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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2001.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File No. 0-30321
QUESTAR MARKET RESOURCES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF UTAH 87-0287750
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 45601, 180 East 100 South, Salt Lake City, Utah 84145-0601
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 324- 2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 31, 2001
- ----------------------------- -------------------------------
Common Stock, $1.00 par value 4,309,427 shares
Registrant meets the conditions set forth in General Instruction H(a)(1) and
(b) of Form 10-Q and is filing this Form 10-Q/A with the reduced disclosure
format.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Restated)
(Unaudited)
<Table>
<Caption>
3 Months Ended 6 Months Ended
June 30, June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
(In Thousands)
REVENUES $ 176,742 $ 165,201 $ 435,588 $ 306,962
OPERATING EXPENSES
Cost of natural gas and other
products sold 78,209 79,790 219,789 143,683
Operating and maintenance 25,415 24,551 49,134 47,465
Exploration 3,878 3,352 5,495 6,607
Depreciation, depletion and amortization 21,476 21,608 42,315 42,821
Other taxes 12,150 8,044 28,987 15,358
Wexpro settlement agreement - oil
income sharing 846 1,209 2,025 2,193
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 141,974 138,554 347,745 258,127
--------- --------- --------- ---------
OPERATING INCOME 34,768 26,647 87,843 48,835
INTEREST AND OTHER INCOME 809 1,950 12,760 3,153
MINORITY INTEREST 107 169
INCOME FROM UNCONSOLIDATED AFFILIATES 179 306 228 1,305
DEBT EXPENSE (4,060) (6,303) (9,045) (11,673)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 31,803 22,600 91,955 41,620
INCOME TAXES 11,168 7,468 32,976 13,101
--------- --------- --------- ---------
NET INCOME $ 20,635 $ 15,132 $ 58,979 $ 28,519
========= ========= ========= =========
</Table>
See notes to consolidated financial statements
2
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QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Restated)
<Table>
<Caption>
June 30, December 31,
2001 2000
(Unaudited)
----------- -----------
(In Thousands)
ASSETS
Current assets
Cash and cash equivalents $ 3,980
Notes receivable from Questar Corp. $ 29,000
Accounts receivable, net 78,208 148,433
Qualifying hedging collateral 48,377
Hedging contracts 2,933
Inventories, at lower of average cost or market -
Gas and oil storage 2,528 7,618
Materials and supplies 2,523 2,298
Prepaid expenses and other 6,495 4,828
----------- -----------
Total current assets 121,687 215,534
----------- -----------
Property, plant and equipment 1,440,456 1,400,159
Less accumulated depreciation, depletion
and amortization 685,960 662,923
----------- -----------
Net property, plant and equipment 754,496 737,236
----------- -----------
Investment in unconsolidated affiliates 15,377 15,417
Other assets
Cash held in escrow account 5,387
Other 2,336 4,344
----------- -----------
2,336 9,731
----------- -----------
$ 893,896 $ 977,918
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of cash balance $ 2,399
Short-term loans 12,500
Notes payable to Questar Corp. 8,900 51,000
Accounts payable and accrued expenses 111,969 164,325
----------- -----------
Total current liabilities 123,268 227,825
----------- -----------
Long-term debt 207,255 244,377
Other liabilities 8,029 13,847
Deferred income taxes 77,030 67,875
Minority interest 7,761 5,483
Common shareholder's equity
Common stock 4,309 4,309
Additional paid-in capital 116,027 116,027
Retained earnings 349,749 299,420
Cumulative other comprehensive income (loss) 468 (1,245)
----------- -----------
Total common shareholder's equity 470,553 418,511
----------- -----------
$ 893,896 $ 977,918
=========== ===========
</Table>
See notes to consolidated financial statements
3
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QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated)
(Unaudited)
<Table>
<Caption>
6 Months Ended
June 30,
2001 2000
--------- ---------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 58,979 $ 28,519
Depreciation, depletion and amortization 42,675 43,168
Deferred income taxes 8,263 (718)
Income from unconsolidated
affiliates, net of cash distributions (127) (1,155)
