INTEROFFICE REPORT Questar Corporation: Energy Company October 6, 2004 Prepared for: S. E. Parks, Senior Vice President and Chief Financial Officer Prepared by: Cathy Caton, Accountant Three segments of Questar operations cover resources and regulated services. Follows is the risk assessment for Questar: Resources, Lack of internal control in estimating reserve (s) revenue, Financial analysis and the market, New land developments, and the Environment. Most of the company's operations are located in the Rocky Mountain region of Wyoming, Utah, