##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q/A
 (Amendment
No. 1)
  þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 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(Address of principal executive offices)
    
    (Zip Code)
 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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##### Table of Contents



EXPLANATORY NOTE
   Investigation 
   2




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##### Table of Contents



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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March 31, 2008Partners equity as previously reported
    
    $
    184,584Effect of the Transfers
    
    
    (9,500
    )Reversal of hedge accounting
    
    
    (2,725
    )Accounting for formation of Quest Cherokee
    
    
    (15,102
    )Capitalization of costs in full cost pool
    
    
    (27,595
    )Recognition of costs in proper periods
    
    
    (957
    )Depreciation, depletion and amortization
    
    
    11,429Impairment of oil and gas properties
    
    
    30,719Other errors
    
    
    3,823Partners equity as restated
    
    $
    174,676
 Three Months Ended March 31,2008
    
    
    2007Net loss as previously reported
    
    $
    (17,346
    )
    
    $
    (3,650
    )Effect of the Transfers
    
    
    
    
    
    
    (500
    )Reversal of hedge accounting
    
    
    (19,196
    )
    
    
    (14,079
    )Capitalization of costs in full cost pool
    
    
    (3,659
    )
    
    
    (2,419
    )Recognition of costs in proper periods
    
    
    583
    
    
    
    (244
    )Stock-based compensation
    
    
    (431
    )
    
    
    (345
    )Depreciation, depletion and amortization
    
    
    (491
    )
    
    
    (480
    )Other errors(*)
    
    
    (225
    )
    
    
    (1,046
    )Net loss as restated
    
    $
    (40,765
    )
    
    $
    (22,763
    )
 
 *
    
    Includes minority interest impact.  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.
    
    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
      4




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##### 



QUEST ENERGY PARTNERS, L.P.
 FORM
10-Q/A
 FOR THE QUARTER ENDED MARCH 31, 2008
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATION
    
    
    7Item 1. Financial Statements
    
    
    7Balance Sheets:
March 31, 2008 and December 31, 2007
    
    
    F-1Statements of Operations:
Three months ended March 31, 2008 and 2007
    
    
    F-2Statements of Cash Flows:
Three months ended March 31, 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
    
    
    8Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4(T). Controls and Procedures
    
    
    15PART II  OTHER INFORMATION
    
    
    19Item 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    20SIGNATURES
    
    
    21EX-31.1EX-31.2EX-32.1EX-32.2
  5




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##### Table of Contents




    
    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.
 6




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements .
  31, 2008.
   7




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 ($ in thousands)
 March 31,
    
    December 31,2008
    
    2007(Unaudited)(Restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    739
    
    
    $
    169Restricted cash
    
    
    1,205
    
    
    
    1,205Accounts receivable, trade
    
    
    57
    
    
    
    86Due from affiliated companies
    
    
    22,895
    
    
    
    15,624Other current assets
    
    
    2,468
    
    
    
    3,091Inventory
    
    
    6,797
    
    
    
    4,956Current
derivative financial instrument assets
    
    
    2,232
    
    
    
    8,008Total current assets
    
    
    36,393
    
    
    
    33,139Property and equipment, net of accumulated
depreciation of $6,168 and $5,473
    
    
    17,323
    
    
    
    17,116Oil and gas properties under full cost method of accounting, net
    
    
    314,604
    
    
    
    294,329Other assets, net
    
    
    3,420
    
    
    
    3,526Long-term derivative financial instrument assets
    
    
    685
    
    
    
    3,467Total assets
    
    $
    372,425
    
    
    $
    351,577LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    17,581
    
    
    $
    18,673Accrued expenses
    
    
    3,267
    
    
    
    639Due to affiliates
    
    
    2,472
    
    
    
    1,708Current portion of notes payable
    
    
    448
    
    
    
    666Current derivative financial instrument liabilities
    
    
    32,383
    
    
    
    8,108Total current liabilities
    
    
    56,151
    
    
    
    29,794Non-current liabilities:Long-term derivative financial instrument liabilities
    
    
    16,506
    
    
    
    6,311Asset retirement obligations
    
    
    2,056
    
    
    
    1,700Notes payable
    
    
    123,036
    
    
    
    94,042Total liabilities
    
    
    197,749
    
    
    
    131,847Commitments and contingenciesPartners equity:Common
unitholders  Issued and outstanding 
 12,301,521 at March 31, 2008 and December 31, 2007, respectively
(9,100,000  public;   3,201,521  affiliate)
    
    
    136,707
    
    
    
    162,610Subordinated
unitholder  affiliate; 8,857,981 units issued and outstanding at March 31, 2008
and December 31, 2007
    
    
    36,217
    
    
    
    54,465General Partner  affiliate;
431,827 units issued and outstanding at March 31, 2008 and December 31, 2007
    
    
    1,752
    
    
    
    2,655Total partners equity
    
    
    174,676
    
    
    
    219,730Total liabilities and partners equity
    
    $
    372,425
    
    
    $
    351,577
  F-1




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 STATEMENTS OF OPERATIONS
(Unaudited)
(Restated)
 ($ in thousands, except per unit and unit data)
 Successor
    
