##### 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 September 30, 2007.
 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
    
    20-0518546(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)210 Park Avenue, Suite 2750, Oklahoma City, OK
    
    73102(Address of principal executive offices)
    
    (Zip Code)
 405-600-7704
  þ
  o o þ
 þ




---



##### Table of Contents



1




---



##### 



QUEST ENERGY PARTNERS, L.P.
 FORM 10-Q
 FOR THE QUARTER ENDED SEPTEMBER 30, 2007
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3QUEST ENERGY PARTNERS, L.P.Unaudited Balance Sheet: September 30, 2007
    
    
    F-1Condensed Notes to Unaudited Balance Sheet
    
    
    F-2QUEST ENERGY PARTNERS PREDECESSORCarve Out Balance Sheets: December 31, 2006 and September 30, 2007
    
    
    F-7Carve Out Statements of Operations: Three Months and Nine Months Ended September
30, 2006 and 2007
    
    
    F-8Carve Out Statements of Cash Flows: Nine Months Ended September 30, 2006 and 2007
    
    
    F-9Condensed Notes to Carve Out Financial Statements
    
    
    F-10Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    4Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    12Item 4. Controls and Procedures
    
    
    12PART 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
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    13Item 5. Other Information
    
    
    13Item 6. Exhibits
    
    
    14SIGNATURES
    
    
    15Certification 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




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements .
 Quest Energy Partners, L.P.
 The financial statements and financial information presented below reflects the balance sheet of
the Partnership. On November 15, 2007, the Partnership completed an initial public offering of
9,100,000 common units representing limited partner interests of the Partnership (Common Units)
at $18.00 per unit, or $16.83 per unit after payment of the underwriting discount (excluding a
structuring fee) (see Notes 1 and 2 below for full details on the organization and initial public
offering). In connection with the initial public offering, Quest Resource contributed to the
Partnership all of its oil and gas properties in the Cherokee Basin in southeastern Kansas and
northeastern Oklahoma. The Partnership conducts its operations through its wholly owned
subsidiaries, Quest Cherokee, LLC (Quest Cherokee) and Quest Cherokee Oilfield Service, LLC
(QCOS). The financial statements of Quest Energy Partners, L.P. Predecessor are included in this
Item 1 because they represent the predecessor entity as of September 30, 2007.
 3




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
 
 BALANCE SHEET
SEPTEMBER 30, 2007
(UNAUDITED)
 ASSETSCurrent assetsCash
    
    $
    1,000Total Assets
    
    $
    1,000PARTNERS CAPITALLimited partners capital
    
    $
    980General partners capital
    
    
    20Total partners capital
    
    $
    1,000
  F-1




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
 
 CONDENSED NOTES TO BALANCE SHEET
 (UNAUDITED)
 1. Nature of Operations
   Note 2. Subsequent Events
    (a)
    
    The Partnership, the General Partner, Quest Resource and certain of Quest Resources
subsidiaries entered into a Contribution, Conveyance and Assumption Agreement (the
Contribution Agreement). At the closing of the offering, the following transactions,
among others, occurred pursuant to the Contribution Agreement:
 
    
    the contribution of Quest Cherokee, LLC (Quest Cherokee) and its subsidiary,
Quest Oilfield Service, LLC (QCOS), to the Partnership;
    
    the issuance of 431,827 General Partner Units and the incentive distribution
rights to the General Partner and the continuation of its 2.0% general partner
interest in the Partnership;
    
    the issuance of 3,201,521 Common Units and 8,857,981 Subordinated Units to Quest
Resource; and
    
    Quest Resource and its affiliates on the one hand, and Quest Cherokee and the
Partnership on the other, agreed to indemnify the other parties from and against all
losses suffered or incurred by reason of or arising out of certain existing legal
proceedings.
 (b)
    
    The Partnership, the General Partner and Quest Resource entered into an Omnibus
Agreement, which governs the Partnerships relationship with Quest Resource and its
affiliates regarding the following matters:
 
    
    reimbursement of certain insurance, operating and general and administrative
expenses incurred on behalf of the Partnership;
    
    indemnification for certain environmental liabilities, tax liabilities, tax
defects and other losses in connection with assets;
    
    a license for the use of the Quest name and mark; and
 F-2




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
CONDENSED NOTES TO BALANCE SHEET
(UNAUDITED)
 
    
    the Partnerships right to purchase from Quest Resource and its affiliates
certain assets that Quest Resource and its affiliates acquire within the Cherokee
Basin.
 (c)
    
    The Partnership, the General Partner and Quest Energy Service, LLC (QES) entered into
a Management Services Agreement, under which QES will perform acquisition services and
general and administrative services, such as accounting, finance, tax, property management,
risk management, land, marketing, legal and engineering to the Partnership, as directed by
the General Partner, for which the Partnership will reimburse QES on a monthly basis for
the reasonable costs of the services provided.(d)
    
    The Partnership entered into an Assignment and Assumption Agreement (the Assignment)
with Bluestem Pipeline, LLC (Bluestem) and Quest Resource, whereby Quest Resource
assigned all of its rights in that certain Midstream Services and Gas Dedication Agreement,
dated as of December 22, 2006, but effective as of December 1, 2006, as amended (the
Midstream Services Agreement), to the Partnership, and the Partnership assumed all of
Quest Resources liabilities and obligations arising under the Midstream Services Agreement
from and after the assignment. As more fully described in the Partnerships final
prospectus (the Prospectus) dated November 8, 2007 (File No. 333-144716) and filed on
November 9, 2007 with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933,
under the Midstream Services Agreement, Bluestem will gather and provide certain midstream
services, including dehydration, treating and compression, to the Partnership for all gas
produced from the Partnerships wells in the Cherokee Basin that are connected to
Bluestems gathering system.(e)
    
    The Partnership signed an Acknowledgement and Consent and therefore became subject to
that certain Omnibus Agreement (the Midstream Omnibus Agreement), dated December 22,
2006, among Quest Resource, Quest Midstream GP, LLC, Bluestem and Quest Midstream Partners,
L.P. (Quest Midstream), which is more fully described in the Partnerships Prospectus.
As long as the Partnership is an affiliate of Quest Resource and Quest Resource or any of
its affiliates control Quest Midstream, the Partnership will be bound by the Midstream
Omnibus Agreement. The Quest Midstream Agreement restricts the Partnership from engaging
in the following businesses, subject to certain exceptions:
 
    
    the gathering, treating, processing and transporting of gas in North America;
    
    the transporting and fractionating of gas liquids in North America;
    
    any other midstream activities, including but not limited to crude oil storage,
transportation, gathering and terminaling;
    
    constructing, buying or selling any assets related to the foregoing businesses;
and
    
    any line of business other than those described in the preceding bullet points
that generates qualifying income, within the meaning of Section 7704(d) of the
Internal Revenue Code of 1986, as amended, 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.
 (f)
    
    The General Partner adopted the Quest Energy Partners, L.P. Long-Term Incentive Plan
(the Plan) for employees, consultants and directors of the General Partner and its
affiliates, including the Partnership, who perform services for the Partnership. The Plan
provides for the grant of unit awards, restricted units, phantom units, unit options, unit
appreciation rights, distribution equivalent rights and other unit-based awards. Subject
to adjustment for certain events, an aggregate of 2,115,950 Common Units may be delivered
pursuant to awards under the Plan.
  F-3




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
CONDENSED NOTES TO BALANCE SHEET
(UNAUDITED)
      pari passu
   
    
    Permitting the ratio (calculated based on the most recently delivered
compliance certificate) of the Partnerships consolidated current
assets (including the unused amount of the borrowing base, but
excluding non-cash assets under FAS 133) to consolidated current
liabilities (excluding non-cash obligations under FAS 133, asset and
asset retirement obligations and current maturities of indebtedness
under the New Credit Agreement) at any fiscal quarter-end, commencing
with the quarter ended December 31, 2007, to be less than 1.0 to 1.0;
provided, however, that current assets and current liabilities will
exclude mark-to-market values of swap contracts, to the extent such
values are included in current assets and current liabilities;
    
    permitting the ratio (calculated on the most recently delivered
compliance certificate) of adjusted consolidated EBITDA to
consolidated interest charges at any fiscal quarter-end, commencing
with the quarter ended December 31, 2007, to be less than 2.5 to 1.0
measured on a rolling four quarter basis; provided that for the
periods ending December 31, 2007, March 31, 2008, June 30, 2008 and
September 30, 2008, the calculations will be done on a pro forma
basis; and
 F-4




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P.
CONDENSED NOTES TO BALANCE SHEET
(UNAUDITED)
 
    
    permitting the ratio (calculated based on the most recently delivered
compliance certificate) of consolidated funded debt to adjusted
consolidated EBITDA at any fiscal quarter-end, commencing with the
quarter ended December 31, 2007, to be greater than 3.5 to 1.0
measured on a rolling four quarter basis; provided that the for the
periods ending December 31, 2007, March 31, 2008, June 30, 2008 and
September 30, 2008, the calculations will be done on a pro forma
basis.
       F-5




---



##### Table of Contents



Quest Energy Partners, L.P. Predecessor
 The financial statements and financial information presented below reflect the operations of
Quest Energy Partners, L.P. Predecessor. In connection with the closing of our initial public
offering on November 15, 2007, Quest Resource contributed to the Partnership all of the oil and gas
properties of Quest Energy Partners, L.P. Predecessor.
 Quest Energy Partners, L.P. Predecessors unaudited interim financial statements, including
carve out balance sheets as of December 31, 2006 and September 30, 2007, carve out statements of
operations for the three month and nine month periods ended September 30, 2006 and 2007, and carve
out statements of cash flows for the nine month periods ended September 30, 2006 and 2007, and the
notes thereto are attached hereto as Pages F-7 through F-24 and are incorporated herein by this
reference.
 F-6




