NOTE 4 — ACQUISITIONS

Third Party Acquisitions

2013 East Texas Oil Field Acquisition

On August 6, 2013, we closed the acquisition of primarily oil properties located in East Texas (the “2013 East Texas Acquisition”) from a private seller for $107.8 million cash, subject to customary purchase price adjustments, using funds drawn on our revolving credit facility. The acquired properties (the “2013 East Texas Properties”) had estimated proved reserves of 5.9 MMBoe as of the date of the acquisition utilizing SEC case pricing. The acquisition had an effective date of June 1, 2013. The costs associated with the 2013 East Texas Acquisition of $0.4 million are recorded in “Acquisition and transaction costs” on our consolidated statements of operations for the year ended December 31, 2013. In connection with the 2013 East Texas Acquisition, we assumed an estimated environmental liability of $0.5 million. Refer to Note 11 – Commitments and Contingencies for further details. Since the closing date, revenues of $60 million and production expenses of $15.2 million related to the operation of the 2013 East Texas Properties are included in our consolidated statements of operations for year ended December 31, 2013.

In connection with the 2013 East Texas Acquisition, we also acquired a 32% interest in ETSWDC giving us control of ETSWDC as we previously owned 24%. During the fourth quarter 2013 we acquired an additional 3% from another seller giving us a 59% ownership interest as of December 31, 2013. As of the closing date of the 2013 East Texas Acquisition, we have a controlling interest in the ETSWDC and have consolidated ETSWDC into our consolidated financial statements. In addition, our previous ownership in ETSWDC was remeasured to fair value on the acquisition date resulting in a gain of $1.3 million recognized in “Other income (expense)” in our consolidated statements of operations.

The 2013 East Texas Acquisition qualified as a business combination and was accounted for under the purchase method of accounting. The fair value measurements of the oil and gas properties, the investment in ETSWDC, and asset retirement obligations were measured using valuation techniques and unobservable inputs that convert future cash flows to a single discounted amount.

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed as of the closing date:


Oil and gas properties	$	105,141
Investment in ETSWDC		9,576
Asset retirement obligation		(6,069)
Other current liabilities		(884)
Net assets acquired	$	107,764

The following table summarizes the estimated preliminary fair values of the ETSWDC assets and liabilities along with the fair value of the noncontrolling interest to derive our investment in ETSWDC acquired in the 2013 East Texas Acquisition.


Assets acquired and liabilities assumed:
Current assets (1)	$	7,858
Property, plant and equipment, net		13,103
Other long term assets		16,215
Total assets		37,176
Liabilities:
Current liabilities		(1,761)
Asset retirement obligation		(4,607)
Pension and postretirement benefits		(12,039)
Total liabilities		(18,407)
Fair value of saltwater disposal company		18,769
Less: remeasurement of previously held interest		(3,237)
Less: fair value of noncontrolling interest		(5,956)
Fair value of ETSWDC acquired by QR Energy, LP	$	9,576

⁽¹⁾

Includes $3.5 million of cash and cash equivalents.

The above estimated preliminary fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. We believe that the information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. We expect to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

Other 2013 Acquisitions

During the fourth quarter of 2013, we also closed various small acquisitions of oil and gas properties with an aggregate purchase price of $22.6 million in cash, subject to customary purchase price adjustments, using funds drawn from our revolving credit facility.

2012 East Texas Oil Field Acquisition

On December 4, 2012 we closed the East Texas Oil Field Acquisition (the “2012 East Texas Acquisition"). We acquired the East Texas Oil Field Properties (the “2012 East Texas Properties”) for $214.3 million in cash after customary purchase price adjustments. The acquired properties had estimated proved reserves of 10.8 MMBoe as of December 31, 2011 utilizing SEC case pricing. The acquisition had an effective date of November 1, 2012. The costs associated with the 2012 East Texas Acquisition of $0.3 million are recorded in “Acquisition and transaction costs” in the consolidated statement of operations for the year ended December 31, 2012. The 2012 East Texas Acquisition qualified as a business combination and was accounted for under the purchase method of accounting. The fair value measurements of the oil and gas properties and asset retirement obligations were measured using valuation techniques and unobservable inputs that convert future cash flows to a single discounted amount.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition closing date:


Oil and gas properties
Evaluated (1)	$	218,039
Unevaluated		5,400
Other Assets		1,900
Asset retirement obligation		(9,843)
Other current liabilities		(1,190)
Net assets acquired	$	214,306

⁽¹⁾

Includes receivable from seller for customary purchase price adjustments recorded in prepaid and other current assets as of December 31, 2012, which was received during 2013.

