SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 2000
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 No X
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, 2000
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 with the
reduced disclosure format.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
2000 1999 2000 1999
(In Thousands)
<S> <C> <C> <C> <C>
REVENUES $165,201 $114,222 $ 306,962 $230,068
OPERATING EXPENSES
Natural gas and other product
purchases 79,790 53,859 143,683 110,251
Operating and maintenance 24,552 19,330 47,470 39,499
Depreciation and amortization 21,151 19,379 42,128 38,984
Write-down of full-cost properties
Other taxes 8,044 4,530 15,358 9,658
Wexpro settlement agreement - oil
income sharing 1,209 213 2,193 422
TOTAL OPERATING EXPENSES 134,746 97,311 250,832 198,814
OPERATING INCOME 30,455 16,911 56,130 31,254
INTEREST AND OTHER INCOME 1,950 1,800 3,043 2,647
INCOME (LOSS) FROM
UNCONSOLIDATED AFFILIATES 306 (31) 1,305 (62)
DEBT EXPENSE (6,303) (4,290) (11,673) (8,553)
INCOME FROM BEFORE INCOME
TAXES 26,408 14,390 48,805 25,286
INCOME TAXES 9,226 3,958 16,574 6,601
NET INCOME $ 17,182 $ 10,432 $ 32,231 $ 18,685
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
(In Thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,292
Notes receivable from Questar Corp. $ 4,000
Accounts receivable, net 124,080 75,823
Inventories 4,449 11,253
Other current assets 5,218 4,452
Total current assets 140,039 95,528
Property, plant and equipment 1,575,906 1,469,676
Less allowances for depreciation 820,330 778,695
Net property, plant and equipment 755,576 690,981
Investment in unconsolidated affiliates 14,457 13,301
Other assets
Cash held in escrow account 4,312 36,727
Securities available for sale 11,449 10,402
Other 3,096 952
18,857 48,081
$928,929 $ 847,891
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 1,246
Notes payable to Questar Corp. $ 30,300 24,500
Accounts payable and accrued
expenses 106,746 92,278
Total current liabilities 137,046 118,024
Long-term debt 294,548 264,894
Other liabilities 9,988 14,674
Deferred income taxes 69,768 59,936
Minority interest 3,586 2,529
Common shareholder's equity
Common stock 4,309 4,309
Additional paid-in capital 116,027 116,027
Retained earnings 293,969 270,388
Other comprehensive loss (312) (2,890)
Total common shareholder's equity 413,993 387,834
</TABLE> $928,929 $ 847,891
See notes to consolidated financial statements
<PAGE>
QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
6 Months Ended
June 30,
2000 1999
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 32,231 $ 18,685
Depreciation 42,475 40,468
Deferred income taxes 2,577 358
(Income) loss from unconsolidated
affiliates, net of cash distributions (1,155) 624
Gain from sale of securities (896) (388)
Changes in operating assets
and liabilities (37,077) 4,881
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 38,155 64,628
INVESTING ACTIVITIES
Capital expenditures
Property, plant and equipment (101,455) (43,401)
Other investments (10,390)
Total (101,455) (53,791)
Proceeds from disposition of property,
plant and equipment, and investments 6,789 2,499
NET CASH USED IN INVESTING
ACTIVITIES (94,666) (51,292)
FINANCING ACTIVITIES
Change in notes receivable
from Questar Corporation 4,000 95,900
Change in notes payable
to Questar Corporation 5,800 (144,900)
Cash released from escrow account 32,414
Long-term debt issued 37,476 174,327
Long-term debt repaid (6,349) (130,000)
Payment of dividends (8,650) (8,300)
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES 64,691 (12,973)
Foreign currency translation
adjustment (642) 23
CHANGE IN CASH AND
CASH EQUIVALENTS $ 7,538 $ 386
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(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, 2000, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
For further information refer to the financial statements
and footnotes thereto included in the Company's report on
Form 10 dated April 12, 2000.