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
 
 CARVE OUT BALANCE SHEETS
  December 31,
    
    
    September 30,2006
    
    
    2007(Restated)
    
    
    (Unaudited)ASSETSCurrent assets:Cash
    
    $
    21,334
    
    
    $
    17,277Restricted cash
    
    
    1,150
    
    
    
    1,205Accounts receivable, trade
    
    
    9,840
    
    
    
    10,425Other receivables
    
    
    371
    
    
    
    1,466Other current assets
    
    
    1,053
    
    
    
    1,848Inventory
    
    
    3,378
    
    
    
    4,424Short-term derivative asset
    
    
    10,795
    
    
    
    7,286Total current assets
    
    
    47,921
    
    
    
    43,931Property and equipment, net of accumulated
depreciation of $5,045 and $6,039
    
    
    16,054
    
    
    
    18,708Oil and gas properties:Properties being amortized
    
    
    316,783
    
    
    
    389,313Properties not being amortized
    
    
    9,445
    
    
    
    12,651326,228
    
    
    
    401,964Less: Accumulated depreciation,
depletion, amortization and impairment
    
    
    (92,733
    )
    
    
    (114,541
    )Net property plant and equipment
    
    
    233,495
    
    
    
    287,423Other assets, net
    
    
    9,466
    
    
    
    9,374Long-term derivative asset
    
    
    4,782
    
    
    
    8,697Total assets
    
    $
    311,718
    
    
    $
    368,133LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable
    
    $
    13,929
    
    
    $
    26,824Revenue payable
    
    
    4,540
    
    
    
    5,676Accrued expenses
    
    
    2,486
    
    
    
    2,346Current portion of notes payable
    
    
    324
    
    
    
    122Short-term derivative liability
    
    
    5,244
    
    
    
    6,098Total current liabilities
    
    
    26,523
    
    
    
    41,066Non-current liabilities:Long-term derivative liability
    
    
    7,449
    
    
    
    2,067Asset retirement obligation
    
    
    1,410
    
    
    
    1,619Notes payable
    
    
    225,569
    
    
    
    250,176Less current maturities
    
    
    (324
    )
    
    
    (122
    )Non-current liabilities
    
    
    234,104
    
    
    
    253,740Total liabilities
    
    
    260,627
    
    
    
    294,806Commitments and contingencies
    
    
    
    
    
    
    Partners capital:Partners capital
    
    
    50,663
    
    
    
    73,320Accumulated other comprehensive income (loss)
    
    
    428
    
    
    
    7Total partners capital
    
    
    51,091
    
    
    
    73,327Total liabilities and partners capital
    
    $
    311,718
    
    
    $
    368,133
  F-7




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
 
 CARVE OUT STATEMENTS OF OPERATIONS
 (UNAUDITED)
 ($ in thousands)
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Revenue:Oil and gas sales
    
    $
    15,329
    
    
    $
    28,494
    
    
    $
    49,115
    
    
    $
    81,910Other revenue (expense)
    
    
    4
    
    
    
    (5
    )
    
    
    (63
    )
    
    
    (37
    )Total revenues
    
    
    15,333
    
    
    
    28,489
    
    
    
    49,052
    
    
    
    81,873Costs and expenses:Oil and gas production
    
    
    6,242
    
    
    
    7,280
    
    
    
    14,064
    
    
    
    22,247Transportation expense
    
    
    5,912
    
    
    
    7,469
    
    
    
    11,079
    
    
    
    20,639General and
administrative
    
    
    2,259
    
    
    
    2,415
    
    
    
    5,473
    
    
    
    8,261Depreciation, depletion
and amortization
    
    
    7,231
    
    
    
    7,978
    
    
    
    18,911
    
    
    
    22,041Total costs and
expenses
    
    
    21,644
    
    
    
    25,142
    
    
    
    49,527
    
    
    
    73,188Operating income (loss)
    
    
    (6,311
    )
    
    
    3,347
    
    
    
    (475
    )
    
    
    8,685Other income (expense):Change in derivative
fair value
    
    
    (332
    )
    
    
    5,539
    
    
    
    6,300
    
    
    
    5,354Sale of assets
    
    
    (57
    )
    
    
    49
    
    
    
    (15
    )
    
    
    (148
    )Interest income
    
    
    75
    
    
    
    102
    
    
    
    323
    
    
    
    382Interest expense
    
    
    (4,970
    )
    
    
    (7,665
    )
    
    
    (11,404
    )
    
    
    (21,825
    )Total other
income (expense)
    
    
    (5,284
    )
    
    
    (1,975
    )
    
    
    (4,796
    )
    