    
    PredecessorThree months ended March 31,2008
    
    
    2007(Consolidated)
    
    
    (Carve out)Revenue:Oil and gas sales
    
    $
    38,314
    
    
    $
    24,974Total revenues
    
    
    38,314
    
    
    
    24,974Costs and expenses:Oil and gas production
    
    
    10,386
    
    
    
    9,048Transportation expense
    
    
    8,663
    
    
    
    6,361General and administrative
    
    
    3,098
    
    
    
    2,374Depreciation, depletion and amortization
    
    
    10,700
    
    
    
    7,762Misappropriation of funds
    
    
    
    
    
    
    500Total costs and expenses
    
    
    32,847
    
    
    
    26,045Operating
income (loss)
    
    
    5,467
    
    
    
    (1,071
    )Other income (expense):Other income
    
    
    69
    
    
    
    94Loss from derivative financial instruments
    
    
    (44,239
    )
    
    
    (13,547
    )Interest income
    
    
    17
    
    
    
    177Interest expense
    
    
    (2,079
    )
    
    
    (8,416
    )Total other income (expense)
    
    
    (46,232
    )
    
    
    (21,692
    )Net loss
    
    $
    (40,765
    )
    
    $
    (22,763
    )General partners interest in net (loss)
    
    $
    (815
    )Limited partners interest in net (loss)
    
    $
    (39,950
    )Net loss per
limited partner units  basic and diluted
    
    $
    (1.89
    )Weighted average limited partner units outstanding:Common units (basic and diluted)
    
    
    12,301,521Subordinated units (basic and diluted)
    
    
    8,857,981
  F-2




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 STATEMENTS OF CASH FLOWS(Unaudited)
(Restated)
 ($ in thousands)
 Successor
    
    
    PredecessorThree months endedMarch 31,2008
    
    
    2007(Consolidated)
    
    
    (Carve out)Cash flows from operating activities:Net loss
    
    $
    (40,765
    )
    
    $
    (22,763
    )Adjustments to reconcile net loss to cash provided by
 operations:Depreciation, depletion  and amortization
    
    
    10,700
    
    
    
    7,762Change in derivative fair value
    
    
    43,028
    
    
    
    14,541Unit awards
granted to employees
    
    
    12
    
    
    
    447Amortization of loan origination fees
    
    
    120
    
    
    
    472Bad debt
expense
    
    
    26
    
    
    
    22Change in assets and liabilities:Accounts receivable
    
    
    3
    
    
    
    (1,688
    )Other receivables
    
    
    
    
    
    
    (1,415
    )Other current assets
    
    
    623
    
    
    
    (828
    )Other assets
    
    
    (13
    )
    
    
    1,745Due from affiliates
    
    
    (6,507
    )
    
    
    345Accounts payable
    
    
    185
    
    
    
    10,735Revenue payable
    
    
    251
    
    
    
    1,479Accrued expenses
    
    
    2,592
    
    
    
    1,093Other
long-term liabilities
    
    
    354
    
    
    
    41Net cash provided by  operating activities
    
    
    10,609
    
    
    
    11,988Cash flows from investing activities:Equipment, development and leasehold costs
    
    
    (34,514
    )
    
    
    (21,607
    )Net cash used in investing activities
    
    
    (34,514
    )
    
    
    (21,607
    )Cash flows from financing activities:Proceeds
from revolver note
    
    
    29,000
    
    
    
    Repayments of note borrowings
    
    
    (224
    )
    
    
    (221
    )Syndication costs
    
    
    (265
    )
    
    
    Capital contributions (distributions)
    
    
    375
    
    
    
    (1,807
    )Distributions to
unitholders
    
    
    (4,411
    )
    
    
    Refinancing
costs
    
    
    
    
    
    
    (1,687
    )Net cash
provided by (used in) financing activities
    
    
    24,475
    
    
    
    (3,715
    )Net increase (decrease) in cash
    
    
    570
    
    
    
    (13,334
    )Cash and
cash equivalents, beginning of period
    
    
    169
    
    
    
    13,334Cash and
cash equivalents, end of period
    
    $
    739
    
    
    $
    
  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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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
   F-5




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##### Table of Contents



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




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##### Table of Contents



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 of Financial Instruments
  F-7




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##### Table of Contents



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




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 Allocation of Costs
   
    
    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 for gathering, dehydration and treating services was
$0.50 per MMBtu of gas 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
   F-9




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
 (Unaudited)
   The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations.
 Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
 Disclosures about Derivative Instruments and Hedging
Activities"
 4. Equity-Based Compensation
   F-10




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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
  March 31, 2008
    
    
    December 31, 2007($ in thousands)Senior credit facility
    
    $
    123,000
    
    
    $
    94,000Other notes payable
    
    
    484
    
    
    
    708Total long-term debt
    
    
    123,484
    
    
    
    94,708Less  current maturities
    
    
    448
    
    
    
