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| STR > SEC Filings for STR > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
The following information updates the discussion of Questar's financial condition provided in its 2008 Form 10-K filing, and analyzes the changes in the results of operations between the three-month periods ended March 31, 2009 and 2008. For definitions of commonly used gas and oil terms found in this report on Form 10-Q, please refer to the "Glossary of Commonly Used Terms" provided in Questar's 2008 Form 10-K.
RESULTS OF OPERATIONS
Following are comparisons of net income (loss) attributable to Questar by line
of business:
3 Months Ended March 31,
2009 2008 Change
(in millions, except per share amounts)
Exploration and Production
Questar E&P ($14.9) $ 96.5 ($111.4)
Wexpro 18.8 16.2 2.6
Midstream Field Services - Gas Management 11.4 18.5 (7.1)
Energy Marketing - Energy Trading and other 5.4 8.1 (2.7)
Market Resources total 20.7 139.3 (118.6)
Interstate Gas Transportation - Questar Pipeline 14.7 15.9 (1.2)
Retail Gas Distribution - Questar Gas 31.8 30.6 1.2
Net income attributable to Questar $67.2 $185.8 ($118.6)
Earnings per diluted share $0.38 $ 1.05 ($ 0.67)
Average diluted shares 175.9 176.2 (0.3)
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EXPLORATION AND PRODUCTION
Questar E&P
Following is a summary of Questar E&P financial and operating results:
3 Months Ended March 31,
2009 2008 Change
(in millions)
Operating Income
Revenues
Natural gas sales $275.0 $239.8 $35.2
Oil and NGL sales 31.1 58.4 (27.3)
Other 1.3 1.5 (0.2)
Total Revenues 307.4 299.7 7.7
Operating expenses
Operating and maintenance 34.4 28.0 6.4
General and administrative 15.6 14.2 1.4
Production and other taxes 15.4 27.0 (11.6)
Depreciation, depletion and amortization 113.3 71.8 41.5
Exploration 3.1 3.5 (0.4)
Abandonment and impairment 3.7 2.6 1.1
Natural gas purchases 0.4 (0.4)
Total Operating Expenses 185.5 147.5 38.0
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Questar 2009 Form 10-Q 14 Net gain (loss) from asset sales 1.9 (0.2) 2.1 Operating Income $123.8 $152.0 ($28.2) Operating Statistics Questar E&P production volumes Natural gas (Bcf) 41.4 34.8 6.6 Oil and NGL (MMbbl) 0.9 0.8 0.1 Total production (Bcfe) 46.9 39.5 7.4 Average daily production (MMcfe) 521.3 433.8 87.5 Questar E&P average realized price, net to the well (including hedges) Natural gas (per Mcf) $ 6.64 $ 6.90 ($ 0.26) Oil and NGL (per bbl) 34.09 74.18 (40.09) |
Questar E&P reported a net loss of $14.9 million in the first quarter, down 115% from net income of $96.5 million in the 2008 quarter. The company reported production of 46.9 Bcfe in the first quarter of 2009 compared to 39.5 Bcfe in the 2008 quarter, a 19% increase. The growth in production offset lower realized natural gas, crude oil and NGL prices but net mark-to-market losses on natural gas basis-only swaps and an 8% increase in per unit production costs resulted in reduced net income compared to the prior year period. Net mark-to-market losses on natural gas basis-only swaps decreased first-quarter 2009 net income $84.7 million, compared to an $8.6 million after-tax gain in the 2008 period.