    
    (16,237
    )Net income (loss)
before income taxes
    
    
    (11,595
    )
    
    
    1,372
    
    
    
    (5,271
    )
    
    
    (7,552
    )Income tax expense
 deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (11,595
    )
    
    $
    1,372
    
    
    $
    (5,271
    )
    
    $
    (7,552
    )
  F-8




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
 
 CARVE OUT STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 ($ in thousands)
 For the Nine Months EndedSeptember 30,2006
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (5,271
    )
    
    $
    (7,552
    )Adjustments to reconcile net income
(loss) to cash provided by operations:Depreciation and depletion
    
    
    21,237
    
    
    
    23,796Change in derivative fair value
    
    
    (16,435
    )
    
    
    (5,354
    )Capital contributions for retirement plan
    
    
    428
    
    
    
    Capital contributions for directors fees
    
    
    358
    
    
    
    12Capital contributions for employees
    
    
    466
    
    
    
    3,015Amortization of loan origination fees
    
    
    874
    
    
    
    1,604Amortization of gas swap fees
    
    
    146
    
    
    
    187Amortization of deferred hedging gains
    
    
    (275
    )
    
    
    (Gain) loss on sale of assets
    
    
    (43
    )
    
    
    148Change in assets and liabilities:Restricted cash
    
    
    3,169
    
    
    
    (55
    )Accounts receivable
    
    
    1,456
    
    
    
    (586
    )Other receivables
    
    
    9
    
    
    
    (1,101
    )Other current assets
    
    
    633
    
    
    
    (795
    )Inventory
    
    
    (2,299
    )
    
    
    56Accounts payable
    
    
    16,893
    
    
    
    8,146Revenue payable
    
    
    
    
    
    
    1,137Accrued expenses
    
    
    48
    
    
    
    (114
    )Net cash provided by operating activities
    
    
    21,394
    
    
    
    22,544Cash flows from investing activities:Equipment, development and leasehold costs
    
    
    (94,132
    )
    
    
    (70,805
    )Net additions to other property and equipment
    
    
    (5,443
    )
    
    
    (4,826
    )Proceeds from sale of property and equipment
    
    
    162
    
    
    
    125Net cash used in investing activities
    
    
    (99,413
    )
    
    
    (75,506
    )Cash flows from financing activities:Proceeds from bank borrowings
    
    
    100,129
    
    
    
    25,000Repayments of note borrowings
    
    
    (238
    )
    
    
    (393
    )Capital contributions (distributions)
    
    
    (7,522
    )
    
    
    25,873Refinancing costs
    
    
    (1,342
    )
    
    
    (1,698
    )Change in other long-term liabilities
    
    
    124
    
    
    
    123Net cash provided by financing activities
    
    
    91,151
    
    
    
    48,905Net increase (decrease) in cash
    
    
    13,132
    
    
    
    (4,057
    )Cash, beginning of period
    
    
    2,527
    
    
    
    21,334Cash, end of period
    
    $
    15,659
    
    
    $
    17,277Supplemental disclosure of cash flow
information:Cash paid during the period for:Interest expense
    
    $
    14,039
    
    
    $
    21,558Income taxes
    
    $
    
    
    
    $
    
  F-9




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
 
 CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 1. Formation of the Partnership and Description of Business
   2. Basis of Presentation
  3. Summary of Significant Accounting Policies
 Use of Estimates
   Basis of Accounting
  Revenue Recognition
  F-10




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 Cash Equivalents
  Uninsured Cash Balances
  Accounts Receivable
   Inventory
  Concentration of Credit Risk
  Natural Gas and Oil Properties
    F-11




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
     Other Property and Equipment
    
    
    Buildings:25 years
    
    Equipment:10 years
    
    Vehicles:7 years
 Debt Issue Costs
  Other Dispositions
  F-12




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 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
 Accounting for Derivative Instruments and Hedging Activities
 Accounting for Derivative Instruments and Hedging
Activities,
    F-13




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
  Allocation of Costs
   
    
    Revenues include all revenues earned by the Cherokee Basin Operations, before elimination
of intercompany sales with Quest Resource and its subsidiaries. Prior to December 1, 2006,
pursuant to a transportation agreement, Bluestem Pipeline, LLC, a wholly-owned subsidiary of
Quest Resource (Bluestem), generally charged the Cherokee Basin Operations transportation
fees ranging from $0.78 per thousand cubic feet (Mcf) to $0.87 per Mcf. Effective December
1, 2006, pursuant to the Midstream Services Agreement, the fee for gathering, dehydration
and treating services is $0.50 per MMBtu of gas and $1.10 per MMBtu of gas for compression
services, subject to annual adjustment. Please read Note 10  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
Partnership 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 Partnership 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 Share
  Reclassifications
  F-14