    666Total long-term debt, net of current maturities
    
    $
    123,036
    
    
    $
    94,042
  2009
    
    $
    142010
    
    
    123,0052011
    
    
    62012
    
    
    72013
    
    
    4Thereafter
    
    
    $
    123,036
 Credit Facility
  Other Long-Term Indebtedness
  F-11




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
 (Unaudited)
 7. Financial Instruments and Hedging Activities
 Oil and Natural Gas  Hedging Activities
    Nine 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)
    
    
    8,458,725
    
    
    
    14,629,200
    
    
    
    12,499,060
    
    
    
    
    
    
    
    2,000,004
    
    
    
    37,586,989Weighted average
fixed price per MMBtu (1)
    
    $
    6.98
    
    
    $
    7.78
    
    
    $
    7.42
    
    
    $
    
    
    
    $
    8.11
    
    
    $
    7.50Fair value, net
    
    $
    (12,429
    )
    
    $
    (11,212
    )
    
    $
    (9,283
    )
    
    $
    
    
    
    $
    44
    
    
    $
    (32,880
    )Natural Gas Collars:Contract volumes (MMBtu)Floor
    
    
    5,280,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,280,275Ceiling
    
    
    5,280,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,280,275Weighted average fixed
price per MMBtu (1)Floor
    
    $
    6.54
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6.54Ceiling
    
    $
    7.53
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7.53Fair value, net
    
    $
    (12,602
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (12,602
    )Total Natural Gas
Contracts(2):Contract volumes (MMBtu)
    
    
    13,739,000
    
    
    
    14,629,200
    
    
    
    12,499,060
    
    
    
    
    
    
    
    2,000,004
    
    
    
    42,867,264Weighted average
fixed price per MMBtu (1)
    
    $
    6.81
    
    
    $
    7.78
    
    
    $
    7.42
    
    
    $
    
    
    
    $
    8.11
    
    
    $
    7.38Fair value, net
    
    $
    (25,031
    )
    
    $
    (11,212
    )
    
    $
    (9,283
    )
    
    $
    
    
    
    $
    44
    
    
    $
    (45,482
    )Oil Swaps:Contract volumes (Bbl)
    
    
    27,000
    
    
    
    36,000
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    93,000Weighted average
fixed price per Bbl (1)
    
    $
    95.92
    
    
    $
    90.07
    
    
    $
    87.50
    
    
    
    
    
    
    $
    
    
    
    $
    90.94Fair value, net
    
    $
    (97
    )
    
    $
    (205
    )
    
    $
    (188
    )
    
    $
    
    
    
    $
    
    
    
    $
    (490
    )
 
 (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 notional volumes by year, as follows: 2008: 4,716,000
MMBtu. F-12




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
 (Unaudited)
 Interest Rate Hedging Activities
  Loss from Derivative Financial Instruments
  Successor
    
    
    PredecessorThree Months EndedMarch 31,2008
    
    
    2007($ in thousands)Unrealized
losses
    
    $
    (43,028
    )
    
    $
    (14,541
    )Realized
(losses) gains
    
    
    (1,211
    )
    
    
    994Loss from derivative financial instruments
    
    $
    (44,239
    )
    
    $
    (13,547
    )
 Fair
Value
 Netting andLevel
    
    
    Level
    
    
    Level
    
    
    Cash
    
    
    Total Net FairAt March 31, 2008
    
    1
    
    
    2
    
    
    3
    
    
    Collateral*
    
    
    ValueDerivative financial instruments  assets
    
    $
    
    
    
    $
    5
    
    
    $
    2,244
    
    
    $
    668
    
    
    $
    2,917Derivative financial instruments  liabilities
    
    $
    
    
    
    $
    (19,579
    )
    
    $
    (28,642
    )
    
    $
    (668
    )
    
    $
    (48,889
    )Total
    
    $
    
    
    
    $
    (19,574
    )
    
    $
    (26,398
    )
    
    $
    
    
    
    $
    (45,972
    )
 
 *
    
    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.     Balance at beginning of year
    
    $
    3,444Realized and unrealized gains included in earnings
    
    
    (29,470
    )Purchases, sales, issuances, and settlements
    
    
    (372
    )Transfers into and out of Level 3
    
    
    Balance as of March 31, 2008
    
    $
    (26,398
    )
 F-13




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
 (Unaudited)
 Credit Risk
   Market Risk
    F-14




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO  CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 8. Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
 Successor
    
    
    PredecessorThree Months EndedMarch 31,2008
    
    
    2007($ in thousand)Asset retirement obligation beginning balance
    
    $
    1,700
    
    
    $
    1,410Liabilities incurred
    
    
    28
    
    
    
    42Liabilities settled
    
    
    (8
    )
    
    
    (1
    )Accretion expense
    
    
    46
    
    
    
    26Revisions in estimated cash flows
    
    
    290
    
    
    
    Asset retirement obligation ending balance
    
    $
    2,056
    
    
    $
    1,477
 9. Partners Equity
   10. Net Loss Per Limited Partner Unit
 Participating Securities and the Two-Class Method under FASB
Statement No. 128
 F-15




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  SuccessorThree Months EndedMarch 31, 2008Per Limited$
    
