##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  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
 þ o
  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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##### 



QUEST ENERGY PARTNERS, L.P.
 FORM 10-Q
 FOR THE QUARTER ENDED MARCH 31, 2008
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATION
    
    
    4Item 1. Financial Statements
    
    
    4Balance Sheets:
March 31, 2008 and December 31, 2007
    
    
    F-1Statements of Operations and Comprehensive Income:
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
    
    
    5Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    11Item 4(T). Controls and Procedures
    
    
    11PART II  OTHER INFORMATION
    
    
    12Item 1. Legal Proceedings
    
    
    12Item 1A. Risk Factors
    
    
    12Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    12Item 3. Defaults Upon Senior Securities
    
    
    12Item 4. Submission of Matters to a Vote of Security Holders
    
    
    12Item 5. Other Information
    
    
    12Item 6. Exhibits
    
    
    13SIGNATURES
    
    
    14Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  -2-




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
    
    when we use the terms Quest Energy Partners, the Company, Successor, our, we,
us and similar terms in a historical context prior to November 15, 2007, we are referring to
Predecessor, and when we use such terms in a historical context on or after November 15, 2007,
in the present tense or prospectively, we are referring to Quest Energy Partners, L.P. and its
subsidiaries, Quest Cherokee, LLC and Quest Cherokee Oilfield Service, LLC;
    
    when we use the term Predecessor, we are referring to the assets, liabilities and
operations of our Parent located in the Cherokee Basin (other than its midstream assets),
which our Parent 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 our Parent, 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 Quest Midstream, we are referring to Quest Midstream Partners, L.P.
and its subsidiaries.
 -3-




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements .
    -4-




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 BALANCE SHEETS
 ($ in thousands)
 March 31,
    
    December 31,2008
    
    2007(Consolidated)(Unaudited)
    
    (Audited)ASSETSCurrent assets:Cash
    
    $
    740
    
    
    $
    10,170Restricted cash
    
    
    1,205
    
    
    
    1,205Accounts receivable, trade
    
    
    294
    
    
    
    297Due from affiliated companies
    
    
    29,726
    
    
    
    12,788Other current assets
    
    
    2,688
    
    
    
    2,923Inventory
    
    
    6,797
    
    
    
    4,956Short-term derivative asset
    
    
    223
    
    
    
    6,729Total current assets
    
    
    41,673
    
    
    
    39,068Property and equipment, net of accumulated
depreciation of $6,873 and $6,183
    
    
    17,057
    
    
    
    17,063Oil and gas properties:Properties being amortized
    
    
    435,296
    
    
    
    406,661Properties not being amortized
    
    
    20,331
    
    
    
    19,328455,627
    
    
    
    425,989Less: Accumulated depreciation,
depletion, amortization and impairment
    
    
    (137,444
    )
    
    
    (127,968
    )Net property plant and equipment
    
    
    318,183
    
    
    
    298,021Other assets, net
    
    
    3,420
    
    
    
    3,526Long-term derivative asset
    
    
    599
    
    
    
    1,568Total assets
    
    $
    380,932
    
    
    $
    359,246LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,012
    
    
    $
    15,195Accrued expenses
    
    
    12,084
    
    
    
    5,056Current portion of notes payable
    
    
    448
    
    
    
    666Short-term derivative liability
    
    
    28,745
    
    
    
    8,241Total current liabilities
    
    
    54,289
    
    
    
    29,158Non-current liabilities:Long-term derivative liability
    
    
    17,203
    
    
    
    5,586Asset retirement obligation
    
    
    1,820
    
    
    
    1,700Notes payable
    
    
    123,484
    
    
    
    94,708Less current maturities
    
    
    (448
    )
    
    
    (666
    )Non-current liabilities
    
    
    142,059
    
    
    
    101,328Total liabilities
    
    
    196,348
    
    
    
    130,486Commitments and contingenciesPartners equity:Partners equity
    
    
    201,833
    
    
    
    230,245Accumulated other comprehensive income (loss)
    
    
    (17,249
    )
    
    
    (1,485
    )Total partners equity
    
    
    184,584
    
    
    
    228,760Total liabilities and partners equity
    
    $
    380,932
    
    
    $
    359,246
  F-1




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
 
 STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (UNAUDITED)
 ($ in thousands, except per unit data)
 Successor
    
    
    PredecessorThree months ended March 31,2008
    
    
    2007(Consolidated)
    