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 Recently Issued Accounting Standards
  Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109 Accounting for Income
Taxes
 Fair Value Measurements
 Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans
  The Fair Value Option for Financial
Assets and Financial Liabilities
 4. Long-Term Debt
  December 31, 2006
    
    
    September 30, 2007(dollars in thousands)Senior credit facilities
    
    $
    225,000
    
    
    $
    250,000Other notes payable
    
    
    569
    
    
    
    176Total long-term debt
    
    
    225,569
    
    
    
    250,176Less  current maturities
    
    
    324
    
    
    
    122Total long-term debt, net of current maturities
    
    $
    225,245
    
    
    $
    250,054
 F-15




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
  2008
    
    $
    122,0002009
    
    
    26,0002010
    
    
    8,0002011
    
    
    50,006,0002012
    
    
    200,006,000Thereafter
    
    
    8,000$
    250,176,000
 Credit Facilities
     
    
    Revolving credit facility under the Senior Credit Agreement  8.92%;
    
    First lien term loan under the Senior Credit Agreement  8.67%;
    
    Second Lien Term Loan  10.88%; and
    
    Third Lien Term Loan  13.38%.
  F-16




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
  
    
    for the Senior Credit Agreement, the Predecessor is required to maintain a ratio of PV-10
value for all of its proved reserves to indebtedness under the Senior Credit Agreement
(excluding obligations under hedging agreements secured by the Senior Credit Agreement) of not
less than 2.0 to 1.0.
    
    for the Second and Third Lien Term Loan Agreements, the Predecessors ratio of PV-10 value
for all of its proved reserves to total net debt must not be less than 1.5 to 1.
    
    for all three credit agreements, after giving effect to the amendments described above, the
Predecessors ratio of total net debt to EBITDA for each quarter ending on the dates set forth
below must not be more than:
 
    
    5.50 to 1.0 for the quarter ended June 30, 2007;
    
    4.75 to 1.0 for the quarter ended September 30, 2007;
    
    4.25 to 1.0 for the quarter ended December 31, 2007;
    
    3.50 to 1.0 for the quarter ended March 31, 2008;
    
    3.25 to 1.0 for the quarter ended June 30, 2008; and
    
    3.0 to 1.0 for the quarter ended on or after September 30, 2008.
     Other Long-Term Indebtedness
  5. Commitments and Contingencies
  F-17




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
        F-18




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
    6. Financial Instruments and Hedging Activities
 Natural Gas Hedging Activities
    F-19




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 Three MonthsEndingDecember 31,
    
    Years Ending December 31,2007
    
    2008
    
    2009
    
    2010
    
    Total(dollars in thousands, except per MMBtu data)Natural Gas Swaps:Contract volumes (MMBtu)
    
    
    593,000
    
    
    
    2,332,000
    
    
    
    9,999,000
    
    
    
    6,000,000
    
    
    
    18,924,000Weighted average
fixed price per MMBtu
(1)
    
    $
    7.20
    
    
    $
    7.35
    
    
    $
    7.85
    
    
    $
    7.55
    
    
    $
    7.67Fixed-price sales
    
    $
    4,272
    
    
    $
    17,141
    
    
    $
    78,451
    
    
    $
    45,239
    
    
    $
    145,103Fair value, net
    
    $
    282
    
    
    $
    1,495
    
    
    $
    5,265
    
    
    $
    1,922
    
    
    $
    8,964Natural Gas Collars:Contract volumes (MMBtu)Floor
    
    
    2,125,000
    
    
    
    7,028,000
    
    
    
    
    
    
    
    
    
    
    
    9,153,000Ceiling
    
    
    2,125,000
    
    
    
    7,028,000
    
    
    
    
    
    
    
    
    
    
    
    9,153,000Weighted average fixed
price per MMBtu
(1)Floor
    
    $
    6.63
    
    
    $
    6.54
    
    
    $
    
    
    
    $
    
    
    
    $
    6.57Ceiling
    
    $
    7.54
    
    
    $
    7.54
    
    
    $
    
    
    
    $
    
    
    
    $
    7.54Fixed-price sales (2)
    
    $
    14,087
    
    
    $
    45,973
    
    
    $
    
    
    
    $
    
    
    
    $
    60,060Fair value, net
    
    $
    463
    
    
    $
    (1,608
    )
    
    $
    
    
    
    $
    
    
    
    $
    (1,145
    )Total Natural Gas
Contracts(3):Contract volumes (MMBtu)
    
    
    2,718,000
    
    
    
    9,360,000
    
    
    
    9,999,000
    
    
    
    6,000,000
    
    
    
    28,077,000Weighted average
fixed price per MMBtu
(1)
    
    $
    6.75
    
    
    $
    6.74
    
    
    $
    7.85
    
    
    $
    7.54
    
    
    $
    7.31Fixed-price sales (2)
    