    
    Partner UnitNet loss
    
    $
    (40,765
    )Less: General partners 2% interest in net loss
    
    
    815Net loss available for limited partners
    
    $
    (39,950
    )
    
    $
    (1.89
    )
  11. Commitments and Contingencies
 et al
 et al.
   F-16




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
 (Unaudited)
        F-17




---



##### 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
    Management Services Agreement.
  F-18




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
 (Unaudited)
     Omnibus Agreement.
    Midstream Omnibus Agreement.
  
    
    the gathering, treating, processing and transporting of gas in North America;
    
    the transporting and fractionating of gas liquids in North America;
 F-19




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 
    
    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.
   Contribution, Conveyance and Assumption Agreement.
 13. Subsequent Events
  F-20




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
 (Unaudited)
 14.  Restatement
  
  March 31, 2008Partners equity as previously reported
    
    $
    184,584A  Effect of the Transfers
    
    
    (9,500
    )B  Reversal of hedge accounting
    
    
    (2,725
    )C  Accounting for formation of Quest Cherokee
    
    
    (15,102
    )D  Capitalization of costs in full cost pool
    
    
    (27,595
    )E  Recognition of costs in proper periods
    
    
    (957
    )F  Depreciation, depletion and amortization
    
    
    11,429G  Impairment of oil and gas properties
    
    
    30,719H  Other errors
    
    
    3,823Partners equity as restated
    
    $
    174,676
 Three Months Ended March 31,2008
    
    
    2007Net loss as previously reported
    
    $
    (17,346
    )
    
    $
    (3,650
    )A  Effect of the Transfers
    
    
    
    
    
    
    (500
    )B  Reversal of hedge accounting
    
    
    (19,196
    )
    
    
    (14,079
    )C  Accounting for formation of Quest Cherokee
    
    
    (3,659
    )
    
    
    (2,419
    )D  Capitalization of costs in full cost pool
    
    
    583
    
    
    
    (244
    )E  Recognition of costs in proper periods
    
    
    (431
    )
    
    
    (345
    )F  Depreciation, depletion and amortization
    
    
    (491
    )
    
    
    (480
    )G  Impairment of oil and gas properties
    
    
    
    
    
    
    H  Other errors
    
    
    (225
    )
    
    
    (1,046
    )Net loss as restated
    
    $
    (40,765
    )
    
    $
    (22,763
    )
 F-21




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
  (A)
 (B)
 (C)
 (D)
 (E)
 (F)
 F-22




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(Unaudited)
 (G)
 (H)
 F-23




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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 March 31, 2008AsPreviously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedRevenue:Oil and gas sales
    
    $
    37,353
    
    
    $
    961
    
    
    $
    38,314Other revenue (expense)
    
    
    50
    
    
    
    (50
    )
    
    
    Total revenues
    
    
    37,403
    
    
    
    911
    
    
    
    38,314Costs and expenses:Oil and gas production
    
    
    8,182
    
    
    
    2,204
    
    
    
    10,386Transportation expense
    
    
    8,663
    
    
    
    
    
    
    
    8,663General and administrative
    
    
    2,458
    
    
    
    640
    
    
    
    3,098Depreciation, depletion and amortization
    
    
    9,511
    
    
    
    1,189
    
    
    
    10,700Total costs and expenses
    
    
    28,814
    
    
    
    4,033
    
    
    
    32,847Operating income (loss)
    
    
    8,589
    
    
    
    (3,122
    )
    
    
    5,467Other income (expense):Loss from derivative financial instruments
    
    
    (23,831
    )
    
    
    (20,408
    )
    
    
    (44,239
    )Miscellaneous other income
    
    
    19
    
    
    
    50
    
    
    
    69Interest expense
    
    
    (2,140
    )
    
    
    61
    
    
    
    (2,079
    )Interest income
    
    
    17
    
    
    
    
    
    
    
    17Total other income (expense)
    
    
    (25,935
    )
    
    
    (20,297
    )
    
    
    (46,232
    )Net  loss
    
    $
    (17,346
    )
    
    $
    (23,419
    )
    
    $
    (40,765
    )General partners interest in net loss
    
    $
    (347
    )
    
    $
    (468
    )
    
    $
    (815
    )Limited partners interest in net loss
    
    $
    (16,999
    )
    
    $
    (22,951
    )
    
    $
    (39,950
    )Net loss per
limited partner units  basic and diluted
    
    $
    (0.80
    )
    
    $
    (1.09
    )
    
    $
    (1.89
    )Weighted average limited partner units
outstanding:Common units (basic and diluted)
    
    
    12,301,521
    
    
    
    
    
    
    
    12,301,521Subordinated units (basic and diluted)
    
    
    8,857,981
    
    
    
    
    
    
    
    8,857,981
 F-24




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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 March 31, 2008AsPreviously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedCash flows from operating activities:Net loss
    
    $
    (17,346
    )
    
    $
    (23,419
    )
    
    $
    (40,765
    )Adjustments
to reconcile net loss to cash (used in) provided by operations:Depreciation, depletion and amortization
    
    
    10,191
    
    
    
    509
    
    
    
    10,700Change in derivative fair value
    
    
    23,831
    
    
    
    19,197
    
    
    
    43,028Unit awards granted to employees
    
    
    
    
    
    
    12
    
    
    
    12Capital contributions for director fees
    
    
    203
    
    
    
    (203
    )
    
    
    Capital contributions for employees
    
    
    868
    
    
    
    (868
    )
    
    
    Amortization of loan origination fees
    
    
    177
    
    
    
    (57
    )
    
    
    120Bad debt expense
    
    
    
    
    
    
    26
    
    
    
    26(Gain) loss on sale of assets
    
    
    (47
    )
    
    
    47
    
    
    
    Change in assets and liabilities:Accounts receivable
    
    
    30
    
    
    
    (27
    )
    
    
    3Other receivables
    
    
    (24
    )
    
    
    24
    
    
    
    Other current assets
    
    
    233
    
    
    
    390
    
    
    
    623Other assets
    
    
    (1,842
    )
    
    
    1,829
    
    
    
    (13
    )Due from affiliates
    
    
    (21,093
    )
    
    
    14,586
    
    
    
    (6,507
    )Accounts payable
    
    
    (1,989
    )
    
    
    2,174
    
    
    
    185Revenue payable
    
    
    
    
    
    
    251
    
    
    
    251Accrued expenses
    
    
    34
    
    
    
    2,558
    
    
    
    2,592Other long-term liabilities
    
    
    
    
    
    
    354
    
    
    
    354Net cash
(used in) provided by operating activities
    
    
    (6,774
    )
    
    
    17,383
    
    
    
    10,609Cash flows from investing activities:Oil & gas property acquisition
    
    
    (9,500
    )
    
    
    9,500
    
    
    
    Equipment,
development and leasehold costs
    
    
    (19,261
    )
    
    
    (15,253
    )
    
    
    (34,514
    )Net additions to other property and equipment
    
    
    (627
    )
    
    
    627
    
    
    
    Net cash used in investing activities
    
    
    (29,388
    )
    
    
    (5,126
    )
    
    
    (34,514
    )Cash flows from financing activities:Proceeds from revolver note
    
    
    29,000
    
    
    
    
    
    
    
    29,000Repayments of note borrowings
    
    
    (223
    )
    
    
    (1
    )
    
    
    (224
    )Capital contributions (distributions)
    
    
    (1,859
    )
    
    
    2,234
    
    
    
    375Distributions to unitholders
    
    
    
    
    
    
    (4,411
    )
    
    
    (4,411
    )Syndication costs
    
    
    (201
    )
    
    
    (64
    )
    
    
    (265
    )Refinancing costs
    
    
    (71
    )
    
    
    71
    
    
    
    Change in other long-term liabilities
    
    
    86
    
    
    
    (86
    )
    
    
    Net cash provided by financing activities
    
    
    26,732
    
    
    
    (2,257
    )
    
    
    24,475Net
(decrease) increase  in cash
    
    
    (9,430
    )
    
    
    10,000
    
    
    
    570Cash and cash equivalents, beginning of period
    
    
    10,170
    
    
    
    (10,001
    )
    
    
    169Cash and
cash equivalents, end of period
    
    $
    740
    
    
    $
    (1
    )
    
    $
    739
 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 March 31, 2008AsPreviously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    740
    
    
    $
    (1
    )
    
    $
    739Restricted cash
    
    
    1,205
    
    
    
    
    
    
    
    1,205Accounts receivable, trade
    
    
    294
    
    
    
    (237
    )
    
    
    57Due from affiliates
    
    
    29,726
    
    
    
    (6,831
    )
    
    
    22,895Other current assets
    
    
    2,688
    
    
    
    (220
    )
    
    
    2,468Inventory
    
    
    6,797
    
    
    
    
    
    
    
    6,797Current
derivative financial  instrument assets
    
    
    223
    
    
    
    2,009
    
    
    
    2,232Total current assets
    
    
    41,673
    
    
    
    (5,280
    )
    
    
    36,393Property and equipment, net
    
    
    17,057
    
    
    
    266
    
    
    
    17,323Oil and gas
properties under full cost method of accounting, net
    
    
    318,183
    
    
    
    (3,579
    )
    
    
    314,604Other assets, net
    
    
    3,420
    
    
    
    
    
    
    
    3,420Long-term
derivative financial instrument assets
    
    
    599
    
    
    
    86
    
    
    
    685Total assets
    
    $
    380,932
    
    
    $
    (8,507
    )
    
    $
    372,425LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,012
    
    
    $
    4,569
    
    
    $
    17,581Accrued expenses
    
    
    12,084
    
    
    
    (8,817
    )
    
    
    3,267Due to affiliates
    
    
    
    
    
    
    2,472
    
    
    
    2,472Current portion of notes payable
    
    
    448
    
    
    
    
    
    
    
    448Current
derivative financial instrument liabilities
    
    
    28,745
    
    
    
    3,638
    
    
    
    32,383Total current liabilities
    
    
    54,289
    
    
    
    1,862
    
    
    
