##### 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 September 30, 2009
 Commission file number: 001-33787
 QUEST ENERGY PARTNERS, L.P.
 (Exact name of registrant specified in its charter)
 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
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



QUEST ENERGY PARTNERS, L.P.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
    
    
    F-1Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 2009 and 2008
    
    
    F-2Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2009 and 2008
    
    
    F-3Condensed
Consolidated Statement of Partners Equity/(Deficit) for the Nine Months
Ended September 30, 2009
    
    
    F-4Notes to Condensed Consolidated Financial Statements
    
    
    F-5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    1Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    10Item 4. Controls and Procedures
    
    
    11PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    15Item 1A. Risk Factors
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36EX-31.1EX-31.2EX-32.1EX-32.2
  i




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 QUEST ENERGY PARTNERS, L.P AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands, except unit data)
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,011
    
    
    $
    3,706Restricted cash
    
    
    301
    
    
    
    112Accounts receivable  trade, net
    
    
    8,323
    
    
    
    11,696Other receivables
    
    
    1,850
    
    
    
    2,590Due from affiliates
    
    
    3,890
    
    
    
    Other current assets
    
    
    576
    
    
    
    2,031Inventory
    
    
    8,329
    
    
    
    8,782Current derivative financial instrument assets
    
    
    19,625
    
    
    
    42,995Total current assets
    
    
    60,905
    
    
    
    71,912Property and equipment, net
    
    
    15,684
    
    
    
    17,367Oil and gas properties under full cost method of accounting, net
    
    
    36,064
    
    
    
    151,120Other assets, net
    
    
    2,628
    
    
    
    4,167Long-term derivative financial instrument assets
    
    
    4,653
    
    
    
    30,836Total assets
    
    $
    119,934
    
    
    $
    275,402LIABILITIES AND EQUITY/(DEFICIT)Current liabilities:Accounts payable
    
    $
    4,867
    
    
    $
    7,380Revenue payable
    
    
    3,391
    
    
    
    3,221Accrued expenses
    
    
    3,011
    
    
    
    1,770Due to affiliates
    
    
    
    
    
    
    4,697Current portion of notes payable
    
    
    29,865
    
    
    
    41,882Current derivative financial instrument liabilities
    
    
    1,413
    
    
    
    12Total current liabilities
    
    
    42,547
    
    
    
    58,962Long-term derivative financial instrument liabilities
    
    
    5,294
    
    
    
    4,230Asset retirement obligations
    
    
    4,943
    
    
    
    4,592Notes payable
    
    
    160,054
    
    
    
    189,090Commitments and contingenciesPartners equity/(deficit):Common unitholders  Issued  12,331,521 at September
30, 2009 and December 31, 2008 (9,100,000  public;
3,231,521  affiliate); outstanding  12,316,521 at
September 30, 2009 and December 31, 2008; respectively
(9,100,000  public; 3,216,521  affiliate)
    
    
    (17,697
    )
    
    
    45,832Subordinated unitholder  affiliate; 8,857,981 units
issued and outstanding at September 30, 2009 and December
31, 2008
    
    
    (71,530
    )
    
    
    (25,857
    )General Partner  affiliate; 431,827 units issued and
outstanding at September 30, 2009 and December 31, 2008
    
    
    (3,677
    )
    
    
    (1,447
    )Total partners equity/(deficit)
    
    
    (92,904
    )
    
    
    18,528Total liabilities and partners equity
    
    $
    119,934
    
    
    $
    275,402
  F-1




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per unit data)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Oil and gas sales
    
    $
    18,151
    
    
    $
    49,454
    
    
    $
    56,260
    
    
    $
    136,908Costs and expenses:Oil and gas production
    
    
    8,458
    
    
    
    9,821
    
    
    
    23,216
    
    
    
    34,104Transportation expense
    
    
    10,879
    
    
    
    8,583
    
    
    
    31,272
    
    
    
    25,921General and administrative expenses
    
    
    5,570
    
    
    
    734
    
    
    
    13,249
    
    
    
    5,501Depreciation, depletion and amortization
    
    
    9,076
    
    
    
    13,196
    
    
    
    24,766
    
    
    
    34,750Impairment of oil and gas properties
    
    
    
    
    
    
    
    
    
    
    95,169
    
    
    
    Recovery of misappropriated funds, net of liabilities assumed
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    Total costs and expenses
    
    
    33,983
    
    
    
    32,334
    
    
    
    187,641
    
    
    
    100,276Operating income (loss)
    
    
    (15,832
    )
    
    
    17,120
    
    
    
    (131,381
    )
    
    
    36,632Other income (expense):Gain (loss) from derivative financial instruments
    
    
    8,752
    
    
    
    145,132
    
    
    
    31,078
    
    
    
    (4,482
    )Other income (expense)
    
    
    (33
    )
    
    
    40
    
    
    
    94
    
    
    
    154Interest expense, net
    
    
    (3,370
    )
    
    
    (4,354
    )
    
    
    (11,274
    )
    
    
    (8,747
    )Total other income (expense)
    
    
    5,349
    
    
    
    140,818
    
    
    
    19,898
    
    
    
    (13,075
    )Net income (loss)
    
    $
    (10,483
    )
    
    $
    157,938
    
    
    $
    (111,483
    )
    
    $
    23,557General partners interest in net income (loss)
    
    $
    (210
    )
    
    $
    3,159
    
    
    $
    (2,230
    )
    
    $
    471Limited partners interest in net income (loss)
    
    $
    (10,273
    )
    
    $
    154,779
    
    
    $
    (109,253
    )
    
    $
    23,086Net income (loss) per limited partner unit: (basic and diluted)
    
    $
    (0.49
    )
    
    $
    7.30
    
    
    $
    (5.16
    )
    
    $
    1.09Weighted average limited partner units outstanding:Common units (basic and diluted)
    
    
    12,317
    
    
    
    12,332
    
    
    
    12,317
    
    
    
    12,329Subordinated units (basic and diluted)
    
    
    8,858
    
    
    
    8,858
    
    
    
    8,858
    
    
    
    8,858
  F-2




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
 For the Nine Months EndedSeptember 30,2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    (111,483
    )
    
    $
    23,557Adjustments to reconcile net income (loss) to cash provided by (used in) operations:Depreciation, depletion and amortization
    
    
    24,766
    
    
    
    34,750Unit-based compensation
    
    
    51
    
    
    