Natural gas is Questar E&P's primary focus. On an energy-equivalent basis, natural gas comprised approximately 88% of Questar E&P 2009 production. A comparison of natural gas-equivalent production by major operating area is shown in the following table:
3 Months Ended March 31,
2009 2008 Change
(in Bcfe)
Pinedale Anticline 14.6 13.3 1.3
Uinta Basin 6.3 6.7 (0.4)
Rockies Legacy 5.0 4.9 0.1
Total Rocky Mountain 25.9 24.9 1.0
Midcontinent 21.0 14.6 6.4
Total Questar E&P 46.9 39.5 7.4
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Total production increased 19% in the first quarter of 2009 compared to a year
earlier. Questar E&P production from the Pinedale Anticline in western Wyoming
grew 10% to 14.6 Bcfe in the first quarter of 2009 as a result of ongoing
development drilling. In the Uinta Basin, production decreased 6% to 6.3 Bcfe
in 2009 due to decreased drilling activity. Questar E&P Rockies Legacy
properties include all of the company's Rocky Mountain region properties except
the Pinedale Anticline and the Uinta Basin. Rockies Legacy 2009 production of
5.0 Bcfe was 0.1 Bcfe higher than a year ago; primarily as a result of increased
production in the Wamsutter Arch and Williston Basin areas.
In the Midcontinent, production grew 44% to 21.0 Bcfe in 2009 and included 5.1 Bcfe of production from development properties in northwest Louisiana acquired on February 29, 2008. Ongoing development drilling in the Elm Grove and Woodardville fields in northwestern Louisiana and continued development of the company's Texas Panhandle Granite Wash play were the main contributors to the production increase.
Realized prices for natural gas, oil and NGL at Questar E&P were lower when compared to the prior year. In 2009, the weighted-average realized natural gas price for Questar E&P (including the impact of hedging) was $6.64 per Mcf compared to $6.90 per Mcf for the same period in 2008, a 4% decrease. Realized oil and NGL prices in 2009 averaged $34.09 per bbl, compared with $74.18 per bbl during the prior year period, a 54% decrease. A regional comparison of average realized prices, including hedges, is shown in the following table:
*
Questar 2009 Form 10-Q
15
3 Months Ended March 31,
2009 2008 Change
Natural gas (per Mcf)
Rocky Mountains $ 5.87 $ 6.37 ($0.50)
Midcontinent 7.57 7.84 (0.27)
Volume-weighted average 6.64 6.90 (0.26)
Oil and NGL (per bbl)
Rocky Mountains $32.01 $74.47 ($42.46)
Midcontinent 36.90 73.79 (36.89)
Volume-weighted average 34.09 74.18 (40.09)
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Questar E&P hedged or pre-sold approximately 77% of gas production in the first three months of 2009 and 2008. Hedging increased Questar E&P 2009 gas revenues by $136.4 million and 2008 gas revenues by $6.9 million. Approximately 25% of 2009 and 53% of 2008 Questar E&P oil production was hedged or pre-sold. Oil hedges increased revenues $4.6 million in 2009 and decreased revenues $7.4 million in 2008.
Questar may hedge up to 100% of forecasted production from proved reserves to lock in acceptable returns on invested capital and to protect cash flow and net income from a decline in commodity prices. During the first quarter of 2009, Questar E&P hedged additional production through 2011. The company uses basis-only swaps to protect cash flows and net income from widening natural gas-price basis differentials that may result from capacity constraints on regional gas pipelines. However, natural gas basis-only swaps expose the company to losses from narrowing natural gas-price basis differentials.