    56,151Non-current liabilities:Long-term
derivative financial instrument liabilities
    
    
    17,203
    
    
    
    (697
    )
    
    
    16,506Asset retirement obligation
    
    
    1,820
    
    
    
    236
    
    
    
    2,056Notes payable
    
    
    123,036
    
    
    
    
    
    
    
    123,036Total liabilities
    
    
    196,348
    
    
    
    1,401
    
    
    
    197,749Commitments and contingenciesPartners equity:Partners
equity

    
    
    201,833
    
    
    
    (201,833
    )
    
    
    Accumulated
other comprehensive income (loss)
    
    
    (17,249
    )
    
    
    17,249
    
    
    
    Common unitholders
    
    
   


    
    
    
   136,707

    
    
    
   136,707Subordinated unitholder  affiliate
    
    

   


    
    
    
   36,217

    
    
    
    36,217General partner  affiliate
    
    
   


    
    
    
   1,752

    
    
    
    1,752Total partners equity
    
    
    184,584
    
    
    
    (9,908
    )
    
    
    174,676Total liabilities and partners equity
    
    $
    380,932
    
    
    $
    (8,507
    )
    
    $
    372,425
 F-26




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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 March 31, 2007AsPreviously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedRevenue:Oil and gas sales
    
    $
    25,549
    
    
    $
    (575
    )
    
    $
    24,974Other revenue (expense)
    
    
    (13
    )
    
    
    13
    
    
    
    Total revenues
    
    
    25,536
    
    
    
    (562
    )
    
    
    24,974Costs and expenses:Oil and gas production
    
    
    7,227
    
    
    
    1,821
    
    
    
    9,048Transportation expense
    
    
    6,361
    
    
    
    
    
    
    
    6,361General and administrative
    
    
    1,753
    
    
    
    621
    
    
    
    2,374Depreciation, depletion and amortization
    
    
    6,694
    
    
    
    1,068
    
    
    
    7,762Misappropriation of funds
    
    
    
    
    
    
    500
    
    
    
    500Total costs and expenses
    
    
    22,035
    
    
    
    4,010
    
    
    
    26,045Operating income (loss)
    
    
    3,501
    
    
    
    (4,572
    )
    
    
    (1,071
    )Other income (expense):Loss
from derivative financial instruments
    
    
    (464
    )
    
    
    (13,083
    )
    
    
    (13,547
    )Miscellaneous other income
    
    
    107
    
    
    
    (13
    )
    
    
    94Interest expense
    
    
    (6,971
    )
    
    
    (1,445
    )
    
    
    (8,416
    )Interest income
    
    
    177
    
    
    
    
    
    
    
    177Total other income (expense)
    
    
    (7,151
    )
    
    
    (14,541
    )
    
    
    (21,692
    )Net  loss
    
    $
    (3,650
    )
    
    $
    (19,113
    )
    
    $
    (22,763
    )
 F-27




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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 March 31, 2007AsPreviously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    As RestatedCash flows from operating activities:Net  loss
    
    $
    (3,650
    )
    
    $
    (19,113
    )
    
    $
    (22,763
    )Adjustments to reconcile net  loss to cash provided by operations:Depreciation, depletion and amortization
    
    
    7,332
    
    
    
    430
    
    
    
    7,762Change in derivative fair value
    
    
    464
    
    
    
    14,077
    
    
    
    14,541Unit awards granted to employees
    
    
    
    
    
    
    447
    
    
    
    447Capital contributions for employees
    
    
    120
    
    
    
    (120
    )
    
    
    Amortization of loan origination fees
    
    
    479
    
    
    
    (7
    )
    
    
    472Amortization of gas swap fees
    
    
    62
    
    
    
    (62
    )
    
    
    Bad debt expense
    
    
    
    
    
    
    22
    
    
    
    22(Gain) loss on sale of assets
    
    
    (65
    )
    
    
    65
    
    
    
    Change in assets and liabilities:Accounts receivable
    
    
    (2,059
    )
    
    
    371
    
    
    
    (1,688
    )Other receivables
    
    
    (1,044
    )
    
    
    (371
    )
    
    
    (1,415
    )Other current assets
    
    
    (806
    )
    
    
    (22
    )
    
    
    (828
    )Other assets
    
    
    (604
    )
    
    
    2,349
    
    
    
    1,745Due from affiliates
    
    
    
    
    
    
    345
    
    
    
    345Accounts payable
    
    
    1,028
    
    
    
    9,707
    
    
    
    10,735Revenue payable
    
    
    1,900
    
    
    
    (421
    )
    
    
    1,479Accrued expenses
    
    
    (429
    )
    
    
    1,522
    
    
    
    1,093Other long-term liabilities
    
    
    
    
    
    
    41
    
    
    
    41Net cash provided by operating activities
    
    
    2,728
    
    
    
    9,260
    
    
    
    11,988Cash flows from investing activities:Equipment, development and leasehold costs
    
    
    (20,864
    )
    
    
    (743
    )
    
    
    (21,607
    )Net additions to other property and equipment
    
    
    (2,458
    )
    
    
    2,458
    
    
    