    21Change in fair value of derivative financial instruments
    
    
    52,018
    
    
    
    (13,312
    )Impairment of oil and gas properties
    
    
    95,169
    
    
    
    Amortization of deferred loan costs
    
    
    1,781
    
    
    
    847Bad debt expense
    
    
    
    
    
    
    97Other
non-cash items affecting net income
    
    
    (55
    )
    
    
    Change in assets and liabilities:Accounts receivable
    
    
    3,373
    
    
    
    (5,818
    )Other receivables
    
    
    740
    
    
    
    (513
    )Other current assets
    
    
    1,455
    
    
    
    120Other assets
    
    
    
    
    
    
    13,696Due to/from affiliates
    
    
    (9,468
    )
    
    
    734Accounts payable
    
    
    (2,727
    )
    
    
    (4,266
    )Revenue payable
    
    
    58
    
    
    
    (146
    )Accrued expenses
    
    
    2,074
    
    
    
    (1,222
    )Other long-term liabilities
    
    
    
    
    
    
    (33
    )Other
    
    
    (1
    )
    
    
    (1
    )Net cash from operating activities
    
    
    57,751
    
    
    
    48,511Cash flows from investing activities:Restricted cash
    
    
    (189
    )
    
    
    1,093Proceeds from sale of oil and gas properties
    
    
    116
    
    
    
    Acquisition of business  PetroEdge
    
    
    
    
    
    
    (71,213
    )Equipment, development and leasehold
    
    
    (1,384
    )
    
    
    (78,214
    )Net cash from investing activities
    
    
    (1,457
    )
    
    
    (148,334
    )Cash flows from financing activities:Proceeds from bank borrowings
    
    
    102
    
    
    
    45,000Repayments of note borrowings
    
    
    (12,849
    )
    
    
    (534
    )Proceeds from revolver note
    
    
    
    
    
    
    89,000Repayments
of revolver note
    
    
    (29,000
    )
    
    
    Contributions (distributions)
    
    
    
    
    
    
    636Distributions to unitholders
    
    
    
    
    
    
    (22,573
    )Syndication costs
    
    
    
    
    
    
    (265
    )Refinancing costs
    
    
    (242
    )
    
    
    (1,893
    )Net cash from financing activities
    
    
    (41,989
    )
    
    
    109,371Net increase  in cash and cash equivalents
    
    
    14,305
    
    
    
    9,548Cash and cash equivalents, beginning of period
    
    
    3,706
    
    
    
    169Cash and cash equivalents, end of period
    
    $
    18,011
    
    
    $
    9,717
  F-3




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF PARTNERS EQUITY/(DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Amounts subsequent to December 31, 2008 are unaudited)
(in thousands, except unit amounts)
 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
    
    
    
    
    
    
    (63,580
    )
    
    
    
    
    
    
    (45,673
    )
    
    
    
    
    
    
    (2,230
    )
    
    
    (111,483
    )Unit-based compensation
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Balance, September 30, 2009
    
    
    12,331,521
    
    
    $
    (17,697
    )
    
    
    8,857,981
    
    
    $
    (71,530
    )
    
    
    431,827
    
    
    $
    (3,677
    )
    
    $
    (92,904
    )
  F-4




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
    Going Concern
    F-5




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##### Table of Contents



Recombination 
    Recent Accounting Pronouncements
 Generally Accepted Accounting Principles
 Derivatives and Hedging
 Earnings Per Share .
 F-6




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##### Table of Contents



Earnings Per Share
 Modernization of Oil and Gas Reporting
 Subsequent Events
 2. Acquisition
 PetroEdge 
  Pro Forma Summary Data Related to Acquisition
  Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2008
    
    2008Pro forma revenue
    
    $
    49,454
    
    
    $
    143,458Pro forma net income
    
    $
    157,938
    
    
    $
    19,020Pro forma net income per limited partner unit  basic and diluted
    
    $
    7.31
    
    
    $
    0.88
 F-7




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##### Table of Contents



3. Long-Term Debt
  September 30,
    
    
    December 31,2009
    
    
    2008Borrowings under bank senior credit facilitiesQuest Cherokee Credit Agreement
    
    $
    160,000
    
    
    $
    189,000Second Lien Loan Agreement
    
    
    29,800
    
    
    
    41,200Notes payable to banks and finance companies, secured by equipment and vehicles
    
    
    119
    
    
    
    772Total debt
    
    
    189,919
    
    
    
    230,972Less current maturities included in current liabilities
    
    
    29,865
    
    
    
    41,882Total long-term debt
    
    $
    160,054
    
    
    $
    189,090
 Credit Facilities
     pari passu
     F-8




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##### Table of Contents



4. Derivative Financial Instruments
   Derivatives and Hedging
 F-9




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##### Table of Contents



Fair Value of Derivative Financial Instruments
 September 30,
    
    
    December 31,Derivative Financial Instruments
    
    
    Balance Sheet location
    
    2009
    
    
    2008Commodity contracts
    
    Current derivative financial instrument asset
    
    $
    19,625
    
    
    $
    42,995Commodity contracts
    
    Long-term derivative financial instrument asset
    
    
    4,653
    
    
    
    30,836Commodity contracts
    
    Current derivative financial instrument liability
    
    
    (1,413
    )
    
    
    (12
    )Commodity contracts
    
    Long-term derivative financial instrument liability
    
    
    (5,294
    )
    
    
    (4,230
    )$
    17,571
    
    
    $
    69,589
 The Effect of Derivative Financial Instruments
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Derivative Financial Instruments
    
    
    Statement of Operations location
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Commodity contracts
    
    Gain (loss) from derivative
financial instruments
    
    $
    8,752
    
    
    $
    145,132
    
    
    $
    31,078
    
    
    $
    (4,482
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Realized gains (losses)
    
    $
    19,616
    
    
    $
    (7,525
    )
    
    $
    83,096
    
    
    $
    (17,795
    )Unrealized gains (losses)
    
    
    (10,864
    )
    
    
    152,657
    
    
    
    (52,018
    )
    
    
    13,313Total
    
    $
    8,752
    
    
    $
    145,132
    
    
    $
    31,078
    
    
    $
    (4,482
    )
  F-10




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##### Table of Contents



Remainder of
    
    Year Ending December 31,2009
    
    2010
    
    2011
    
    2012
    
    Thereafter
    
    Total($ in thousands, except volumes and per unit data)Natural Gas Swaps:Contract volumes (Mmbtu)
    
