QUESTAR MARKET RESOURCES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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

OUESTAR MARKET RESOURCES, INC.
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( Exact name of registrant as specified in its charter)

State of Utah 87-0287750
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

180 East 100 South P.O. Box 45601, Salt Lake City, Utah 84145-0601
- ------------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (801)324-2600

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $1.00 Par Value

SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933:

7 1/2% Notes Due 2011

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
--- ---

State the aggregate market value of the voting stock held by nonaffiliates
of the registrant as of March 1, 2002. $0.

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 1, 2002: 4,309,427 shares of Common Stock,
$1.00 par value. (All shares are owned by Questar Corporation.)

Registrant meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K Report with the
reduced disclosure format.

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TABLE OF CONTENTS

FORM 10-K

ANNUAL REPORT, 2001

PART I
ITEM 1. BUSINESS.

GENERAL

Questar Market Resources, Inc. (the "Company" or "QMR," which is a
reference that includes the Company's subsidiaries) is a wholly owned subsidiary
of Questar Corporation ("Questar"), which is a publicly traded and diversified
energy services company. Questar has two principal business units--Regulated
Services and Market Resources. QMR and its subsidiaries comprise the Market
Resources unit of Questar and engage in gas and oil exploration, development and
production; gas gathering and processing; wholesale gas and hydrocarbon liquids
trading, risk management, natural gas storage, and electric power project
development. QMR also buys and sells producing gas and oil properties.

QMR is a subholding company that conducts business through subsidiaries
Questar Exploration and Production Company ("Questar E & P"); Celsius Energy
Resources, Ltd. ("Celsius"); Shenandoah Energy, Inc. ("SEI"); Wexpro Company
("Wexpro"); Questar Gas Management Company ("QGM"); and Questar Energy Trading
Company ("QET"). The corporate organization is shown in the following chart.

QUESTAR
CORPORATION
|
----------------------------------------------------------------------
| | |
| QUESTAR QUESTAR
QUESTAR MARKET REGULATED
INFOCOMM, RESOURCES, SERVICES
INC. INC. COMPANY
(Information (Subholding (Subholding
Services) Company) Company)
| |
| --------------------------------
| | |
| QUESTAR GAS QUESTER
| COMPANY PIPELINE
| (Retail COMPANY
| Distribution) (Transportation
| and Storage)
|
|
----------------------------------------------------------------------------------------------------
| | | | | |
Wexpro Company Shenandoah Questar Celsius Energy Questar Energy Questar
(Manages and Energy Inc. Exploration Resources, Trading Company Gas
Develops (Exploration & Production Ltd. (Wholesale Management
Cost-of-Service and Company (Exploration Energy Company
Properties) Production, (Exploration and Marketing, (Gathering
Gathering, and Production - Risk and
Processing) Production) Canada) Management Processing)
and Storage)

QMR is the primary growth area within Questar's business strategy. Over the
next five years, Questar expects to spend 60-70 percent of its total capital
budget in QMR's businesses and expects to obtain double-digit growth in earnings
from these investments. Future capital investments include ongoing exploration
and development drilling on existing properties; possible acquisition of
additional producing gas and oil properties; development of new gathering and
processing infrastructure, underground gas storage facilities, and electric
power generation plants; and continued funding of marketing and risk management
activities.

The Company's management believes that growth in its core exploration and
production ("E&P") business enhances complementary growth in other QMR
subsidiaries. As the E&P entities find or acquire new reserves, QGM should have
more opportunities to expand gathering and processing activities, and QET should
have more physical production to support its marketing programs and risk
management activities.

2

BUSINESS STRATEGY. QMR has the following strategies in its business:

- pursue a disciplined acquisition and exploitation program that
grows reserves and production at attractive finding and
development costs;

- expand and exploit a portfolio of quality drilling prospects;

- deliver industry-leading returns on assets and shareholder
equity;

- hedge 50 to 75 percent of equity production to meet earnings and
growth targets while protecting against downside commodity price
risk;

- divest marginal assets and activities;

- maintain a strong balance sheet to fund future acquisitions as
opportunities arise;

- evaluate and implement latest proven technology to enhance
performance and reduce costs; and

- protect the environment and the health and safety of employees,
customers and the communities in which the Company operates.

QMR's activities are described below:

GAS AND OIL EXPLORATION AND PRODUCTION.

Questar's E&P group consists of Questar E&P and its Canadian subsidiary,
Celsius, and SEI. These entities pursue a low-risk acquire and exploit strategy
focused in three geographic core areas where the Company has accumulated
significant expertise - the Rockies, the Midcontinent, and western Canada.

Important areas of activity within the Rockies include the Pinedale
Anticline in southwestern Wyoming, where Questar E&P and affiliate Wexpro have
recently embarked on an aggressive multi-year drilling program, and the recently
acquired SEI properties.

PINEDALE ANTICLINE. At Pinedale Anticline, Questar E&P and Wexpro have
approximately 60 percent average working interest in 14,800 acres in the Mesa
Area. At year-end 2001, the combined entities had 30 producing wells and five
wells actively drilling or awaiting completion. On December 31, 2001, the
companies reported combined gross production of approximately 63 MMcfed,
compared to 26 MMcfed at year-end 2000. (SEE the Glossary of Commonly Used Gas
and Oil Terms on page 57 of this report for abbreviations.)

QMR's success at Pinedale represents its strategy of aggressive application
of proven technology to add value. Wexpro originally discovered gas at Pinedale
in the early 1970's, but the "tight" nature of the sandstone reservoirs
prohibited establishment of economic flow rates. Over the past several decades,
steady advances in hydraulic fracture technology and development of

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techniques to conduct cost-effective multiple stage stimulations in a single
well bore finally unlocked the vast quantities of gas included in these tight
sand reservoirs. A typical well at Pinedale, drilled to depths of 13,000 to
15,000 feet, and completed with up to a dozen separate "stages" of fracture
stimulation, costs between $2.6 and $3.6 million. Results to date indicate
average gross per well reserves of 5 to 6 Bcfe, depending on location.

QMR expects to continue drilling at Pinedale throughout 2002. The area is
subject to certain environmental and regulatory restrictions that prohibit or
restrict activities during certain times of the year. The current Pinedale
development plan, based on 80-acre spacing, will require 135 to 150 wells to
fully develop QMR's acreage. The Company continues to assess the feasibility of
40-acre spacing.

SEI. In August 2001, QMR acquired SEI, a privately-held entity engaged in
gas and oil drilling and production plus gathering and processing activities in
Utah's Uinta Basin, for $403 million in cash and assumed debt. The SEI
acquisition added 415 Bcfe of proved reserves (72 percent natural gas and 28
percent oil), 114,000 net acres of undeveloped leasehold acreage, 100 MMcfd of
natural gas processing capacity, 90 miles of gathering lines, and four drilling
rigs.