Prize Acquisition

On April 20, 2012 we closed the Prize Acquisition. We acquired predominantly low decline, long life oil properties, almost all of which are located in the Ark-La-Tex area, for $225.1 million in cash after customary purchase price adjustments. The acquired properties had estimated proved reserves as of December 31, 2011 utilizing SEC case pricing of 13.3 MMBoe. The acquisition had an effective date of January 1, 2012. The costs associated with the Prize Acquisition of $1.1 million are recorded in “Acquisition and transaction costs” in the consolidated statement of operations for the year ended December 31, 2012. In conjunction with the Prize Acquisition, we assumed an estimated environmental liability of $1.9 million. Refer to Note 11 – Commitments and Contingencies for further details. Since the closing date, revenues of $24.6 million and operating expenses of $8.3 million related to the operation of the Prize properties are included in the consolidated statements of operations for the year ended December 31, 2012. The Prize Acquisition qualified as a business combination and was accounted for under the purchase method of accounting. The fair value measurements of the oil and gas properties and asset retirement obligations were measured using valuation techniques and unobservable inputs that convert future cash flows to a single discounted amount.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition closing date:


Oil and gas properties
Evaluated	$	226,670
Unevaluated		6,100
Asset retirement obligation		(4,738)
Environmental liability		(1,891)
Other current liabilities		(993)
Net assets acquired	$	225,148

Pro forma Financial Data

The following unaudited pro forma income statement information for years ended December 31, 2013 and 2012 assumes the 2013 East Texas Acquisition had occurred on January 1, 2012, and the Prize Acquisition and the 2012 East Texas Acquisition had occurred on January 1, 2011. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as increased depreciation and amortization expense on the fair value of the assets acquired. The unaudited pro forma financial results may not be indicative of the results that would have occurred had the acquisition been completed at the beginning of the periods presented, nor are they indicative of future results of operations.


		Year Ended
		(Unaudited)
		December 31, 2013		December 31, 2012
		Pro Forma		Pro Forma
Total revenues	$	485,284	$	476,345
Operating income	$	115,104	$	104,327
Net income attributable to QR Energy, LP	$	66,068	$	107,238
Net income per unit:
Common unitholders' (basic)	$	0.34	$	0.75
Common unitholders' (diluted)	$	0.34	$	0.73
Subordinated units (basic and diluted)	$	-	$	0.78

Affiliated Acquisitions

On December 28, 2012, we completed our acquisition of the December 2012 Transferred Properties from the Fund in exchange of $28.6 million in cash, after customary purchase price adjustments, and the assumption of $115 million in debt. The net assets were recorded by the Partnership using historical book value of the Fund as the acquisition is a transaction between entities under common control. Our historical financial statements were revised to include the results attributable to the December 2012 Transferred Properties as if we owned the properties for all periods presented in our consolidated financial statements. See Note 1 – Organization and Operations for further disclosures regarding this transaction. See Note 2 – Summary of Significant Accounting Policies for further discussion regarding the accounting policies for transactions between entities under common control.


Oil and gas properties
Evaluated	$	141,315
Accumulated depreciation, depletion, and amortization		(45,416)
Other assets (1)		10,732
Derivative instruments, net		(2,948)
Long-term debt		(115,000)
Asset retirement obligation		(34,261)
Book value of net assets		(45,578)
Purchase price adjustment		5,270
Net assets contributed by the Predecessor (2)	$	(40,308)

⁽¹⁾

Represents a reclamation deposit in escrow as security for abandonment and redemption obligations.

⁽²⁾

The net assets contributed to us include the historical book value of the Predecessor as prescribed by our accounting policy for transactions between entities under common control in Note 2 – Summary of Significant Accounting Policies and a $5.3 million purchase price adjustment related to novated derivatives unwound by the Partnership.

Effective October 1, 2011, we completed our acquisition of the October 2011 Transferred Properties from the Fund in exchange for 16,666,667 Class C Convertible Preferred Units and the assumption of $227 million in debt. The net assets were recorded by the Partnership using historical book value of the Fund as the acquisition is a transaction between entities under common control. See Note 1 – Organization and Operations for further disclosures regarding this transaction.


Oil and gas properties, net	$	441,207
Gas processing equipment, net		251
Derivative instrument asset, net		64,671
Deferred tax asset		205
Long-term debt		(227,000)
Asset retirement obligation		(26,294)
Natural gas imbalance		(3,709)
Book value of net assets		249,331
Purchase price adjustments		2,715
Net assets contributed by the Predecessor (1)	$	252,046

⁽¹⁾

The net assets contributed to us include the historical book value of the Predecessor as prescribed by our accounting policy for transactions between entities under common control in Note 2 – Summary of Significant Accounting Policies and a $2.7 million purchase price adjustment for natural gas imbalances in accordance with the purchase and sale agreement.