Note 2 - Purchase of Canadian Gas and Oil Company
On January 26, 2000, a subsidiary of Questar Market
Resources (QMR or the Company) acquired 100% of the
outstanding shares of Canor Energy Ltd (Canor) from NI
Canada ULC, a subsidiary of Northwest Natural Gas Co for
cash of $US 61 million plus the assumption of $5.4 million
of short-term debt. The transaction was accounted for as a
purchase. Canor owns and/or operates more than 800 wells
located in Alberta, British Columbia and Saskatchewan
provinces of Canada. Canor's proven gas and oil reserves
were estimated at 61.1 billion cubic feet equivalent.
Assets purchased and liabilities assumed were as follows:
(In Thousands)
Cash $ 245
Other current assets 3,502
Property, plant and equipment 73,720
Other assets 282
Short-term debt (5,444)
Other current liabilities (4,356)
Deferred income taxes (4,976)
Other liabilities (1,989)
Total purchase price, including
acquisition costs $ 60,984
Note 3 - Debt Offering
On April 12, 2000, QMR filed a registration statement with
the Securities and Exchange Commission for a public debt
offering. Following effectiveness of such registration
statement, QMR intends to issue $150 million of notes and
use the proceeds to repay a portion of the outstanding
debt.
Note 4 - Operations By Line of Business
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
2000 1999 2000 1999
(In Thousands)
<S> <C> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS
Exploration and production - U.S. $ 48,633 $ 35,365 $ 91,169 $ 69,081
Exploration and production - Canada 8,781 2,916 15,754 5,400
Wexpro - cost of service 3,080 739 6,924 2,863
Gas management and energy trading 83,595 56,828 149,713 113,147
$144,089 $ 95,848 $ 263,560 $190,491
REVENUES FROM AFFILIATED COMPANIES
Wexpro - cost of service $ 18,103 $ 15,095 $ 35,233 $ 30,189
Gas management and energy trading 3,009 3,279 8,169 9,388
$ 21,112 $ 18,374 $ 43,402 $ 39,577
OPERATING INCOME (LOSS)
Exploration and production - U.S. $ 16,095 $ 8,092 $ 29,827 $ 12,779
Exploration and production - Canada 3,080 726 5,153 1,014
Wexpro - cost of service 9,365 7,440 18,396 15,234
Gas management and energy trading 1,915 653 2,754 2,227
OPERATING INCOME $ 30,455 $ 16,911 $ 56,130 $ 31,254
NET INCOME (LOSS)
Exploration and production - U.S. $ 8,932 $ 5,016 $ 16,810 $ 7,645
Exploration and production - Canada 662 (22) 1,180 (279)
Wexpro - cost of service 5,950 4,770 11,737 9,854
Gas management and energy trading 1,638 668 2,504 1,465
NET INCOME $ 17,182 $ 10,432 $ 32,231 $ 18,685
Note 5 - Comprehensive Income
</TABLE>
Comprehensive income is defined as any nonowner change in
common equity. Generally, comprehensive income includes
earnings reported on the income statement plus changes in
common equity formerly reported on the balance sheet only.
Other comprehensive income included in this note is
comprised of changes in the market value of the investments
in securities available for sale and foreign currency
translation adjustments. These transactions are not the
culmination of the earnings process, but result from
periodically adjusting historical balances to market value.
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Comprehensive Income:
Net income $ 17,182 $ 10,432 $ 32,231 $ 18,685
Other comprehensive income (loss)
Unrealized gain (loss) on securities
available for sale 3,397 (332) 5,517
Foreign currency translation adjust (1,040) (272) (1,560) (491)
Other comprehensive income (loss)
before income taxes 2,357 (604) 3,957 (491)
Income taxes on other
comprehensive income (loss) 776 (231) 1,379 (188)
Net other comprehensive income 1,581 (373) 2,578 (303)
Total comprehensive $ 18,763 $ 10,059 $ 34,809 $ 18,382
income (loss)
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
QUESTAR MARKET RESOURCES, INC.
June 30, 2000
(Unaudited)
Operating Results
Questar Exploration and Production, Wexpro, Questar Gas
Management and Questar Energy Trading, collectively Questar
Market Resources (QMR or the Company), conducts 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,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $144,089 $ 95,848 $ 263,560 $190,491
From affiliates 21,112 18,374 43,402 39,577
Total revenues $165,201 $114,222 $ 306,962 $230,068
Operating income $ 30,455 $ 16,911 $ 56,130 $ 31,254
Net income 17,182 10,432 32,231 18,685
OPERATING STATISTICS
Production volumes
Natural gas (in million cubic feet 17,674 15,341 34,624 30,389
Oil and natural gas liquids
(in thousands of barrels)
Questar Exploration & Production 563 588 1,117 1,194
Wexpro 140 127 268 268
Total oil and NGL production 703 715 1,385 1,462
Production revenue
Natural gas (per thousand
cubic feet) $ 2.48 $ 1.93 $ 2.33 $ 1.90
Oil and natural gas liquids
(per barrel) $ 20.98 $ 13.99 $ 21.62 $ 12.28
Marketing volumes in energy
equivalent decatherms (in
thousands of decatherms) 25,180 26,158 52,205 60,317
Natural gas gathering volumes (in
thousands of decatherms)
For unaffiliated customers 23,261 21,835 45,039 42,126
For Questar Gas 9,235 8,682 19,088 16,919
For other affiliated customers 6,514 4,560 11,678 9,119
Total gathering 39,010 35,077 75,805 68,164
Gathering revenue (per decatherm) $ 0.13 $ 0.15 $ 0.14 $ 0.15
</TABLE>
Revenues
Revenues reported for the 2000 periods presented were
substantially higher than the revenues for the comparable
1999 periods as a result of higher prices for gas and oil
and increased gas production. The average natural gas
price per thousand cubic feet (Mcf) rose 28% in the second
quarter and 23% in the first half of 2000 when compared
with the same periods of 1999. The increase in gas prices
reflected a strong demand caused largely by the use of
natural gas in the generation of electricity. Oil and
natural gas liquids (NGL) prices increased 45% in the
second quarter and 71% per barrel in the first half of 2000
(excluding Wexpro's oil production). Oil and NGL prices
have increased steadily over the past year as
production generally declined and demand rose.
Of the current 6 Bcf per month gas production,
approximately 42% is covered by hedge contracts at an
average price of $2.20 per Mcf, net back to the wellhead.
About one-third of the contracts are collars and the
remainder are fixed price contracts. The floor price of
collar arrangements is used in calculating the average
hedged price. Approximately 76% of oil, excluding Wexpro
production, is hedged at an average price of $17.14 per
barrel, net back to the wellhead through the end of 2001.
The second quarter of 2000 includes record production
levels with an average monthly production of 7 billion
cubic feet equivalent, excluding Wexpro. Production
benefited from a successful development drilling program
and the first quarter acquisition of Canadian producing
properties. Canadian gas production grew 165% to 1.9
billion cubic feet (Bcf). U.S. gas production was 8% above
year-ago levels at 15.8 Bcf as increased drilling activity
offset a property sale in the fourth quarter of 1999.
However, the increased drilling did not fully replace the
production of oil and NGL production as a result of selling
nonstrategic properties in the fourth-quarter of 1999.
Expenses
Operating and maintenance expenses were higher in the
three-, six- and twelve-month periods of 2000 when compared
with the corresponding 1999 periods primarily because of
increased investment in producing properties including the
acquisition of a Canadian gas and oil company in January
2000. In addition, higher gas prices increased the cost of
replacing gas in extraction plant operations.
The full-cost amortization rate for U.S. operations dropped
$.03 to $.79 per thousand cubic feet equivalent of
production (Mcfe) compared with the second quarter of 1999.