    
    3,687,360
    
    
    
    16,129,060
    
    
    
    13,550,302
    
    
    
    11,000,004
    
    
    
    9,000,003
    
    
    
    53,366,729Weighted-average fixed
price per Mmbtu
    
    $
    7.78
    
    
    $
    6.26
    
    
    $
    6.80
    
    
    $
    7.13
    
    
    $
    7.28
    
    
    $
    6.85Fair value, net
    
    $
    11,939
    
    
    $
    5,020
    
    
    $
    1,048
    
    
    $
    1,676
    
    
    $
    1,178
    
    
    $
    20,861Natural Gas Collars:Contract volumes (Mmbtu)
    
    
    187,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,500Weighted-average fixed
price per Mmbtu:Floor
    
    $
    11.00
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    11.00Ceiling
    
    $
    15.00
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15.00Fair value, net
    
    $
    1,154
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,154Total Natural Gas Contracts:Contract volumes (Mmbtu)
    
    
    3,874,860
    
    
    
    16,129,060
    
    
    
    13,550,302
    
    
    
    11,000,004
    
    
    
    9,000,003
    
    
    
    53,554,229Weighted-average fixed
price per Mmbtu
    
    $
    7.94
    
    
    $
    6.26
    
    
    $
    6.80
    
    
    $
    7.13
    
    
    $
    7.28
    
    
    $
    6.87Fair value, net
    
    $
    13,093
    
    
    $
    5,020
    
    
    $
    1,048
    
    
    $
    1,676
    
    
    $
    1,178
    
    
    $
    22,015Basis Swaps:Contract volumes (Bbl)
    
    
    
    
    
    
    3,630,000
    
    
    
    8,549,998
    
    
    
    9,000,000
    
    
    
    9,000,003
    
    
    
    30,180,001Weighted-average fixed
price per Bbl
    
    $
    
    
    
    $
    0.63
    
    
    $
    0.67
    
    
    $
    0.70
    
    
    $
    0.71
    
    
    $
    0.69Fair value, net
    
    $
    
    
    
    $
    (957
    )
    
    $
    (1,512
    )
    
    $
    (1,393
    )
    
    $
    (1,138
    )
    
    $
    (5,000
    )Crude Oil Swaps:Contract volumes (Bbl)
    
    
    9,000
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,000Weighted-average fixed
price per Bbl
    
    $
    90.07
    
    
    $
    87.50
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    88.09Fair value, net
    
    $
    170
    
    
    $
    386
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    556Total fair value, net
    
    $
    13,263
    
    
    $
    4,449
    
    
    $
    (464
    )
    
    $
    283
    
    
    $
    40
    
    
    $
    17,571
 F-11




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##### Table of Contents



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 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
  Fair Value Measurements and Disclosures
  
    
    Level 1  Quoted prices available in active markets for identical assets or liabilities
as of the reporting date.
 
    
    Level 2  Pricing inputs other than quoted prices in active markets included in Level 1
which are either directly or indirectly observable as of the reporting date. Level 2
consists primarily of non-exchange traded commodity derivatives.
 
    
    Level 3  Pricing inputs include significant inputs that are generally less observable
from objective sources.
   F-12




---



##### Table of Contents



Netting andLevel
    
    
    Level
    
    
    Level
    
    
    Cash
    
    
    Total Net FairSeptember 30, 2009
    
    1
    
    
    2
    
    
    3
    
    
    Collateral*
    
    
    ValueDerivative financial instruments  assets
    
    $
    
    
    
    $
    5,663
    
    
    $
    18,615
    
    
    $
    
    
    
    $
    24,278Derivative financial instruments  liabilities
    
    $
    
    
    
    $
    (133
    )
    
    $
    (6,574
    )
    
    $
    
    
    
    $
    (6,707
    )Total
    
    $
    
    
    
    $
    5,530
    
    
    $
    12,041
    
    
    $
    
    
    
    $
    17,571December 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.     Nine Months EndedSeptember 30, 2009Balance at beginning of period
    
    $
    60,947Realized and unrealized gains included in earnings
    
    
    25,309Purchases, sales, issuances, and settlements
    
    
    (74,215
    )Transfers into and out of Level 3
    
    
    Balance as of September 30, 2009
    
    $
    12,041
 6. Asset Retirement Obligations
  Nine months endedSeptember 30, 2009Asset retirement obligations at beginning of period
    
    $
    4,592Liabilities incurred
    
    
    Liabilities settled
    
    
    Accretion
    
    
    351Revisions in estimated cash flows
    
    
    Asset retirement obligations at end of period
    
    $
    4,943
 F-13




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##### Table of Contents



7. Equity Compensation Plans
  8. Net Income Per Limited Partner Unit
 Earnings Per Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    (10,483
    )
    
    $
    157,398
    
    
    $
    (111,483
    )
    
    $
    23,557Less: General Partner 2.0% ownership
    
    
    (210
    )
    
    
    (3,159
    )
    
    
    (2,230
    )
    
    
    (471
    )Net income (loss) available to limited partners
    
    $
    (10,273
    )
    
    $
    154,779
    
    
    $
    (109,253
    )
    
    $
    (23,086
    )Basic and diluted weighted average number of
units:Common units
    
    
    12,316,521
    
    
    
    12,309,021
    
    
    
    12,316,521
    
    
    
    12,308,282Subordinated units
    
    
    8,857,981
    
    
    
    8,857,981
    
    
    
    8,857,981
    
    
    
    8,857,981Unvested unit-based awards participating
    
    
    
    
    
    
    22,500
    
    
    
    
    
    
    
    20,283Basic and diluted weighted average number of
units
    
    
    21,174,502
    
    
    
    21,189,502
    
    
    
    21,174,502
    
    
    
    21,186,546Basic and diluted net income (loss) per
limited partner unit:
    
    $
    (0.49
    )
    
    $
    7.30
    
    
    $
    (5.16
    )
    
    $
    1.09
    F-14




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##### Table of Contents



9. Impairment of Oil and Gas Properties
    10. Commitments and Contingencies
 Litigation
  Federal
Individual Securities Litigation
 J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, J. Steven Emerson IRA RO II,
and Emerson Family Foundation v. Quest Resource Corporation, Inc., Quest Energy Partners L.P.,
Jerry Cash, David E. Grose, and John Garrison, Case No. 5:09-cv-1226-M, U.S. District Court for the
Western District of Oklahoma, filed November 3, 2009
  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
  F-15




