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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q/A
 (Amendment No. 1)
 (Mark One)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008.
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to          .
 Commission file number: 001-33787
 QUEST ENERGY PARTNERS, L.P.
  Delaware
    
    26-0518546(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 210 Park Avenue, Suite 2750, Oklahoma City, OK 73102
  405-600-7704
 o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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EXPLANATORY NOTE
   Investigation 
   -2-




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Restatement and Reaudit 
  
    
    The Transfers, which were not approved expenditures, were not properly accounted for as
losses.
    
    Hedge accounting was inappropriately applied for our commodity derivative instruments and
the valuation of commodity derivative instruments was incorrectly computed.
    
    Errors were identified in the accounting for the formation of Quest Cherokee in December
2003 in which: (i) no value was ascribed to the Quest Cherokee Class A units that were
issued to ArcLight Energy Partners Fund I, L.P. (ArcLight) in connection with the
transaction, (ii) a debt discount (and related accretion) and minority interest were not
recorded, (iii) transaction costs were inappropriately capitalized to oil and gas
properties, and (iv) subsequent to December 2003, interest expense was improperly stated as
a result of these errors. In 2005, the debt relating to this transaction was repaid and the
Class A units were repurchased from ArcLight. Due to the errors that existed in the previous
accounting, additional errors resulted in 2005 including: (i) a loss on extinguishment of
debt was not recorded, and (ii) oil and gas properties and retained earnings were
overstated. Subsequent to the 2005 transaction, depreciation, depletion and amortization
expense was also overstated due to these errors.
    
    Certain general and administrative expenses unrelated to oil and gas production were
inappropriately capitalized to oil and gas properties, and certain operating expenses were
inappropriately capitalized to oil and gas properties being amortized. These items resulted
in errors in valuation of the full cost pool, oil and gas production expenses and general
and administrative expenses.
    
    Invoices were not properly accrued resulting in the understatement of accounts payable
and numerous other balance sheet and income statement accounts.
    
    As a result of previously discussed errors and an additional error related to the methods
used in calculating depreciation, depletion and amortization, errors existed in our
depreciation, depletion and amortization expense and our accumulated depreciation, depletion
and amortization.
    
    As a result of previously discussed errors relating to oil and gas properties and hedge
accounting, and errors relating to the treatment of deferred taxes, errors existed in our
ceiling test calculations.
 -3-




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June 30, 2008Partners equity as previously reported
    
    $
    80,110Effect of the Transfers
    
    
    (9,500
    )Reversal of hedge accounting
    
    
    3,658Accounting for formation of Quest Cherokee
    
    
    (15,102
    )Capitalization of costs in full cost pool
    
    
    (31,091
    )Recognition of costs in proper periods
    
    
    (2,656
    )Depreciation, depletion and amortization
    
    
    11,000Impairment of oil and gas properties
    
    
    30,719Other errors
    
    
    5,136Partners equity as restated
    
    $
    72,274
 Three Months Ended June 30,2008
    
    
    2007Net income
(loss) as previously reported
    
    $
    16,221
    
    
    $
    (5,231
    )Effect of the Transfers
    
    
    
    
    
    
    (500
    )Reversal of hedge accounting
    
    
    (105,179
    )
    
    
    7,689Capitalization of costs in full cost pool
    
    
    (3,425
    )
    
    
    (3,028
    )Recognition of costs in proper periods
    
    
    (1,699
    )
    
    
    (188
    )Stock-based compensation
    
    
    446
    
    
    
    104Depreciation, depletion and amortization
    
    
    (429
    )
    
    
    (175
    )Other errors
    
    
    449
    
    
    
    126Net loss as restated
    
    $
    (93,616
    )
    
    $
    (1,203
    )
 Six Months Ended June 30,2008
    
    
    2007Net  loss as previously reported
    
    $
    (1,125
    )
    
    $
    (8,924
    )Effect of the Transfers
    
    
    
    
    
    
    (1,000
    )Reversal of hedge accounting
    
    
    (124,375
    )
    
    
    (6,394
    )Capitalization of costs in full cost pool
    
    
    (7,084
    )
    
    
    (5,447
    )Recognition of costs in proper periods
    
    
    (1,116
    )
    
    
    (432
    )Stock-based compensation
    
    
    15
    
    
    
    (241
    )Depreciation, depletion and amortization
    
    
    (920
    )
    
    
    (655
    )Other errors
    
    
    224
    
    
    
    (916
    )Net loss as restated
    
    $
    (134,381
    )
    
    $
    (24,009
    )
  Other Matters 
 
    
    The theft of approximately $1.0 million by David E. Grose, the former chief financial
officer, and Brent Mueller, the former purchasing manager. The evidence indicates that this
theft occurred in the third quarter of 2008 after the periods covered
by this report and therefore did not affect the periods covered
by this report.
 -4-




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
    
    A kickback scheme involving David E. Grose and Brent Mueller, in which each received
kickbacks totaling approximately $0.9 million from several related suppliers beginning in
2005.
  
    
    the necessary retention of numerous professionals, including consultants to perform the
accounting and finance functions following the termination of the chief financial officer,
independent legal counsel to conduct the internal investigation, investment bankers and
financial advisors, and law firms to respond to the class action and derivative suits that
have been filed against us and our affiliates and to pursue the claims against the former
employees;
    
    costs associated with amending our credit agreements;
    
    preparing the restated consolidated financial statements; and
    
    conducting the reaudits of the restated consolidated financial statements.
   Part
I
      -5-




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##### 



QUEST ENERGY PARTNERS, L.P.
 FORM
10-Q/A
 FOR THE QUARTER ENDED JUNE 30, 2008
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATION
    
    
    8Item 1. Financial Statements
    
    
    8Balance Sheets:
June 30, 2008 and December 31, 2007
    
    
    F-1Statements of Operations 
Three and six months ended June 30, 2008 and 2007
    
    
    F-2Statements of Cash Flows:
Six months ended June 30, 2008 and 2007
    
    
    F-3Notes to Unaudited Consolidated/Carve Out Financial Statements
    
    
    F-4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4(T). Controls and Procedures
    
    
    18PART II  OTHER INFORMATION
    
    
    21Item 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    23SIGNATURES
    
    
    25EX-31.1EX-31.2EX-32.1EX-32.2
  -6-




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
    
    when we use the terms Quest Energy Partners, the Company, Successor, our, we,
us and similar terms in a historical context prior to November 15, 2007, we are referring to
Predecessor, and when we use such terms in a historical context on or after November 15, 2007,
in the present tense or prospectively, we are referring to Quest Energy Partners, L.P. and its
subsidiaries, Quest Cherokee, LLC and Quest Cherokee Oilfield Service, LLC;
    
    when we use the term Predecessor, we are referring to the assets, liabilities and
operations of QRCP located in the Cherokee Basin (other than its midstream assets),
which QRCP contributed to us at the completion of our initial public offering on
November 15, 2007;
    
    when we use the terms Quest Energy GP or our general partner, we are referring to Quest
Energy GP, LLC, our general partner;
    
    when we use the term QRCP,
we are referring to Quest Resource Corporation (Nasdaq:
QRCP), the owner of our general partner, and its subsidiaries (other than us); and
    
    when we use the term QMLP or Quest Midstream, we are referring to Quest Midstream Partners, L.P.
and its subsidiaries.
 