    
    (Carve out)Revenue:Oil and gas sales
    
    $
    37,353
    
    
    $
    25,549Other revenue (expense)
    
    
    50
    
    
    
    (13
    )Total revenues
    
    
    37,403
    
    
    
    25,536Costs and expenses:Oil and gas production
    
    
    16,845
    
    
    
    13,588General and administrative
    
    
    2,458
    
    
    
    1,753Depreciation, depletion and amortization
    
    
    9,511
    
    
    
    6,694Total costs and expenses
    
    
    28,814
    
    
    
    22,035Operating income
    
    
    8,589
    
    
    
    3,501Other income (expense):Other income (expense)
    
    
    19
    
    
    
    107Change in derivative fair value
    
    
    (23,831
    )
    
    
    (464
    )Interest income
    
    
    17
    
    
    
    177Interest expense
    
    
    (2,140
    )
    
    
    (6,971
    )Total other income (expense)
    
    
    (25,935
    )
    
    
    (7,151
    )Income (loss) before income taxes
    
    
    (17,346
    )
    
    
    (3,650
    )Income tax expense  deferred
    
    
    
    
    
    
    Net (loss)
    
    
    (17,346
    )
    
    
    (3,650
    )Other comprehensive income (loss), net of tax:Change in fixed-price contract and other
derivative fair value, net of tax of $0 and $0
    
    
    (15,764
    )
    
    
    (13,480
    )Other comprehensive income (loss)
    
    
    (15,764
    )
    
    
    (13,480
    )Comprehensive income (loss)
    
    $
    (33,110
    )
    
    $
    (17,130
    )General partners interest in net (loss)
    
    $
    (347
    )Limited partners interest in net (loss)
    
    $
    (16,999
    )Net loss per limited partner unit:Common units (basic and diluted)
    
    $
    (0.80
    )Subordinated units (basic and diluted)
    
    $
    (0.80
    )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)
 ($ in thousands)
 Successor
    
    
    PredecessorFor the three months endedMarch 31,2008
    
    
    2007(Consolidated)
    
    
    (Carve out)Cash flows from operating activities:Net (loss)
    
    $
    (17,346
    )
    
    $
    (3,650
    )Adjustments to reconcile net income (loss) to cash provided by
(used in) operations:Depreciation and depletion
    
    
    10,191
    
    
    
    7,332Change in derivative fair value
    
    
    23,831
    
    
    
    464Capital contributions for directors fees
    
    
    203
    
    
    
    Capital contributions for employees
    
    
    868
    
    
    
    120Amortization of loan origination fees
    
    
    177
    
    
    
    479Amortization of gas swap fees
    
    
    
    
    
    
    62(Gain) loss on sale of assets
    
    
    (47
    )
    
    
    (65
    )Change in assets and liabilities:Accounts receivable
    
    
    30
    
    
    
    (2,059
    )Other receivables
    
    
    (24
    )
    
    
    (1,044
    )Other current assets
    
    
    233
    
    
    
    (806
    )Inventory
    
    
    (1,842
    )
    
    
    (604
    )Due from affiliates
    
    
    (21,093
    )
    
    
    Accounts payable
    
    
    (1,989
    )
    
    
    1,028Revenue payable
    
    
    
    
    
    
    1,900Accrued expenses
    
    
    34
    
    
    
    (429
    )Net cash provided by (used in) operating activities
    
    
    (6,774
    )
    
    
    2,728Cash flows from investing activities:Equipment, development and leasehold costs
    
    
    (19,261
    )
    
    
    (20,864
    )Oil and gas property acquisition
    
    
    (9,500
    )
    
    
    Net additions to other property and equipment
    
    
    (627
    )
    
    
    (2,458
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    922Net cash used in investing activities
    
    
    (29,388
    )
    
    
    (22,400
    )Cash flows from financing activities:Proceeds from bank borrowings
    
    
    29,000
    
    
    
    Repayments of note borrowings
    
    
    (223
    )
    
    
    (221
    )Syndication costs
    
    
    (201
    )
    
    
    Capital contributions (distributions)
    
    
    (1,859
    )
    
    
    23,077Refinancing costs
    
    
    (71
    )
    
    
    Change in other long-term liabilities
    
    
    86
    
    
    
    40Net cash provided by financing activities
    
    
    26,732
    
    
    
