NOTE 19 — RELATED PARTY TRANSACTIONS

Ownership in QRE GP by the Management of the Fund and its Affiliates

As of December 31, 2013, affiliates of the Fund owned 100% of QRE GP, and an aggregate 29.2% limited partner interest in us represented by all of our preferred units and 7,145,866 common units. In addition, QRE GP owned a 0.1% general partner interest in us, represented by 51,036 general partner units and a 7.5% limited partner interest represented by 6,133,558 Class B units. Our Chief Executive Officer and Chief Operating Officer have a beneficial ownership in QRE GP and the Fund.

As of December 31, 2012, affiliates of the Fund owned 100% of QRE GP, and an aggregate 31.7% limited partner interest in us represented by all of our preferred units and 7,145,866 common units. In addition, QRE GP owned a 0.1% general partner interest in us, represented by 51,036 general partner units. Our Chief Executive Officer and Chief Operating Officer have a beneficial ownership in QRE GP and the Fund.

Contracts with QRE GP and Its Affiliates

We have entered into agreements with QRE GP and its affiliates. The following is a description of those agreements.

Services Agreement

On December 22, 2010, in connection with the closing of the IPO, we entered into the Services Agreement with QRM, QRE GP and OLLC, pursuant to which QRM will provide the administrative and acquisition advisory services necessary to allow QRE GP to manage, operate and grow our business. We do not have any employees. The Services Agreement requires that employees of QRM (including the persons who are executive officers of QRE GP) devote such portion of their time as may be reasonable and necessary for the operation of our business. The executive officers of QRE GP currently devote a majority of their time to our business, and we expect them to continue to do so for the foreseeable future.

Under the Services Agreement, from the closing of the IPO through December 31, 2012, QRM was entitled to a quarterly administrative services fee equal to 3.5% of the Adjusted EBITDA, as defined by the Services Agreement, generated by us during the preceding quarter, calculated prior to the payment of the fee.

Beginning on January 1, 2013, QRM became entitled to a quarterly reimbursement of general and administrative charges based on the allocation of charges between the Fund and us based on the estimated use of such services by each party. The fee included direct expenses plus an allocation of compensation costs based on employee time expended and other indirect expenses based on multiple operating metrics. If the Fund raises a second fund, the quarterly administrative services costs will be further divided to include the second fund as well. QRM will have discretion to determine in good faith the proper allocation of the charges pursuant to the Services Agreement.

For the years ended December 31, 2013, 2012 and 2011, the Fund charged us $33 million, $7.3 million, and $2.5 million, respectively, in administrative services fee in accordance with the Services Agreement, and we will reimburse QRE GP for such payments it makes to QRM.

In connection with the management of our business, QRM provides services for invoicing and collecting of our revenues as well as processing of payments to our vendors. Periodically QRM remits cash to us for the net working capital received on our behalf. Changes in the affiliate (payable)/receivable balances during the years ended December 31, 2013 and 2012 are included below:


Net affiliate payable as of December 31, 2011	$	3,734
Revenues and other increases		256,496
Expenditures		(208,780)
Settlements from the Fund		(51,450)
Net affiliate receivable as of December 31, 2012		-
Revenues and other increases		403,867
Expenditures		(264,092)
Settlements from the Fund		(135,860)
Net affiliate receivable as of December 31, 2013	$	3,915

Other Contributions to Partners’ Capital

Other contributions to partners’ capital include the following items for the period indicated:


	Year Ended		Year Ended		Year Ended
	December 31, 2013		December 31, 2012		December 31, 2011
Noncash general and administrative expense contributed by the Fund(1)	$	-	$	31,591	$	17,364
Noncash general and administrative expense contributed by the Predecessor(2)		-		6,485		17,357
Fair value of interest rate derivatives novated to us from the Fund(3)		-		-		2,600
Prepaid insurance incurred by the Fund on our behalf(4)		-		-		224
Total other contributions from affiliates	$	-	$	38,076	$	37,545

⁽¹⁾

Represents our share of allocable general and administrative expenses incurred by QRM on our behalf, but not reimbursable by us.

⁽²⁾

Represents our share of allocable general and administrative expenses incurred by QRM on our behalf, but not reimbursable by us for the December 2012 Transferred Properties for the years ended December 31, 2012 and 2011 and for the October 2011 Transferred Properties for the period from January 1 to September 30, 2011.