The U.S. rate is expected to be about $.77 in the third
quarter of 2000. The declining U.S. rate has driven the
combined U.S. and Canadian full-cost amortization rate to
$.80 per energy-equivalent Mcf (Mcfe) for the first half of
2000 compared with $.82 for the comparable 1999 period.
The lower rate was due to successfully adding reserves
through drilling and purchases, while selling nonstrategic
properties at favorable prices. Depreciation and
amortization expenses were higher in the 2000 periods
presented when compared with the 1999 periods. Increased
production volumes from full-cost properties more than
offset the lower amortization rates. Increased investment
in other properties also resulted in higher depreciation
expense in the 2000 periods.
Higher commodity prices and increased production volumes
resulted in an increase in production-related taxes
reported in other taxes on the income statement. Debt
expense was higher in the 2000 periods presented because of
increased borrowings and higher short-term interest rates.
The effective income tax rate for the first half was 34%
in 2000 and 26.1% in 1999. The effective income tax rate
increased largely because of a reduction in
production-related tax credits and a higher portion of
earnings coming from Canada, where income tax rates are
higher. The Company recognized $2,259,000 of
production-related tax credits in the 2000 period and
$2,608,000 in the 1999 period.
Net income
QMR's second quarter net income increased $6.8 million
representing a 65% improvement over the second quarter of
1999. First half 2000 net income was 72% higher compared
with the first half of 1999. Higher commodity prices and
gas production and a lower full-cost amortization rate were
primary reasons for the increase. Other factors include
higher earnings from Wexpro and gas-management operations.
Wexpro's net income increased $1.9 million to $11.7 million
in the first half of 2000. Wexpro expanded its investment
in development-drilling projects in response to higher
regional demand. Wexpro develops gas reserves on behalf of
affiliated company, Questar Gas, which is a rate-regulated
distributor of natural gas. At year-end 1999, Wexpro
earned an average 18.9% after-tax return on investment in
those properties. In addition, increased oil and NGL prices
resulted in higher earnings for Wexpro and an increase in
shared oil profits for Questar Gas.
Gas-management and energy-trading operations reported $2.5
million in combined earnings for the first half of 2000
versus $1.5 million a year ago. Volumes of gas gathered
increased 11% in the first half of 2000 reflecting more
production in the areas served. Higher prices benefited
the operations of liquids-extraction plants that
experienced improved results for the second quarter and
first half of 2000. The plants extract and sell liquids
from the natural gas stream. Increased commodity prices
caused revenues from energy-marketing activities to be
higher in the 2000 periods but were offset by the low value
of transportation contracts and settlement of gas
imbalances.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities in the first
half of 2000 of $38.2 million was $26.5 million less than
was generated in the first half of 1999. Cash deposits as
a result of hedging account margin calls and timing
differences in collection of accounts receivables more than
offset the effects of higher net income. The
interest-bearing hedging account deposit payments amounted
to $36.4 million at June 30, 2000 and were classified as
receivables on the balance sheet.
Investing Activities
Capital expenditures were $101.5 million in 2000, which
includes a $60.7 million cash payment, net of cash
received, for the purchase of a Canadian company. Capital
expenditures for calendar year 2000 are estimated at $175.7
million.
Financing Activities
QMR financed capital expenditures, including the
acquisition of a Canadian company, through borrowings from
Questar and from an existing long-term debt arrangement,
from net cash provided from operating activities and from
cash released from an escrow account. Debt balances owed
to Questar as of June 30, 2000, amounted to $30.3 million
and $24.5 million at December 31, 1999. QMR filed a
registration statement with the Securities and Exchange
Commission in order to raise $150 million in a public debt
offering. Proceeds of the debt offering will be used to repay
a portion of debt outstanding. QMR intends to finance
remaining 2000 capital expenditures through net cash
provided from operations, borrowings from Questar and
borrowings under an existing long-term debt facility.