 -7-




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements .
     -8-




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 ($ in thousands except
share data)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)(Restated)ASSETSCurrent assets:Cash and
cash equivalents
    
    $
    11,504
    
    
    $
    169Restricted cash
    
    
    112
    
    
    
    1,205Accounts receivable, trade
    
    
    (274
    )
    
    
    86Due from affiliated companies
    
    
    21,595
    
    
    
    15,624Other current assets
    
    
    3,185
    
    
    
    3,091Inventory
    
    
    9,845
    
    
    
    4,956Current
derivative financial instrument assets
    
    
    1,837
    
    
    
    8,008Total current assets
    
    
    47,804
    
    
    
    33,139Property and equipment, net of accumulated
depreciation of $ 7,214 and $ 5,473
    
    
    18,808
    
    
    
    17,116Oil and gas
properties under full cost method of accounting, net
    
    
    325,643
    
    
    
    294,329Other assets, net
    
    
    3,185
    
    
    
    3,526Long-term
derivative financial instrument assets
    
    
    9,536
    
    
    
    3,467Total assets
    
    $
    404,976
    
    
    $
    351,577LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    24,754
    
    
    $
    18,673Accrued expenses
    
    
    8,262
    
    
    
    639Due to affiliates
    
    
    1,504
    
    
    
    1,708Current portion of notes payable
    
    
    247
    
    
    
    666Current
derivative financial instrument liabilities
    
    
    68,355
    
    
    
    8,108Total current liabilities
    
    
    103,122
    
    
    
    29,794Non-current liabilities:Long-term
derivative financial instrument liabilities
    
    
    85,306
    
    
    
    6,311Asset retirement obligation
    
    
    2,125
    
    
    
    1,700Notes payable
    
    
    142,149
    
    
    
    94,042Non-current liabilities
    
    
    229,580
    
    
    
    102,053Total liabilities
    
    
    332,702
    
    
    
    131,847Commitments and contingenciesPartners equity:Common
unitholders   Issued and outstanding    12,301,521 at June 30, 2008 and December 31, 2007
(9,100,000   public;   3,201,521   affiliate)
    
    
    78,392
    
    
    
    162,610Subordinated
unitholder   affiliate; 8,857,981 units issued and outstanding
at June 30, 2008
and December 31, 2007
    
    
    (5,821
    )
    
    
    54,465General Partner   affiliate;
431,827 units issued and outstanding at June 30, 2008 and December 31, 2007
    
    
    (297
    )
    
    
    2,655Total partners equity
    
    
    72,274
    
    
    
    219,730Total liabilities and partners equity
    
    $
    404,976
    
    
    $
    351,577
  F-1




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 STATEMENTS OF OPERATIONS
 ($ in thousands,
except unit and per unit data)
 (Unaudited)  (Restated)
 Successor
    
    
    Predecessor
    
    
    Successor
    
    
    PredecessorThree Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Consolidated)
    
    
    (Carve out)
    
    
    (Consolidated)
    
    
    (Carve out)Revenue:Oil and gas sales
    
    $
    49,142
    
    
    $
    27,570
    
    
    $
    87,454
    
    
    $
    52,544Total revenues
    
    
    49,142
    
    
    
    27,570
    
    
    
    87,454
    
    
    
    52,544Costs and expenses:Oil and gas production
    
    
    13,898
    
    
    
    9,856
    
    
    
    24,283
    
    
    
    18,904Transportation
expense
    
    
    8,675
    
    
    
    6,920
    
    
    
    17,338
    
    
    
    13,281General and administrative
    
    
    1,669
    
    
    
    4,333
    
    
    
    4,767
    
    
    
    6,707Depreciation, depletion and amortization
    
    
    10,855
    
    
    
    8,146
    
    
    
    21,554
    
    
    
    15,951Misappropriation of funds
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    1,000Total costs and expenses
    
    
    35,097
    
    
    
    29,755
    
    
    
    67,942
    
    
    
    55,843Operating income (loss)
    
    
    14,045
    
    
    
    (2,185
    )
    
    
    19,512
    
    
    
    (3,299
    )Other income (expense):Gain (loss)
from derivative financial instruments
    
    
    (105,375
    )
    
    
    8,391
    
    
    
    (149,614
    )
    
    
    (5,156
    )Other income (expense)
    
    
    45
    
    
    
    (323
    )
    
    
    114
    
    
    
    (229
    )Interest income
    
    
    90
    
    
    
    103
    
    
    
    107
    
    
    
    280Interest expense
    
    
    (2,421
    )
    
    
    (7,189
    )
    
    
    (4,500
    )
    
    
    (15,605
    )Total other income (expense)
    
    
    (107,661
    )
    
    
    982
    
    
    
    (153,893
    )
    
    
    (20,710
    )Net  loss
    
    $
    (93,616
    )
    
    $
    (1,203
    )
    
    $
    (134,381
    )
    
    $
    (24,009
    )General partners interest in net loss
    
    $
    (1,872
    )
    
    
    
    
    
    $
    (2,688
    )Limited partners interest in net loss
    
    $
    (91,744
    )
    
    
    
    
    
    $
    (131,693
    )Net
loss per limited partner unit (basic and diluted)
    
    $
    (4.33
    )
    
    
    
    
    
    $
    (6.22
    )Weighted average limited partner units outstanding:Common units (basic and diluted)
    
    
    12,331,521
    
    
    
    
    
    
    
    12,331,521Subordinated units (basic and diluted)
    
    
    8,857,981
    
    
    
    
    
    
    
    8,857,981
  F-2




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 STATEMENTS OF CASH FLOWS
 ($ in thousands)  (Unaudited)  (Restated)
 Successor
    
    
    PredecessorSix Months EndedJune 30,2008
    
    
    2007(Consolidated)
    
    
    (Carve out)Cash flows from operating activities:Net loss
    
    $
    (134,381
    )
    
    $
    (24,009
    )Adjustments
to reconcile net loss to cash provided by (used in)
operations:Depreciation, depletion and amortization
    
    
    21,554
    
    
    
    15,951Gain (loss) from
derivative financial instruments
    
    
    139,344
    
    
    
    6,577Unit-based
compensation
    
    
    17
    
    
    
    Contributions
for consideration for compensation to employees
    
    
    
    
    
    
    2,770Amortization of loan origination fees
    
    
    240
    
    
    
    944Bad debt expense
    
    
    64
    
    
    
    22Change in assets and liabilities:Accounts receivable
    
    
    296
    
    
    
    (2,231
    )Other receivables
    
    
    
    
    
    
    (1,509
    )Other current assets
    
    
    (94
    )
    
    
    (634
    )Due from affiliates
    
    
    (6,175
    )
    
    
    241Other assets
    
    
    101
    
    
    
    193Accounts payable
    
    
    7,782
    
    
    
    2,642Revenue payable
    
    
    (99
    )
    
    
    1,972Accrued expenses
    
    
    7,524
    
    
    
    174Other
long-term liabilities
    
    
    445
    
    
    
    80Other
    
    
    1
    
    
    
    Net cash provided by operating activities
    
    
    36,619
    
    
    
    3,183Cash flows from investing activities:Restricted
cash
    
    
    1,093
    
    
    
    (10
    )Equipment, development and leasehold costs
    
    
    (60,972
    )
    
    
    (47,019
    )Net cash used in investing activities
    
    
    (59,879
    )
    
    
    (47,029
    )Cash flows from financing activities:Proceeds
from revolver note
    
    
    48,000
    
    
    
    10,000Repayments of note borrowings
    
    
    (313
    )
    
    
    (299
    )Capital contributions
    
    
    450
    
    
    
    23,478Distributions
to unitholders
    
    
    (13,277
    )
    
    
    Refinancing costs
    
    
    (265
    )
    
    
    (1,687
    )Net cash provided by financing activities
    
    
    34,595
    
    
    
    31,492Net increase (decrease) in cash
    
    
    11,335
    
    
    
    (12,354
    )Cash and
cash equivalents, beginning of period
    
    
    169
    
    
    
    13,334Cash and
cash equivalents, end of period
    
    $
    11,504
    
    
    $
    980
  F-3




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
 (Unaudited)
 1. Formation of the Company and Description of Business
    2.
Basis of Presentation and Misappropriation, Reaudit and Restatement
     Misappropriation, Reaudit and Restatement
  Investigation
     3. Summary of Significant Accounting Policies
  Consolidation Policy
  F-4




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
   Use of Estimates
   Basis of Accounting
  Revenue Recognition
  Cash Equivalents
  Uninsured Cash Balances
  Restricted Cash
  Accounts Receivable
   Inventory
  F-5




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 Other Current Assets
  Concentration of Credit Risk
   Oil and Natural Gas Properties
    F-6




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  Other Property and Equipment
   
    
    Buildings:25 years
    
    Equipment:10 years
    
    Vehicles:7 years
  Debt Issue Costs
  Other Dispositions
  Marketable Securities
 Accounting for
Certain Investments in Debt and Equity Securities
 Income Taxes
  Fair Value Measurements
  F-7




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
       Derivative Instruments and Hedging Activities
 Accounting for Derivative Instruments and Hedging
Activities
 F-8




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
  Net Income per Limited Partner Unit
 Participating Securities and the Two-Class Method under FASB Statement No. 128
 Business Segment Reporting
  Allocation of Costs
  F-9




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  
    
    Revenues include all revenues earned by the Cherokee Basin Operations, before
elimination of intercompany sales with QRCP and its subsidiaries. Pursuant to the
midstream services agreement with an affiliate of the Company, Bluestem Pipeline, LLC
(Bluestem), for 2007 the fee was $0.50 per MMBtu of gas for gathering, dehydration and
treating services and $1.10 per MMBtu of gas for compression services, subject to annual
adjustment. Please read Note 12  Related Party Transactions.
    
    Certain common expenses of QRCPs operations and the Cherokee Basin Operations
were treated as follows:
 
    
    general and administrative expenses associated with the pipeline
operations were eliminated;
    
    Costs associated with the salt water disposal system, which were previously reported in Bluestem
operations prior to the formation of Quest Midstream in December 2006, were allocated to the
Cherokee Basin Operations; and
    
    third party costs incurred at the QRCP level that are clearly identifiable
as Cherokee Basin Operations costs, such as insurance premiums related to the
Cherokee Basin Operations and legal fees of outside counsel related to contracts
entered into or claims made by or against the Cherokee Basin Operations and salaries
and benefits of Cherokee Basin Operations executives paid by QRCP, were allocated to
the Cherokee Basin Operations.
 
    
    Non-producing acreage located outside of the Cherokee Basin and not transferred
to the Company was eliminated from the balance sheet and related expenses were
eliminated.
    
    To the extent that the common expenses described above were charged to the
Cherokee Basin Operations in the past, the reduction in expenses was retroactively
reflected with the offsetting debit to partners equity.
    
    Since the Company is not subject to entity level income taxes, no allocation of
income taxes or deferred income taxes was reflected in the financial statements.
    
    Derivative transactions remained with the Cherokee Basin Operations.
    
    Managements estimates of the expenses of the Cherokee Basin Operations on a
stand-alone basis were not expected to be significantly different from those reflected
in the statements.
 Earnings per Unit
  Recently Issued Accounting Standards
    The Fair Value Option for Financial Assets and
Financial Liabilities
  F-10




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  Business Combinations.
 Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
 Disclosures about Derivative Instruments and Hedging
Activities"
 Determination of the Useful
Life of Intangible Assets Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles
 4. Equity-Based Compensation
  F-11




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
   5. Acquisition
  6. Long-Term Debt
  June 30, 2008
    
    December 31, 2007($ in thousands)Senior credit facility
    
    $
    142,000
    
    
    $
    94,000Notes
payable to banks and finance companies, secured by equipment and
vehicles, due in installments through October 2013 with interest
ranging from 1.9% to 8.9% per annum
    
    
    396
    
    
    
    708Total long-term debt
    
    
    142,396
    
    
    
    94,708Less  current maturities
    
    
    247
    
    
    
    666Total long-term debt, net of current maturities
    
    $
    142,149
    
    
    $
    94,042
  2009
    
    $
    592010
    
    
    142,0522011
    
    
    262012
    
    
    62013
    
    
    6Thereafter
    
    
    $
    142,149
 Credit Facility
   F-12




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
   Other Long-Term Indebtedness
  7. Financial Instruments and Hedging Activities
 Oil and Natural Gas Hedging Activities
    Six MonthsEndingDecember 31,

    Years Ending December 31,2008

    2009
    2010
    2011
    2012
    Total(dollars in thousands, except per MMBtu and Bbl data)Natural Gas Swaps:Contract volumes (MMBtu)
    
    
    5,659,656
    

    
    14,629,200
    
    
    12,499,060
    
    
    2,000,004
    
    
    2,000,004
    
    
    36,787,924Weighted average
fixed price per MMBtu
(1)
    
    $
    6.98
    

    $
    7.78
    
    $
    7.42
    
    $
    8.00
    
    $
    8.11
    
    $
    7.57Fair value, net
    
    $
    (22,159
    )

    $
    (47,865
    )
    $
    (34,117
    )
    $
    (3,543
    )
    $
    (3,150
    )
    $
    (110,834
    )Natural Gas Collars:Contract volumes (MMBtu)Floor
    
    
    3,532,984
    

    
    
    
    
    
    
    
    3,000,000
    
    
    3,000,000
    
    
    9,532,984Ceiling
    
    
    3,532,984
    

    
    
    
    
    
    
    
    3,000,000
    
    
    3,000,000
    
    
    9,532,984
 F-13




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 Six MonthsEndingDecember 31,

    Years Ending December 31,2008

    2009
    2010
    2011
    2012
    Total(dollars in thousands, except per MMBtu and Bbl data)Weighted average fixed
price per MMBtu
(1)Floor
    
    $
    6.54
    

    $
    
    
    $
    
    
    $
    7.00
    
    $
    7.00
    
    $
    6.83Ceiling
    
    $
    7.53
    

    $
    
    
    $
    
    
    $
    9.40
    
    $
    9.60
    
    $
    8.77Fair value, net
    
    $
    (18,282
    )

    $
    
    
    $
    
    
    $
    (5,432
    )
    $
    (3,775
    )
    $
    (27,489
    )Total Natural Gas
Contracts(2):Contract volumes (MMBtu)
    
    
    9,192,640
    

    
    14,629,200
    
    
    12,499,060
    
    
    5,000,004
    
    
    5,000,004
    
    
    46,320,908Weighted average
fixed price per MMBtu
(1)
    
    $
    6.81
    

    $
    7.78
    
    $
    7.42
    
    $
    7.40
    
    $
    7.44
    
    $
    7.41Fair value, net
    
    $
    (40,441
    )

    $
    (47,865
    )
    $
    (34,117
    )
    $
    (8,975
    )
    $
    (6,925
    )
    $
    (138,323
    )Oil Swaps:Contract volumes (Bbl)
    
    
    18,000
    

    
    36,000
    
    
    30,000
    
    
    
    
    
    
    
    
    84,000Weighted average
fixed price per Bbl (1)
    
    $
    95.92
    

    $
    90.07
    
    $
    87.50
    
    
    
    
    
    
    
    $
    90.91Fair value, net
    
    $
    (805
    )

    $
    (1,755
    )
    $
    (1,405
    )
    $
    
    
    $
    
    
    $
    (3,965
    )
 
 (1)
    
    The prices to be realized for hedged production are expected to vary from the prices shown
due to basis.(2)
    
    Does not include basis swaps with a notional volume of 3,156,000 MMBtu for 2008. Interest Rate Hedging Activities
  Gain
(loss) from Derivative Financial Instruments
  Successor
    
    
    Predecessor
    
    
    Successor
    
    
    PredecessorThree
    
    
    SixMonths Ended
    
    
    Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007($ in thousands)Unrealized
gains (losses)
    
    $
    (96,316
    )
    
    $
    7,964
    
    
    $
    (139,344
    )
    
    $
    (6,577
    )Realized
gains (losses)
    
    
    (9,059
    )
    
    
    427
    
    
    
    (10,270
    )
    
    
    1,421Gain (loss)
from derivative financial instruments
    
    $
    (105,375
    )
    
    $
    8,391
    
    
    $
    (149,614
    )
    
    $
    (5,156
    )
 Fair
Value
 Netting andLevel
    
    
    Level
    
    
    Level
    
    
    Cash
    
    
    Total Net Fair1
    
    
    2
    
    
    3
    
    
    Collateral*
    
    
    ValueDerivative financial instruments  assets
    
    $
    
    
    
    $
    
    
    
    $
    11,373
    
    
    $
    
    
    
    $
    11,373Derivative financial instruments  liabilities
    
    $
    
    
    
    $
    (29,197
    )
    
    $
    (124,464
    )
    
    $
    
    
    
    $
    (153,661
    )Total
    
    $
    
    
    
    $
    (29,197
    )
    
    $
    (113,091
    )
    
    $
    
    
    
    $
    (142,288
    )
 
 *
    
    Amounts represent the effect of legally enforceable master netting
agreements between the Company and its counterparties and the payable
or receivable for cash collateral held or placed with the same
counterparties. F-14




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
     Balance at beginning of year
    
    $
    3,444Realized and
unrealized losses included in earnings
    
    
    (112,595
    )Purchases, sales, issuances, and settlements
    
    
    (3,940
    )Transfers into and out of Level 3
    
    
    Balance as of June 30, 2008
    
    $
    (113,091
    )
 Fair Value Measurements
  Credit Risk
  F-15




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS(Unaudited)
  Market Risk
    8. Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
 Successor
    
    
    Predecessor
    
    
    Successor
    
    
    PredecessorThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007($ in thousands)Asset retirement obligation beginning balance
    
    $
    2,056
    
    
    $
    1,477
    
    
    $
    1,700
    
    
    $
    1,410Liabilities incurred
    
    
    24
    
    
    
    41
    
    
    
    52
    
    
    
    83Liabilities settled
    
    
    (5
    )
    
    
    (2
    )
    
    
    (13
    )
    
    
    (3
    )Accretion expense
    
    
    50
    
    
    
    30
    
    
    
    96
    
    
    
    56Revisions in estimated cash flows
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    Asset retirement obligation ending balance
    
    $
    2,125
    
    
    $
    1,546
    
    
    $
    2,125
    
    
    $
    1,546
 F-16




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 9. Partners Equity
   10. Net  Loss Per Limited Partner Unit
 Participating Securities and the
Two-Class Method under FASB Statement No. 128
  Three Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2008Per Limited
    
    
    
    
    
    
    Per Limited$
    
    
    Partner Unit
    
    
    $
    
    
    Partner UnitNet  loss
    
    $
    (93,616
    )
    
    
    
    
    
    $
    (134,381
    )Less: General
partners 2%
interest in net
income (loss)
    
    
    (1,872
    )
    
    
    
    
    
    
    (2,688
    )Net  loss
available for
limited partners
    
    $
    (91,744
    )
    
    $
    (4.33
    )
    
    
    (131,693
    )
    
    $
    (6.22
    )
   11. Commitments and Contingencies
  F-17




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 et al
 et al.
     F-18




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
      12. Related Party Transactions
  Midstream
Services Agreement
 F-19




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
     Management Services Agreement.
     Omnibus Agreement.
  F-20




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
    Midstream Omnibus Agreement.
  
    
    the gathering, treating, processing and transporting of gas in North America;
    
    the transporting and fractionating of gas liquids in North America;
    
    any other midstream activities, including but not limited to crude oil storage, transportation, gathering and terminaling;
    
    constructing, buying or selling any assets related to the foregoing businesses; and
    
    any line of business other than those described in the preceding bullet points that generates qualifying income, within
the meaning of Section 7704(d) of the Code, other than any business that is primarily engaged in the exploration for and
production of oil or gas and the sale and marketing of gas and oil derived from such exploration and production
activities.
   
    
    the ownership of a passive investment of less than 5% in an entity engaged in a Restricted Business;
    
    any business in which Quest Midstream permits the Company to engage;
    
    the ownership or operation of assets used in a Restricted Business if the value of the assets is less than $4 million; and
    
    any business that the Company has given Quest Midstream the option to acquire and it has elected not to purchase.
  F-21




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS

(Unaudited)
  Contribution, Conveyance and Assumption Agreement.
  13. Subsequent Events
 PetroEdge Acquisition
   Other
     F-22




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS

(Unaudited)
 14.  Restatement
    F-23




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS

(Unaudited)
 June 30, 2008Partners equity as previously reported
    
    $
    80,110A  Effect of the Transfers
    
    
    (9,500
    )B  Reversal of hedge accounting
    
    
    3,658C  Accounting for formation of Quest Cherokee
    
    
    (15,102
    )D  Capitalization of costs in full cost pool
    
    
    (31,091
    )E  Recognition of costs in proper periods
    
    
    (2,656
    )F  Depreciation, depletion and amortization
    
    
    11,000G  Impairment of oil and gas properties
    
    
    30,719H  Other errors
    
    
    5,136Partners equity as restated
    
    $
    72,274
 Three Months Ended June
30,2008
    
    
    2007Net income
(loss) as previously reported
    
    $
    16,221
    
    
    $
    (5,231
    )A  Effect of the Transfers
    
    
    
    
    
    
    (500
    )B  Reversal of hedge accounting
    
    
    (105,179
    )
    
    
    7,689C  Accounting for formation of Quest Cherokee
    
    
    
    
    
    
    D  Capitalization of costs in full cost pool
    
    
    (3,425
    )
    
    
    (3,028
    )E  Recognition of costs in proper periods
    
    
    (1,699
    )
    
    
    (188
    )F  Depreciation, depletion and amortization
    
    
    (429
    )
    
    
    (175
    )G  Impairment of oil and gas properties
    
    
    
    
    
    
    H  Other errors
    
    
    895
    
    
    
    230Net
loss as restated
    
    $
    (93,616
    )
    
    $
    (1,203
    )
 Six Months Ended June 30,2008
    
    
    2007Net loss as previously reported
    
    $
    (1,125
    )
    
    $
    (8,924
    )A  Effect of the Transfers
    
    
    
    
    
    
    (1,000
    )B  Reversal of hedge accounting
    
    
    (124,375
    )
    
    
    (6,394
    )C  Accounting for formation of Quest Cherokee
    
    
    
    
    
    
    D  Capitalization of costs in full cost pool
    
    
    (7,084
    )
    
    
    (5,447
    )E  Recognition of costs in proper periods
    
    
    (1,116
    )
    
    
    (432
    )F  Depreciation, depletion and amortization
    
    
    (920
    )
    
    
    (655
    )G  Impairment of oil and gas properties
    
    
    
    
    
    
    H  Other errors
    
    
    239
    
    
    
    (1,157
    )Net loss as restated
    
    $
    (134,381
    )
    
    $
    (24,009
    )
  (A)
 (B)
 F-24




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  (C)
 (D)
 (E)
 (F)
 (G)
 (H)
 F-25




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS

(Unaudited)
  Three Months Ended June 30, 2008As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedRevenue:Oil and gas sales
    
    $
    39,901
    
    
    $
    9,241
    
    
    $
    49,142Other revenue (expense)
    
    
    71
    
    
    
    (71
    )
    
    
    Total revenues
    
    
    39,972
    
    
    
    9,170
    
    
    
    49,142Costs and expenses:Oil and gas production
    
    
    9,763
    
    
    
    4,135
    
    
    
    13,898Transportation expense
    
    
    8,675
    
    
    
    
    
    
    
    8,675General and administrative
    
    
    1,925
    
    
    
    (256
    )
    
    
    1,669Depreciation, depletion and amortization
    
    
    9,732
    
    
    
    1,123
    
    
    
    10,855Total costs and expenses
    
    
    30,095
    
    
    
    5,002
    
    
    
    35,097Operating income
    
    
    9,877
    
    
    
    4,168
    
    
    
    14,045Other income (expense):Gain (loss) from derivative financial instruments
    
    
    8,695
    
    
    
    (114,070
    )
    
    
    (105,375
    )Other income (expense)
    
    
    (26
    )
    
    
    71
    
    
    
    45Interest income
    
    
    90
    
    
    
    
    
    
    
    90Interest expense
    
    
    (2,415
    )
    
    
    (6
    )
    
    
    (2,421
    )Total other income (expense)
    
    
    6,344
    
    
    
    (114,005
    )
    
    
    (107,661
    )Net income (loss)
    
    $
    16,221
    
    
    $
    (109,837
    )
    
    $
    (93,616
    )General
partners interest in net income (loss)
    
    
    324
    
    
    
    (2,196
    )
    
    
    (1,872
    )Limited partners interest in net income (loss)
    
    
    15,897
    
    
    
    (107,641
    )
    
    
    (91,744
    )Net income
(loss) per limited partner unit (basic and duluted)
    
    $
    0.75
    
    
    $
    (5.08
    )
    
    $
    (4.33
    )Weighted average limited partner units outstanding:Common units (basic and diluted)
    
    
    12,331,521
    
    
    
    
    
    
    
    12,331,521Subordinated units (basic and diluted)
    
    
    8,857,981
    
    
    
    
    
    
    
    8,857,981
 F-26




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 Six Months Ended June 30, 2008As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedRevenue:Oil and gas sales
    
    $
    77,252
    
    
    $
    10,202
    
    
    $
    87,454Other revenue (expense)
    
    
    120
    
    
    
    (120
    )
    
    
    Total revenues
    
    
    77,372
    
    
    
    10,082
    
    
    
    87,454Costs and expenses:Oil and gas production
    
    
    17,944
    
    
    
    6,339
    
    
    
    24,283Transportation expense
    
    
    17,338
    
    
    
    
    
    
    
    17,338General and administrative
    
    
    4,383
    
    
    
    384
    
    
    
    4,767Depreciation, depletion and amortization
    
    
    19,242
    
    
    
    2,312
    
    
    
    21,554Total costs and expenses
    
    
    58,907
    
    
    
    9,035
    
    
    
    67,942Operating income
    
    
    18,465
    
    
    
    1,047
    
    
    
    19,512Other income (expense):Loss from derivative financial instruments
    
    
    (15,136
    )
    
    
    (134,478
    )
    
    
    (149,614
    )Other income (expense)
    
    
    (6
    )
    
    
    120
    
    
    
    114Interest income
    
    
    107
    
    
    
    
    
    
    
    107Interest expense
    
    
    (4,555
    )
    
    
    55
    
    
    
    (4,500
    )Total other income (expense)
    
    
    (19,590
    )
    
    
    (134,303
    )
    
    
    (153,893
    )Net loss
    
    $
    (1,125
    )
    
    $
    (133,256
    )
    
    $
    (134,381
    )General partners interest in loss
    
    
    (23
    )
    
    
    (2,665
    )
    
    
    (2,688
    )Limited partners interest in loss
    
    
    (1,102
    )
    
    
    (130,591
    )
    
    
    (131,693
    )Net loss per limited partner unit  (basic and diluted)
    
    $
    (0.05
    )
    
    $
    (6.17
    )
    
    $
    (6.22
    )Weighted average limited partner units outstanding:Common units (basic and diluted)
    
    
    12,331,521
    
    
    
    
    
    
    
    12,331,521Subordinated units (basic and diluted)
    
    
    8,857,981
    
    
    
    
    
    
    
    8,857,981
 F-27




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  Six Months Ended June 30, 2008As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedCash flows from operating activities:Net loss
    
    $
    (1,125
    )
    
    $
    (133,256
    )
    
    $
    (134,381
    )Adjustments to reconcile net income (loss) to cash provided by operations:Depreciation,
depletion and amortization
    
    
    20,586
    
    
    
    968
    
    
    
    21,554Gain (loss)
from derivative financial instruments
    
    
    14,969
    
    
    
    124,375
    
    
    
    139,344Unit based compensation
    
    
    
    
    
    
    17
    
    
    
    17Capital contributions for director fees
    
    
    272
    
    
    
    (272
    )
    
    
    Capital contributions for employees
    
    
    1,555
    
    
    
    (1,555
    )
    
    
    Amortization of loan origination fees
    
    
    456
    
    
    
    (216
    )
    
    
    240Bad debt expense
    
    
    10
    
    
    
    54
    
    
    
    64(Gain) loss on sale of assets
    
    
    (21
    )
    
    
    21
    
    
    
    Change in assets and liabilities:Restricted cash
    
    
    1,094
    
    
    
    (1,094
    )
    
    
    Accounts receivable, trade
    
    
    436
    
    
    
    (140
    )
    
    
    296Other receivables
    
    
    (72
    )
    
    
    72
    
    
    
    Other current assets
    
    
    (444
    )
    
    
    350
    
    
    
    (94
    )Inventory
    
    
    (4,788
    )
    
    
    4,788
    
    
    
    Due from affiliates
    
    
    (12,462
    )
    
    
    6,287
    
    
    
    (6,175
    )Other assets
    
    
    
    
    
    
    101
    
    
    
    101Accounts payable
    
    
    3,539
    
    
    
    4,243
    
    
    
    7,782Revenue payable
    
    
    
    
    
    
    (99
    )
    
    
    (99
    )Accrued expenses
    
    
    (167
    )
    
    
    7,691
    
    
    
    7,524Other long-term liabilities
    
    
    
    
    
    
    445
    
    
    
    445Other
    
    
    
    
    
    
    1
    
    
    
    1Net cash provided by operating activities
    
    
    23,838
    
    
    
    12,781
    
    
    
    36,619Cash flows from investing activities:Restricted cash
    
    
    
    
    
    
    1,093
    
    
    
    1,093Equipment, development and leasehold
    
    
    (54,451
    )
    
    
    (6,521
    )
    
    
    (60,972
    )Net cash used in investing activities
    
    
    (54,451
    )
    
    
    (5,428
    )
    
    
    (59,879
    )Cash flows from financing activities:Proceeds from revolver note
    
    
    48,000
    
    
    
    
    
    
    
    48,000Repayments of note borrowings
    
    
    (312
    )
    
    
    (1
    )
    
    
    (313
    )Capital contributions (distributions)
    
    
    (5,590
    )
    
    
    6,040
    
    
    
    450Distributions to unitholders
    
    
    
    
    
    
    (13,277
    )
    
    
    (13,277
    )Proceeds from issuance of common units
    
    
    (201
    )
    
    
    201
    
    
    
    Refinancing costs
    
    
    (116
    )
    
    
    (149
    )
    
    
    (265
    )Change in other long-term liabilities
    
    
    167
    
    
    
    (167
    )
    
    
    Net cash provided by financing activities
    
    
    41,948
    
    
    
    (7,353
    )
    
    
    34,595Net increase (decrease) in cash
    
    
    11,335
    
    
    
    
    
    
    
    11,335Cash and
cash equivalents  beginning of period
    
    
    10,170
    
    
    
    (10,001
    )
    
    
    169Cash and
cash equivalents end of period
    
    $
    21,505
    
    
    $
    (10,001
    )
    
    $
    11,504
 F-28




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  June 30, 2008As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedASSETSCurrent assets:Cash and
cash equivalents
    
    $
    21,505
    
    
    $
    (10,001
    )
    
    $
    11,504Restricted cash
    
    
    112
    
    
    
    
    
    
    
    112Accounts receivable, trade
    
    
    
    
    
    
    (274
    )
    
    
    (274
    )Due from affiliates
    
    
    18,948
    
    
    
    2,647
    
    
    
    21,595Other current assets
    
    
    3,367
    
    
    
    (182
    )
    
    
    3,185Inventory
    
    
    9,845
    
    
    
    
    
    
    
    9,845Current
derivative financial instrument assets
    
    
    151
    
    
    
    1,686
    
    
    
    1,837Total current assets
    
    
    53,928
    
    
    
    (6,124
    )
    
    
    47,804Property and equipment, net
    
    
    18,665
    
    
    
    143
    
    
    
    18,808Oil and gas
properties under full cost method of accounting, net
    
    
    332,906
    
    
    
    (7,263
    )
    
    
    325,643Other assets, net
    
    
    3,185
    
    
    
    
    
    
    
    3,185Long-term
derivative financial instrument assets
    
    
    
    
    
    
    9,536
    
    
    
    9,536Total assets
    
    $
    408,684
    
    
    $
    (3,708
    )
    
    $
    404,976LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    18,815
    
    
    $
    5,939
    
    
    $
    24,754Accrued expenses
    
    
    17,448
    
    
    
    (9,186
    )
    
    
    8,262Due to affiliates
    
    
    
    
    
    
    1,504
    
    
    
    1,504Current portion of notes payable
    
    
    247
    
    
    
    
    
    
    
    247Current
derivative financial instrument liabilities
    
    
    66,379
    
    
    
    1,976
    
    
    
    68,355Total current liabilities
    
    
    102,889
    
    
    
    233
    
    
    
    103,122Non-current liabilities:Long-term
derivative financial instrument liabilities
    
    
    81,597
    
    
    
    3,709
    
    
    
    85,306Asset retirement obligation
    
    
    1,939
    
    
    
    186
    
    
    
    2,125Notes payable
    
    
    142,149
    
    
    
    
    
    
    
    142,149Non-current liabilities
    
    
    225,685
    
    
    
    3,895
    
    
    
    229,580Total liabilities
    
    
    328,574
    
    
    
    4,128
    
    
    
    332,702Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    Partners equity:Partners equity
    
    
    208,921
    
    
    
    (208,921
    )
    
    
    Accumulated
other comprehensive loss
    
    
    (128,811
    )
    
    
    128,811
    
    
    
    Common unitholders
    
    
    
    
    
    
    78,392
    
    
    
    78,392Subordinated unitholder  affiliate
    
    
    
    
    
    
    (5,821
    )
    
    
    (5,821
    )General partner  affiliate
    
    
    
    
    
    
    (297
    )
    
    
    (297
    )Total partners equity
    
    
    80,110
    
    
    
    (7,836
    )
    
    
    72,274Total liabilities and partners equity
    
    $
    408,684
    
    
    $
    (3,708
    )
    
    $
    404,976
 F-29




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  Three Months Ended June 30, 2007As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedRevenue:Oil and gas sales
    
    $
    27,867
    
    
    $
    (297
    )
    
    $
    27,570Other revenue (expense)
    
    
    (19
    )
    
    
    19
    
    
    
    Total revenues
    
    
    27,848
    
    
    
    (278
    )
    
    
    27,570Costs and expenses:Oil and gas production
    
    
    7,740
    
    
    
    2,116
    
    
    
    9,856Transportation
expense
    
    
    6,809
    
    
    
    111
    
    
    
    6,920General and administrative
    
    
    4,093
    
    
    
    240
    
    
    
    4,333Depreciation, depletion and amortization
    
    
    7,326
    
    
    
    820
    
    
    
    8,146Misappropriation of funds
    
    
    
    
    
    
    500
    
    
    
    500Total costs and expenses
    
    
    25,968
    
    
    
    3,787
    
    
    
    29,755Operating income (loss)
    
    
    1,880
    
    
    
    (4,065
    )
    
    
    (2,185
    )Other income (expense):Gain from derivative financial instruments
    
    
    279
    
    
    
    8,112
    
    
    
    8,391Other income (expense)
    
    
    (304
    )
    
    
    (19
    )
    
    
    (323
    )Interest income
    
    
    103
    
    
    
    
    
    
    
    103Interest expense
    
    
    (7,189
    )
    
    
    
    
    
    
    (7,189
    )Total other income (expense)
    
    
    (7,111
    )
    
    
    8,093
    
    
    
    982Net income (loss)
    
    $
    (5,231
    )
    
    $
    4,028
    
    
    $
    (1,203
    )
 F-30




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS(Unaudited)
 Six Months Ended June 30, 2007As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedRevenue:Oil and gas sales
    
    $
    53,416
    
    
    $
    (872
    )
    
    $
    52,544Other revenue (expense)
    
    
    (32
    )
    
    
    32
    
    
    
    Total revenues
    
    
    53,384
    
    
    
    (840
    )
    
    
    52,544Costs and expenses:Oil and gas production
    
    
    14,967
    
    
    
    3,937
    
    
    
    18,904Transportation
expense
    
    
    13,170
    
    
    
    111
    
    
    
    13,281General and administrative
    
    
    5,846
    
    
    
    861
    
    
    
    6,707Depreciation, depletion and amortization
    
    
    14,063
    
    
    
    1,888
    
    
    
    15,951Misappropriation of funds
    
    
    
    
    
    
    1,000
    
    
    
    1,000Total costs and expenses
    
    
    48,046
    
    
    
    7,797
    
    
    
    55,843Operating income (loss)
    
    
    5,338
    
    
    
    (8,637
    )
    
    
    (3,299
    )Other income (expense):Loss from derivative financial instruments
    
    
    (185
    )
    
    
    (4,971
    )
    
    
    (5,156
    )Other income (expense)
    
    
    (197
    )
    
    
    (32
    )
    
    
    (229
    )Interest income
    
    
    280
    
    
    
    
    
    
    
    280Interest expense
    
    
    (14,160
    )
    
    
    (1,445
    )
    
    
    (15,605
    )Total other income (expense)
    
    
    (14,262
    )
    
    
    (6,448
    )
    
    
    (20,710
    )Net loss
    
    $
    (8,924
    )
    
    $
    (15,085
    )
    
    $
    (24,009
    )
 F-31




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  Six Months Ended June 30, 2007As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    

As RestatedCash flows from operating activities:Net loss
    
    $
    (8,924
    )
    
    $
    (15,085
    )
    
    $
    (24,009
    )Adjustments to reconcile net loss to cash
provided by operations:Depreciation,
depletion and amortization
    
    
    15,316
    
    
    
    635
    
    
    
    15,951Change in derivative fair value
    
    
    185
    
    
    
    6,392
    
    
    
    6,577Capital contributions for director fees
    
    
    (25
    )
    
    
    2,795
    
    
    
    2,770Capital contributions for employees
    
    
    2,343
    
    
    
    (2,343
    )
    
    
    Amortization of loan origination fees
    
    
    1,024
    
    
    
    (80
    )
    
    
    944Amortization of gas swap fees
    
    
    125
    
    
    
    (125
    )
    
    
    Bad debt expense
    
    
    
    
    
    
    22
    
    
    
    22(Gain) loss on sale of assets
    
    
    240
    
    
    
    (240
    )
    
    
    Change in assets and liabilities:Restricted cash
    
    
    (10
    )
    
    
    10
    
    
    
    Accounts receivable, trade
    
    
    (2,602
    )
    
    
    371
    
    
    
    (2,231
    )Other receivables
    
    
    (1,143
    )
    
    
    (366
    )
    
    
    (1,509
    )Other current assets
    
    
    (591
    )
    
    
    (43
    )
    
    
    (634
    )Inventory
    
    
    (1,083
    )
    
    
    1,083
    
    
    
    Due from affiliates
    
    
    
    
    
    
    241
    
    
    
    241Other assets
    
    
    
    
    
    
    193
    
    
    
    193Accounts payable
    
    
    (3,496
    )
    
    
    6,138
    
    
    
    2,642Revenue payable
    
    
    2,524
    
    
    
    (552
    )
    
    
    1,972Accrued expenses
    
    
    (1,344
    )
    
    
    1,518
    
    
    
    174Other
long-term liabilities
    
    
    
    
    
    
    80
    
    
    
    80Net cash provided by operating activities
    
    
    2,539
    
    
    
    644
    
    
    
    3,183Cash flows from investing activities:Restricted cash
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )Increase in other assets
    
    
    (10
    )
    
    
    10
    
    
    
    Equipment, development and leasehold
    
    
    (45,466
    )
    
    
    (1,553
    )
    
    
    (47,019
    )Proceeds from sale of property and equipment
    
    
    (20
    )
    
    
    20
    
    
    
    Net cash used in investing activities
    
    
    (45,496
    )
    
    
    (1,533
    )
    
    
    (47,029
    )Cash flows from financing activities:Proceeds from revolver note
    
    
    10,000
    
    
    
    
    
    
    
    10,000Repayments of note borrowings
    
    
    (300
    )
    
    
    1
    
    
    
    (299
    )Capital contributions (distributions)
    
    
    23,511
    
    
    
    (33
    )
    
    
    23,478Refinancing costs
    
    
    (1,688
    )
    
    
    1
    
    
    
    (1,687
    )Change in other long-term liabilities
    
    
    80
    
    
    
    (80
    )
    
    
    Net cash provided by financing activities
    
    
    31,603
    
    
    
    (111
    )
    
    
    31,492Net increase (decrease) in cash
    
    
    (11,354
    )
    
    
    (1,000
    )
    
    
    (12,354
    )Cash and
cash equivalents, beginning of period
    
    
    21,334
    
    
    
    (8,000
    )
    
    
    13,334Cash and
cash equivalents, end of period
    
    $
    9,980
    
    
    $
    (9,000
    )
    
    $
    980
 F-32




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Business of Issuer
  Restatement
  Significant Developments During the Six Months Ended June 30, 2008
     Recent Developments
 PetroEdge Acquisition
    ths
   -9-




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##### Table of Contents



Results of Operations
  Overview.
 Three Months
    
    
    
    
    
    
    
    
    
    Six MonthsEnded June 30,
    
    
    
    
    
    
    
    
    
    Ended June 30,Successor
    
    Predecessor
    
    Increase
    
    Successor
    
    Predecessor
    
    Increase2008
    
    2007
    
    (Decrease)
    
    2008
    
    2007
    
    (Decrease)($ in thousands)Oil and gas sales
    
    $
    49,142
    
    
      $
    27,570
    
    
      $
    21,572
    
    
    
    78.2
    %
    
    $
    87,454
    
    
      $
    52,544
    
    
      $
    34,910
    
    
    
    66.4
    %Oil and gas production costs
    
    $
    13,898
    
    
      $
    9,856
    
    
      $
    4,042
    
    
    
    41.0
    %
    
      $
    24,283
    
    
      $
    18,904
    
    
      $
    5,379
    
    
    
    28.5
    %Transportation expense
(related affiliate)
    
    $
    8,675
    
    
      $
    6,920
    
    
      $
    1,755
    
    
    
    25.4
    %
    
      $
    17,338
    
    
      $
    13,281
    
    
      $
    4,057
    
    
    
    30.5
    %Depreciation, depletion and
amortization
    
    $
    10,855
    
    
      $
    8,146
    
    
      $
    2,709
    
    
    
    33.3
    %
    
      $
    21,554
    
    
      $
    15,951
    
    
      $
    5,603
    
    
    