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##### Table of Contents



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
 Jacob Dodd v. Arvilla Oilfield Services, LLC, et al., Case No. 08-C-47, Circuit Court of
Ritchie County, State of West Virginia, filed May 8, 2008
 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
  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.
 F-16




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##### Table of Contents



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
  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
  Federal Securities Class Actions
 Michael Friedman, individually and on behalf of all others similarly situated v. Quest Energy
Partners LP, Quest Energy GP LLC, Quest Resource Corporation, Jerry Cash, and David E. Grose ,
Case No. 08-cv-936-M, U.S. District Court for the Western District of Oklahoma, filed September
5, 2008
 James Jents, individually and on behalf of all others similarly situated v. Quest Resource
Corporation, Jerry Cash, David E. Grose, and John Garrison, Case No. 08-cv-968-M, U.S. District
Court for the Western District of Oklahoma, filed September 12, 2008
 J. Braxton Kyzer and Bapui Rao, individually and on behalf of all others similarly situated v.
Quest Energy Partners LP, Quest Energy GP LLC, Quest Resource Corporation and David E. Grose, Case No. 08-cv-1066-M, U.S. District Court for the Western District of Oklahoma, filed October
6, 2008
 Paul Rosen, individually and on behalf of all others similarly situated v. Quest Energy Partners
LP, Quest Energy GP LLC, Quest Resource Corporation, Jerry Cash, and David E. Grose, Case No.
08-cv-978-M, U.S. District Court for the Western District of Oklahoma, filed September 17, 2008
 Michael Friedman,
individually and on behalf of all others similarly situated v. Quest Energy Partners LP, Quest
Energy GP LLC, Quest Resource Corporation, Jerry Cash, and David E. Grose
  F-17




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##### Table of Contents



Royalty Owner Class Action
 Hugo Spieker, et al. v. Quest Cherokee, LLC , Case No. 07-1225-MLB, in the U.S. District Court,
District of Kansas, filed August 6, 2007
  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 with the Kansas Court of Appeals,
Case No. 08-100576-A; oral argument scheduled for November 18, 2009)
 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
 F-18




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##### Table of Contents



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 (trial set for December 2009)
 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
Wilson County, State of Kansas, filed September 18, 2008 (settled and dismissed in August 2009)
 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
 Quest Cherokee v. Hinkle, et. al. & Admiral Bay, Case No. 2006-CV-74, District Court of
Labette County, State of Kansas, filed September 15, 2006 (trial set for February  2010)
 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
  F-19




---



##### Table of Contents



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
  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-20




---



##### Table of Contents



Oil & gas properties
    
    $
    1,076Current liabilities
    
    
    (326
    )Long-term debt
    
    
    (719
    )Net assets received
    
    $
    31
 Merger Agreement and Support Agreement
   12. Subsequent Events
  F-21




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Forward-looking statements
    Overview of QELP
  Operating Highlights
  
    
    We reduced production costs  in the current quarter by $0.13 per Mcfe from the prior year quarter.
    
    We sustained natural gas production levels similar to the prior year despite minimal current
period capital expenditures on acquisition and development.
 Financial Highlights
  
    
    We reduced total debt by $41.1 million since December 31, 2008.
 
    
    We increased cash and cash equivalents by $14.3 million since December 31, 2008.
 
    
    We repriced our derivatives during the second quarter of 2009  and received $26 million as a result.
 1




---



##### Table of Contents



Recent Developments
 Global Financial Crisis and Impact on Capital Markets and Commodity Prices
    Suspension of Distributions
   Settlement Agreements
    2




---



##### Table of Contents



Oil & gas properties
    
    $
    1,076Current liabilities
    
    
    (326
    )Long-term debt
    
    
    (719
    )Net assets received
    
    $
    31
 Recombination
     3




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##### Table of Contents



Results of Operations
  Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008
 Overview.
 Three Months EndedSeptember 30,
    
    Increase/2009
    
    2008
    
    (Decrease)Oil and gas sales
    
    $
    18,151
    
    
    $
    49,454
    
    
    $
    (31,303
    )
    
    
    (63.3
    )%Oil and gas production costs
    
    $
    8,458
    
    
    $
    9,821
    
    
    $
    (1,363
    )
    
    
    (13.9
    )%Transportation expense
    
    $
    10,879
    
    
    $
    8,583
    
    
    $
    2,296
    
    
    
    26.8
    %Depreciation, depletion and amortization
    
    $
    9,076
    
    
    $
    13,196
    
    
    $
    (4,120
    )
    
    
    (31.2
    )%General and administrative expenses
    
    $
    5,570
    
    
    $
    734
    
    
    $
    4,836
    
    
    
    658.9
    %Gain from derivative financial instruments
    
    $
    8,752
    
    
    $
    145,132
    
    
    $
    (136,380
    )
    
    
    (94.0
    )%Interest expense, net
    
    $
    3,370
    
    
    $
    4,354
    
    
    $
    (984
    )
    
    
    (22.6
    )%
 Production.
 Three Months EndedSeptember 30,
    
    Increase/2009
    
    2008
    
    (Decrease)Production Data:Natural gas production (Mmcf)
    
    
    5,317
    
    
    
    5,694
    
    
    
    (377
    )
    
    
    (6.6
    )%Oil production (Mbbl)
    
    
    20
    
    
    
    19
    
    
    
    1
    
    
    
    5.3
    %Total production (Mmcfe)
    
    
    5,437
    
    
    
    5,808
    
    
    
    (371
    )
    
    
    (6.4
    )%Average daily production (Mmcfe/d)
    
    
    59.1
    
    
    
    63.1
    
    
    
    (4.0
    )
    
    
    (6.3
    )%Average Sales Price per Unit:Natural gas (Mcf)
    
    $
    3.18
    
    
    $
    8.30
    
    
    $
    (5.12
    )
    
    
    (61.7
    )%Oil (Bbl)
    
    $
    64.21
    
    
    $
    116.89
    
    
    $
    (52.68
    )
    
    
    (45.1
    )%Natural gas equivalent (Mcfe)
    
    $
    3.34
    
    
    $
    8.51
    
    
    $
    (5.17
    )
    
    
    (60.8
    )%Average Unit Costs per Mcfe:Production costs
    
    $
    1.56
    
    
    $
    1.69
    
    
    $
    (0.13
    )
    
    
    (7.7
    )%Transportation expense
    
    $
    2.00
    
    
    $
    1.48
    
    
    $
    0.52
    
    
    