Gain from sale of securities (896)
Changes in operating assets
and liabilities 65,727 (37,077)
--------- ---------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 175,517 31,841
INVESTING ACTIVITIES
Capital expenditures (80,211) (97,384)
Proceeds from disposition of property,
plant and equipment 19,214 8,904
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (60,997) (88,480)
FINANCING ACTIVITIES
Change in notes receivable from Questar Corp. (29,000) 4,000
Change in notes payable to Questar Corp. (42,100) 5,800
Checks outstanding in excess of cash balance 2,399 (1,246)
Change in short-term loans (12,500)
Change in cash balance in escrow account 5,387 32,414
Long-term debt issued 185,000 37,476
Long-term debt repaid (221,446) (6,349)
Other 2,446
Payment of dividends (8,650) (8,650)
--------- ---------
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES (118,464) 63,445
Foreign currency translation adjustment (36) (514)
--------- ---------
Change in cash and cash equivalents (3,980) 6,292
Beginning cash and cash equivalents 3,980
--------- ---------
Ending cash and cash equivalents $ -- $ 6,292
========= =========
</Table>
See notes to consolidated financial statements
4
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QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Restated)
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim periods presented. All such adjustments are of a normal recurring
nature. Due to the nature of the business, the results of operations for the
three- and six-month periods ended June 30, 2001, are not necessarily
indicative of the results that may be expected for the year ending December
31, 2001. For further information refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K/A for the year ended December 31, 2000,
Note 2 - Change in Method of Accounting for Gas and Oil Properties
On July 1, 2001, Questar Market Resources (QMR) elected to change its accounting
method for gas and oil properties from the full cost method to the successful
efforts method. The change was prompted by an acquisition of a company that uses
successful efforts. A subsidiary, Wexpro, has always employed the successful
efforts method. Management believes that the successful efforts method is
preferable and will more accurately present the results of operations of the
Company's exploration, development and production activities, minimizes asset
write-downs caused by temporary declines in gas and oil prices and reflects
impairment of the carrying value of the Company's gas and oil properties only
when there has been an other-than-temporary decline in their fair value.
As a result of this change in accounting method, prior year and interim
financial statements have been retroactively restated. The effect of the
change in accounting method on previously reported earnings was an increase
in net income of $2.0 million for the six-month period ended June 30, 2001
and a decrease in net income of $3.7 million in the six-month period ended
June 30, 2000.
Note 3 - Subsequent Event - Acquisition
QMR acquired 100% of the common stock of Shenandoah Energy, Inc. (SEI) on July
31, 2001 for $403 million in cash including assumed debt. SEI was a privately
held Denver-based exploration, production, gathering and drilling company. QMR
obtained an estimated 415 billion cubic feet equivalent of proved oil and gas
reserves, gas processing capacity of 100 MMcf per day, 90 miles of gathering
lines, 114,000 acres of net undeveloped leasehold acreage and four drilling
rigs. SEI operations are located primarily in the Uintah Basin of eastern Utah.
The transaction was accounted for as a purchase business combination in
accordance with accounting principles generally accepted in the United States.
The purchase price in excess of the estimated fair value of the assets was
assigned to goodwill. The acquisition was financed through bank borrowings.
Note 4 - Financing
On March 6, 2001, Market Resources, in a public offering, issued $150 million
of 7.5% notes due 2011. Market Resources applied the proceeds of the debt
offering to repay a portion of its outstanding floating-rate bank debt. On
January 16, 2002, QMR issued $200 million of 7% notes due 2007 and used the
proceeds to repay existing debt. The notes were issued through a private
placement; however, QMR intends to register the notes.