    22,896Net increase (decrease) in cash
    
    
    (9,430
    )
    
    
    3,224Cash, beginning of period
    
    
    10,170
    
    
    
    21,334Cash, end of period
    
    $
    740
    
    
    $
    24,558Supplemental disclosure of cash flow information:Cash paid during the period for:Interest expense
    
    $
    1,944
    
    
    $
    5,845Income taxes
    
    $
    
    
    
    $
    
  F-3




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




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




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED 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
 Accounting for Derivative Instruments and Hedging Activities
 F-7




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED 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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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED 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 QRC 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 QRC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
Partners, L.P. (Quest Midstream) in December 2006, were allocated to the Cherokee
Basin Operations; and
    
    third party costs incurred at the QRC 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 QRC, 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 partners 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
  Reclassifications
  Recently Issued Accounting Standards
   F-9




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED 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 UNAUDITED 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
  2008
    
    $
    4482009
    
    
    152010
    
    
    123,0062011
    
    
    62012
    
    
    82013
    
    
    1Thereafter
    
    
    $
    123,484
 Credit Facility
  Other Long-Term Indebtedness
  F-11




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 7. Financial Instruments and Hedging Activities
 Natural Gas and Oil 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)
    
    
    3,752,000
    
    
    
    14,629,000
    
    
    
    12,499,000
    
    
    
    
    
    
    
    2,000,000
    
    
    
    32,880,000Weighted average
fixed price per MMBtu (1)
    
    $
    8.16
    
    
    $
    7.85
    
    
    $
    7.42
    
    
    
    
    
    
    $
    8.11
    
    
    $
    7.74Fixed-price sales
    
    $
    30,620
    
    
    $
    114,861
    
    
    $
    92,778
    
    
    
    
    
    
    $
    16,220
    
    
    $
    254,479Fair value, net
    
    $
    (11,402
    )
    
    $
    (13,749
    )
    
    $
    (8,085
    )
    
    
    
    
    
    $
    434
    
    
    $
    (32,802
    )Natural Gas Collars:Contract volumes (MMBtu)Floor
    
    
    5,281,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,281,000Ceiling
    
    
    5,281,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,281,000Weighted average fixed
price per MMBtu (1)Floor
    
    $
    6.54
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6.54Ceiling
    
    $
    7.54
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7.54Fixed-price sales (2)
    
    $
    34,542
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    34,542Fair value, net
    
    $
    (11,803
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (11,803
    )Total Natural Gas
Contracts(3):Contract volumes (MMBtu)
    
    
    9,033,000
    
    
    
    14,629,000
    
    
    
    12,499,000
    
    
    
    
    
    
    
    2,000,000
    
    
    
    38,161,000Weighted average
fixed price per MMBtu (1)
    
    $
    7.21
    
    
    $
    7.85
    
    
    $
    7.42
    
    
    $
    
    
    
    $
    8.11
    
    
    $
    7.57Fixed-price sales (2)
    
    $
    65,162
    
    
    $
    114,861
    
    
    $
    92,778
    
    
    $
    
    
    
    $
    16,220
    
    
    $
    289,021Fair value, net
    
    $
    (23,205
    )
    
    $
    (13,749
    )
    
    $
    (8,085
    )
    
    $
    
    
    
    $
    434
    
    
    $
    (44,605
    )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
    
    
    
    
    
    
    
    
    
    
    $
    90.94Fixed-price sales
    
    $
    2,590
    
    
    $
    3,243
    
    
    $
    2,625
    
    
    
    
    
    
    
    
    
    
    $
    8,458Fair value, net
    
    $
    (128
    )
    
    $
    (205
    )
    
    $
    (188
    )
    
    $
    
    
    
    $
    
    
    
    $
    (521
    )
 F-12




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QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 
 (1)
    
    The prices to be realized for hedged production are expected to vary from the prices shown
due to basis.(2)
    
    Assumes ceiling prices for natural gas collar volumes.(3)
    
    Does not include basis swaps with notional volumes by year, as follows: 2008: 4,716,000
MMBtu.      Interest Rate Hedging Activities
  Change in Derivative Fair Value
  Successor
    
    
    PredecessorFor the Three Months EndedMarch 31,2008
    
    
    2007($ in thousands)Change in fair value of derivatives not
qualifying as cash flow hedges
    
    $
    (23,548
    )
    