Questar E&P production costs (the sum of depreciation, depletion and amortization expense, lease operating expense, general and administrative expense, allocated interest expense and production taxes) per Mcfe of production increased 8% to $4.12 per Mcfe in 2009 versus $3.83 per Mcfe in 2008. Questar E&P production costs are summarized in the following table:
3 Months Ended March 31,
2009 2008 Change
(per Mcfe)
Depreciation, depletion and amortization $2.42 $1.82 $0.60
Lease operating expense 0.73 0.71 0.02
General and administrative expense 0.33 0.36 (0.03)
Allocated interest expense 0.31 0.26 0.05
Production taxes 0.33 0.68 (0.35)
Total Production Costs $4.12 $3.83 $0.29
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Production volume-weighted average depreciation, depletion and amortization (DD&A) expense per Mcfe increased in 2009 due to third and fourth quarter 2008 price-related negative reserve revisions, the ongoing depletion of older, lower-cost reserves and the increasing share of Questar E&P production derived from properties that are being developed in a higher-cost environment. The DD&A rate also increased due to higher costs for drilling, completion and related services, higher cost of steel casing, other tubulars and wellhead equipment during the peak of industry activity in 2008. Lease operating expense per Mcfe was higher due to increased costs of materials and consumables, increased produced-water disposal costs and increased well-workover activity. General and administrative expense per Mcfe decreased due primarily to increased production. Allocated interest expense per unit of production increased in the 2009 period primarily due to financing costs related to the 2008 acquisition of properties in northwest Louisiana. Production taxes per Mcfe decreased in the first quarter of 2009 as a result of lower natural gas and oil sales prices. The company pays production taxes based on sales prices before the impact of hedges.
Major Questar E&P Operating Areas
Pinedale Anticline
As of March 31, 2009, Market Resources (including both Questar E&P and Wexpro) operated and had working interests in 337 producing wells on the Pinedale Anticline compared to 250 at the end of the first quarter of 2008. Of the 337 producing wells, Questar E&P has working interests in 315 wells, overriding royalty interests in an additional 21 Wexpro-operated wells, and no interest in one well operated by Wexpro. Wexpro has working interests in 107 of the 337 producing wells.
Questar 2009 Form 10-Q
In 2005, the Wyoming Oil and Gas Conservation Commission (WOGCC) approved 10-acre-density drilling for Lance Pool wells on about 12,700 acres of Market Resources 17,872-acre (gross) Pinedale leasehold. The area approved for increased density corresponds to the currently estimated productive limits of Market Resources core acreage in the field. The Company continues to evaluate development on five-acre density at Pinedale. In January 2008, the WOGCC approved five-acre-density drilling for Lance Pool wells on about 4,200 gross acres of Market Resources Pinedale leasehold. If five-acre-density development is appropriate for a majority of its leasehold, the Company currently estimates up to 1,400 additional wells will be required to fully develop the Lance Pool on its acreage.
Uinta Basin
As of March 31, 2009, Questar E&P had an operating interest in 888 producing wells in the Uinta Basin of eastern Utah, compared to 872 at March 31, 2008. Uinta Basin proved reserves are found in a series of vertically stacked, laterally discontinuous reservoirs at depths of 5,000 feet to deeper than 18,000 feet. Questar E&P owns interests in over 250,000 gross leasehold acres in the Uinta Basin.
Rockies Legacy
The remainder of Questar E&P Rocky Mountain region leasehold interests, productive wells and proved reserves are distributed over a number of fields and properties managed as the company Rockies Legacy division. Most of the properties are located in the Greater Green River Basin of western Wyoming. Planned exploration and development activity for 2009 includes wells in the San Juan, Paradox, Powder River, Green River, Vermillion and Williston Basins.
Midcontinent
Questar E&P Midcontinent properties are distributed over a large area, including the Anadarko Basin of Oklahoma and the Texas Panhandle, the Arkoma Basin of Oklahoma and western Arkansas, and the Ark-La-Tex region of Arkansas, Louisiana, and Texas With the exception of northwest Louisiana, the Granite Wash play in the Texas Panhandle and the emerging Woodford Shale play in western Oklahoma, Questar E&P Midcontinent leasehold interests are fragmented, with no significant concentration of property interests.