Revenue Recognition Guideline Issued by the Securities and
Exchange Commission
In December 1999, the SEC issued Staff Accounting Bulletin
(SAB) 101, "Revenue Recognition in Financial Statements."
The SAB raised issues concerning the timing of recording
revenues given that sales transactions may contain some
conditions allowing customers to return products or receive
refunds. The effect of adopting this accounting guideline
is not known at this time because the Company has not
completed its evaluation. The SEC has postponed the
effective date of this ruling from the second quarter of
2000 to the fourth quarter.
Forward-Looking Statements
The 10-Q contains forward-looking statements about future
operations, capital spending, regulatory matters and
expectations of Questar Market Resources. According to
management, these statements are made in good faith and are
reasonable 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
discussed in forward-looking statements include changes in
general economic conditions, gas and oil prices and
supplies, competition, 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 and adverse changes in the business or financial
condition of the Company.
These factors are not necessarily all of the important
factors that could cause actual results to differ
significantly from those expressed in any forward-looking
statements. Other unknown or unpredictable factors could
also have a significant adverse effect on future results.
The Company does not undertake an obligation to update
forward-looking information contained herein or elsewhere
to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking
information.
Part II
Other Information
Item 1. Legal Proceedings
a. Questar Exploration and Production Company ("Questar
E&P"), a wholly owned subsidiary of Questar Market Resources, Inc.
("Market Resources" or the "Company") is the primary Questar
defendant in a class action lawsuit--Bridenstine v. Kaiser Francis
Oil Company--pending in an Oklahoma state court. See the Company's
Form 10, Item 8. Legal Proceedings. Both the Company and its
parent, Questar Corporation ("Questar") are also named defendants.
Plaintiffs have recently claimed additional damages because the
defendants allegedly did not market gas volumes for the "best
available price." The damages claimed by the plaintiffs increased
from an estimated $54 million to an estimated $80 million plus
punitive damages. The trail judge delayed the jury trial from
August of 2000 to January of 2001, but has not yet ruled on motions
filed by the defendants for partial summary judgment.
Questar E&P disputes the claims filed by the plaintiffs.
b. Questar Energy Trading Company and Questar Gas Management
Company, two of the Company's wholly owned subsidiaries, have been
added as defendants in a lawsuit filed by Jack Grynberg, an
independent producer, pending in a Utah state district court
(Grynberg v. Questar Pipeline Company). The lawsuit was originally
filed against Questar Pipeline Company, an affiliate of the Company
in Questar's Regulated Services unit, in September of 1999. It
alleges that the Questar defendants mismeasured gas volumes
attributable to his working interest from a property in
southwestern Wyoming. The plaintiff cites mismeasurement to support
claims for breach of contract, negligent misrepresentation, fraud,
breach of fiduciary responsibilities, but does not allege any
specific damages.
The Questar defendants have filed a comprehensive motion to
dismiss the complaint on several grounds including expiration of the
applicable statute of limitations, no basis for independent tort
claims, and federal preemption.
The Company's subsidiaries and affiliates have been involved in
several cases filed by Mr. Grynberg alleging gas mismeasurement and
resulting underpayment to interest owners. See the Company's Form
10, Item 8. Legal Proceedings, for a description of another case
filed by Mr. Grynberg.
Item 6. Exhibits and Reports on Form 8-K
a. The following exhibit has been filed as part of this report.
Exhibit No. Exhibit
12. Ratio of earnings to fixed charges.
b. The Company did not file a Current Report on Form 8-K during
the quarter.
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)
August 11, 2000 /s/G. L. Nordloh
(Date) G. L. Nordloh
President and Chief
Executive Officer
August 11, 2000 /s/ S. E. Parks
(Date) S. E. Parks
Vice President, Treasurer and
Chief Financial Officer
EXHIBIT LIST
Exhibit
Number Exhibit
12. Ratio of earnings to fixed charges.