⁽³⁾

On February 28, 2011, the Fund novated to us fixed-for-floating interest rate swaps covering $225.0 million of borrowings under our revolving credit facility. The Fund also novated to us on July 1, 2011 natural gas basis swaps with contract dates until 2015. The fair value of these derivative instruments was a net asset position.

⁽⁴⁾

QRM also incurred prepaid insurance on our behalf, but not reimbursable by us.

Cash Contributions from the Predecessor

The following table presents cash received by the Predecessor on our behalf related to the December 2012 Transferred Properties and October 2011 Transferred Properties for the following periods prior to our acquisition of the net assets on December 28, 2012 and October 3, 2011, respectively:



	Year ended		Year ended
	December 31, 2012		December 31, 2011
Cash receipts	$	(109,274)	$	(204,898)
Production expenditures paid		41,528		80,889
Derivative buyup payment		-		42,653
Interest paid		4,050		9,981
Capital expenditures paid		28,723		45,868
Cash distributions to the Predecessor	$	(34,973)	$	(25,507)

Omnibus Agreement

On December 22, 2010, in connection with the closing of our IPO, we entered into an Omnibus Agreement (the “Omnibus Agreement”) by and among us, QRE GP, OLLC, the Fund, the Predecessor and QA Global.

Under the terms of the Omnibus Agreement, the Fund will offer us the first option to purchase properties that it may offer for sale, so long as the properties consist of at least 70% proved developed producing reserves. The 70% threshold is a value-weighted determination made by the Fund. Additionally, the Fund will allow us to participate in acquisition opportunities to the extent that it invests any of the remaining approximately $113.2 million of its equity capital or acquires reserves as follow-on investments that are associated with its existing reserves. Specifically, the Fund will offer us the first opportunity to participate in at least 25% of each acquisition opportunity available to it, so long as at least 70% of the allocated value is attributable to proved developed producing reserves. These contractual obligations will remain in effect until December 21, 2015.

The Omnibus Agreement provides that the Fund will indemnify us against: (i) title defects, subject to a $75,000 per claim de minimus exception, for amounts in excess of a $4.0 million threshold, and (ii) income taxes attributable to pre-closing operations as of the IPO Closing Date. The Fund indemnification obligation will (i) survive for one year after the closing of our IPO with respect to title, and (ii) terminate upon the expiration of the applicable statute of limitations with respect to income taxes. We will indemnify the Fund against certain potential environmental claims, losses and expenses associated with the operation of our business that arise after the consummation of our IPO.

Management Incentive Fee

Under our partnership agreement, for each quarter for which we have paid distributions that equaled or exceeded 115% of our minimum quarterly distribution (which amount we refer to as our “Target Distribution”), or $0.4744 per unit, QRE GP will be entitled to a quarterly management incentive fee, payable in cash, equal to 0.25% of our management incentive fee base, which will be an amount equal to the sum of:

the future net revenue of our estimated proved oil and natural gas reserves, discounted to present value at 10% per annum and calculated based on SEC methodology;

adjusted for our commodity derivative contracts; and

the fair market value of our assets, other than our estimated oil and natural gas reserves and our commodity derivative contracts, that principally produce qualifying income for federal income tax purposes, at such value as may be determined by the board of directors of QRE GP and approved by the conflicts committee of QRE GP’s board of directors.

For the years ended December 31, 2013, 2012 and 2011, the management incentive fee earned by QRE GP was $3.4 million, $6.1 million and $1.6 million, respectively. The fourth quarter 2012 management incentive fee was reduced by the portion of the management incentive fee converted as discussed below under General Partner’s Right to Convert Management Incentive Fee into Class B Units.

General Partner’s Right to Convert Management Incentive Fee into Class B Units

From and after the end of the subordination period and subject to the limitations described below, our general partner has the continuing right, at any time when it has received all or any portion of the management incentive fee for three full consecutive quarters and shall be entitled to receive all or a portion of the management incentive fee for a fourth consecutive quarter, to convert into Class B units up to 80%, such percentage actually converted being referred to as the Applicable Conversion Percentage, of the management incentive fee for the fourth quarter in lieu of receiving a cash payment for such portion of the management incentive fee. Any Conversion Election made during a quarter must be made before payment of the management incentive fee in respect of the previous quarter and will be effective as of the first day of such quarter, and the Class B units issued upon such conversion will be entitled to distributions as if they were outstanding on the first day of such quarter.