Questar E&P has approximately 31,000 net acres of Haynesville Shale lease rights in northwest Louisiana. The depth of the top of the Haynesville Shale ranges from approximately 10,500 feet to 12,500 feet across Questar E&P's leasehold and is below the Hosston and Cotton Valley formations that Questar E&P has been developing in northwest Louisiana for over a decade. Questar E&P continues infill-development drilling in the Cotton Valley and Hosston formations in northwest Louisiana and intends to drill or participate in up to 35 horizontal Haynesville Shale wells in 2009. As of March 31, 2009, Questar E&P had seven operated rigs drilling in the project area and operated or had working interests in 554 producing wells in northwest Louisiana compared to 463 at March 31, 2008.
Wexpro
Wexpro reported net income of $18.8 million in the first quarter of 2009
compared to $16.2 million in 2008, a 16% increase. Wexpro 2009 results benefited
from a higher average investment base compared to the prior-year period.
Pursuant to the Wexpro Agreement, Wexpro recovers its costs and receives an
unlevered after-tax return of approximately 19-20% on its investment base.
Wexpro's investment base is its investment in commercial wells and related
facilities adjusted for working capital and reduced for deferred income taxes
and depreciation. Wexpro's investment base totaled $400.1 million at March 31,
2009, an increase of $85.6 million or 27% since March 31, 2008. Wexpro produced
13.2 Bcf of cost-of-service gas in the 2009 quarter.
MIDSTREAM FIELD SERVICES - Questar Gas Management
Following is a summary of Gas Management financial and operating results:
3 Months Ended March 31,
2009 2008 Change
(in millions)
Operating Income
Revenues
Gathering $36.6 $35.3 $ 1.3
Processing 18.4 33.6 (15.2)
Total Revenues 55.0 68.9 (13.9)
Operating expenses
Operating and maintenance 19.6 24.1 (4.5)
General and administrative 3.8 5.1 (1.3)
Production and other taxes 0.9 0.3 0.6
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Questar 2009 Form 10-Q 17 Depreciation, depletion and amortization 10.9 6.3 4.6 Total Operating Expenses 35.2 35.8 (0.6) Net loss from asset sales (0.2) (0.2) Operating Income $19.6 $33.1 ($13.5) Operating Statistics Natural gas processing volumes NGL sales (MMgal) 21.4 21.4 NGL sales price (per gal) $0.47 $1.21 ($0.74) Fee-based processing volumes (in millions of MMBtu) For unaffiliated customers 24.8 24.7 0.1 For affiliated customers 27.7 25.5 2.2 Total Fee-Based Processing Volumes 52.5 50.2 2.3 Fee-based processing (per MMBtu) $0.16 $0.14 $0.02 Natural gas gathering volumes (in millions of MMBtu) For unaffiliated customers 65.1 51.3 13.8 For affiliated customers 44.9 37.3 7.6 Total Gas Gathering Volumes 110.0 88.6 21.4 Gas gathering revenue (per MMBtu) $0.29 $0.32 ($0.03) |
Gas Management, which provides gas-gathering and processing-services, reported net income of $11.4 million in the first three months of 2009 compared to $18.5 million in the same period of 2008. The decrease in net income was driven by lower gathering and processing margins and increased depreciation expense. Depreciation expense grew $4.6 million or 73% as the result of investment additions in 2008.
Total gathering margins (revenues minus direct gathering expenses) in 2009 decreased 3% to $26.2 million compared to $27.0 million in 2008. Expanding Pinedale production, new projects serving third parties in the Uinta Basin and the consolidation of Rendezvous contributed to a 27% increase in third-party volumes in 2009. Gathering volumes increased 21.4 million MMBtu, or 24% to 110.0 million MMBtu in 2009. Rendezvous, formerly an unconsolidated affiliate, was consolidated with Gas Management beginning in 2008. Rendezvous provides gas gathering services for the Pinedale and Jonah producing areas of Wyoming.
Total processing margins (revenues minus direct plant expenses and processing plant-shrink) in 2009 decreased 48% to $9.3 million compared to $17.8 million in 2008. Fee-based gas processing volumes were 52.5 million MMBtu in 2009, a 5% increase compared to 2008. In 2009, fee-based gas processing revenues increased 17% or $1.2 million, while the frac spread from keep-whole processing decreased 72% or $8.8 million. Approximately 93% of Gas Management's net operating revenue (revenue minus processing plant-shrink) in 2009 was derived from fee-based contracts, up from 78% in 2008.