    $
    (1,036
    )Ineffective portion of derivatives qualifying
as cash flow hedges
    
    
    (283
    )
    
    
    572$
    (23,831
    )
    
    $
    (464
    )
  F-13




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 Credit Risk
   Market Risk
    Fair Value of Financial Instruments
  March 31, 2008
    
    December 31, 2007Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(Dollars in thousands)Derivative assets:Basis swaps
    
    $
    223
    
    
    $
    223
    
    
    $
    281
    
    
    $
    281Fixed-price natural gas swaps
    
    $
    599
    
    
    $
    599
    
    
    $
    2,742
    
    
    $
    2,742Fixed-price natural gas collars
    
    $
    
    
    
    $
    
    
    
    $
    5,274
    
    
    $
    5,274Derivative liabilities:Basis swaps
    
    $
    (8,470
    )
    
    $
    (8,470
    )
    
    $
    (856
    )
    
    $
    (856
    )Fixed-price natural gas swaps
    
    $
    (25,154
    )
    
    $
    (25,154
    )
    
    $
    (5,586
    )
    
    $
    (5,585
    )Fixed-price natural gas collars
    
    $
    (11,803
    )
    
    $
    (11,803
    )
    
    $
    (7,385
    )
    
    $
    (7,386
    )Fixed-price oil swaps
    
    $
    (521
    )
    
    $
    (521
    )
    
    $
    
    
    
    $
    Credit facilities
    
    $
    (123,000
    )
    
    $
    (123,000
    )
    
    $
    (94,000
    )
    
    $
    (94,000
    )Other financing agreements
    
    $
    (484
    )
    
    $
    (484
    )
    
    $
    (708
    )
    
    $
    (708
    )
 F-14




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 Accounting for Derivative Instruments and Hedging Activities
 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
    
    
    87
    
    
    
    42Liabilities settled
    
    
    (1
    )
    
    
    (1
    )Accretion expense
    
    
    34
    
    
    
    26Revisions in estimated cash flows
    
    
    
    
    
    
    Asset retirement obligation ending balance
    
    $
    1,820
    
    
    $
    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 UNAUDITED CONSOLIDATED/CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
  SuccessorThree Months EndedMarch 31, 2008Per Limited$
    
    
    Partner UnitNet loss
    
    $
    (17,346
    )Less: General partners 2% interest in net loss
    
    
    347Net loss available for limited partners
    
    $
    (16,999
    )
    
    $
    (0.80
    )
  11. Commitments and Contingencies
 et al
 et al.
   F-16




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




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##### Table of Contents



QUEST ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED 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 UNAUDITED 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 UNAUDITED 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



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Business of Issuer
  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
    
    $
    37,353
    
    
    $
    25,549
    
    
    $
    11,804
    
    
    
    46.2
    %Other revenue/(expense)
    
    $
    50
    
    
    $
    (13
    )
    
    $
    63
    
    
    
    484.6
    %Oil and gas production costs
    
    $
    8,182
    
    
    $
    7,227
    
    
    $
    955
    
    
    
    13.2
    %Transportation expense (related affiliate)
    
    $
    8,663
    
    
    $
    6,361
    
    
    $
    2,302
    
    
    
    36.2
    %Depreciation, depletion and amortization
    
    $
    9,511
    
    
    $
    6,694
    
    
    $
    2,814
    
    
    
    41.8
    %General and administrative expenses
    
    $
    2,458
    
    
    $
    1,753
    
    
    $
    705
    
    
    
    40.2
    %Change in derivative fair value
    
    $
    (23,831
    )
     
    $
    (464
    )
    
    $
    (23,367
    )
    
    
    (5,036.0
    )%Interest expense
    
    $
    2,140
    
    
    $
    6,971
    
    
    $
    (4,831
    )
    
    
    (69.3
    )%
 5




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##### Table of Contents



Production.
 Successor
    
    PredecessorFor the three months endedMarch 31,
    
    Increase2008
    
    2007
    
    (Decrease)Production Data (net):Natural gas production (MMcf)
    
    
    4,991
    
    
    
    3,716
    
    
    
    1,275
    
    
    
    34.3
    %Oil production (Bbl)
    
    
    11,188
    
    
    
    2,020
    
    
    
    9,168
    
    
    
    453.9
    %Total production (MMcfe)
    
    
    5,058
    
    
    
    3,728
    
    
    