    $
    18,359
    
    
    $
    63,114
    
    
    $
    78,451
    
    
    $
    45,239
    
    
    $
    205,163Fair value, net
    
    $
    745
    
    
    $
    (113
    )
    
    $
    5,265
    
    
    $
    1,922
    
    
    $
    7,819
 
 (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: 2007: 305,000 MMBtu;
2008: 1,464,000 MMBtu.     Interest Rate Hedging Activities
  Change in Derivative Fair Value
  F-20




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007(dollars in thousands)Change in fair
value of
derivatives not
qualifying as cash
flow hedges
    
    $
    (1,330
    )
    
    $
    4,748
    
    
    $
    13,300
    
    
    $
    3,329Settlements due to
ineffective cash
flow hedges
    
    
    
    
    
    
    
    
    
    
    (10,232
    )
    
    
    Ineffective portion
of derivatives
qualifying as cash
flow hedges
    
    
    998
    
    
    
    791
    
    
    
    3,232
    
    
    
    2,025$
    (332
    )
    
    $
    5,539
    
    
    $
    6,300
    
    
    $
    5,354
  Credit Risk
   Market Risk
    F-21




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 Fair Value of Financial Instruments
  December 31, 2006
    
    September 30, 2007Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair Value($ in thousands)Derivative assets:Interest rate
swaps and caps
    
    $
    197
    
    
    $
    197
    
    
    $
    
    
    
    $
    Basis swaps
    
    $
    62
    
    
    $
    62
    
    
    $
    205
    
    
    $
    205Fixed-price
natural gas swaps
    
    $
    2,207
    
    
    $
    2,207
    
    
    $
    8,815
    
    
    $
    8,815Fixed-price
natural gas collars
    
    $
    13,111
    
    
    $
    13,111
    
    
    $
    6,963
    
    
    $
    6,963Derivative liabilities:Basis swaps
    
    $
    (377
    )
    
    $
    (377
    )
    
    $
    (57
    )
    
    $
    (57
    )Fixed-price
natural gas collars
    
    $
    (12,316
    )
    
    $
    (12,316
    )
    
    $
    (8,108
    )
    
    $
    (8,108
    )Credit facilities
    
    $
    (225,000
    )
    
    $
    (225,000
    )
    
    $
    (250,000
    )
    
    $
    (250,000
    )Other financing
agreements
    
    $
    (569
    )
    
    $
    (569
    )
    
    $
    (176
    )
    
    $
    (176
    )
    7. Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
 F-22




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007($ in thousands)Asset retirement
obligation
beginning balance
    
    $
    1,275
    
    
    $
    1,546
    
    
    $
    1,150
    
    
    $
    1,410Liabilities incurred
    
    
    45
    
    
    
    44
    
    
    
    130
    
    
    
    128Liabilities settled
    
    
    (2
    )
    
    
    (2
    )
    
    
    (5
    )
    
    
    (5
    )Accretion expense
    
    
    24
    
    
    
    31
    
    
    
    67
    
    
    
    86Revisions in
estimated cash
flows
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Asset retirement
obligation ending
balance
    
    $
    1,342
    
    
    $
    1,619
    
    
    $
    1,342
    
    
    $
    1,619
 8. Subsequent Events
  Hedge SummaryHedged PriceFloor
    
    Ceiling
    
    Vol.(Mmcf)2008Southern Star Swap
    
    $
    7.35
    
    
    $
    7.35
    
    
    
    2,332Southern Star Collar
    
    $
    8.00
    
    
    $
    8.93
    
    
    
    2,137NYMEX Collar (1)
    
    $
    4.50
    
    
    $
    5.52
    
    
    
    2,928Southern Star Collar
    
    $
    8.00
    
    
    $
    9.02
    
    
    
    1,963NYMEX Swap
    
    $
    7.88
    
    
    $
    7.88
    
    
    
    4,8002008 Total
    
    
    
    
    
    
    
    
    
    
    14,1602009Southern Star Swap
    
    $
    7.82
    
    
    $
    7.82
    
    
    
    4,500Southern Star Swap
    
    $
    7.87
    
    
    $
    7.87
    
    
    
    4,500Southern Star Swap
    
    $
    7.85
    
    
    $
    7.85
    
    
    
    1,000Southern Star Swap
    
    $
    7.13
    
    
    $
    7.13
    
    
    
    2,6302009 Total
    
    
    
    
    
    
    
    
    
    
    12,6302010Southern Star Swap
    
    $
    7.50
    
    
    $
    7.50
    
    
    
    4,000Southern Star Swap
    
    $
    7.615
    
    
    $
    7.615
    
    
    
    2,000Southern Star Swap
    
    $
    7.010
    
    
    $
    7.010
    
    
    
    4,000Southern Star Swap
    
    $
    7.010
    
    
    $
    7.010
    
    
    
    5002010 Total
    
    
    
    
    
    
    
    
    
    
    10,499
 
 (1)
    