The Company anticipates aggressively developing the SEI acreage over the
next several years by drilling the large inventory of Wasatch Formation,
low-risk tight gas sand development locations. The Wasatch Formation underlies
the Green River Formation, which QMR believes contains significant unrecovered
oil volumes. Green River reservoirs have been extensively developed and
waterflooded by the previous operator of the SEI properties, but low recovery
factors indicate significant additional recoverable oil volumes that were not
obtained from the reservoirs during the initial waterflood. Wasatch development
drilling will allow further evaluation of remaining Green River potential as
each wellbore allows a "free look" at the zone in areas around the margins of
the existing Green River oil pool that have not been drilled extensively and
between existing Green River producers inside the current pool boundaries. The
Company will evaluate the results of 2002 drilling to determine the viability of
additional Green River oil development.

OTHER AREAS. In the Midcontinent area, Questar E&P is active in the
Anadarko and Arkoma basins, the area commonly referred to as "ARK-LA-TEX", and
the onshore Gulf Coast basin. And in Canada, Celsius focuses on the intermediate
and deeper sections of the Western Canadian Sedimentary Basin in Alberta and
British Columbia.

NATURAL GAS FOCUSED. Natural gas remains the primary focus of the Company's
E&P operations. As of year-end 2001, the Company had proved reserves (excluding
cost-of-service reserves belonging to its affiliate Questar Gas Company
("Questar Gas")) of 998.0 Bcf of gas and 31.1 MMBbls of oil and NGLs, compared
to 639.9 Bcf of gas and 15.0 MMBbls of oil and NGLs at the end of 2000. On an
energy-equivalent ratio of six Mcf of natural gas to one Bbl of crude oil,
natural gas comprised approximately 84.3 percent of total non-regulated proved
reserves. Proved developed reserves constituted 60.8 percent of the total
non-regulated proved reserves reported. Approximately 6.2 percent of the group's
natural gas proved reserves and 10.7 percent of its proved oil reserves are
located in Canada. SEE Note 11 of the Notes to Consolidated Financial Statements
under Item 14 of this report for additional information concerning QMR's
reserves.

4

Questar E&P maintains regional offices in Denver, Colorado and Tulsa and
Oklahoma City, Oklahoma. SEI has offices in Denver and Vernal, Utah. Canadian
operations are managed through an office in Calgary, Alberta.

DEVELOPMENT AND PRODUCTION SERVICES

QMR subsidiary Wexpro develops and produces gas supplies on certain
producing properties owned by Questar's retail distribution utility, Questar
Gas, in exchange for reimbursement of costs and a specified return on investment
in successful gas wells. Wexpro was incorporated as a subsidiary of Questar Gas
in 1976 and ownership was transferred to QMR in 1982. Questar Gas's efforts to
transfer ownership interest in producing properties and leasehold acreage to
Wexpro resulted in protracted regulatory proceedings and legal adjudications
that ended with a court-approved settlement agreement that was effective August
1, 1981 ("Settlement Agreement"). A summary of the Settlement Agreement is
contained in Note 9 of the Notes to Consolidated Financial Statements under Item
No. 14 of this report.

Under the Settlement Agreement, Questar Gas reimburses Wexpro for its costs
plus a specified rate of return on its net investment in successful gas wells,
adjusted for working capital and deferred taxes. Wexpro's rate of return
averaged 19.7 percent on an after-tax basis in 2001. At year-end 2001, Wexpro's
investment (net of deferred income taxes) in cost-of-service operations was
$161.3 million compared to $124.8 million at year-end 2000. Wexpro does not
conduct exploratory operations nor acquire leasehold acreage for exploration
activities. Under the terms of the Settlement Agreement, Wexpro bears all dry
hole costs. The Settlement Agreement is monitored by the Utah Division of Public
Utilities, the staff of the Public Service Commission of Wyoming and experts
retained by these agencies.

The gas volumes developed and produced by Wexpro for Questar Gas are
reflected in the latter's rates at cost-of-service prices. Cost-of-service gas
(defined to include the gas attributable to royalty interest owners) produced by
Wexpro satisfied 44 percent of Questar Gas's system requirements during 2001.
During 2001, the average wellhead cost of Questar Gas's cost-of-service gas was
$2.55 per Dth, which is lower than Questar Gas's average price for
field-purchased gas.

Wexpro participates in drilling activities in response to the demands of
other working interest owners, to protect its rights, and to meet the needs of
Questar Gas. In 2001, Wexpro produced 41.0 Bcfe of natural gas and hydrocarbon
liquids from Questar Gas's cost-of-service properties and added 69.1 Bcfe of
reserves through drilling activities and reserve estimate revisions. These
numbers do not include related royalty gas.

Wexpro, under the terms of the Settlement Agreement, also owns
oil-producing properties. The revenues from the sale of crude oil produced from
such properties are used to recover operating expenses and provide Wexpro with a
return on its investment. In addition, Wexpro receives 46 percent of any
residual income. The remaining income is received by Questar Gas and used to
reduce natural gas costs reflected in customer rates. Wexpro also has an
ownership interest in the wells and facilities related to its oil properties and
in the wells and facilities that have been installed since August 1, 1981 to
develop and produce certain gas properties.

5

Wexpro maintains an office in Rock Springs, Wyoming, in addition to its
principal office in Salt Lake City, Utah.

GATHERING, PROCESSING, POWER DEVELOPMENT, MARKETING AND RISK MANAGEMENT.

QGM conducts gathering and processing activities in the Rocky Mountain and
Midcontinent areas. QGM's activities are not subject to regulation by the
Federal Energy Regulatory Commission (the "FERC") because the Natural Gas Act of
1938 specifically provides that the FERC's jurisdiction does not extend to
facilities involved in the production or gathering of natural gas.

Most of QGM's gathering system in the Rockies was originally built to
gather production from Questar Gas's cost-of-service properties as part of a
regulated enterprise. The system includes gathering lines, compressor stations,
field dehydration plants and measuring stations. Under a contract that was
assigned when the gathering assets were transferred from Questar Pipeline, QGM
is obligated to gather the cost-of-service production for the life of the
properties. During 2001, QGM gathered 37.2 MMDth of natural gas for Questar Gas,
compared to 36.8 MMDth in 2000. QGM also gathers gas for QMR affiliates and for
nonaffiliated customers. During 2001, QGM gathered 27.0 MMDth for QMR
affiliates, compared to 25.0 MMDth in 2000, and gathered 91.7 MMDth for
nonaffiliated customers, compared to 93.0 MMDth in 2000.

During 2001, QGM formed a new joint venture--Rendezvous Gas Services
("Rendezvous")-- with Western Gas Resources ("Western Gas"), to develop and
operate new gathering and compression facilities in the Hoback Basin of
southwestern Wyoming. QGM and Western Gas each own 50 percent of Rendezvous. The
Hoback Basin is the site of increased industry activity including recent
prolific discoveries by Questar E&P and Wexpro at Pinedale Anticline. Gas
reserves from more than 179,000 gross acres are dedicated to Rendezvous under
existing gathering contracts. The Rendezvous system will deliver gas from new
development activities along the Pinedale Anticline and adjacent areas for
processing and blending at the Blacks Fork plant in which QGM has a 50 percent
interest and at Rendezvous will also deliver gas volumes to the nearby Granger
plant owned by an affiliate of Western Gas.