    Proceeds from sale of property and equipment
    
    
    922
    
    
    
    (922
    )
    
    
    Net cash used in investing activities
    
    
    (22,400
    )
    
    
    793
    
    
    
    (21,607
    )Cash flows from financing activities:Repayments of note borrowings
    
    
    (221
    )
    
    
    
    
    
    
    (221
    )Capital contributions (distributions)
    
    
    23,077
    
    
    
    (24,884
    )
    
    
    (1,807
    )Refinancing costs
    
    
    
    
    
    
    (1,687
    )
    
    
    (1,687
    )Change in other long-term liabilities
    
    
    40
    
    
    
    (40
    )
    
    
    Net cash
provided by (used in) financing activities
    
    
    22,896
    
    
    
    (26,611
    )
    
    
    (3,715
    )Net increase (decrease) in cash
    
    
    3,224
    
    
    
    (16,558
    )
    
    
    (13,334
    )Cash and
cash equivalents, beginning of period
    
    
    21,334
    
    
    
    (8,000
    )
    
    
    13,334Cash and
cash equivalents, end of period
    
    $
    24,558
    
    
    $
    (24,558
    )
    
    $
    
 F-28




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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 Three Months Ended March 31, 2008
    Results of Operations
  Overview.
 Successor
    
    PredecessorThree MonthsEndedMarch 31,
    
    Increase/2008
    
    2007
    
    (Decrease)($ in thousands)Oil and gas sales
    
    $
    38,314
    
    
    $
    24,974
    
    
    $
    13,340
    
    
    
    53.4
    %Oil and gas production costs
    
    $
    10,386
    
    
    $
    9,048
    
    
    $
    1,338
    
    
    
    14.8
    %Transportation expense (related affiliate)
    
    $
    8,663
    
    
    $
    6,361
    
    
    $
    2,302
    
    
    
    36.2
    %Depreciation, depletion and amortization
    
    $
    10,700
    
    
    $
    7,762
    
    
    $
    2,938
    
    
    
    37.9
    %General and administrative expenses
    
    $
    3,098
    
    
    $
    2,374
    
    
    $
    724
    
    
    
    30.5
    %Loss from derivative financial instruments
    
    $
    44,239
    
     
    $
    13,547
    
    
    $
    30,692
    
    
    
    226.6
    %Interest
expense, net
    
    $
    2,062
    
    
    $
    8,239
    
    
    $
    (6,177
    )
    
    
    (75.0
    )%
 8




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##### Table of Contents



Production.
 Successor
    
    PredecessorThree months endedMarch 31,
    
    Increase2008
    
    2007
    
    (Decrease)Production Data (net):Natural gas production (MMcf)
    
    
    4,966
    
    
    
    3,724
    
    
    
    1,242
    
    
    
    33.4
    %Oil
production (BBbl)
    
    
    11
    
    
    
    2
    
    
    
    9
    
    
    
    450.0
    %Total production (MMcfe)
    
    
    5,032
    
    
    
    3,736
    
    
    
    1,296
    
    
    
    34.7
    %Average daily production (MMcfe/d)
    
    
    55.3
    
    
    
    41.5
    
    
    
    13.8
    
    
    
    33.3
    %Average Sales Price per Unit:Natural gas equivalents (Mcfe)
    
    $
    7.61
    
    
    $
    6.68
    
    
    $
    0.93
    
    
    
    13.9
    %Natural gas (Mcf)
    
    $
    7.49
    
    
    $
    6.68
    
    
    $
    0.81
    
    
    
    12.1
    %Oil (Bbl)
    
    $
    98.12
    
    
    $
    50.35
    
    
    $
    47.77
    
    
    
    94.9
    %Average Unit Costs per Mcfe:Production costs
    
    $
    2.06
    
    
    $
    2.42
    
    
    $
    (0.36
    )
    
    
    (14.9
    )%Transportation expense (related affiliate)
    
    $
    1.72
    
    
    $
    1.70
    
    
    $
    0.02
    
    
    
    1.2
    %Depreciation, depletion and amortization
    
    $
    2.13
    
    
    $
    2.08
    
    
    $
    0.05
    
    
    
    2.4
    %General and administrative expenses
    
    $
    0.62
    
    
    $
    0.64
    
    
    $
    (0.02
    )
    
    
    (3.1
    )%Interest
expense, net
    
    $
    0.41
    
    
    $
    2.21
    
    
    $
    (1.80
    )
    
    
    (81.4
    )%
 Oil
and Gas Sales.
 Operating Expenses.
   Depreciation, Depletion and Amortization.
 9




---



##### Table of Contents



General and Administrative Expenses.
 Loss from Derivative Financial
Instruments
 Interest Expense, Net.
 Net Loss
  Liquidity and Capital Resources
 Liquidity
     th th th
 10




---



##### Table of Contents



Capital Expenditures
   
    
    maintenance capital expenditures, which are those capital expenditures
required to maintain our production levels and asset base over the
long term; and
    
    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.
 11




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##### Table of Contents



Contractual Obligations
  Payments Due By PeriodLess
    
    
    
    
    
    
    