    1,330
    
    
    
    35.7
    %Average daily production (MMcfe/d)
    
    
    55.6
    
    
    
    41.4
    
    
    
    14.2
    
    
    
    34.3
    %Average Sales Price per Unit (Mcfe):Excluding hedges
    
    $
    7.62
    
    
    $
    6.99
    
    
    $
    0.63
    
    
    
    9.0
    %Including hedges
    
    $
    7.38
    
    
    $
    7.12
    
    
    $
    0.26
    
    
    
    3.7
    %Natural gas (Mcf) Excluding hedges
    
    $
    7.51
    
    
    $
    6.99
    
    
    $
    0.52
    
    
    
    7.4
    %Including hedges
    
    $
    7.26
    
    
    $
    7.12
    
    
    $
    0.14
    
    
    
    2.0
    %Oil (Bbl) Excluding hedges
    
    $
    98.12
    
    
    $
    50.33
    
    
    $
    47.79
    
    
    
    95.0
    %Including hedges
    
    $
    98.12
    
    
    $
    50.33
    
    
    $
    47.79
    
    
    
    95.0
    %Average Unit Costs per Mcfe:Production costs
    
    $
    1.62
    
    
    $
    1.94
    
    
    $
    (0.32
    )
    
    
    (16.5
    )%Transportation expense (related affiliate)
    
    $
    1.72
    
    
    $
    1.71
    
    
    $
    0.01
    
    
    
    0.6
    %Depreciation, depletion and amortization
    
    $
    1.88
    
    
    $
    1.80
    
    
    $
    0.08
    
    
    
    4.4
    %General and administrative expenses
    
    $
    0.49
    
    
    $
    0.47
    
    
    $
    0.02
    
    
    
    4.3
    %Interest expense
    
    $
    0.42
    
    
    $
    1.87
    
    
    $
    (1.45
    )
    
    
    (77.5
    )%
 Oil and Gas Sales.
 Other Revenue/(Expense)
 Operating Expenses.
   Depreciation, Depletion and Amortization.
 6




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##### Table of Contents



General and Administrative Expenses.
 Change in Derivative Fair Value.
 Interest Expense.
 Net Income
  Liquidity and Capital Resources
 Liquidity
     th th th
 7




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##### Table of Contents



Capital Expenditures
   
    
    $41.0 million to drill and complete these wells and recomplete an estimated 52 gross wells in the Cherokee Basin;
    
    $37.5 million for acreage, the acquisition of properties in Seminole County, Oklahoma, equipment and vehicle
replacement and purchases and salt water disposal facilities in the Cherokee Basin;
  
    
    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.
 8




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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
    
    
    
    21
    
    
    
    14
    
    
    
    1Interest expense obligation (1)(2)
    
    
    22,373
    
    
    
    6,580
    
    
    
    15,790
    
    
    
    2
    
    
    
    1Drilling contractor
    
    
    2,548
    
    
    
    2,548
    
    
    
    
    
    
    
    
    
    
    
    Asset retirement obligation
    
    
    1,820
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,820Derivatives
    
    
    45,948
    
    
    
    28,745
    
    
    
    17,203
    
    
    
    
    
    
    
    Total
    
    $
    196,173
    
    
    $
    38,321
    
    
    $
    156,014
    
    
    $
    16
    
    
    $
    1,822
 
 (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 $4.8 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 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 14, 2010. This change has been reflected in
the table above. See Note 13 to the 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;
 9




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##### Table of Contents




    
    business strategy;
    
    budgets;
    
    amount, nature and timing of capital expenditures;
    
    drilling of wells;
    
    acquisition and development of natural gas and oil properties;
    
    timing and amount of future production of natural gas and oil;
    
    operating costs and other expenses;
    
    estimated future net revenues from natural gas and oil 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 natural gas and crude oil;
    
    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 natural gas and oil 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;
 10




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##### Table of Contents




    
    disruptions, capacity constraints in or other limitations on Quest Midstreams pipeline systems;
    
    costs associated with perfecting title for natural gas and oil 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 natural gas and oil 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
  
 Item 4(T). Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  11




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##### Table of Contents



Changes in Internal Controls
  
 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
  12




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##### 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. 13




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SIGNATURES
    By:
    /s/ Jerry D. CashJerry D. CashChief Executive OfficerBy:
    /s/ David E. GroseDavid E. GroseChief Financial Officer 14