The year also witnessed a functional combination of QGM's gathering
facilities in eastern Utah with SEI's gathering assets. SEI's eastern Utah
assets include 90 miles of gas gathering lines and the 100 MMcfd Red Wash plant.

QGM is also involved in gas processing. A gas processing plant strips
hydrocarbon liquids including ethane, propane, butane and gasoline (collectively
NGLs) from the raw natural gas stream. Typically, NGLs are also more valuable to
producers as separate commodities than they are when sold as part of the natural
gas stream. Gas processing also enables producers to meet gas-quality
specifications of interstate pipelines. QMR owns 50 percent of the Blacks Fork
gas processing plant, which has a current capacity of 84 MMcfd and is readily
expandable as new production volumes are gathered on the Rendezvous system. QGM
and Wexpro jointly own a 43 MMcfd processing facility located in the Canyon
Creek area of southwestern Wyoming. QGM also owns interests in other processing
plants in the Rockies and Midcontinent areas.

6

QET conducts energy marketing and risk management activities for QMR. It
combines QMR equity production with gas volumes purchased from third parties to
build a flexible and reliable portfolio. QET aggregates supplies of natural gas
for delivery to large customers, including industrial users, municipalities, and
other marketing entities. During 2001, the Company marketed a total of 91.8
EMMDth of natural gas and earned a margin of $.149 per equivalent Dth. (The
volumes and margins exclude affiliated production.)

QET also executes hedges on equity production for various QMR affiliates
and on certain marketing transactions. QET does not engage in speculative
hedging transactions. SEE Notes 1 and 5 to Consolidated Financial Statements
included in Item 14 of this report for additional information relating to
hedging activities.

As a wholesale marketing entity, QET concentrates on markets in the Pacific
Northwest, Rocky Mountains, Midwest, and western Canada that are close to
reserves owned by affiliates or accessible by major pipelines. It has contracted
for firm-transportation capacity on pipelines and firm-storage capacity at the
Clay Basin storage facility owned by its affiliate Questar Pipeline Company
("Questar Pipeline").

QET, through a limited liability company in which it has a 75 percent
interest, operates the Clear Creek storage facility located in southwestern
Wyoming. Clear Creek has 8 Bcf of gross capacity and is connected to pipelines
owned by affiliates Questar Pipeline and Overthrust Pipeline Company
("Overthrust"), and by The Williams Companies. A pipeline connection with the
Kern River pipeline is planned for 2002.

QET is also charged with development of an electric power generation
strategy for Questar. QET's strategy is to pursue power generation opportunities
in western states that are complementary to Questar's pipeline, gas storage and
production assets. While near-term market fundamentals for new power project
developments are weak, QET believes it has identified several projects that are
well-positioned to take advantage of increasing demand for power in the western
United States in the intermediate term. QET will only invest in power projects
supported by long-term power purchase agreements with creditworthy
counterparties.

QET is in the final stages of negotiating a possible marketing alliance
with a major energy marketing company. The first phase will be a pilot project
in which QET will assign storage contracts to the alliance. QET will provide
physical market support and market intelligence, and the merchant partner will
manage commercial activities. This pilot will allow QET to assess the benefits
and risks of expanding its marketing and risk management activities either alone
or in conjunction with a strategic partner. QET anticipates finalizing the
agreement for the first phase within the first quarter of 2002.

QGM and QET both maintain offices in Salt Lake City, Utah.

REGULATION

The Company's operations are subject to various levels of government
controls and regulation in the United States and Canada at the federal,
state/provincial, and local levels. Such

7

regulation includes requiring permits for the drilling of wells; maintaining
bonding requirements in order to drill or operate wells; submitting and
implementing spill prevention plans; submitting notices relating to the
presence, use and release of specified contaminants incidental to gas and oil
regulations; and regulating the location of wells, the method of drilling and
casing wells, surface usage and restoration of properties upon which wells have
been drilled, the plugging and abandoning of wells and the transportation of
production. QMR's operations are also subject to various conservation matters,
including the regulation of the size of drilling and spacing units or proration
units, the number of wells that may be drilled in a unit, and the unitization or
pooling of gas and oil properties. State conservation laws establish the maximum
rates of production from gas and oil wells, generally prohibit the venting or
flaring of gas, and impose certain requirements for the ratable purchase of
production.

Some of QMR's leases, including many of its leases in the Rocky Mountain
area, are granted by the federal government and administered by federal
agencies. These leases require compliance with detailed financial regulations on
such things as drilling and operations on the leases and the calculation and
payment of royalties.

Various federal, state and local environmental laws and regulations affect
the Company's operations and costs. These laws and regulations concern the
generation, storage, transportation, disposal or discharge of contaminants into
the environment and the general protection of public health, natural resources,
wildlife, and the environment. They also impose substantial liabilities for any
failure on the part of the Company to comply with them.

Each province in Canada and the federal government of Canada also have laws
and regulations governing land tenure, royalties, production rates and taxes,
and environmental protection.

COMPETITION AND CUSTOMERS

QMR faces competition in all aspects of its business including the
acquisition of reserves and leases; obtaining goods, services, and labor; and
marketing its production. The Company's competitors include multinational energy
companies and other independent producers, many of which have greater financial
resources than QMR.

QMR's business activities can be subject to seasonal variations.
Historically, the demand for natural gas decreases during the summer months and
increases during the winter months. The increasing demand for natural gas to
generate electricity may cause increased demand during the hottest months of the
summer. Weather (both in terms of temperatures and moisture) can have dramatic
impacts on natural gas prices and the Company's operations.

The Company sells its natural gas production to a variety of customers
including pipelines, gas marketing firms, industrial users, and local
distribution companies. QMR's crude volumes are sold to refiners, remarketers
and other companies, some of which have pipeline facilities near the producing
properties. In the event pipeline facilities are not available, crude oil is
trucked to storage, refining, or pipeline facilities.

8

RELATIONSHIPS WITH AFFILIATES

The subsidiaries of QMR have important relationships with their affiliates
as described above. Questar provides certain administrative services, e.g.,
public and government relations, financial and audit, to QMR and other members
of the consolidated group. Questar, as a general rule, also sponsors the
qualified and welfare plans in which QMR's employees participate. (Some QMR
entities have chosen not to participate in all of the benefit plans sponsored by
Questar.) Each of the Company's subsidiaries is responsible for a proportionate
share of the costs associated with these services and benefit plans.

EMPLOYEES

As of December 31, 2001, QMR had 581 employees in the United States,
compared to 412 at year-end 2000. This increase is attributable to the
acquisition of SEI. (Canadian operations are handled through leased employees.)
None of these employees is represented under collective bargaining agreements.
Employee relations are generally deemed to be satisfactory. QMR also
periodically engages independent consulting petroleum engineers, environmental
professionals, geologists, geophysicists, landmen and attorneys on a fee basis.

ITEM 2. PROPERTIES.

RESERVES. The following table sets forth the Company's estimated proved
reserves, the estimated future net revenues from the reserves and the
standardized measure of discounted net cash flows as of December 31, 2001. QMR's
reserves were collectively estimated by Ryder Scott Company; H. J. Gruy and
Associates, Inc.; Netherland, Sewell & Associates, Inc.; Malkewicz Hueni
Associates, Inc.; Gilbert Laustsen Jung Associates Ltd.; and Sproule Associates,
Ltd., independent petroleum engineers. The Company does not have any long-term
supply contracts with foreign governments, or reserves of equity investees or of
subsidiaries with a significant minority interest. These proved reserve volumes
do not include cost-of-service reserves managed and developed by Wexpro for
Questar Gas.

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(1) Estimated future net revenue represents estimated future gross revenue
to be generated from the production of proved reserves, net of
estimated production and development costs (but excluding the effects
of general and administrative expenses; debt service; depreciation,
depletion and amortization; and income tax expense).

(2) The standardized measure of discounted net cash flows prepared by the
Company represent the present value of estimated future net revenues
after income taxes, discounted at 10 percent.

Estimates of the Company's proved reserves and future net revenues are made
using sales prices estimated to be in effect as of the date of such reserve
estimates and are held constant throughout the life of the properties (except to
the extent a contract specifically provides for escalation). Estimated
quantities of proved reserves and future net revenues are affected by natural
gas and oil prices, which have fluctuated widely in recent years. There are
numerous uncertainties inherent in estimating natural gas and oil reserves and
their estimated values, including many factors beyond the control of the
producer. The reserve data set forth in this document are estimates.

Reference should be made to Note 12 of the Notes to Consolidated Financial
Statements included in Item 14 of this report for additional information
pertaining to the Company's proved natural gas and oil reserves as of the end of
each of the last three years.

The Company will file estimated reserves as of December 31, 2001, with the
Energy Information Administration in the Department of Energy on Form EIA-23.
Although QMR uses the same technical and economic assumptions when it prepares
the EIA-23, it is obligated to report reserves for wells it operates, not for
all wells in which it has an interest, and to include the reserves attributable
to other owners in such wells.

The following charts illustrate QMR's reserve statistics for the years
ended December 31, 1997 through 2001:

GAS AND OIL RESERVES (BCFE)*
---------------------------

*Does not include cost-of-service reserves managed and developed by Wexpro for
Questar Gas.

10

Proportion of Proved Developed to Proved Reserves
and Proportion of Gas ReseresS (Bcfe)*
--------------------------------------

*Does not include cost-of-service reserves managed and developed by Wexpro for
Questar Gas.

GEOGRAPHIC DIVERSITY OF PRODUCING PROPERTIES

The following table summarizes proved reserves by the Company's major
operating areas at December 31, 2001:

*Does not include cost-of-service reserves managed and developed by Wexpro for
Questar Gas.

PRODUCTION. The following table sets forth the Company's net production
volumes, the average sales prices per Mcf of gas, Bbl of oil and Bbl of NGLs
produced, and the production cost per Mcfe for the years ended December 31,
2001, 2000, and 1999, respectively:

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CANADA
Volumes produced and sold
Gas (Bcf) 6.7 7.3 2.9
Oil and NGL (MMBbls) .7 .7 .4
Sales Prices:1
Gas (per Mcf) $ 3.25 $ 2.83 $ 1.61
Oil and NGL (per Bbl) $ 21.98 $ 22.29 $ 16.56
Production costs per Mcfe1 $ .74 $ .75 $ .67

(1)In United States dollars.

PRODUCTIVE WELLS. The following table summarizes the Company's productive
wells as of December 31, 2001:

PRODUCTIVE WELLS (1) (2)

(1) Although many of the Company's wells produce both gas and oil, a well
is categorized as either a gas well or an oil well based upon the ratio of gas
to oil production.

(2) Each well completed to more than one producing zone is counted as a
single well. There were 98 gross wells with multiple completions.

The Company also held numerous overriding royalty interests in gas and oil
wells, a portion of which are convertible to working interests after recovery of
certain costs by third parties. After converting to working interests, these
overriding royalty interests will be included in the Company's gross and net
well count.

LEASEHOLD ACREAGE. The following table summarizes developed and undeveloped
leasehold acreage in which the Company owns a working interest as of December
31, 2001. "Undeveloped Acreage" includes (i) leasehold interests that already
may have been classified as containing proved undeveloped reserves; and (ii)
unleased mineral interest acreage owned by the Company. Excluded from the table
is acreage in which the Company's interest is limited to royalty, overriding
royalty, and other similar interests.

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Leasehold Acreage - December 31, 2001

(1) Developed acres are acres spaced or assignable to productive wells.

(2) Undeveloped acreage is leased acreage on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of natural gas and oil regardless of whether
such acreage contains proved reserves. Of the

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aggregate 2,292,116 gross and 980,142 net undeveloped acres, 107,361
gross and 29,939 net acres are held by production from other leasehold
acreage.

Substantially all the leases summarized in the preceding table will expire
at the end of their respective primary terms unless the existing leases are
renewed or production has been obtained from the acreage subject to the lease
prior to that date, in which event the lease will remain in effect until the
cessation of production. The following table sets forth the gross and net acres
subject to leases summarized in the preceding table that will expire during the
periods indicated:

DRILLING ACTIVITY. The following table summarizes the number of development
and exploratory wells drilled by the Company, including the cost-of-service
wells drilled by Wexpro, during the years indicated.

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EXPLORATORY WELLS

United States
Completed as natural gas wells 1 .4 - - 1 0.2
Completed as oil wells - - - - - -
Dry holes 1 .4 5 2.0 2 1.1
Waiting on completion - - - - 1 -
Drilling - - 1 - 1 -
Canada
Competed as natural gas wells 1 .5 1 .2 - -
Completed as oil wells 1 .4 1 .2 - -
Dry holes 5 1.9 2 .9 - -
---------------------------------------------------------------
Total Exploratory Wells 9 3.6 10 3.3 5 1.3
---------------------------------------------------------------
Total Wells 337 130.3 316 94.0 235 92.6
===============================================================

OPERATION OF PROPERTIES. The day-to-day operations of gas and oil
properties are the responsibility of an operator designated under pooling or
operating agreements. The operator supervises production, maintains production
records, employs field personnel and performs other functions. The charges under
operating agreements customarily vary with the depth and location of the well
being operated.