    1,464 Bcf with basis lock @ $1.03 per mcf 9. Initial Public Offering
   F-23




---



##### Table of Contents



QUEST ENERGY PARTNERS, L.P. PREDECESSOR
CONDENSED NOTES TO CARVE OUT FINANCIAL STATEMENTS
(UNAUDITED)
    10. Related Party Transactions
    11. Restatement of Certain Carve Out Financial Statements
  F-24




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of the financial condition and results of operations of
Quest Energy Partners, L.P. Predecessor should be read in conjunction with our Prospectus and the
carve out financial statements of Quest Energy Partners, L.P. Predecessor and the related notes
thereto included elsewhere in this Quarterly Report on
Form 10-Q.
 Business of Issuer
    Significant Developments During the Nine Months Ended September 30, 2007
     Results of Operations
  4




---



##### Table of Contents



Three Months Ended September 30, 2006 and September 30, 2007
 Overview.
 Three MonthsEndedSeptember 30,
    
    Increase/2006
    
    2007
    
    (Decrease)($ in thousands)Oil and gas sales
    
    $
    15,329
    
    
    $
    28,494
    
    
    $
    13,165
    
    
    
    85.9
    %Other revenue/(expense)
    
    
    4
    
    
    
    (5
    )
    
    
    (9
    )
    
    
    -225.0
    %Operating expenses
    
    
    12,154
    
    
    
    14,749
    
    
    
    2,595
    
    
    
    21.4
    %Depreciation, depletion and
amortization
    
    
    7,231
    
    
    
    7,978
    
    
    
    747
    
    
    
    10.3
    %General and administrative
expenses
    
    
    2,259
    
    
    
    2,415
    
    
    
    156
    
    
    
    6.9
    %Interest expense
    
    
    4,970
    
    
    
    7,665
    
    
    
    2,695
    
    
    
    54.3
    %Change in derivative fair value
    
    
    (332
    )
    
    
    5,539
    
    
    
    5,871
    
    
    
    1,768.4
    %
 Production.
 Three MonthsEndedSeptember 30,
    
    Increase/2006
    
    2007
    
    (Decrease)Production Data:Total net production (MMcfe)
    
    
    3,331
    
    
    
    4,554
    
    
    
    1,223
    
    
    
    36.7
    %Average daily net production
(MMcfe/d)
    
    
    36.21
    
    
    
    49.50
    
    
    
    13.29
    
    
    
    36.7
    %Average Sales Price per Unit (Mcfe):Excluding hedges
    
    $
    5.67
    
    
    $
    5.43
    
    
    $
    (0.24)
    
    
    
    -4.2
    %Including hedges
    
    
    4.56
    
    
    
    6.24
    
    
    
    1.68
    
    
    
    36.8
    %Average Unit Costs per Mcfe:Production costs
    
    $
    3.41
    
    
    $
    3.24
    
    
    $
    (0.17
    )
    
    
    -5.0
    %Depreciation, depletion and
amortization
    
    
    2.17
    
    
    
    1.75
    
    
    
    (0.42
    )
    
    
    -19.3
    %General and administrative expenses
    
    
    0.68
    
    
    
    0.53
    
    
    
    (0.15
    )
    
    
    -22.1
    %
 Oil and Gas Sales.
  Other Revenue/(Expense).
 Operating Expenses.
 5




---



##### Table of Contents



Depreciation, Depletion and Amortization.
 General and Administrative Expenses
 Interest Expense.
 Change in Derivative Fair Value
 6




---



##### Table of Contents



Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2007
 Overview.
 Nine MonthsEndedSeptember 30,
    
    Increase/2006
    
    2007
    
    (Decrease)($ in thousands)Oil and gas sales
    
    $
    49,115
    
    
    $
    81,910
    
    
    $
    32,795
    
    
    
    66.8
    %Other revenue/(expense)
    
    
    (63
    )
    
    
    (37
    )
    
    
    26
    
    
    
    41.3
    %Operating expenses
    
    
    25,143
    
    
    
    42,886
    
    
    
    17,743
    
    
    
    70.6
    %Depreciation, depletion
and amortization
    
    
    18,911
    
    
    
    22,041
    
    
    
    3,130
    
    
    
    16.6
    %General and
administrative expenses
    
    
    5,473
    
    
    
    8,261
    
    
    
    2,788
    
    
    
    50.9
    %Interest expense
    
    
    11,404
    
    
    
    21,825
    
    
    
    10,421
    
    
    
    91.4
    %Change in derivative fair
value
    
    
    6,300
    
    
    
    5,354
    
    
    
    (946
    )
    
    
    -15.0
    %
 Production.
 Nine MonthsEndedSeptember 30,
    
    Increase/2006
    
    2007
    
    (Decrease)Production Data:Total net production (MMcfe)
    
    
    8,718
    
    
    
    12,338
    
    
    
    3,620
    
    
    
