PART I FINANCIAL INFORMATION

Item 1. Financial Statements

QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

3 Months Ended

6 Months Ended

June 30,

June 30,

2003

2002

2003

2002

(In Thousands)

REVENUES

$    185,937

$    152,484

$    425,579

$    305,613

OPERATING EXPENSES

  Cost of natural gas and other products sold

63,468

45,448

165,610

94,512

  Operating and maintenance

31,386

30,181

64,538

65,565

  Depreciation, depletion and amortization

28,059

28,354

58,064

57,638

  Exploration

1,043

1,133

2,213

3,881

  Abandonment and impairment of gas and oil properties

492

749

975

1,055

  Production and other taxes

12,525

7,893

24,958

15,292

  Wexpro agreement - oil income sharing

752

728

1,452

1,009

    TOTAL OPERATING EXPENSES

137,725

114,486

317,810

238,952

    OPERATING INCOME

48,212

37,998

107,769

66,661

Interest and other income

1,241

5,472

2,258

11,226

Income from unconsolidated affiliates

1,322

666

2,358

1,101

Minority interest

46

95

91

192

Debt expense

(6,956)

(8,845)

(14,468)

(17,264)

    INCOME BEFORE INCOME TAXES

      AND CUMULATIVE EFFECT

43,865

35,386

98,008

61,916

Income taxes

16,089

12,569

36,183

21,497

    INCOME BEFORE CUMULATIVE EFFECT

27,776

22,817

61,825

40,419

Cumulative effect of accounting change

for asset retirement obligations, net of

income taxes of $3,049

(5,113)

       NET INCOME

$     27,776

$     22,817

$     56,712

$     40,419

See notes accompanying financial statements

QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30,

December 31,

2003

2002

(Unaudited)

(In Thousands)

ASSETS

Current assets

  Cash and cash equivalents

$     16,615

$    10,404

  Notes receivable from Questar Corp.

77,600

95,600

  Accounts receivable, net

112,586

106,487

  Hedging collateral margin calls

9,150

  Fair value of hedging contracts

4,322

3,617

  Inventories, at lower of average cost or market -

    Gas and oil storage

13,917

6,924

    Materials and supplies

4,437

4,217

  Prepaid expenses and other

5,898

7,965

      Total current assets

244,525

235,214

Property, plant and equipment

1,983,180

1,917,645

Less accumulated depreciation, depletion and amortization

754,873

716,989

    Net property, plant and equipment

1,228,307

1,200,656

Investment in unconsolidated affiliates

23,210

23,617

Goodwill

61,423

61,423

Other assets

12,738

2,787

$1,570,203

$1,523,697

LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities

  Notes payable to Questar Corp.

$     78,500

$    9,900

  Accounts payable and accrued expenses

149,056

140,826

  Fair value of hedging contracts

66,498

24,278

    Total current liabilities

294,054

175,004

Long-term debt

405,000

550,000

Deferred income taxes

199,472

204,185

Asset retirement obligation

52,349

Other long-term liabilities

20,969

19,013

Minority interest

7,957

8,156

Common shareholder's equity

  Common stock

4,309

4,309

  Additional paid-in capital

116,027

116,027

  Retained earnings

511,945

463,883

  Other comprehensive loss

(41,879)

(16,880)

    Total common shareholder's equity

590,402

567,339

$1,570,203

$1,523,697

See notes accompanying the consolidated financial statements

QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

6 Months Ended

June 30,

2003

2002

(In Thousands)

OPERATING ACTIVITIES

  Net income

$    56,712

$    40,419

  Depreciation, depletion and amortization

60,105

60,232

  Deferred income taxes

13,265

9,110

  Abandonment and impairment of gas and oil properties

975

1,055

  Income from unconsolidated affiliates, net

    of cash distributions

407

1,026

  Net (gain) loss from asset sales

100

(4,828)

  Cumulative effect of accounting change

5,113

  Minority interest

(91)

(192)

  Changes in operating assets and liabilities

(12,503)

15,212

      NET CASH PROVIDED FROM OPERATING ACTIVITIES

124,083

122,034

INVESTING ACTIVITIES

  Capital expenditures

(57,146)

(78,316)

  Proceeds from disposition of assets

6,433

10,793

      NET CASH USED IN INVESTING ACTIVITIES

(50,713)

(67,523)

FINANCING ACTIVITIES

  Change in notes receivable from Questar Corp.

18,000

(18,300)

  Change in notes payable to Questar Corp.

68,600

(99,200)

  Increase in cash balance in escrow account

(5,213)

  Long-term debt issued

200,000

  Long-term debt repaid

(145,000)

(124,454)

  Other

(109)

308

  Payment of dividends

(8,650)

(8,650)

        NET CASH USED IN FINANCING ACTIVITIES

(67,159)

(55,509)

  Foreign currency translation adjustment

83

  Change in cash and cash equivalents

6,211

(915)

  Beginning cash and cash equivalents

10,404

2,270

  Ending cash and cash equivalents

$    16,615

$    1,355

See notes accompanying consolidated financial statements

QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(Unaudited)

Note 1 - Basis of Presentation

The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period presented. All such adjustments are of a normal recurring nature. The results of operations for the three- and six- month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2002 filed by Questar Market Resources, Inc. (QMR or the Company).

Note 2 - New Accounting Standard

Cumulative Effect for Accounting Change - "Accounting for Asset Retirement Obligations"

On January 1, 2003, QMR adopted Statement of Financial Accounting Standards 143 (SFAS 143) "Accounting for Asset Retirement Obligations" and recorded a $5.1 million after tax charge for the cumulative effect of this accounting change. SFAS 143 addresses the financial accounting and reporting of the fair value of legal obligations associated with the retirement of tangible long-lived assets. The new standard requires the Company to estimate a fair value of abandonment costs and to capitalize and depreciate those costs over the life of the related assets. The asset retirement obligation is adjusted to its present value each period through an accretion process using a credit-adjusted risk-free interest rate. Both the accretion expense associated with the liability and the depreciation associated with the capitalized abandonment costs are non-cash expenses until the asset is retired. The adoption of SFAS 143 caused QMR to change the accounting method for plugging and abandonment c osts associated with gas and oil wells and certain other properties. SFAS 143 was applied retroactively to prior years to determine the cumulative effect through December 31, 2002.

The accretion expense in the first six months of 2003 amounted to $1.0 million. An additional $700,000 of accretion costs were recorded in a receivable from Questar Gas for properties operated by QMR. If the new method of accounting for plugging and abandonment costs had been in effect in the first half of 2002, the pro forma effect accretion expense would have been $900,000.

Changes in asset retirement obligation

In Thousands

Balance at January 1, 2003

$50,667

Accretion

1,654

Additions

606

Retirements

(578)

Balance at June 30, 2003

$52,349

Note 3 - Investment in Unconsolidated Affiliates

QMR, indirectly through subsidiaries, has interests in partnerships accounted for on the equity basis. These entities are engaged primarily in gathering and/or processing of natural gas. The entities do not have debt obligations with third-party lenders. QMR uses the equity method to account for investments in affiliates in which it does not have control. The principal affiliates and QMR's ownership percentage as of June 30, 2003 were: Rendezvous Gas Services LLC, a limited liability corporation, (50%) and Canyon Creek Compression Co., a general partnership (15%). QMR's 50% interest in Blacks Fork Processing is included in the amounts for 2002 period presented. QMR acquired the other 50% interest in Blacks Fork Processing in the fourth quarter of 2002 and has consolidated operating results since the acquisition.

Summarized operating results of the investments are listed below.

6 Months Ended

June 30,

2003

2002

(In Thousands)

Revenues

$  7,908

$ 10,550

Operating income

4,787

2,763

Income before income taxes

4,806

2,800

Note 4 - Operations By Line of Business

3 Months Ended

6 Months Ended

June 30,

June 30,

2003

2002

2003

2002

(In Thousands)

REVENUES FROM UNAFFILIATED CUSTOMERS

  Exploration and production

$ 79,856

$ 69,118

$ 66,594

$133,083

  Cost of service

1,656

955

6,658

3,537

  Gathering, processing and marketing

74,468

53,472

195,921

112,083

$155,980

$123,545

$369,173

$248,703

REVENUES FROM AFFILIATED COMPANIES

  Exploration and production

$     45

$    415

$     45

$  1,170

  Cost of service

26,791

26,172

50,536

50,101

  Gathering, processing and marketing

3,121

2,352

5,825

5,639

$ 29,957

$ 28,939

$ 56,406

$ 56,910

OPERATING INCOME

  Exploration and production

$ 32,386

$ 21,904

$ 70,080

$ 34,594

  Cost of service

12,930

13,338

26,326

26,222

  Gathering, processing and marketing

2,896

2,756

11,363

5,845

$ 48,212

$ 37,998

$107,769

$ 66,661

NET INCOME

  Exploration and production

$ 17,413

$ 13,310

$ 37,958

$ 21,576

  Cost of service

8,466

7,858

16,652

15,481

  Gathering, processing and marketing

1,897

1,649

7,215

3,362

      Income before cumulative effect of

       change in accounting

27,776

22,817

61,825

40,419

      Cumulative effect

(5,113)

$ 27,776

$ 22,817

$ 56,712

$ 40,419

GEOGRAPHIC INFORMATION REVENUES

  United States

$185,937

$144,575

$425,579

$291,433

  Canada

7,909

14,180

$185,937

$152,484

$425,579

$305,613

FIXED ASSETS - NET, at period end

  United States

$    1,228,307

$   1,187,101

  Canada

77,719

$   1,228,307

$   1,264,820

Note 5 - Comprehensive Income

Comprehensive income is the sum of net income as reported in the Consolidated Statements of Income and other comprehensive income transactions reported in Shareholder's Equity. Other comprehensive income transactions include changes in the market value of gas and oil hedging derivatives and changes in holding value resulting from foreign currency translation adjustments. These transactions are not the culmination of the earnings process, but result from periodically adjusting historical balances to market value. Income or loss is realized when the gas or oil underlying the hedging contracts is sold.

3 Months Ended

6 Months Ended

June 30,

June 30,

2003

2002

2003

2002

(In Thousands)

Net income

$     27,776

$       22,817

$      56,712

$       40,419

Other comprehensive income (loss)

  Unrealized income (loss) on hedging transactions

(16,740)

3,914

(39,928)

(45,859)

  Foreign currency translation adjustments

2,342

2,239

      Other comprehensive income (loss) before

          income taxes

(16,740)

6,256

(39,928)

(43,620)

      Income taxes on other comprehensive

          income (loss)

(6,260)

2,721

(14,929)

(16,036)

      Net other comprehensive income (loss)

(10,480)

3,535

(24,999)

(27,584)

              Total comprehensive income

$     17,296

$       26,352

$     31,713

$       12,835

Note 6 - Reclassifications

Certain reclassifications were made to the 2002 financial statements to conform with the 2003 presentation.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

QUESTAR MARKET RESOURCES, INC. AND SUBSIDIARIES

June 30, 2003

(Unaudited)

Operating Results

Questar Market Resources and subsidiaries (QMR) acquire and develop gas and oil properties, develop cost-of-service reserves for affiliate utility Questar Gas, provide gas-gathering and processing services, market equity and third-party gas and oil, provide risk-management services, and own and operate an underground gas-storage reservoir. Primary objectives of gas- and oil-marketing operations are to support QMR's earnings targets and to protect QMR's earnings from adverse commodity-price changes. QMR does not enter into gas- and oil-hedging contracts for speculative purposes. Following is a summary of QMR's financial results and operating information:

3 Months Ended

6 Months Ended

June 30,

June 30,

2003

2002

2003

2002

FINANCIAL RESULTS - (In Thousands)

  Revenues

    From unaffiliated customers

$155,980

$123,545

$369,173

$248,703

    From affiliates

29,957

28,939

56,406

56,910

      Total revenues

$185,937

$152,484

$425,579

$305,613

  Operating income

$ 48,212

$ 37,998

$107,769

$ 66,661

  Income before cumulative effect

$ 27,776

$ 22,817

$ 61,825

$ 40,419

  Cumulative effect of accounting change

(5,113)

  Net income

$ 27,776

$22,817

$56,712

$ 40,419

OPERATING STATISTICS

  Nonregulated production volumes

    Natural gas (in MMcf)

17,957

19,856

38,061

39,863

    Oil and natural gas liquids (in Mbbl)

568

736

1,140

1,483

    Total production (Bcfe)

21.4

24.3

44.9

48.8

    Average daily production (MMcfe)

235

267

248

269

  Average selling price, net to the well

    Average realized selling price (including hedges)

      Natural gas (per Mcf)

$ 3.66

$ 2.55

$ 3.59

$ 2.49

      Oil and natural gas liquids (per bbl)

$ 2.45

$20.60

$23.59