monitoring of our accounting operations throughout the organization were either not
designed and in place or not operating effectively.(b)
    
    We did not maintain an effective internal control monitoring function.
Specifically, there were insufficient policies and procedures to effectively determine
the adequacy of our internal control over financial reporting and monitoring the ongoing
effectiveness thereof.
  (3)
    
    Period end financial close and reporting We did not establish and maintain effective
controls over certain of our period-end financial close and reporting processes because of
the following material weaknesses:
 (a)
    
    We did not maintain effective controls over the preparation and review of the
interim and annual consolidated financial statements and to ensure that we identified
and accumulated all required supporting information to ensure the completeness and
accuracy of the consolidated financial statements and that balances and disclosures
reported in the consolidated financial statements reconciled to the underlying
supporting schedules and accounting records.(b)
    
    We did not maintain effective controls to ensure that we identified and
accumulated all required supporting information to ensure the completeness and
accuracy of the accounting records.(c)
    
    We did not maintain effective controls over the preparation, review and
approval of account reconciliations. Specifically, we did not have effective controls
over the completeness and accuracy of supporting schedules for substantially all
financial statement account reconciliations.(d)
    
    We did not maintain effective controls over the complete and accurate
recording and monitoring of intercompany accounts. Specifically, effective controls
were not designed and in place to ensure that intercompany balances were completely
and accurately classified and reported in our underlying accounting records and to
ensure proper elimination as part of the consolidation process.(e)
    
    We did not maintain effective controls over the recording of journal entries,
both recurring and non-recurring. Specifically, effective controls were not designed
and in place to ensure that journal entries were properly prepared with sufficient
support or documentation or were reviewed and approved to ensure the accuracy and
completeness of the journal entries recorded.
 (4)
    
    Derivative instruments We did not establish and maintain effective controls to
ensure the correct application of GAAP related to derivative instruments. Specifically,
we did not adequately document the criteria for measuring hedge effectiveness at the
inception of certain derivative transactions and did not subsequently value those
derivatives appropriately.(5)
    
    Depreciation, depletion and amortization We did not establish and maintain
effective controls to ensure completeness and accuracy of depreciation, depletion and
amortization expense. Specifically, effective controls were not designed and in place to
calculate and review the depletion of oil and gas properties.(6)
    
    Impairment of oil and gas properties We did not establish and maintain effective
controls to ensure the accuracy and application of GAAP related to the capitalization of
costs related to oil and gas properties and the required evaluation of impairment of such
costs. Specifically, effective controls were not designed and in place to determine, review and record the nature of items recorded to oil and gas
properties and the calculation of oil and gas property impairments.
 14




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##### Table of Contents



(7)
    
    Cash management We did not establish and maintain effective controls to
adequately segregate the duties over cash management. Specifically, effective controls
were not designed to prevent the misappropriation of cash.
  
 Remediation Plan
       15




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Changes in Internal Control Over Financial Reporting
  16




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS.
   
 ITEM 1A.
    
    RISK FACTORS.
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5.
    
    OTHER INFORMATION.
  
 ITEM 6.
    
    EXHIBITS
 10.1*
    
    Amendment No. 2 to the Midstream Services and Gas Dedication Agreement, dated as of February 27, 2009, by and between Quest Energy Partners, L.P. and Bluestem Pipeline, LLC (incorporated herein by reference to Exhibit 10.15 to Quest Energy Partners, L.P.s Annual Report on Form 10-K filed on June 16, 2009).31.1
    
    Certification by principal executive officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by principal financial officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by principal executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification by principal financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
   17




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##### Table of Contents



SIGNATURES
 th
 Quest Energy Partners, L.P.
By: Quest Energy GP, LLC, its general partnerBy:

/s/
David C. LawlerDavid C. LawlerPresident and Chief Executive Officer By:

/s/
Eddie M. LeBlanc, IIIEddie M. LeBlanc, IIIChief Financial Officer 18