    40.6
    %Average daily net production (MMcfe/d)
    
    
    31.93
    
    
    
    45.19
    
    
    
    13.26
    
    
    
    41.5
    %Average Sales Price per Unit (Mcfe):Excluding hedges
    
    $
    6.08
    
    
    $
    6.21
    
    
    $
    0.13
    
    
    
    2.0
    %Including hedges
    
    
    4.40
    
    
    
    6.61
    
    
    
    2.21
    
    
    
    50.6
    %Average Unit Costs per Mcfe:Production costs
    
    $
    3.04
    
    
    $
    3.48
    
    
    $
    0.43
    
    
    
    14.3
    %Depreciation, depletion and amortization
    
    
    2.17
    
    
    
    1.79
    
    
    
    (0.38
    )
    
    
    -17.6
    %General and administrative expenses
    
    
    0.63
    
    
    
    0.67
    
    
    
    0.04
    
    
    
    6.3
    %
 Oil and Gas Sales.
  Other Expense.
 Operating Expenses
 7




---



##### Table of Contents



Depreciation, Depletion and Amortization
 General and Administrative Expenses
 Interest Expense
 Change in Derivative Fair Value.
 Liquidity and Capital Resources
 Liquidity
   8




---



##### Table of Contents



th th th
 Future Capital Expenditures
  
    
    $76.0 million and $49.5 million, respectively, to drill and complete these wells and
recomplete an estimated 80 gross wells in the Cherokee Basin; and
    
    $37.0 million and $29.0 million, respectively, for acreage, 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 or our asset base over the long term.
    Cash Flows
 Cash Flows from Operating Activities.
 9




---



##### Table of Contents



Cash Flows Used in Investing Activities.
 Cash Flows from Financing Activities.
 Contractual Obligations
  Total
    
    
    2007
    
    
    2008-2009
    
    
    2010-2011
    
    
    thereafter($ in thousands)Quest Resource Term Notes (1)
    
    $
    225,000
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    75,000Quest Resource Revolver (1)(2)
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Interest payment Obligation
(1)(3)
    
    
    113,397
    
    
    
    6,730
    
    
    
    53,794
    
    
    
    47,551
    
    
    
    5,322Asset retirement obligation
    
    
    1,619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,619Drilling contractor
    
    
    5,952
    
    
    
    1,711
    
    
    
    4,241Notes payable
    
    
    176
    
    
    
    122
    
    
    
    34
    
    
    
    12
    
    
    
    8Lease obligations
    
    
    6,950
    
    
    
    219
    
    
    
    1,665
    
    
    
    1,465
    
    
    
    3,601Derivatives
    
    
    8,165
    
    
    
    6,098
    
    
    
    2,067
    
    
    
    
    
    
    
    Total
    
    $
    386,259
    
    
    $
    14,880
    
    
    $
    61,801
    
    
    $
    199,028
    
    
    $
    110,550
 
 (1)
    
    Quest Resource indebtedness was repaid on November 15, 2007 at the closing of our initial
public offering with $75 million of borrowings under our new revolving credit facility (which
is described elsewhere in this report), the net proceeds from our initial public offering and
borrowings under Quest Resources new credit facility.(2)
    
    $50 million revolving credit facility of Quest Resource that matures on November 14, 2010. As
of September 30, 2007, $25 million was borrowed under this facility.(3)
    
    The interest payment obligation was computed using the LIBOR interest rate as of September
30, 2007. If the interest rate were to change 1%, then the interest payment obligation would
change by $10.4 million. Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  Recently Issued Accounting Standards
  10




---



##### Table of Contents



Forward-looking Information
  
    
    the volatility of gas and oil prices;
    
    discovery, estimation, development and replacement of gas and oil reserves;
    
    cash flow, liquidity and financial condition;
    
    business and financial strategy;
    
    amount, nature and timing of capital expenditures, including future development costs;
    
    availability and terms of capital;
    
    timing and amount of future production of gas and oil;
    
    availability of drilling and production equipment, labor and other services;
    
    operating costs and other expenses;
    
    prospect development and property acquisitions;
    
    marketing of gas and oil;
    
    competition in the gas and oil industry;
    
    the impact of weather and the occurrence of natural disasters such as fires;
    
    governmental regulation of the gas and oil industry;
    
    developments in oil-producing and gas-producing countries; and
    
    strategic plans, expectations and objectives for future operations.
   11




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  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
   12




---



##### Table of Contents



Item 3. Default Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  13




---



##### Table of Contents



Item 6. Exhibits
 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.
 14




---



##### Table of Contents



SIGNATURES
  QUEST ENERGY PARTNERS, L.P.
By: Quest Energy GP, LLC, its general partnerBy:
    /s/ Jerry D. CashJerry D. CashChief Executive OfficerBy:
    /s/ David E. GroseDavid E. GroseChief Financial Officer 15