-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UME2kqTYOactysCXFJR8/qWIls8dXTqcgrFEfQXF1RaeKgiLigvu50RPgaZ9Cetn 23RTVyRYidznfPC8ixl+XQ== 0000912057-02-006788.txt : 20020414 0000912057-02-006788.hdr.sgml : 20020414 ACCESSION NUMBER: 0000912057-02-006788 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20020219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUESTAR MARKET RESOURCES INC CENTRAL INDEX KEY: 0001108827 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-30321 FILM NUMBER: 02553105 BUSINESS ADDRESS: STREET 1: 180 EAST 100 SOUTH CITY: SALT LAKE CITY STATE: UT ZIP: 84145-0433 MAIL ADDRESS: STREET 1: P O BOX 45601 CITY: SALT LAKE CITY STATE: UT ZIP: 84145-0601 10-Q/A 1 a2070854z10-qa.txt 10-Q/A 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. PART I FINANCIAL INFORMATION Item 1. Financial Statements QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Restated) (Unaudited)
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 ========= ========= ========= =========
See notes to consolidated financial statements 2 QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Restated)
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 =========== ===========
See notes to consolidated financial statements 3 QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated) (Unaudited)
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 ========= =========
See notes to consolidated financial statements 4 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. 5 Note 5 - Operations By Line of Business
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 ======== ========
6 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.
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 ======== ======== ======== ========
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 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 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.
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
9 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 10 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 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 12 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. 13 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 - ----------------- -------------------------------------- (Date) G. L. Nordloh President and Chief Executive Officer February 14, 2002 /s/ S. E. Parks - ----------------- -------------------------------------- (Date) S. E. Parks Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----