Gas Management may use forward sales contracts to reduce processing-margin volatility associated with keep-whole contracts. Forward sales contracts reduced NGL revenues by $1.4 million in 2008.
ENERGY MARKETING - Questar Energy Trading
Energy Trading net income was $5.4 million in 2009, a decrease of 33% compared to $8.1 million in 2008 as a result of lower marketing margin. Revenues from unaffiliated customers were $114.6 million in 2009 compared to $194.5 million in 2008, a 41% decrease, primarily the result of lower natural gas prices. The weighted-average natural gas sales price decreased 46% in 2009 to $3.78 per MMBtu, compared to $7.04 per MMBtu in 2008.
INTERSTATE GAS TRANSPORTATION - Questar Pipeline
Questar Pipeline, which provides interstate natural gas-transportation and storage services, reported first quarter 2009 net income of $14.7 million compared with $15.9 million in 2008, an 8% decrease. Operating income decreased $3.2 million, or 10%, in the first quarter 2009-to-2008 comparison due primarily to lower NGL revenues. Following is a summary of Questar Pipeline financial and operating results:
Questar 2009 Form 10-Q
18
3 Months Ended March 31,
2009 2008 Change
(in millions)
Operating Income
Revenues
Transportation $42.7 $44.2 ($1.5)
Storage 9.6 9.6
NGL sales 1.8 4.0 (2.2)
Energy services 4.0 3.5 0.5
Gas processing 0.9 1.7 (0.8)
Other 0.8 1.2 (0.4)
Total Revenues 59.8 64.2 (4.4)
Operating expenses
Operating and maintenance 8.1 9.2 (1.1)
General and administrative 8.6 9.4 (0.8)
Depreciation and amortization 10.8 10.8
Other taxes 2.3 2.2 0.1
Cost of goods sold 0.8 0.2 0.6
Total Operating Expenses 30.6 31.8 (1.2)
Net gain from asset sales 0.1 0.1
Operating Income $29.3 $32.5 ($3.2)
Operating Statistics
Natural gas-transportation volumes (MMdth)
For unaffiliated customers 153.9 129.8 24.1
For Questar Gas 44.4 43.2 1.2
For other affiliated customers 1.2 0.9 0.3
Total Transportation 199.5 173.9 25.6
Transportation revenue (per dth) $0.21 $0.25 ($0.04)
Firm daily transportation demand at March 31,
(including
White River Hub of 1,005 in 2009 in Mdth) 4,219 3,169 1,050
Natural gas processing
NGL sales (MMgal) 3.0 2.5 0.5
NGL sales price (per gal) $0.59 $1.61 ($1.02)
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Revenues
As of March 31, 2009, Questar Pipeline had firm-transportation contracts of 4,219 Mdth per day, including 1,005 Mdth per day from Questar Pipeline's 50% ownership of White River Hub, compared with 3,169 Mdth per day as of March 31, 2008. The White River Hub was placed in service in December 2008. Questar Pipeline has expanded its transportation system in response to growing regional natural gas production and transportation demand.
Questar Gas is Questar Pipeline's largest transportation customer with contracts for 901 Mdth per day. The majority of the Questar Gas transportation contracts extend through mid 2017.
Transportation revenues decreased $1.5 million in the first quarter of 2009 compared to the first quarter of 2008, primarily because of an adjustment to an accrual for sharing of interruptible transportation revenues that was recorded in the first quarter of 2008.