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Note 5 - Operations By Line of Business
<Table>
<Caption>
3 Months Ended 6 Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
(In Thousands)
REVENUES FROM UNAFFILIATED CUSTOMERS
Exploration and production $ 64,733 $ 57,414 $143,053 $106,923
Cost of service 2,976 3,080 8,042 6,924
Gathering, processing and marketing 84,348 83,595 231,827 149,713
-------- -------- -------- --------
$152,057 $144,089 $382,922 $263,560
======== ======== ======== ========
REVENUES FROM AFFILIATED COMPANIES
Exploration and production $ -- $ -- $ 4 $ --
Cost of service 22,691 18,103 46,066 35,233
Gathering, processing and marketing 1,994 3,009 6,596 8,169
-------- -------- -------- --------
$ 24,685 $ 21,112 $ 52,666 $ 43,402
======== ======== ======== ========
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (Restated)
Exploration and production $ 16,395 $ 17,066 $ 32,095 $ 33,378
Cost of service 3,646 3,367 7,414 6,904
Gathering, processing and marketing 1,435 1,175 2,806 2,539
-------- -------- -------- --------
$ 21,476 $ 21,608 $ 42,315 $ 42,821
======== ======== ======== ========
OPERATING INCOME (Restated)
Exploration and production $ 22,959 $ 15,367 $ 60,763 $ 27,685
Cost of service 10,289 9,365 20,778 18,396
Gathering, processing and marketing 1,520 1,915 6,302 2,754
-------- -------- -------- --------
$ 34,768 $ 26,647 $ 87,843 $ 48,835
======== ======== ======== ========
NET INCOME (Restated)
Exploration and production $ 13,243 $ 7,544 $ 41,341 $ 14,278
Cost of service 6,487 5,950 13,071 11,737
Gathering, processing and marketing 905 1,638 4,567 2,504
-------- -------- -------- --------
$ 20,635 $ 15,132 $ 58,979 $ 28,519
======== ======== ======== ========
FIXED ASSETS - NET, at period end (Restated)
Exploration and production $494,455 $485,988
Cost of service 167,680 136,108
Gathering, processing and marketing 92,361 73,294
-------- --------
$754,496 $695,390
======== ========
GEOGRAPHIC INFORMATION
REVENUES
United States $165,423 $156,420 $410,923 $291,208
Canada 11,319 8,781 24,665 15,754
-------- -------- -------- --------
$176,742 $165,201 $435,588 $306,962
======== ======== ======== ========
FIXED ASSETS - NET, at period end (Restated)
United States $670,022 $601,025
Canada 84,474 94,365
-------- --------
$754,496 $695,390
======== ========
</Table>
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Note 6 - Comprehensive Income (Restated)
Comprehensive income is the sum of net income as reported in the Consolidated
Statement of Income and other comprehensive income transactions reported in
Shareholder's Equity. Other comprehensive income transactions that currently
apply to QMR result from changes in the market value of energy-hedging contracts
and changes in holding value resulting from foreign currency translation
adjustments. These transactions are not the culmination of the earnings process,
but result from periodically adjusting historical balances to market value.
Income or loss is realized when the gas or oil underlying the hedging contracts
is sold. In 2000, other comprehensive income included mark-to-market adjustments
of securities available for sale. QMR sold the balance of these securities late
in 2000.
<Table>
<Caption>
3 Months Ended 6 Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
(In Thousands)
Comprehensive Income:
Net income $ 20,635 $ 15,132 $ 58,979 $ 28,519
Other comprehensive income (loss)
Unrealized gain on hedging transaction 55,128 3,028
Unrealized gain on securities available for sale 3,397 5,517
Foreign currency translation adjustments 1,831 (875) (438) (1,431)
-------- -------- -------- --------
Other comprehensive income
before income taxes 56,959 2,522 2,590 4,086
Income taxes on other
comprehensive income 21,642 871 877 1,424
-------- -------- -------- --------
Net other comprehensive income 35,317 1,651 1,713 2,662
-------- -------- -------- --------
Total comprehensive income $ 55,952 $ 16,783 $ 60,692 $ 31,181
======== ======== ======== ========
</Table>
Note 7 - New Accounting Standard - "Accounting for Derivative Instruments and
Hedging Activities"
The Company adopted the accounting provisions of SFAS 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities" beginning in
January 2001. SFAS 133 addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standard, entities are required to carry all derivative instruments in the
balance sheet at fair value. The accounting for changes in fair value, which
result in gains or losses, of a derivative instrument depends on whether such
instrument has been designated and qualifies as part of a hedging relationship
and, if so, depends on the reason for holding it. If certain conditions are met,
entities may elect to designate a derivative instrument as a hedge of exposure
to changes in fair value, cash flows or foreign currencies. If the hedged
exposure is a fair-value exposure, the gain or loss on the derivative instrument
is recognized in earnings in the period of the change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash-flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income in the shareholders' equity section of
the balance sheet and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness, as well as the ineffective portion of the
gain or loss, is reported in earnings immediately.
As of January 1, 2001, the Company structured a majority of its energy
derivative instruments as cash flow hedges. As a result of adopting SFAS 133 in
January 2001, the Company recorded a $121 million hedging liability for
derivative instruments. Measured at June 30, 2001, the results of hedging
activities amounted to a $2.9 million current asset. Settlement of contracts
accounted for $65.8 million of the decrease, while a decrease in prices of gas
and oil on futures markets resulted in a $58.1 million decline. The offset to
the hedging asset, net of income taxes, was a $1.9 million unrealized gain on
hedging activities recorded in other comprehensive income in the shareholder's
equity section of the balance sheet. The ineffective portion of hedging
transaction recognized in earnings was not significant. The
7
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fair-value calculation does not consider changes in fair value of the
corresponding scheduled equity physical transactions.
The contracts at June 30, 2001 had terms extending through December 2003. About
82% of those contracts, representing approximately $5 million, settle and will
be reclassified from other comprehensive income in the next 12 months.
Note 8 - Reclassifications
Certain reclassifications were made to the 2000 financial statements to conform
with the 2001 presentation.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
June 30, 2001
(Unaudited)
Operating Results
Questar Exploration and Production (Questar E & P), Wexpro, Questar Gas
Management and Questar Energy Trading, collectively Questar Market Resources
(QMR or the Company), conduct exploration and production, gas gathering and
processing, and energy marketing operations. Following is a summary of QMR's
financial results and operating information.
<Table>
<Caption>
3 Months Ended 6 Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $152,057 $144,089 $382,922 $263,560
From affiliates 24,685 21,112 52,666 43,402
-------- -------- -------- --------
Total revenues $176,742 $165,201 $435,588 $306,962
======== ======== ======== ========
Operating income (Restated) $ 34,768 $ 26,647 $ 87,843 $ 48,835
Net income (Restated) $ 20,635 $ 15,132 $ 58,979 $ 28,519
OPERATING STATISTICS
Production volumes
Natural gas (in million cubic feet) 15,844 17,674 31,631 34,624
Oil and natural gas liquids (in thousands of barrels)
Questar Exploration & Production 522 563 1,017 1,117
Wexpro 114 140 239 268
Production revenue
Natural gas (per thousand cubic feet) $ 3.31 $ 2.48 $ 3.74 $ 2.33
Oil and natural gas liquids (per barrel)
Questar Exploration & Production $ 20.36 $ 19.77 $ 20.91 $ 20.69
Wexpro $ 26.06 $ 25.87 $ 27.04 $ 25.49
Wexpro investment base at June 30, net of
deferred income taxes (in millions) $ 127.2 $ 108.2
Marketing volumes in energy equivalent decatherms
(in thousands of decatherms) 23,524 25,180 47,552 52,205
Natural gas gathering volumes (in thousands of decatherms)
For unaffiliated customers 24,526 23,261 46,611 45,039
For Questar Gas 8,695 9,235 18,906 19,088
For other affiliated customers 6,601 6,514 13,400 11,678
-------- -------- -------- --------
Total gathering 39,822 39,010 78,917 75,805
======== ======== ======== ========
Gathering revenue (per decatherm) $ 0.13 $ 0.13 $ 0.13 $ 0.14
</Table>
9
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Revenues
Strong natural gas prices more than offset lower production volumes resulting in
revenues that were 7% higher in the second quarter and 42% higher in the first
half of 2001 when compared with the corresponding 2000 periods. Questar E & P
reported that its average realized natural gas price was 33% higher in the
second quarter and 61% higher in the first half of 2001. Production volumes
decreased in 2001 as a result of selling reserves in place and a natural decline
in older fields. However, production volumes for the second half of 2001 will
increase due to QMR's acquisition of Shenandoah Energy, Inc. (SEI).
On July 31, 2001, QMR acquired SEI at a cost of $403 million including the
assumption of debt. QMR received 415 billion cubic feet equivalent of proved
reserves comprised of approximately 72% gas and 28% oil. SEI is expected to
add 63 million cubic feet equivalent per day of gas and oil to QMR's
nonutility production.
Approximately 58% of gas volumes in the first half of 2001 were hedged with
floors and ceilings averaging $3.04 per Mcf and $3.27 per Mcf, respectively, net
to the well. The remainder of gas production realized prices averaging about
$5.59 per Mcf, driven by cold winter temperatures and an energy shortage in the
western United States. Approximately 58% of gas production for the second half
of 2001, including production from SEI properties, is hedged with floors and
ceilings averaging $3.03 per Mcf and $3.40 per Mcf, respectively, net to the
well. Approximately 16% of 2002 gas production is hedged at a floor of $3.55 per
Mcf and a ceiling of $4.05 per Mcf, net to the well. Hedging activities reduced
revenues from gas sales by $58.6 million in the first half of 2001.
For Questar E & P, prices for oil and natural gas liquids (NGL) were 1% higher
in the first half of 2001. Approximately 60% of oil production in the first half
of 2001 was hedged at an average price of $17.20 per barrel, net to the well.
Realized prices for the remaining oil production averaged about $27 per barrel.
Hedging activities reduced revenues from oil sales by $5.8 million in the first
half of 2001. NGL prices increased 47% over the same period in 2000. QMR does
not hedge the sales price of NGL.
Revenues from energy marketing increased $81.7 million in the first half
comparison primarily due as a result of higher gas prices. The margin from
energy marketing was $6.3 million in the first half of 2001 compared with
$700,000 in the 2000 period.
Expenses (Restated)
Operating and maintenance expenses were higher in the 2001 periods presented
when compared with the corresponding 2000 periods. The expenses of operating
producing properties increased $2.3 million in the first half comparison
primarily due to adding properties. Also, the expenses of operating a gas
storage facility that began operations in the third quarter of 2000 resulted
in a $500,000 increase in the first half of 2001. However, legal costs were
$2.1 million lower in the first half of 2001 following the settlement of a
major lawsuit in the second half of 2000. Exploration expense declined $1.1
million from the 2000 period as a result of reduced exploration activity.
Depreciation, depletion and amortization (DD&A) was lower in the first half
of 2001compared with the first half of 2000 as a result of decreased
production more than offsetting a higher DD&A rate. The combined U.S. and
Canadian DD&A rate for the first half of 2001 was $.84 per thousand cubic
feet equivalent (Mcfe) of production compared with $.80 for the corresponding
period a year ago. The 2001 rate increase reflects rising costs associated
with drilling operations as a consequence of increased industry activity.
Other taxes increased because of higher gas prices and the effect on
production-related taxes. Debt expense was lower in the 2001 periods because of
lower debt levels.
The effective income tax rate for the first half of 2001 was 35.9% compared with
31.5% for the same period of 2000. The effective income tax rate increased
because of a higher portion of earnings derived from Canada, where income tax
rates
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are higher. The Company recognized $2.4 million of non-conventional fuel tax
credits in the 2001 period and $2.3 million in the 2000 period.
Other income (Restated)
Other income includes a $10.6 million pretax gain from selling non-strategic
oil and gas and gathering properties, primarily in the first quarter of
2001 and a $900,000 pretax gain from selling securities in the second quarter
of 2000.
Net income (Restated)
QMR's first half net income increased $24.7 million, representing a 107%
improvement over the first half of 2000. The increase resulted from higher
commodity prices, increased earnings for Wexpro and gains from selling
non-strategic assets. Wexpro's net income was $1.3 million higher in the first
half of 2001. Wexpro increased its investment in development-drilling projects
resulting in a $19 million increase in the Wexpro investment base since June 30,
2000. Wexpro develops gas reserves on behalf of affiliated company, Questar Gas,
which is a rate-regulated distributor of natural gas. In addition, higher oil
and NGL prices contributed to Wexpro's improved earnings.
Liquidity and Capital Resources
Operating Activities (Restated)
Net cash provided from operating activities in the first half of 2001 of
$175.5 million was $143.7 million more than was generated in the first half
of 2000. The increase in cash flow from operating activities resulted from
higher net income, the release of cash deposited as collateral for qualifying
hedging contracts and the collection of receivables.
Investing Activities (Restated)
Capital expenditures were $80.2 million in the first half of 2001. The
acquisition of SEI on July 31, increased 2001 capital expenditures by $403
million. Forecasted capital expenditures for calendar year 2001 are $560
million.
Financing Activities
Net cash provided from operating activities in the first half of 2001 enabled
QMR to repay short-term debt, finance capital expenditures and loan the
remaining cash to Questar. Proceeds from the sale of assets in the first
quarter of 2001 amounting to approximately $26.5 million were used to repay
debt balances. QMR borrowed $414 million to finance the acquisition of SEI
and will consider selling non-strategic assets and/or issuing equity to
reduce the level of debt. On March 6, 2001, QMR in a public offering issued
$150 million of 7.5% notes due 2011. QMR applied the proceeds of the debt
offering to repay a portion of its outstanding floating-rate debt. QMR
expects to finance remaining 2001 capital expenditures with the proceeds of
net cash provided from operating activities, bank loans and borrowing from
Questar.
Quantitative and Qualitative Disclosures about Market Risk
QMR's primary market-risk exposures arise from commodity-price changes for
natural gas, oil and other hydrocarbons and changes in long-term interest rates.
The Company has an investment in a foreign operation that may subject it to
exchange-rate risk. QMR also has reserved pipeline capacity for which it is
obligated to pay $3 million annually for the next six years, regardless of
whether it is able to market the capacity to others.
HEDGING POLICY
The Company has established policies and procedures for managing market risks
through the use of commodity-based derivative arrangements. Primary objectives
of these hedging transactions are to support the Company's earnings
11
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targets and to protect earnings from downward moves in commodity prices. The
Company will target between 50 and 75% of the current year's production hedged
at or above plan levels by the first of March in the current year. The Company
will ladder in these hedges, to reach forward beyond the current year when price
levels are right. The volume of production hedged and mix of derivative
instruments employed are regularly evaluated and adjusted by management in
response to changing market conditions and reviewed periodically by the Board of
Directors. Additionally, under the terms of the Market Resources' revolving
credit facility, not more than 75% of Market Resources' production quantities
can be committed to hedging arrangements. The Company does not enter into
derivative arrangements for speculative purposes.
ENERGY-PRICE RISK MANAGEMENT
Oil and natural gas prices fluctuate in response to changes in supply and
demand. Market Resources bears a majority of the risk associated with commodity
price changes and uses hedge arrangements in the normal course of business to
limit the risk of adverse price movements. However, these same arrangements
usually limit future gains from favorable price movements.
QMR held hedge contracts covering the price exposure for about 61.6 million dth
of gas and 459,000 barrels of oil at June 30, 2001. A year earlier the contracts
covered 50.3 million dth of natural gas and 1.7 million barrels of oil. The
hedging contracts exist for a significant share of QMR-owned gas and oil
production and for a portion of energy-marketing transactions. The contracts at
June 30, 2001 had terms extending through December 2003. About 82% of those
contracts, representing approximately $5 million, settle and will be
reclassified from other comprehensive income in the next 12 months.
The undiscounted mark-to-market adjustment of financial gas and oil
price-hedging contracts at June 30, 2001 was a negative $4.3 million. A 10%
decline in gas and oil prices would cause a positive mark-to-market adjustment
of $7.9 million; while a 10% increase in prices would cause a negative
mark-to-market adjustment of $7.9 million. The mark-to-market adjustment of gas
and oil price-hedging contracts at June 30, 2000 was a negative $69.1 million. A
10% decline in gas and oil prices at that time would have caused a positive
mark-to-market adjustment of $20.3 million. Conversely, a 10% increase in prices
would have resulted in a $20.3 million negative mark-to-market adjustment at
that date. The calculations reflect energy prices posted on the NYMEX, various
"into the pipe" postings, and fixed prices on the indicated dates. These
sensitivity calculations do not consider changes in the fair value of the
corresponding scheduled physical transactions (i.e., the correlation between the
index price and the price to be realized for the physical delivery of gas or oil
production), which should largely offset the change in value of the hedge
contracts.
INTEREST-RATE RISK MANAGEMENT
As of June 30, 2001, QMR held $57.3 million of floating-rate long-term debt. The
book value approximates fair value.
FOREIGN CURRENCY RISK MANAGEMENT
The Company does not hedge the foreign currency exposure of its foreign
operation's net assets and long-term debt. Long-term debt held by the foreign
operation, amounting to $42.3 million (U.S.), is expected to be repaid from
future operations of the foreign company.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of Section
27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding the Company's future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may", "will", "could", "expect",
"intend", "project", "estimate", "anticipate", "believe", "forecast", or
"continue" or the negative thereof or variations thereon or similar terminology.
Although these statements are made in good faith and are reasonable
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representations of the Company's expected performance at the time, actual
results may vary from management's stated expectations and projections due to a
variety of factors.
Important assumptions and other significant factors that could cause actual
results to differ materially from those expressed or implied in forward-looking
statements include changes in general economic conditions, gas and oil prices
and supplies, competition, rate-regulatory issues, regulation of the Wexpro
settlement agreement, availability of gas and oil properties for sale or for
exploration and other factors beyond the control of the Company. These other
factors include the rate of inflation, assumptions used in business
combinations, the weather and other natural phenomena, the effect of accounting
policies issued periodically by accounting standard-setting bodies, and adverse
changes in the business or financial condition of the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUESTAR MARKET RESOURCES, INC.
(Registrant)
February 14, 2002 /s/ G. L. Nordloh
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(Date) G. L. Nordloh
President and Chief Executive Officer
February 14, 2002 /s/ S. E. Parks
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(Date) S. E. Parks
Vice President, Treasurer and
Chief Financial Officer