QMR is the operator of approximately 50 percent of its wells. As operator,
QMR receives reimbursement for direct expenses incurred in the performance of
its duties as well as monthly per-well producing and drilling overhead
reimbursement at rates customarily charged in the area to or by unaffiliated
third parties. In presenting its financial data, the Questar E&P group records
the monthly overhead reimbursement as a reduction of general and administrative
expense, which is a common industry practice. Wexpro records the reimbursement
as a reduction of operating and maintenance expenses subject to the Settlement
Agreement.

TITLE TO PROPERTIES. Title to properties is subject to royalty, overriding
royalty, carried, net profits, working and other similar interests and
contractual arrangements customary in the gas and oil industry, liens for
current taxes not yet due and, in some instances, to other encumbrances. The
Company believes that such burdens do not materially detract from the value of
such properties or from the respective interests therein or materially interfere
with their use in the operation of the business.

As is customary in the industry in the case of undeveloped properties,
little investigation of record title is made at the time of acquisition (other
than a preliminary review of local records). Investigations, generally including
a title opinion of outside counsel, are made prior to the consummation of an
acquisition of producing properties and before commencement of drilling
operations on undeveloped properties.

15

ITEM 3. LEGAL PROCEEDINGS.

There are various legal proceedings pending against QMR and its affiliates.
Management believes that the outcome of these cases will not have a material
adverse effect on the Company's financial position or liquidity. Significant
cases are discussed below.

GRYNBERG. Questar affiliates, including Questar E&P, are named defendants
in a lawsuit filed by an independent producer (Grynberg) under the Federal False
Claims Act. This case is substantially similar to cases filed by Grynberg
against pipelines and their affiliates that have all been consolidated for
discovery and pre-trial motions in Wyoming's federal district court. The cases
involve allegations of industry-wide mismeasurement and undervaluation of gas
volumes on which royalty payments are due the federal government. The complaint
seeks treble damages and imposition of civil penalties. The federal district
judge denied the motions filed by the defendants to dismiss the lawsuits, but
has not yet set a date for a scheduling conference.

A second Grynberg lawsuit is currently on appeal before the Utah Supreme
Court. The case was dismissed by a Utah state court judge when he granted the
motion for summary judgment filed by the Questar parties. Grynberg claims that
QGM, QET, and Questar Pipeline mismeasured gas volumes attributable to his
working interest in specified wells located in southwestern Wyoming. He cites
mismeasurement to support claims for breach of contract, negligent
misrepresentation, fraud, breach of fiduciary responsibilities and related
cases.

GAS PIPELINES. Questar E&P, QGM, Wexpro, and other Questar defendants are
among the numerous defendants in this case, which is currently styled as WILL
PRICE V. GAS PIPELINES, but was formerly known as QUINQUE OPERATING COMPANY V.
GAS PIPELINES. Pending in a Kansas state district court, this case is similar to
the cases filed by Grynberg, but the allegations of a conspiracy by the pipeline
industry to set standards that result in the system mismeasurement of natural
gas volumes and resulting underpayment of royalties are made on behalf of
private and state lessors, rather than on behalf of the federal government. The
defendants, including the Questar defendants, have filed motions to dismiss for
lack of personal jurisdiction.

DEQ. Company subsidiaries have received notices of violation from the
Wyoming Department of Environmental Quality ("DEQ") in conjunction with DEQ's
program to require that all existing air_emission facilities be registered and
permitted. QMR has raised an issue concerning DEQ's failure to provide proper
notice of the new requirements and contends that existing equipment should be
"grandfathered" under DEQ's regulatory program in place at time of installation.
The Company expects that any penalties assessed its subsidiaries will not exceed
$300,000 on an aggregate basis. The penalties are assessed on a per_well or
per_facility basis and differ based on the eligibility of the facility for a
waiver or the need for appropriate action to minimize emissions. In response to
the action taken by the DEQ, QMR has made an extensive review of wells and other
facilities in Wyoming to ascertain that the necessary filings have been made and
has established procedures to make such filings on an ongoing basis.

SAMSON. Questar E&P is the named defendant in this case, which is pending
in a federal district court in Oklahoma. The case involves claims that Questar
E&P, as the operator of a Texas well, failed to attribute to Samson Resources
Company its proportionate share of the non-consent

16

working and revenue interest for the well. The trial court judge granted
Samson's motion for partial summary judgment by ruling that Samson should be
credited with an 18 percent working interest, which is valued at approximately
$1.2 million. The trial scheduled to begin in May will consider Samson's claims
for conversion and unspecified punitive damages.

ROYALTY CLASS ACTION CASES. Royalty class actions are being increasingly
asserted by landowners against entities involved in the gas and oil
production and marketing businesses. QMR entities have been involved in one
major class action (the Bridenstine case) that was settled near the end of
2000, reached an agreement to settle another Oklahoma case that was recently
filed and obligating it to pay approximately $1.1 million, and been named in
class actions in Wyoming, which have yet to be certified.

Some royalty owners are claiming that they are entitled to payments
calculated on the final end-use value of gas volumes, rather than on leasehold
sale prices for such volumes, particularly when sales are made to affiliates.
QMR believes that it will continue to be subject to royalty class actions.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company did not submit any matters to a vote of its sole stockholder
during the last quarter of 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

All of the Company's outstanding shares of common stock, $1.00 par value,
are owned by Questar. Information concerning the dividends paid on such stock
and the ability to pay dividends is reported in the Statements of Common
Shareholder's Equity and the Notes to Financial Statements included in Item 14
of this report.

ITEM 6. SELECTED FINANCIAL DATA.

The Company, as the wholly owned subsidiary of a reporting company under
the Securities and Exchange Act of 1934, as amended, (the "Act"), is entitled to
omit the information requested in this Item.

17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS

QUESTAR MARKET RESOURCES ("QMR" or "Market Resources" or the "Company") conducts
exploration and production, gas development, gathering, processing and marketing
activities.

Questar Market Resources' net income rose 30% in 2001 compared with 2000 driven
by a 53% increase in earnings from exploration and production operations and a
16% increase in Wexpro's earnings from gas-development operations. In 2001, gas
and oil reserves grew 62% after production to nearly 1.2 trillion cubic feet
equivalent.

On July 1, 2001, QMR elected to change its accounting method for gas and oil
properties from the full cost method to the successful efforts method. Prior
years financial statements were restated in an amended Form 10-K filed for the
year ended December 31, 2000. Previously reported earnings decreased $7.2
million and $2.0 million for the years ended December 31, 2000 and 1999,
respectively.

Following is a summary of financial results and operating information.

REVENUES
Revenues were 1% higher in 2001 when compared with 2000 as a result of increased
production, higher gas prices and increased investment in gas-development
activities. Market Resources produced 85.6 billion cubic feet equivalent (Bcfe)
in 2001 compared with 82.3 Bcfe in 2000 due to the acquisition of Shenandoah
Energy Inc. (SEI) on July 31, 2001, excluding Wexpro. Gas production increased
2% over year earlier levels while average realized selling prices rose 15%.
Production of oil and natural gas liquids (NGL) rose 12%, excluding Wexpro.
Energy-marketing volumes dropped 13% in 2001 compared with 2000. In 2001,
declining prices for plant products and higher gas prices were responsible for
reduced revenues and lower margins from processing plants.