    35.1
    %General and administrative
expense
    
    $
    1,669
    
    
      $
    4,333
    
    
    $
    (2,664
    )
    
    
    (61.5
    %)
    
      $
    4,767
    
    
      $
    6,707
    
    
    $
    (1,940
    )
    
    
    (28.9
    %)Gain (loss) from derivative financial instrument
    
    $
    (105,375
    )
    
      $
    8,391
    
    
      $
    (113,766
    )
    
    
    (1,355.8
    %)
    
    $
    (149,614
    )
    
    $
    (5,156
    )
    
    $
    (144,458
    )
    
    
    (2,801.7
    %)Interest expense, net
    
    $
    2,331
    
    
      $
    7,086
    
    
    $
    (4,755
    )
    
    
    (67.1
    %)
    
      $
    4,393
    
    
      $
    15,325
    
    
    $
    (10,932
    )
    
    
    (71.3
    %)
 -10-




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##### Table of Contents



Production.
 Three Months
    
    
    
    
    
    
    
    
    
    Six MonthsEnded June 30,
    
    
    
    
    
    
    
    
    
    Ended June 30,Increase
    
    
    
    
    
    
    
    
    
    Increase2008
    
    2007
    
    (Decrease)
    
    2008
    
    2007
    
    (Decrease)Production Data (net):Natural gas production
(MMcf)
    
    
    5,095
    
    
    
    4,112
    
    
    
    983
    
    
    
    23.9
    %
    
    
    10,061
    
    
    
    7,836
    
    
    
    2,225
    
    
    
    28.4
    %Oil
production (BBbl)
    
    
    17
    
    
    
    2
    
    
    
    15
    
    
    
    750.0
    %
    
    
    28
    
    
    
    4
    
    
    
    24
    
    
    
    600.0
    %Total production (MMcfe)
    
    
    5,197
    
    
    
    4,124
    
    
    
    1,073
    
    
    
    26.0
    %
    
    
    10,229
    
    
    
    7,860
    
    
    
    2,369
    
    
    
    30.1
    %Average daily
production (MMcfe/d)
    
    
    57.1
    
    
    
    45.3
    
    
    
    11.8
    
    
    
    26.0
    %
    
    
    56.2
    
    
    
    43.4
    
    
    
    12.8
    
    
    
    29.5
    %Average Sales Price per
Unit:Natural
gas equivalents (Mcfe)
    
    $
    9.46
    
    
    $
    6.69
    
    
    $
    2.77
    
    
    
    41.4
    %
    
    $
    8.55
    
    
    $
    6.68
    
    
    $
    1.87
    
    
    
    28.0
    %Natural gas (Mcf)
    
    $
    9.28
    
    
    $
    6.68
    
    
    $
    2.60
    
    
    
    38.9
    %
    
    $
    8.40
    
    
    $
    6.68
    
    
    $
    1.72
    
    
    
    25.7
    %Oil (Bbl)
    
    $
    111.25
    
    
    $
    55.32
    
    
    $
    55.93
    
    
    
    101.1
    %
    
    $
    105.96
    
    
    $
    52.79
    
    
    $
    53.17
    
    
    
    100.7
    %Average Unit Costs per
Mcfe:Production costs
    
    $
    2.67
    
    
    $
    2.39
    
    
    $
    0.28
    
    
    
    11.7
    %
    
    $
    2.37
    
    
    $
    2.41
    
    
    $
    (0.04
    )
    
    
    (1.7
    )%Transportation expense
(related affiliate)
    
    $
    1.67
    
    
    $
    1.68
    
    
    $
    (0.01
    )
    
    
    (0.6
    )%
    
    $
    1.69
    
    
    $
    1.69
    
    
    $
    
    
    
    
    
    %Depreciation, depletion
and amortization
    
    $
    2.09
    
    
    $
    1.98
    
    
    $
    0.11
    
    
    
    5.6
    %
    
    $
    2.11
    
    
    $
    2.03
    
    
    $
    0.08
    
    
    
    3.9
    %General and
administrative expense
    
    $
    0.32
    
    
    $
    1.05
    
    
    $
    (0.73
    )
    
    
    (69.5
    )%
    
    $
    0.47
    
    
    $
    0.75
    
    
    $
    (0.28
    )
    
    
    (37.3
    )%Interest
expense, net
    
    $
    0.45
    
    
    $
    1.72
    
    
    $
    (1.27
    )
    
    
    (73.8
    )%
    
    $
    0.43
    
    
    $
    1.95
    
    
    $
    (1.52
    )
    
    
    (77.9
    )%
 Three
Months Ended June 30, 2008 Compared with the Three Months Ended
June 30, 2007
 Oil and Gas Sales.
 Operating Expenses.
  -11-




---



##### Table of Contents



Depreciation, Depletion and Amortization.
 General and Administrative Expense.
 Gain
(Loss) From  Derivative Financial Instruments.
 Interest
Expense, Net.
 Six
Months Ended June 30, 2008 Compared with the Six Months Ended
June 30, 2007
 Oil and Gas Sales.
 Operating Expenses.
 -12-




---



##### Table of Contents



Depreciation, Depletion and Amortization.
 General
and Administrative Expense.
 Loss From Derivative Financial Instruments.
 Interest
Expense, Net.
 Net Loss
   -13-




---



##### Table of Contents



Liquidity and Capital Resources
 Liquidity
     th th th
 Capital Expenditures
   
    
    maintenance capital expenditures, which are those capital expenditures
required to maintain our production levels and asset base over the
long term; and
 -14-




---



##### Table of Contents




    
    expansion capital expenditures, which are those capital expenditures
that we expect will increase our production of our gas and oil
properties and our asset base over the long term.
    Cash Flows
 Cash
Flows from Operating Activities.
 Cash
Flows Used in Investing Activities.
 Cash
Flows from Financing Activities.
 Contractual Obligations
  Payments
Due by PeriodLess
    
    
    
    
    
    
    
    
    
    
    MoreThan 1
    
    
    1-3
    
    
    4-5
    
    
    Than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years($ in thousands)Revolving credit facility
    
    $
    142,000
    
    
    $
    
    
    
    $
    142,000
    
    
    $
    
    
    
    $
    Notes payable
    
    
    396
    
    
    
    247
    
    
    
    111
    
    
    
    32
    
    
    
    6Interest expense obligation (1)
    
    
    22,720
    
    
    
    9,734
    
    
    
    12,983
    
    
    
    3
    
    
    
    Lease obligations
    
    
    498
    
    
    
    110
    
    
    
    202
    
    
    
    186
    
    
    
    Drilling contractor
    
    
    856
    
    
    
    856
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    166,470
    
    
    $
    10,947
    
    
    $
    155,296
    
    
    $
    221
    
    
    $
    6
 
 (1)
    
    The interest payment obligation was computed using the LIBOR interest rate as of June
30, 2008. If the interest rate were to change 1%, then the total interest payment
obligation would change by $1.4 million. -15-




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Critical Accounting Policies and Estimates
  Off-Balance Sheet Arrangements
  Cautionary Statements for Purpose of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
  
    
    projections and estimates concerning the timing and success of specific projects;
    
    financial position;
    
    business strategy;
    
    budgets;
    
    amount, nature and timing of capital expenditures;
    
    drilling of wells;
    
    acquisition and development of oil and natural gas properties;
    
    timing and amount of future production of oil and natural gas;
    
    operating costs and other expenses;
    
    estimated future net revenues from  oil and natural gas reserves and the present value thereof;
    
    cash flow and anticipated liquidity; and
    
    other plans and objectives for future operations.
  -16-




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
    
    our ability to implement our business strategy;
    
    the extent of our success in discovering, developing and producing reserves, including the risks inherent
in exploration and development drilling, well completion and other development activities;
    
    fluctuations in the commodity prices for crude oil and natural gas;
    
    engineering and mechanical or technological difficulties with operational equipment, in well completions
and workovers, and in drilling new wells;
    
    land issues;
    
    the effects of government regulation and permitting and other legal requirements;
    
    labor problems;
    
    environmental related problems;
    
    the uncertainty inherent in estimating future  oil and natural gas production or reserves;
    
    production variances from expectations;
    
    the substantial capital expenditures required for the drilling of wells and the related need to fund such
capital requirements through commercial banks and/or public securities markets;
    
    disruptions, capacity constraints in or other limitations on Quest Midstreams pipeline systems;
    
    costs associated with perfecting title for  oil and natural gas rights in some of our properties;
    
    the need to develop and replace reserves;
    
    competition;
    
    dependence upon key personnel;
    
    the lack of liquidity of our equity securities;
    
    operating hazards attendant to the  oil and natural gas business;
    
    down-hole drilling and completion risks that are generally not recoverable from third parties or insurance;
    
    potential mechanical failure or under-performance of significant wells;
    
    climatic conditions;
    
    natural disasters;
    
    acts of terrorism;
    
    availability and cost of material and equipment;
    
    delays in anticipated start-up dates;
    
    our ability to find and retain skilled personnel;
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
    
    availability of capital;
    
    the strength and financial resources of our competitors; and
    
    general economic conditions.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Six MonthsEndingDecember 31,
    
    Years Ending December 31,2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    Total(dollars in thousands, except per MMBtu and Bbl data)Natural Gas Swaps:Contract volumes (MMBtu)
    
    
    5,659,656
    
    
    
    14,629,200
    
    
    
    12,499,060
    
    
    
    2,000,004
    
    
    
    2,000,004
    
    
    
    36,787,924Weighted average
fixed price per MMBtu
(1)
    
    $
    6.98
    
    
    $
    7.78
    
    
    $
    7.42
    
    
    $
    8.00
    
    
    $
    8.11
    
    
    $
    7.57Fair value, net
    
    $
    (22,159
    )
    
    $
    (47,865
    )
    
    $
    (34,117
    )
    
    $
    (3,543
    )
    
    $
    (3,150
    )
    
    $
    (110,834
    )Natural Gas Collars:Contract volumes (MMBtu)Floor
    
    
    3,532,984
    
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    9,532,984Ceiling
    
    
    3,532,984
    
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    9,532,984Weighted average fixed
price per MMBtu
(1)Floor
    
    $
    6.54
    
    
    $
    
    
    
    $
    
    
    
    $
    7.00
    
    
    $
    7.00
    
    
    $
    6.83Ceiling
    
    $
    7.53
    
    
    $
    
    
    
    $
    
    
    
    $
    9.40
    
    
    $
    9.60
    
    
    $
    8.77Fair value, net
    
    $
    (18,282
    )
    
    $
    
    
    
    $
    
    
    
    $
    (5,432
    )
    
    $
    (3,775
    )
    
    $
    (27,489
    )Total Natural Gas
Contracts(2):Contract volumes (MMBtu)
    
    
    9,192,640
    
    
    
    14,629,200
    
    
    
    12,499,060
    
    
    
    5,000,004
    
    
    
    5,000,004
    
    
    
    46,320,908Weighted average
fixed price per MMBtu
(1)
    
    $
    6.81
    
    
    $
    7.78
    
    
    $
    7.42
    
    
    $
    7.40
    
    
    $
    7.44
    
    
    $
    7.41Fair value, net
    
    $
    (40,441
    )
    
    $
    (47,865
    )
    
    $
    (34,117
    )
    
    $
    (8,975
    )
    
    $
    (6,925
    )
    
    $
    (138,323
    )Oil Swaps:Contract volumes (Bbl)
    
    
    18,000
    
    
    
    36,000
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    84,000Weighted average
fixed price per Bbl (1)
    
    $
    95.92
    
    
    $
    90.07
    
    
    $
    87.50
    
    
    
    
    
    
    
    
    
    
    $
    90.91Fair value, net
    
    $
    (805
    )
    
    $
    (1,755
    )
    
    $
    (1,405
    )
    
    $
    
    
    
    $
    
    
    
    $
    (3,965
    )
 
 (1)
    
    The prices to be realized for hedged production are expected to vary from the prices shown
due to basis.(2)
    
    Does not include basis swaps with a notional volume of 3,156,000 MMBtu for 2008.  
 Item 4(T). Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
   -18-




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(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.
  (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.
 -19-




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(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.(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.
  -20-




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Remediation Plan
       Changes
in Internal Controls
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
 Form 10-K.
 -21-




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Default Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  -22-




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Item 6. Exhibits
 2.1*
    
    Agreement for Purchase and Sale, dated July 11, 2008, by and among
Quest Resource Corporation, Quest Eastern Resource LLC and Quest
Cherokee LLC (incorporated herein by reference to Exhibit 2.1 to
Quest Energy Partners, L.P.s Current Report on Form 8-K filed on
July 16, 2008).3.1*
    
    Amendment No. 1 to First Amended and Restated Agreement of Limited
Partnership of Quest Energy Partners, L.P., effective as of January
1, 2007, by Quest Energy GP, LLC (incorporated herein by reference
to Exhibit 3.1 to Quest Energy Partners, L.P.s Current Report on
Form 8-K filed on April 11, 2008).3.2*
    
    First Amended and Restated Agreement of Limited Partnership of Quest
Energy Partners, L.P., dated as of November 15, 2007, by and between
Quest Energy GP, LLC and Quest Resource Corporation (incorporated
herein by reference to Exhibit 3.1 to Quest Energy Partners, L.P.s
Current Report on Form 8-K filed on November 21, 2007).10.1*
    
    First Amendment to Amended and Restated Credit Agreement, effective
as of April 15, 2008, by and among Quest Cherokee, LLC, Royal Bank
of Canada, KeyBank National Association and the lenders party
thereto (incorporated herein by reference to Exhibit 10.1 to Quest
Energy Partners, L.P.s Current Report on Form 8-K filed on April
23, 2008).10.2*
    
    Second Lien Senior Term Loan Agreement, dated as of July 11, 2008,
by and among Quest Cherokee, LLC, Quest Energy Partners, L.P., Royal
Bank of Canada, KeyBank National Association, Société Générale, the
lenders party thereto and RBC Capital Markets (incorporated herein
by reference to Exhibit 10.1 to Quest Energy Partners, L.P.s
Current Report on Form 8-K filed on July 16, 2008).10.3*
    
    Guaranty for Second Lien Term Loan Agreement by Quest Cherokee
Oilfield Service, LLC in favor of Royal Bank of Canada, dated as of
July 11, 2008 (incorporated herein by reference to Exhibit 10.2 to
Quest Energy Partners, L.P.s Current Report on Form 8-K filed on
July 16, 2008).10.4*
    
    Guaranty for Second Lien Term Loan Agreement by Quest Energy
Partners, L.P. in favor of Royal Bank of Canada, dated as of
July 11, 2008 (incorporated herein by reference to Exhibit 10.3 to
Quest Energy Partners, L.P.s Current Report on Form 8-K filed on
July 16, 2008).10.5*
    
    Second Lien Senior Pledge and Security Agreement for Second Lien
Term Loan Agreement by Quest Cherokee Oilfield Service, LLC for the
benefit of Royal Bank of Canada, dated as of July 11, 2008
(incorporated herein by reference to Exhibit 10.4 to Quest Energy
Partners, L.P.s Current Report on Form 8-K filed on July 16, 2008).10.6*
    
    Second Lien Senior Pledge and Security Agreement for Second Lien
Term Loan Agreement by Quest Energy Partners, L.P. for the benefit
of Royal Bank of Canada, dated as of July 11, 2008 (incorporated
herein by reference to Exhibit 10.5 to Quest Energy Partners, L.P.s
Current Report on Form 8-K filed on July 16, 2008).10.7*
    
    Second Lien Senior Pledge and Security Agreement for Second Lien
Term Loan Agreement by Quest Cherokee, LLC for the benefit of Royal
Bank of Canada, dated as of July 11, 2008 (incorporated herein by
reference to Exhibit 10.6 to Quest Energy Partners, L.P.s Current
Report on Form 8-K filed on July 16, 2008).10.8*
    
    Intercreditor Agreement, dated as of July 11, 2008, by and between
Royal Bank of Canada and Quest Cherokee, LLC (incorporated herein by
reference to Exhibit 10.7 to Quest Energy Partners, L.P.s Current
Report on Form 8-K filed on July 16, 2008).31.1
    
    Certification by Chief 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.
 -23-




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31.2
    
    Certification by Chief 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 Chief 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Incorporated by reference. -24-




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SIGNATURES
 th
 QUEST ENERGY PARTNERS, L.P.By:
    Quest Energy GP, LLC, its general partnerBy:
    /s/ David C. LawlerDavid C. LawlerChief Executive OfficerBy:
    /s/ Eddie M. LeBlanc, IIIEddie M. LeBlanc, IIIChief Financial Officer -25-