    35.1
    %Depreciation, depletion and amortization
    
    $
    1.67
    
    
    $
    2.27
    
    
    $
    (0.60
    )
    
    
    (26.4
    )%
 Oil and Gas Sales.
 Oil and Gas Operating Expenses.
  4




---



##### Table of Contents



Depreciation, Depletion and Amortization.
 General and Administrative Expenses.
 Gain from Derivative Financial Instruments.
 Interest Expense, net.
 Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008
 Overview.
 Nine Months EndedSeptember 30,
    
    Increase/2009
    
    2008
    
    (Decrease)Oil and gas sales
    
    $
    56,260
    
    
    $
    136,908
    
    
    $
    (80,648
    )
    
    
    (58.9
    )%Oil and gas production costs
    
    $
    23,216
    
    
    $
    34,104
    
    
    $
    (10,888
    )
    
    
    (31.9
    )%Transportation expense
    
    $
    31,272
    
    
    $
    25,921
    
    
    $
    5,351
    
    
    
    20.6
    %Depreciation, depletion and amortization
    
    $
    24,766
    
    
    $
    34,750
    
    
    $
    (9,984
    )
    
    
    (28.7
    )%General and administrative expenses
    
    $
    13,249
    
    
    $
    5,501
    
    
    $
    7,748
    
    
    
    140.8
    %Impairment of oil and gas properties
    
    $
    95,169
    
    
    $
    
    
    
    $
    95,169
    
    
    
    *Gain (loss) from derivative financial instruments
    
    $
    31,078
    
    
    $
    (4,482
    )
    
    $
    35,560
    
    
    
    793.4
    %Interest expense, net
    
    $
    11,274
    
    
    $
    8,747
    
    
    $
    2,527
    
    
    
    28.9
    %
 
 *
    
    Not meaningful 5




---



##### Table of Contents



Production.
 Nine Months EndedSeptember 30,
    
    Increase/2009
    
    2008
    
    (Decrease)Production Data:Natural gas production (Mmcf)
    
    
    16,107
    
    
    
    15,755
    
    
    
    352
    
    
    
    2.2
    %Oil production (Mbbl)
    
    
    60
    
    
    
    47
    
    
    
    13
    
    
    
    27.7
    %Total production (Mmcfe)
    
    
    16,467
    
    
    
    16,037
    
    
    
    430
    
    
    
    2.7
    %Average daily production (Mmcfe/d)
    
    
    60.3
    
    
    
    58.5
    
    
    
    1.8
    
    
    
    3.1
    %Average Sales Price per Unit:Natural gas (Mcf)
    
    $
    3.30
    
    
    $
    8.36
    
    
    $
    (5.06
    )
    
    
    (60.5
    )%Oil (Bbl)
    
    $
    52.27
    
    
    $
    110.40
    
    
    $
    (58.13
    )
    
    
    (52.7
    )%Natural gas equivalent (Mcfe)
    
    $
    3.42
    
    
    $
    8.54
    
    
    $
    (5.12
    )
    
    
    (60.0
    )%Average Unit Costs per Mcfe:Production costs
    
    $
    1.41
    
    
    $
    2.13
    
    
    $
    (0.72
    )
    
    
    (33.8
    )%Transportation expense
    
    $
    1.90
    
    
    $
    1.62
    
    
    $
    0.28
    
    
    
    17.3
    %Depreciation, depletion and amortization
    
    $
    1.50
    
    
    $
    2.17
    
    
    $
    (0.67
    )
    
    
    (30.9
    )%
 Oil and Gas Sales.
 Oil and Gas Operating Expenses.
   Depreciation, Depletion and Amortization.
 General and Administrative Expenses.
 6




---



##### Table of Contents



Impairment of Oil and Gas Properties.
 Gain/(Loss) from Derivative Financial Instruments.
 Interest Expense,
net.
 Liquidity and Capital Resources
 Overview
   Cash Flows from Operating Activities.
  7




---



##### Table of Contents



Cash
Flows from Investing Activities.
 Nine Months EndedSeptember 30, 2009(in thousands)Capital expenditures:Leasehold acquisition
    
    $
    1,027Development
    
    
    212Other items
    
    
    145Total capital expenditures
    
    $
    1,384
 Cash Flows from Financing Activities.
 Working Capital.
 Credit Agreements
     pari passu
 8




---



##### Table of Contents



Contractual Obligations
    Off-balance Sheet Arrangements
  9




---



##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 Commodity Price Risk
   Remainder of
    
    Year Ending December 31,2009
    
    2010
    
    2011
    
    2012
    
    Thereafter
    
    Total($ in thousands, except volumes and per unit data)Natural Gas Swaps:Contract volumes (Mmbtu)
    
    
    3,687,360
    
    
    
    16,129,060
    
    
    
    13,550,302
    
    
    
    11,000,004
    
    
    
    9,000,003
    
    
    
    53,366,729Weighted-average fixed
price per Mmbtu
    
    $
    7.78
    
    
    $
    6.26
    
    
    $
    6.80
    
    
    $
    7.13
    
    
    $
    7.28
    
    
    $
    6.85Fair value, net
    
    $
    11,939
    
    
    $
    5,020
    
    
    $
    1,048
    
    
    $
    1,676
    
    
    $
    1,178
    
    
    $
    20,861Natural Gas Collars:Contract volumes (Mmbtu)
    
    
    187,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,500Weighted-average fixed
price per Mmbtu:Floor
    
    $
    11.00
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    11.00Ceiling
    
    $
    15.00
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15.00Fair value, net
    
    $
    1,154
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,154Total Natural Gas Contracts:Contract volumes (Mmbtu)
    
    
    3,874,860
    
    
    
    16,129,060
    
    
    
    13,550,302
    
    
    
    11,000,004
    
    
    
    9,000,003
    
    
    
    53,554,229Weighted-average fixed
price per Mmbtu
    
    $
    7.94
    
    
    $
    6.26
    
    
    $
    6.80
    
    
    $
    7.13
    
    
    $
    7.28
    
    
    $
    6.87Fair value, net
    
    $
    13,093
    
    
    $
    5,020
    
    
    $
    1,048
    
    
    $
    1,676
    
    
    $
    1,178
    
    
    $
    22,015Basis Swaps:Contract volumes (Bbl)
    
    
    
    
    
    
    3,630,000
    
    
    
    8,549,998
    
    
    