Questar Pipeline owns and operates the Clay Basin underground storage complex in eastern Utah. This facility is 100% subscribed under long-term contracts. In addition to Clay Basin, Questar Pipeline also owns and operates three smaller aquifer gas storage facilities. Questar Gas has contracted for 26% of firm-storage capacity at Clay Basin for terms extending from one to 12 years and 100% of the firm-storage capacity at the aquifer facilities for terms extending for 11 years.
Questar 2009 Form 10-Q
Questar Pipeline charges FERC-approved transportation and storage rates that are based on straight-fixed-variable rate design. Under this rate design, all fixed costs of providing service including depreciation and return on investment are recovered through the demand charge. About 95% of Questar Pipeline costs are fixed and recovered through these demand charges. Questar Pipeline's earnings are driven primarily by demand revenues from firm shippers. Since only about 5% of operating costs are recovered through volumetric charges, changes in transportation volumes do not have a significant impact on earnings.
NGL sales were 55% lower in 2009 over 2008 due primarily to a 63% decrease in NGL prices and a 20% increase in sales volume.
Expenses
Operating and maintenance expenses decreased by 12% to $8.1 million in the first quarter of 2009 compared to $9.2 million in the first quarter of 2008. The decrease was due to lower maintenance costs. General and administrative expenses decreased by 9% to $8.6 million in the first quarter of 2009. Operating, maintenance, general and administrative expenses per dth transported declined to $0.08 in the first quarter of 2009 compared with $0.11 in the first quarter of 2008 because transportation volumes increased 15% and costs decreased 10%. Operating, maintenance, general and administrative expenses include processing and storage costs.
Depreciation expense was flat in the first quarter of 2009 compared to the first quarter of 2008.
RETAIL GAS DISTRIBUTION - Questar Gas
Questar Gas, which provides retail natural gas distribution services in Utah, Wyoming and Idaho, reported net income of $31.8 million in the first quarter of 2009 compared with $30.6 million in the first quarter of 2008, a 4% increase. Operating income increased $3.8 million, or 7%, in the 2009-to-2008 first-quarter comparison due to higher revenues from a general rate case and customer growth. Following is a summary of Questar Gas financial and operating results:
3 Months Ended March 31,
2009 2008 Change
(in millions)
Operating Income
Revenues
Residential and commercial sales $392.0 $376.0 $16.0
Industrial sales 2.3 2.9 (0.6)
Transportation for industrial customers 2.5 2.3 0.2
Service 1.7 1.6 0.1
Other 7.2 9.4 (2.2)
Total revenues 405.7 392.2 13.5
Cost of natural gas sold 293.1 292.8 0.3
Margin 112.6 99.4 13.2
Other operating expenses
Operating and maintenance 31.0 21.8 9.2
General and administrative 9.8 10.5 (0.7)
Depreciation and amortization 10.8 10.2 0.6
Other taxes 3.8 3.5 0.3
Total other operating expenses 55.4 46.0 9.4
Operating income $ 57.2 $ 53.4 $ 3.8
Operating Statistics
Natural gas volumes (MMdth)
Residential and commercial sales 44.5 49.9 (5.4)
Industrial sales 0.3 0.4 (0.1)
Transportation for industrial customers 16.5 16.0 0.5
Total industrial 16.8 16.4 0.4
Total deliveries 61.3 66.3 (5.0)
Natural gas revenue (per dth)
Residential and commercial sales $8.81 $7.53 $1.28
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Questar 2009 Form 10-Q 20 Industrial sales 7.57 6.57 1.00 Transportation for industrial customers $0.15 $0.14 $0.01 Colder (warmer) than normal temperatures (1%) 12% (13%) Temperature-adjusted usage per customer (dth) 47.4 49.2 (1.8) Customers at March 31 (thousands) 892.8 881.9 10.9 |
Margin Analysis
Questar Gas margin (revenues minus gas costs) increased $13.2 million in the
first quarter of 2009 compared to the first quarter of 2008. Following is a
summary of major changes in Questar Gas margin:
Change
2008 to 2009
(in millions)
. . .
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