    
    
    
    MoreThan 1
    
    
    1-3
    
    
    4-5
    
    
    Than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years($ in thousands)Revolving credit facility (2)
    
    $
    123,000
    
    
    $
    
    
    
    $
    123,000
    
    
    $
    
    
    
    $
    Notes payable
    
    
    484
    
    
    
    448
    
    
    
    19
    
    
    
    13
    
    
    
    4Interest expense obligation (1)(2)
    
    
    22,254
    
    
    
    8,613
    
    
    
    13,638
    
    
    
    3
    
    
    
    Drilling contractor
    
    
    2,548
    
    
    
    2,548
    
    
    
    
    
    
    
    
    
    
    
    Lease obligation
    
    
    534
    
    
    
    111
    
    
    
    205
    
    
    
    187
    
    
    
    31Total
    
    $
    148,820
    
    
    $
    11,720
    
    
    $
    136,862
    
    
    $
    203
    
    
    $
    35
 
 (1)
    
    The interest expense obligation was computed using the LIBOR interest rate as of March
31, 2008. If the interest rate were to change 1%, then the total interest payment
obligation would change by $3.1 million. Effective April 15, 2008, the interest rate on our
revolving credit facility was increased by 1%. This change has been reflected in the table
above. See Note 13 to the consolidated financial statements included in this report.(2)
    
    Effective April 15, 2008, the maturity date for the revolving credit facility was
changed from November 15, 2012 to November 15, 2010. This change has been reflected in
the table above. See Note 13 to the consolidated financial statements included in this report. 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;
 12




---



##### Table of Contents




    
    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.
  
    
    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;
 13




---



##### Table of Contents




    
    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;
    
    availability of capital;
    
    the strength and financial resources of our competitors; and
    
    general economic conditions.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Nine 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)
    
    
    8,458,725
    
    
    
    14,629,200
    
    
    
    12,499,060
    
    
    
    
    
    
    
    2,000,004
    
    
    
    37,586,989Weighted average
fixed price per MMBtu (1)
    
    $
    6.98
    
    
    $
    7.78
    
    
    $
    7.42
    
    
    $
    
    
    
    $
    8.11
    
    
    $
    7.50Fair value, net
    
    $
    (12,429
    )
    
    $
    (11,212
    )
    
    $
    (9,283
    )
    
    $
    
    
    
    $
    44
    
    
    $
    (32,880
    )Natural Gas Collars:Contract volumes (MMBtu)Floor
    
    
    5,280,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,280,275Ceiling
    
    
    5,280,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,280,275Weighted average fixed
price per MMBtu (1)Floor
    
    $
    6.54
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6.54Ceiling
    
    $
    7.53
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7.53Fair value, net
    
    $
    (12,602
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (12,602
    )Total Natural Gas
Contracts(2):Contract volumes (MMBtu)
    
    
    13,739,000
    
    
    
    14,629,200
    
    
    
    12,499,060
    
    
    
    
    
    
    
    2,000,004
    
    
    
    42,867,264Weighted average
fixed price per MMBtu (1)
    
    $
    6.81
    
    
    $
    7.78
    
    
    $
    7.42
    
    
    $
    
    
    
    $
    8.11
    
    
    $
    7.38Fair value, net
    
    $
    (25,031
    )
    
    $
    (11,212
    )
    
    $
    (9,283
    )
    
    $
    
    
    
    $
    44
    
    
    $
    (45,482
    )Oil Swaps:Contract volumes (Bbl)
    
    
    27,000
    
    
    
    36,000
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    93,000Weighted average
fixed price per Bbl (1)
    
    $
    95.92
    
    
    $
    90.07
    
    
    $
    87.50
    
    
    
    
    
    
    $
    
    
    
    $
    90.94Fair value, net
    
    $
    (97
    )
    
    $
    (205
    )
    
    $
    (188
    )
    
    $
    
    
    
    $
    
    
    
    $
    (490
    )
 
 (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 notional volumes by year, as follows: 2008: 4,716,000
MMBtu.  14




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##### Table of Contents



Item 4(T). Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
   15




---



##### Table of Contents



(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.
 The control environment material weaknesses described above contributed to the material
weaknesses related to the transfers that were the subject of the internal investigation and to
our internal control over financial reporting, period end financial close and reporting,
accounting for derivative instruments, depreciation, depletion and amortization, impairment of
oil and gas properties and cash management described in items (2) to (7) below.
 (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.
 Each of these material weaknesses relating to the monitoring of our internal control over
financial reporting contributed to the material weaknesses described in items (3) through (7)
below.
 (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.
 16




---



##### Table of Contents



(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.
  17




---



##### Table of Contents



Remediation Plan
       Changes in Internal Controls
  18




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Default Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  19




---



##### Table of Contents



Item 6. Exhibits
 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).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 2002.31.2
    
    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. 20




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##### Table of Contents



SIGNATURES
 th
   By:
    /s/ David C. LawlerDavid C. LawlerChief Executive OfficerBy:

/s/
Eddie M. LeBlanc, IIIEddie M. LeBlanc, IIIChief Financial Officer 21