    9,000,000
    
    
    
    9,000,003
    
    
    
    30,180,001Weighted-average fixed
price per Bbl
    
    $
    
    
    
    $
    0.63
    
    
    $
    0.67
    
    
    $
    0.70
    
    
    $
    0.71
    
    
    $
    0.69Fair value, net
    
    $
    
    
    
    $
    (957
    )
    
    $
    (1,512
    )
    
    $
    (1,393
    )
    
    $
    (1,138
    )
    
    $
    (5,000
    )Crude Oil Swaps:Contract volumes (Bbl)
    
    
    9,000
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,000Weighted-average fixed
price per Bbl
    
    $
    90.07
    
    
    $
    87.50
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    88.09Fair value, net
    
    $
    170
    
    
    $
    386
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    556Total fair value, net
    
    $
    13,263
    
    
    $
    4,449
    
    
    $
    (464
    )
    
    $
    283
    
    
    $
    40
    
    
    $
    17,571
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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.
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(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.
 (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.
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Changes in Internal Control Over Financial Reporting
        a)
    
    We hired additional experienced accounting personnel with specific experience in
(1) financial reporting for public companies; (2) preparing consolidated financial
statements; (3) oil and gas property and pipeline asset accounting; (4) inter-company
accounts and investments in subsidiaries; and (5) GAAP revenue accounting.
 b)
    
    We implemented a closing calendar and consolidation process that includes accrual
based financial statements being reviewed by qualified personnel in a timely manner.
 c)
    
    We review consolidating financial statements with senior management, the
audit committee of the board of directors and the full board of directors.
 d)
    
    We complete disclosure checklists for both GAAP and SEC required disclosures to
ensure disclosures are complete.
 e)
    
    We have created a disclosure committee as part of our SEC filing process.
  a)
    
    Communicated internally to employees regarding ethics and the availability of our
internal fraud hotline;
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b)
    
    Evaluated and prioritized the material weaknesses noted above and developed
specific actions necessary in order to remediate them;
 c)
    
    Performed a preliminary assessment of our accounting and disclosure policies and
procedures and begun the process of updating and revising them; and
 d)
    
    Begun regular meetings of the disclosure committee.
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PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS.
   
 ITEM 1A.
    
    RISK FACTORS.
 Risks Related to the Recombination
 While the Recombination is pending, we will be subject to business uncertainties and contractual
restrictions that could adversely affect our business.
    QRCPs control over us may preclude us from pursuing alternative transactions that may be more
beneficial to our common unitholders than the Recombination.
  Our partnership agreement limits our general partners fiduciary duties to unitholders and
restricts the remedies available to holders of our common units and subordinated units for actions
taken by our general partner that might otherwise constitute breaches of fiduciary duty.
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
    
    any conflict of interest and any resolution thereof shall be permitted
and deemed approved by all of our partners, and shall not constitute a
breach of our partnership agreement or of any duty stated or implied
by law or equity, if the resolution or course of action in respect of
conflict of interest is approved by a majority of the members of the
conflicts committee acting in good faith (meaning they believed that
such approval was in our best interests);
    
    it will be presumed that, in making its decision, the conflicts
committee acted in good faith, and in any proceeding brought by or on
behalf of any limited partner or us, the person bringing or
prosecuting such proceeding will have the burden of overcoming such
presumption; and
    
    our general partner and its officers and directors will not be liable
for monetary damages to us, our limited partners or their assignees
for any acts or omissions, unless there has been a final and
non-appealable judgment entered by a court of competent jurisdiction
determining that the general partner or those other persons acted in
bad faith or engaged in fraud or willful misconduct or, in the case of
a criminal matter, acted with knowledge that the conduct was criminal.
  Our financial projections may not prove accurate.
 The Merger Agreement is subject to closing conditions that could result in the completion of the
Recombination being delayed or not consummated, and the Recombination may not be consummated even
if our unitholders and the QRCP stockholders and QMLP unitholders approve the Merger Agreement and
the Recombination.
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Failure to complete the Recombination could negatively impact the value of our common units and our
future business and financial results because of, among other things, the disruption that would
occur as a result of uncertainties relating to a failure to complete the Recombination.
  
    
    there may be events of default under our indebtedness and such indebtedness may be
accelerated and become immediately due and payable, which may result in our bankruptcy
(please read  If the Recombination is delayed or not consummated or if the Merger
Agreement is terminated, there may be events of default under our indebtedness enabling
the lenders to accelerate such indebtedness, which could lead to the foreclosure of
collateral and our bankruptcy);
 
    
    the market price of our common units may decline to the extent that the current
market price reflects market assumptions that the Recombination will be completed and
that the combined company will experience a potentially enhanced financial position;
 
    
    there will be substantial transaction costs related to the Recombination, such as
investment banking, legal and accounting fees, printing expenses and other related
charges, that must be paid even if the Recombination is not completed;
 
    
    there may be an adverse impact on relationships with customers, suppliers and others
to the extent they believe that we cannot compete in the marketplace or continue as a
solvent entity without the Recombination or otherwise remain uncertain about our future
prospects in the absence of the Recombination; and
 
    
    we may experience difficulty in retaining and recruiting current and prospective
employees.
 We will incur significant transaction and merger-related integration costs in connection with the
Recombination.
  Risks Related to Our Financial Condition
 Former senior management were terminated in 2008 following the discovery of various
misappropriations of funds of QRCP and QELP.
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QELP and QRCP are involved in securities lawsuits that may result in judgments, settlements, and/or
indemnity obligations that are not covered by insurance and that may have a material adverse effect
on us.
   U.S. government investigations could affect our results of operations.
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Our independent registered public accounting firm has expressed substantial doubt about our ability
to continue as a going concern.
  We have identified significant and pervasive material weaknesses in our internal control over
financial reporting.
  
    
    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.
    
    We did not maintain effective monitoring controls to determine the
adequacy of our internal control over financial reporting and related
policies and procedures.
    
    We did not establish and maintain effective controls over certain of
our period-end financial close and reporting processes, including the
preparation and review of financial statements and schedules and
journal entries.
    
    We did not establish and maintain effective controls to ensure the
correct application of GAAP related to derivative instruments.
    
    We did not establish and maintain effective controls to ensure
completeness and accuracy of depreciation, depletion and amortization
expense.
    
    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.
    
    We did not establish and maintain effective controls to adequately
segregate the duties over cash management.
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We have restated certain of our historical financial statements.
   
    
    The transfers described above, which were not approved expenditures
were not properly accounted for as losses.
    
    Hedge accounting was inappropriately applied for 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. 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, pipeline assets 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 depreciation, depletion and
amortization expense and 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 ceiling test calculations.
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If the Recombination is delayed or not consummated or if the Merger Agreement is terminated, there
may be events of default under our indebtedness enabling the lenders to accelerate such
indebtedness, which could lead to our foreclosure of collateral and bankruptcy.
       Risks Related to Our Business
 The current financial crisis and economic conditions have had, and may continue to have, a material
adverse impact on our business and financial condition.
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
    
    our ability to obtain credit and access the capital markets to fund
the exploration or development of reserves, the construction of
additional assets or the acquisition of assets or businesses from
third parties may continue to be restricted;
    
    our hedging arrangements could become ineffective if our
counterparties are unable to perform their obligations or seek
bankruptcy;
    
    the values we are able to realize in asset sales or other transactions
we engage in to raise capital may be reduced, thus making these
transactions more difficult to consummate and less economic; and
    
    the demand for oil and natural gas could further decline due to
deteriorating economic conditions, which could adversely affect our
business, financial condition or results of operations.
   Energy prices are very volatile, and if commodity prices remain low or continue to decline, our
revenues, profitability and cash flows will be adversely affected. A sustained or further decline
in oil and natural gas prices may adversely affect our business, financial condition or results of
operations and our ability to fund our capital expenditures and meet our financial commitments.
  
    
    the domestic and foreign supply of and demand for oil and natural gas;
    
    the price and level of foreign imports of oil and natural gas;
    
    the level of consumer product demand;
    
    weather conditions;
    
    overall domestic and global economic conditions;
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
    
    political and economic conditions in oil and gas producing countries, including embargoes
and continued hostilities in the Middle East and other sustained military campaigns, acts
of terrorism or sabotage;
    
    actions of the Organization of Petroleum Exporting Countries and other state-controlled
oil companies relating to oil price and production controls;
    
    the impact of the U.S. dollar exchange rates on oil and gas prices;
    
    technological advances affecting energy consumption;
    
    domestic and foreign governmental regulations and taxation;
    
    the impact of energy conservation efforts;
    
    the costs, proximity and capacity of gas pipelines and other transportation facilities; and
    
    the price and availability of alternative fuels.
  
    
    reduce the amount of cash flow available for capital expenditures,
including for the drilling of wells and the construction of
infrastructure to transport the natural gas we produce;
    
    negatively impact the value of our reserves because declines in oil
and natural gas prices would reduce the amount of oil and natural gas
we can produce economically;
    
    reduce the drilling and production activity of our third party
customers and increase the rate at which our customers shut in wells;
and
    
    limit our ability to borrow money or raise additional capital.
 Future price declines may result in a write-down of our asset carrying values.
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As a result of our financial condition, we have had to significantly reduce our capital
expenditures, which will ultimately reduce cash flow and result in the loss of some leases.
  We face the risks of leverage.
   
    
    our ability to obtain additional debt or equity financing, if necessary, for drilling,
expansion, working capital and other business needs may be impaired or such financing may
not be available on favorable terms;
    
    a substantial decrease in our revenues as a result of lower oil and natural gas prices,
decreased production or other factors could make it difficult for us to pay our
liabilities. Any failure by us to meet these obligations could result in litigation,
non-performance by contract counterparties or bankruptcy;
    
    our funds available for operations and future business opportunities will be reduced by
that portion of our cash flow required to make principal or interest payments on our
debt;
    
    we may be more vulnerable to competitive pressures or a downturn in our business or the
economy generally; and
    
    our flexibility in responding to changing business and economic conditions may be limited.
  Our credit agreements have substantial restrictions and financial covenants that restrict our
business and financing activities.
  
    
    incur indebtedness;
    
    grant liens;
 24




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
    
    pay dividends;
    
    redeem or repurchase equity interests;
    
    make certain acquisitions and investments, loans or advances;
    
    lease equipment;
    
    enter into a merger, consolidation or sale of assets;
    
    dispose of property;
    
    enter into hedging arrangements with certain counterparties;
    
    limit the use of loan proceeds;
    
    make capital expenditures above specified amounts; and
    
    enter into transactions with affiliates.
   An increase in interest rates will cause our debt service obligations to increase.
  We may be unable to pass through all of our costs and expenses for gathering and compression to
royalty owners under our gas leases, which would reduce our net income and cash flows.
  We depend on one customer for sales of our Cherokee Basin natural gas. A reduction by this customer
in the volumes of gas it purchases from us could result in a substantial decline in our revenues
and net income.
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We are exposed to trade credit risk in the ordinary course of our business activities.
  Unless we replace the reserves that we produce, our existing reserves and production will decline,
which would adversely affect our revenues, profitability and cash flows.
   There is a significant delay between the time we drill and complete a CBM well and when the well
reaches peak production. As a result, there will be a significant lag time between when we make
capital expenditures and when we will begin to recognize significant cash flow from those
expenditures.
  Our estimated proved reserves are based on assumptions that may prove to be inaccurate. Any
material inaccuracies in these reserve estimates or underlying assumptions will materially affect
the quantities and present value of our reserves.
  
    
    a constant level of future oil and gas prices;
    
    geological conditions;
    
    production levels;
    
    capital expenditures;
    
    operating and development costs;
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
    
    the effects of governmental regulations and taxation; and
    
    availability of funds.
    
    
    the actual prices we receive for oil and gas;
    
    our actual operating costs in producing oil and gas;
    
    the amount and timing of actual production;
    
    the amount and timing of our capital expenditures;
    
    supply of and demand for oil and gas; and
    
    changes in governmental regulations or taxation.
 Extractive
Activities
 Drilling for and producing oil and gas is a costly and high-risk activity with many uncertainties
that could adversely affect our financial condition or results of operations.
  
    
    high costs, shortages or delivery delays of drilling rigs, equipment, labor or other services;
    
    adverse weather conditions;
    
    difficulty disposing of water produced as part of the coal bed methane production process;
    
    equipment failures or accidents;
    
    title problems;
    
    pipe or cement failures or casing collapses;
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
    
    compliance with environmental and other governmental requirements;
    
    environmental hazards, such as gas leaks, oil spills, pipeline ruptures and discharges of
toxic gases;
    
    lost or damaged oilfield drilling and service tools;
    
    loss of drilling fluid circulation;
    
    unexpected operational events and drilling conditions;
    
    increased risk of wellbore instability due to horizontal drilling;
    
    unusual or unexpected geological formations;
    
    natural disasters, such as fires;
    
    blowouts, surface craterings and explosions; and
    
    uncontrollable flows of oil, gas or well fluids.
  Our hedging activities could result in financial losses or reduce our income.
    
    
    a counterparty may not perform its obligation under the applicable derivative instrument;
    
    there may be a change in the expected differential between the underlying commodity
price in the derivative instrument and the actual price received; and
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
    
    the steps we take to monitor our derivative financial instruments may not detect and
prevent violations of our risk management policies and procedures.
 Because of our lack of asset and geographic diversification, adverse developments in our operating
areas would adversely affect our results of operations.
  The oil and gas industry is highly competitive and we may be unable to compete effectively with
larger companies, which may adversely affect our results of operations.
   Our business involves many hazards and operational risks, some of which may not be fully covered by
insurance. If a significant accident or event occurs that is not fully insured, our operations and
financial results could be adversely affected.
  
    
    damage to wells, pipelines, related equipment and surrounding properties caused by
hurricanes, tornadoes, floods, fires and other natural disasters and acts of
terrorism;
    
    inadvertent damage from construction, farm and utility equipment;
    
    leaks of gas or oil spills as a result of the malfunction of equipment or facilities;
    
    fires and explosions; and
    
    other hazards that could also result in personal injury and loss of life, pollution
and suspension of operations.
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Shortages of crews could delay our operations, adversely affect our ability to increase our
reserves and production and adversely affect our results of operations.
  Certain of our undeveloped leasehold acreage is subject to leases that may expire in the near
future.
  Our identified drilling location inventories will be developed over several years, making them
susceptible to uncertainties that could materially alter the occurrence or timing of their
drilling, resulting in temporarily lower cash from operations, which may impact our results of
operations.
  We may incur losses as a result of title deficiencies in the properties in which we invest.
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We may incur significant costs and liabilities in the future resulting from a failure to comply
with new or existing environmental and operational safety regulations or an accidental release of
hazardous substances into the environment.
    We may face unanticipated water and other waste disposal costs.
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
    
    we cannot obtain future permits from applicable regulatory agencies;
    
    water of lesser quality or requiring additional treatment is produced;
    
    our wells produce excess water;
    
    new laws and regulations require water to be disposed in a different manner; or
    
    costs to transport the produced water to the disposal wells increase.
  Recent and future environmental laws and regulations may significantly limit, and increase the cost
of, our exploration, production and transportation operations.
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If we do not make acquisitions on economically acceptable terms, our future growth and
profitability will be limited.
   
    
    mistaken assumptions about reserves, future production, volumes, revenues and
costs, including synergies;
    
    an inability to integrate successfully the businesses we acquire;
    
    a decrease in our liquidity as a result of our using a significant portion of our
available cash or borrowing capacity to finance the acquisition;
    
    a significant increase in our interest expense or financial leverage if we incur
additional debt to finance the acquisition;
    
    the assumption of unknown liabilities for which we are not indemnified or for which
our indemnity is inadequate;
    
    an inability to hire, train or retain qualified personnel to manage and operate our
growing business and assets;
    
    limitations on rights to indemnity from the seller;
    
    mistaken assumptions about the overall costs of equity or debt;
    
    the diversion of managements and employees attention from other business concerns;
    
    the incurrence of other significant charges, such as impairment of goodwill or
other intangible assets, asset devaluation or restructuring charges;
    
    unforeseen difficulties operating in new product areas or new geographic areas; and
    
    customer or key employee losses at the acquired businesses.
   
    
    geology;
    
    well economics;
    
    availability of third party services;
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
    
    transportation charges;
    
    content, quantity and quality of oil and gas produced;
    
    volume of waste water produced;
    
    state and local regulations and permit requirements; and
    
    production, severance, ad valorem and other taxes.
  Our success depends on key management personnel, the loss of any of whom could disrupt our
business.
   
 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.
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ITEM 6.
    
    EXHIBITS
 *2.1
    
    First Amendment dated as of October 2, 2009 to the Agreement and
Plan of Merger, dated as of July 2, 2009, by and among New Quest
Holdings Corp. (n/k/a PostRock Energy Corporation), Quest Resource
Corporation, Quest Midstream Partners, L.P., Quest Energy Partners,
L.P., Quest Midstream GP, LLC, Quest Energy GP, LLC, Quest Resource
Acquisition Corp., Quest Energy Acquisition, LLC, Quest Midstream
Holdings Corp. and Quest Midstream Acquisition, LLC (incorporated
herein by reference to Exhibit 2.2 to PostRock Energy Corporations
Registration Statement on Form S-4 filed on October 6, 2009).*10.1
    
    Third Amendment to Second Lien Senior Term Loan Agreement, dated as
of September 30, 2009, by and among Quest Cherokee, LLC, Quest
Energy Partners, L.P., Quest Cherokee Oilfield Service, LLC, Royal
Bank of Canada, KeyBank National Association, Société Générale 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 October 1, 2009).*10.2
    
    Fourth Amendment to Second Lien Senior Term Loan Agreement, dated as of
October 31, 2009, by and among Quest Cherokee, LLC, Quest Energy Partners, L.P.,
Quest Cherokee Oilfield Service, LLC, Royal Bank of Canada, KeyBank National Association,
Société Générale 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 November 2, 2009).*10.3
    
    First Amendment dated as of October 2, 2009 to the Support
Agreement, dated as of July 2, 2009, by and among Quest Resource
Corporation, Quest Energy Partners, L.P., Quest Midstream Partners,
L.P., Alerian Opportunity Partners IV, LP, Alerian Opportunity
Partners IX, LP and certain other unitholders of Quest Midstream
Partners, L.P. party thereto (incorporated herein by reference to
Exhibit 10.61 to PostRock Energy Corporations Registration
Statement on Form S-4 filed on October 6, 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.
 
 *
    
    Incorporated by reference.  35




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##### Table of Contents



SIGNATURES
  Quest Energy Partners, L.P.By:
    
    Quest Energy GP, LLC, its general partnerBy:
    
    /s/ David C. Lawler

David C. LawlerChief Executive Officer and PresidentBy:
    
    /s/ Eddie M. LeBlanc, III

Eddie M. LeBlanc, IIIChief Financial Officer
 36