NOTE 1 – ORGANIZATION AND OPERATIONS

QR Energy, LP (“we,” “us,” “our,” or the “Partnership”) is a Delaware limited partnership formed on September 20, 2010, to receive certain assets of an affiliated entity, QA Holdings, LP (the “Predecessor”) and own and exploit producing oil and natural gas properties in North America. Certain of the Predecessor's subsidiary limited partnerships (collectively known as the “Fund”), comprise Quantum Resources A1, LP, Quantum Resources B, LP, Quantum Resources C, LP, QAB Carried WI, LP, QAC Carried WI, LP and Black Diamond Resources, LLC. Quantum Resources Management, LLC (“QRM”) provides management and operational services for us and the Fund. Our general partner is QRE GP, LLC (or “QRE GP”). We conduct our operations through our wholly-owned subsidiary QRE Operating, LLC (“OLLC”).

On December 22, 2010 (the “Closing Date”), we completed our initial public offering (“IPO”) of 15,000,000 common units representing limited partner interests in the Partnership at $20.00 per common unit. Total net proceeds from the sale of the common units in the IPO were $279.8 million ($300.0 million gross proceeds less $19.5 million underwriters' discount and $0.7 million structuring fee). IPO related costs and expenses totaling $5.1 million were borne entirely by the Fund.

On the Closing Date, we also entered into the following agreements and transactions with the Fund:

Contribution Agreement and Concurrent Transactions

A Contribution, Conveyance and Assumption Agreement (the “Contribution Agreement”) was executed on the Closing Date by and among the Fund, the Partnership and QRE GP with net assets contributed by the Fund to the Partnership as follows:

Oil and gas properties, net	$	444,671
Natural gas imbalance		(1,247	)
Long-term debt		(200,000	)
Derivative instrument liability, net (1)		(1,425	)
Asset retirement obligation		(18,263	)
Net Assets	$	223,736

(1)

Novation of derivative instruments from the Fund to the Partnership was concurrent with the IPO but not part of the Contribution Agreement and such derivative instruments were transferred at fair value on the Closing Date. The fair value is reflected in the Predecessor's book value by the means of non-recurring valuation measurements as of the date of transfer.

In exchange for the net assets above, the Fund received 11,297,737 common and 7,145,866 subordinated limited partner units and a $300.0 million cash distribution. QRE GP made a capital contribution of $0.7 million in exchange for 35,729 general partner units. The contribution was received in January 2011.

As a result of these transactions, at December 31, 2010, our ownership structure comprised a 0.1% general partnership interest held by QRE GP, 55.1% in limited partner interest held by the Fund and 44.8% in limited partner interests held by public unitholders.

On January 3, 2011, the underwriters exercised their over-allotment option in full to purchase 2,250,000 common units issued by the Partnership at $20.00 per unit. Total net proceeds from the sale of these common units, after deducting the underwriters' discount and structuring fee, were approximately $42.0 million which, in accordance with the Contribution Agreement were distributed to the Fund as consideration for assets contributed on the Closing Date and reimbursements for pre-formation capital expenditures.

At September 30, 2011, our ownership structure comprised a 0.1% general partner interest held by QRE GP, a 51.6% in limited partner interest held by the Fund and a 48.3% limited partner interest held by public unitholders.