The number of Class B units (rounded to the nearest whole number) to be issued in connection with such a conversion will be equal to (a) the product of: (i) the Applicable Conversion Percentage; and (ii) the average of the management incentive fee paid to our general partner for the quarter immediately preceding the quarter for which such fee is to be converted and the management incentive fee payable to our general partner for the quarter for which such fee is to be converted, divided by (b) the cash distribution per unit for the most recently completed quarter.

We refer to such conversion as a “Conversion Election.” The reduction in the management incentive fee as a result of any conversion will directly offset the increase in distributions required by the newly issued Class B units.

In the event of such Conversion Election, unless we experience a change of control, our general partner will not be permitted to exercise the Conversion Election again until (i) the completion of the fourth full calendar quarter following the previous Conversion Election and (ii) the Gross Management Incentive Fee Base has increased to 115% of the Gross Management Incentive Fee Base as of the immediately preceding conversion date.

The subordination period on our subordinated units ended on December 31, 2012 and our general partner had received a management incentive fee for three full consecutive quarters. On February 22, 2013, our general partner elected to convert 80% of the fourth quarter 2012 management incentive fee and, on March 4, 2013, received 6,133,558 Class B units which were issued and outstanding upon conversion. The general partner received a reduced fourth quarter management incentive fee of $0.7 million and received a distribution on the Class B units related to the fourth quarter 2012.

On March 2, 2014 we completed a transaction related to our general partner interest pursuant to a Contribution Agreement. See Note 22 – Subsequent Events for more information.

Purchase and Sale Agreements

On December 28, 2012, we completed an acquisition of certain oil and gas properties in Florida from the Fund for an aggregate price of $143.6 million, pursuant to the December 2012 Purchase Agreement. In exchange for the assets, we assumed $115.0 million in debt from the Fund and paid the remaining $28.6 million in cash.

On October 3, 2011, we completed an acquisition of certain oil and gas properties located in the Permian Basin, Ark-La-Tex and Mid-Continent areas from the Fund for an aggregate purchase price of $578.8 million, pursuant to a Purchase and Sale Agreement (the “October 2011 Purchase Agreement”) dated September 12, 2011. In exchange for the assets, we assumed $227.0 million in debt from the Fund which was repaid at closing and issued to the Fund 16,666,667 unregistered Preferred Units.

See Note 1 – Organization and Operations and Note 4 – Acquisitions for further discussion of the acquisitions and Note 2 – Summary of Significant Accounting Policies for discussion of the basis of presentation in the financial statements.

Lease Guarantees

The Fund has entered into various lease contracts that can routinely extend beyond five years which list the Partnership as a guarantor. See Note 11 – Commitments and Contingencies.

Long–Term Incentive Plan

On December 22, 2010, in connection with the closing of the IPO, the Board of Directors of QRE GP adopted the Plan to compensate employees, officers, consultants and directors of QRE GP and those of its affiliates, including QRM, who perform services for us. As of December 31, 2013, 2012 and 2011, we had 1,022,311, 668,323, and 271,364 unvested restricted and performance unit awards outstanding with remaining unamortized costs of $11.9 million, $9.0 million, and $4.8 million, respectively. For additional discussion regarding the Plan see Note 15 – Equity-Based Compensation.

Distributions of Available Cash to QRE GP and Affiliates

We will generally make cash distributions to our unitholders and QRE GP pro rata, including QRE GP and our affiliates. The Partnership made cash distributions to QRE GP and our affiliates during 2012 and 2013 as discussed in Note 12 – Partners’ Capital.

Our Relationship with Bank of America

Don Powell, one of our independent directors, served as an independent director of Bank of America (“BOA”) through May 2013 and did not seek re-election. BOA is a lender under our Credit Agreement.

Farmout Agreement with Related Party

In January 2014, we entered into a Farmout Agreement with Tanos Exploration II, LLC (“Tanos”), a Quantum Energy Partners affiliate, whereas Tanos is to be the operator of certain wells until completion or other termination criteria are met.