Market Resources hedges its gas and oil production to support earnings targets
and to protect earnings from downward moves in commodity prices. In 2001,
approximately 59% of equity gas production and 58% of oil production, excluding
Wexpro, was hedged. This compares with 2000 when approximately 53% of gas
production and 73% of oil production was priced under hedging contracts. In
2001, the average price received from hedging transactions was $2.99 per Mcf of
gas, net to the well, and $18.28 per barrel of oil, net to the well. Hedging
activities reduced 2001 revenues from gas sales by $44.7 million and oil sales
by $9.8 million.

Revenues from cost-of-service operations were 21% higher in both 2001 and 2000
when compared with prior years. Wexpro operates and develops oil and natural gas
properties on behalf of Questar Gas and receives a return on its investment in
successful wells in addition to being reimbursed for operating expenses. The
natural gas produced from these properties is delivered to Questar Gas at
Wexpro's cost of service. Oil is sold at market prices. Any net income from oil
sales remaining after recovery of expenses and Wexpro's return on investment is
shared between Wexpro and Questar Gas. Questar Gas' portion is reported as
oil-income sharing on the income statement. Wexpro's investment base, net of
deferred income taxes, grew 29% and 15% in 2001 and 2000, respectively. The
return on average investment base was 19.7% in 2001 and 19.5% in 2000.

19

Revenues increased 49% in 2000 when compared with 1999 due primarily to higher
energy prices and increased gas production. Natural gas prices began rising in
the second half of 2000 and spiked in the first quarter of 2001 due to an energy
shortage in the western United States. Natural gas production rose 10% as a
result of acquiring Canadian producing properties in January 2000.

OPERATING EXPENSES
Operating and maintenance (O&M) expenses were 5% higher in 2001 when compared
with 2000 due primarily to an increase of the number of gas and oil properties
operated following the acquisition of SEI. O&M expenses increased 34% in 2000
compared with 1999 due primarily to an increase in the number of gas and oil
properties and to the costs of litigating and settling a major lawsuit.
Exploration expense, largely a function of drilling dry exploratory wells,
decreased 12% in 2001 after increasing 49% in 2000. Depreciation, depletion and
amortization expense (DD&A) increased 9% in 2001 due to a 4% increase in gas and
oil production and a higher average rate. The average DD&A rate for oil and gas
properties was $.83 per thousand cubic feet equivalent (Mcfe) for 2001, up from
$.78 per Mcfe in 2000 and $.71 per Mcfe in 1999. Production and other taxes rose
19% in 2001 and 69% in 2000 driven by higher revenues and prices. Production
costs per Mcfe, which include direct O&M and production-related taxes for
producing properties, averaged $.83, $.70 and $.59 for 2001, 2000 and 1999,
respectively.

ENRON EXPOSURE
A QMR energy-marketing affiliate has bought and sold natural gas and engaged in
energy trading activities with affiliates of Enron. At the time of Enron's
announced plan and filing to seek protection under bankruptcy laws, Enron owed
QMR $3.0 million for gas purchased from QMR and QMR owed Enron $.8 million for
gas purchased from Enron. In addition, QMR owed $.8 million to Enron in a
terminated swap contract. It is the opinion of QMR's counsel that these
transactions may be netted. QMR has reserved the net amount of these balances or
$1.4 million.

INTEREST AND OTHER INCOME
Interest and other income was 109% higher in the 2001 compared with 2000 due to
a $13.9 million pre-tax gain as a result of selling non-strategic producing
properties and gas-gathering facilities. Interest and other income in 2000
included a $1.7 million pre-tax net gain from selling securities available for
sale and properties, capitalized financing costs associated with an underground
storage project of $1.9 million and $1.4 million of interest earned on
qualifying hedging collateral. Gains from selling non-strategic producing
properties amounted to $4 million in 1999, while sales of securities available
for sale generated a $.4 million pre-tax gain.

DEBT EXPENSE
Interest expense was flat in 2001 compared with 2000. While QMR significantly
increased its debt load to finance the acquisition of SEI, short-term interest
rates were the lowest in recent history. The base rate for short-term loans, the
one-month LIBOR rate, declined from 6.5% in January 2001 to 1.9% in January
2002. The increase in interest expense in 2000 compared with 1999 was due to
higher short- and long-term borrowing balances and higher interest rates in
2000.

INCOME TAXES
The effective combined federal, state and foreign income tax rate was 34.9% in
2001, 33.2% in 2000 and 28.5% in 1999. Income tax rates were below the combined
income rate of about 40% primarily due to non-conventional fuel credits, which
amounted to $5 million in 2001, $4.7 million in 2000 and $5.3 million in 1999.

NONREGULATED GAS AND OIL RESERVES
In 2001, gas and oil reserves grew 62% after production to 1,184 Bcfe through a
combined strategy of acquiring reserves and a successful drilling program.
Market Resources achieved a 631% reserve replacement ratio in 2001 compared with
261% in 2000. QMR acquired 415 Bcfe of proved gas and oil reserves in the SEI
acquisition. Reserve additions, revisions and purchases, and sales in place,
amounted to 540 Bcfe in 2001. In January 2001, Market Resources completed the
sale of 290 producing properties and a gas gathering system in the

20

Midcontinent. Daily production volumes of the properties sold approximated 4.3
MMcf of gas and 180 barrels of oil.

The five-year average finding cost was $.85 per Mcfe in 2001 compared with $.86
in 2000 and $.90 in 1999, excluding Wexpro.

LIQUIDITY AND CAPITAL RESOURCES
Operating Activities

Net cash provided from operating activities increased 91% in 2001 compared with
2000 as a result of 30% higher net income and collection of accounts receivable
and the return of interest-bearing deposits with energy brokers. Timing
differences in accounts receivable and deposits with energy brokers more than
offset 77% increase in net income in 2000 compared with 1999.

Investing Activities

QMR acquired SEI for $403 million including debt and received 415 Bcfe of proved
oil and gas reserves, gas processing capacity of 100 MMcf per day, 90 miles of
gathering lines, 114,000 net acres of undeveloped leasehold acreage and four
drilling rigs. In addition, QMR participated in drilling 337 wells (130 net
wells) that resulted in 113 net gas wells, 10 net oil wells and 7 net dry holes.
There were 56 gross wells in progress at year end. The success rate of completed
net wells was 95%. QMR invested $7.7 million in the Rendezvous partnership that
will provide gas gathering and compression services in southwestern Wyoming. The
details of capital expenditures for 2001, 2000 and a forecast of 2002 are as
follows:

21

Financing Activities

Record capital spending and refinancing debt to take advantage of low interest
rates combined to make 2001 a very active financing year. Net cash provided from
operating activities of $251.3 million and proceeds from the sale of
non-strategic assets of $32.7 million supplied 44% of the funding needed for
capital expenditures. The remaining 56% was supplied through short- and
long-term debt offerings. QMR borrowed $415 million, $280 million of which was
in the form of a short-term bridge loan, to finance its acquisition of SEI. A
portion of the bridge loan was subsequently refinanced with a one-year callable
commercial paper note in the amount of $220 million. The commercial paper note
was partially repaid with the proceeds of $200 million of five-year private
placement notes with a 7% interest rate, issued January 16, 2002. The terms of
the private placement notes required registration of the notes with the
Securities and Exchange Commission. A registration statement was filed February
22, 2002 that became effective March 4, 2002. The exchange notes are expected to
be issued in April 2002. In March 2001, QMR sold $150 million of 10-year notes
with a 7.5% interest rate and used the proceeds to reduce debt.

In 2000, Market Resources initiated an unrated commercial-paper program with
$100 million of capacity. Commercial-paper borrowings are limited to and
supported by available capacity on Market Resources' existing revolving credit
facility. Market Resources had a commercial-paper balance of $12.5 million at
December 31, 2000 and no borrowing under this arrangement at December 31, 2001.

QMR reported negative working capital of $218.5 million at December 31, 2001. As
a result of purchasing SEI, QMR borrowed $220 million on a short-term basis.
Subsequently, the short-term loan was reduced by $100 million from an offering
of long-term debt in January 2002. QMR plans to further reduce the balance in
short-term debt through the sale of non-strategic assets and cash flows from
operations.

QMR's consolidated capital structure consisted of 43% long-term debt and 57%
common shareholder's equity at December 31, 2001. Considering short-term debt in
the calculation increases the debt portion to 56%. The Company's long-term debt
has been rated BBB+ by Standard and Poor's and Baa2 by Moody's.

Critical Accounting Policies

The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. Management
believes the following accounting policies may involve a higher degree of
complexity and judgment.

SUCCESSFUL EFFORTS ACCOUNTING FOR GAS AND OIL OPERATIONS
Under the successful efforts method of accounting, the Company capitalizes the
costs of acquiring leaseholds, drilling development wells and successful
exploratory wells and purchasing related support equipment and facilities. The
costs of unsuccessful exploratory wells are charged to expense when it is
determined that such wells have not located proved reserves. Unproved leaseholds
costs are periodically reviewed for impairment. Costs related to impaired
prospects are charged to expense. Costs of geological and geophysical studies
and other exploratory activities are expensed as incurred. Costs associated with
production and general corporate activities are expensed in the period incurred.
The Company recognizes gain or loss on the sale of properties on a field basis.

Capitalized proved leasehold costs are depleted on the unit-of-production method
based on proved reserves on a field basis. All other capitalized costs
associated with oil and gas properties are depreciated on the unit-of-production
method based on proved developed reserves on a field basis. The Company engages
independent consultants to calculate gas and oil reserves. Reserve estimates are
based on a complex and highly interpretive process that is subject to continuous
revision as additional production and development-drilling information becomes
available.

22

WEXPRO SETTLEMENT AGREEMENT
Wexpro's operations are subject to the terms of the Wexpro settlement agreement.
The agreement was effective August 1, 1981, and sets forth the rights of Questar
Gas' utility operations to share in the results of Wexpro's operations and the
rate of return that Wexpro will earn for managing Questar Gas' reserves. The
agreement was approved by the PSCU and PSCW in 1981 and affirmed by the Supreme
Court of Utah in 1983.

ACCOUNTING FOR DERIVATIVES
On January 1, 2001, the Company adopted the accounting provisions of SFAS 133,
as amended, "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under the standard, the
Company is 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. The Company structured virtually all of its energy
derivative instruments as cash flow hedges. Any changes in the fair value of
cash flow hedges are recorded on the balance sheet until the underlying gas or
oil is produced.

The cumulative effect of this accounting change decreased other comprehensive
income by $79.4 million (after tax) and did not have a material effect on income
at adoption. Of the cumulative effect recorded in other comprehensive income,
$44.6 million (after tax) was reclassified into the Consolidated Income
Statement during 2001.

REVENUE RECOGNITION
Revenues are recognized in the period that services are provided or products are
delivered. The Company's exploration and production operations use the sales
method of accounting for gas revenues, whereby revenue is recognized on all gas
sold to purchasers. A liability is recorded to the extent that the Company has
an imbalance in excess of its share of remaining reserves in an underlying
property.

ITEM 7A. 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. A Market Resources subsidiary has long-term contracts for
pipeline capacity for the next several years and is obligated to pay for
transportation services with no guarantee that it will be able to recover the
full cost of these transportation commitments.

HEDGING POLICY
The Company has established policies and procedures for managing commodity price
risks through the use of commodity-based derivative arrangements. Primary
objectives of these hedging transactions are to support the Company's earnings
targets and to protect earnings from falling commodity prices. The Company will
target between 50 and 75% of the current year's production to be hedged at or
above budget levels by the end of March in the current year. The Company will
ladder in these hedges, to reach forward beyond the current year when price
levels are attractive. The volume of production hedged and the 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 hedge arrangements. The Company does not enter into
derivative arrangements for speculative purposes.

23

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.

Market Resources held hedge contracts covering the price exposure for about 70.2
million dth of gas and 1.1 million bbl of oil at December 31, 2001. A year
earlier the contracts covered 50.5 million dth of natural gas and 1 million bbl
of oil. The hedging contracts exist for a significant share of equity gas and
oil production and for a portion of gas-marketing transactions. The contracts at
December 31, 2001, had terms extending through December 2003, with about 75% of
those contracts expiring by the end of 2002.

The undiscounted mark-to-market adjustment of financial gas and oil
price-hedging contracts at December 31, 2001 was a positive $37.7 million. A 10%
decline in gas and oil prices would add $14.8 million to the mark-to-market
calculation; while a 10% increase in prices would deduct $14.8 million. The
mark-to-market adjustment of gas and oil price-hedging contracts at December 31,
2000 was a negative $98 million. A 10% decline in gas and oil prices at that
time would decrease the mark-to-market adjustment by $18.1 million to $79.9
million. Conversely, a 10% increase in prices would have resulted in an $18.1
million negative mark-to-market adjustment to a negative $116.1 million balance
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. Also, the sensitivity measures exclude mark-to-market calculations on
physical hedge contracts, where settlement is achieved through delivery of the
gas or oil as opposed to cash settlements with a counterparty.

LIQUIDITY ACCELERATORS
QMR has entered into commodity price hedging contracts with several
counterparties. The counterparties are banks and energy trading firms. In some
contracts the amount of credit allowed before QMR must post collateral for
out-of-the-money hedges varies depending on the credit rating of QMR's debt. In
cases where this arrangement exists, if QMR's credit ratings fall below
investment grade (BBB- by Standard & Poor's or Baa3 by Moody's) counterparty
credit generally falls to zero.

INTEREST-RATE RISK MANAGEMENT
QMR held $150 million of fixed rate debt with a fair value of $147.8 million at
December 31, 2001. The fair value of fixed rate debt is subject to change as
interest rates fluctuate. The Company held floating-rate long-term debt at
December 31, 2001 and 2000 amounting to $253.9 million and $244.4 million,
respectively. The book value of variable-rate debt approximates fair value. If
interest rates declined by 10%, the annual interest costs paid on variable-rate
long-term debt would decrease about $.7 million based on the balance outstanding
at December 31, 2001 and $1.7 million for the year earlier balance. Effective
October 2001, the Company hedged $100 million of variable-rate debt by entering
into a fixed-rate interest swap for one year. Due to declining interest rates at
the end of 2001, the mark-to-market adjustment of the interest rate swap
resulted in an unrealized loss of $627,000 and $67,000 of additional interest
expense.

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 $61.1 million (U.S.) is expected to be repaid from future
operations of the foreign company.

24

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
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, quoted prices of securities available for
sale, 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.

25

ITEM 8. STATEMENTS AND SUPPLEMENTARY DATA.

The Company's financial statements are included in Part IV, Item 14,
herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

QMR has not changed its independent auditors or had any disagreements with
them concerning accounting matters and financial statement disclosures within
the last 24 months.

PART III

The Company, as the wholly owned subsidiary of a reporting company under
the Act is entitled to omit all information requested in PART III (Items 10-13).

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1)(2) Financial Statements and Financial Statement Schedules. The
financial statements and schedule identified in the List of Financial Statements
are filed as part of this report.

(3) Exhibits. The following is a list of exhibits required to be filed as a
part of this report in Item 14(c).

EXHIBIT NO. DESCRIPTION

3.1.* Articles of Incorporation dated April 27, 1988 for Utah
Entrada Industries, Inc. (Exhibit No. 3.1. to the Company's
Form 10 dated April 12, 2000.)

3.2.* Articles of Merger, dated May 20, 1988, of Entrada
Industries, Inc., a Delaware corporation and Utah Entrada
Industries, Inc, a Utah corporation. (Exhibit No. 3.2. to
the Company's Form 10 dated April 12, 2000.)

3.3.* Articles of Amendment dated August 31, 1998, changing the
name of Entrada Industries, Inc. to Questar Market
Resources, Inc. (Exhibit No. 3.3. to the Company's Form 10
dated April 12, 2000.)

3.4.* Bylaws (as amended effective February 8, 2000.) (Exhibit No.
3.4. to the Company's Form 10 dated April 12, 2000.)

4.1.* Indenture dated as of March 1, 2001, between the Questar
Market Resources, Inc. and Bank One, NA, as Trustee for the
Company's 7 1/2% Notes due 2011. (Exhibit No. 4.01. to the
Company's Current Report on Form 8-K dated March 6, 2001.)

26

4.2.* Form of 7 1/2% Notes due 2011. (Exhibit No. 4.02. to the
Company's Current Report on Form 8-K dated March 6, 2001.)

4.4. U.S. Credit Agreement, dated April 19, 1999, by and among
Questar Market Resources, Inc., as U.S. borrower,
NationsBank, N.A., as U.S. agent, and certain financial
institutions, as lenders, with the First Amendment dated May
17, 1999, the Second Amendment dated July 30, 1999, the
Third Amendment dated November 30, 1999, the Fourth
Amendment dated April 17, 2000, the Fifth Amendment dated
October 6, 2000, and the Sixth Amendment dated February 9,
2001. (Exhibit No. 4.1. to the Company's Form 10 dated April
12, 2000, for the U. S. Credit Agreement, and the First,
Second and Third Amendments; Exhibit No. 4.1. to the
Company's Form 10/A dated November 9, 2000, for the Fourth
and Fifth Amendments. Exhibit No. 4.3. to the Company's Form
10-K Annual Report for 2000 for the Sixth Amendment.) The
Seventh Amendment dated April 16, 2001, is filed as Exhibit
4.4 to this report.

4.5. Long-term debt instruments with principal amounts not
exceeding 10 percent of QMR's total consolidated assets are
not filed as exhibits. The Company will furnish a copy of
these agreements to the Commission upon request.

10.1.* Stipulation and Agreement, dated October 14, 1981, executed
by Mountain Fuel Supply Company [Questar Gas Company];
Wexpro Company; the Utah Department of Business Regulations,
Division of Public Utilities; the Utah Committee of Consumer
Services; and the staff of the Public Service Commission of
Wyoming. (Exhibit No. 10(a) to Questar Gas Company's Form
10-K Annual Report for 1981.)

10.2.* Stock Purchase Agreement among the Company, Shenandoah
Energy and Shenandoah Energy's stockholders. (Exhibit No.
10.2. to the Company's Current Report on Form 8-K dated July
31, 2001.)

12. Ratio of earnings to fixed charges.

21. Subsidiary Information.

23. Consent of Independent Auditors.

24. Power of Attorney.

*Exhibits so marked have been filed with the Securities and Exchange
Commission as part of the referenced filing and are incorporated herein by
reference.

(b) The Company filed a Current Report on Form 8-K dated October 12,
2001 that contained the financial statements and pro forma information required
as a result of the Company's acquisition of Shenandoah Energy, Inc.

27

ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 14(a)(1) and (2), and (d)

LIST OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

YEAR ENDED DECEMBER 31, 2001

QUESTAR MARKET RESOURCES, INC.

SALT LAKE CITY, UTAH

FORM 10-K -- ITEM 14 (a) (1) AND (2)

QUESTAR MARKET RESOURCES, INC.

LIST OF FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULES

The following financial statements of Questar Market Resources Inc. are included
in Item 8:

Statements of income, Years ended December 31, 2001, 2000 and 1999

Balance sheets, December 31, 2001 and 2000

Statements of common shareholder's equity, Years ended December 31,2001,
2000 and 1999

Statements of cash flows, Years ended December 31, 2001, 2000 and 1999

Notes to financial statements

The following financial statement schedule is included in Item 8:

Schedule: Valuation and Qualifying Accounts

All other financial statement schedules, for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission, are
not required under the related instructions or are inapplicable and therefore
have been omitted.

28

Report of Independent Auditors

Board of Directors
Questar Market Resources, Inc.

We have audited the accompanying consolidated balance sheets of Questar Market
Resources, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of income, common shareholder's equity and cash flows for each of the
three years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and statement are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Questar Market Resources, Inc.
at December 31, 2001 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

As discussed in Notes 1 and 5 to the financial statements, effective January 1,
2001, Questar Market Resources, Inc. adopted Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.

/s/ Ernst & Young, LLP
----------------------------------
Ernst & Young, LLP

Salt Lake City, Utah
February 8, 2002

29

QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

See notes to consolidated financial statements.

30

QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

31

LIABILITIES AND SHAREHOLDER'S EQUITY

See notes to consolidated financial statements.

32

QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

See notes to consolidated financial statements.

33

QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS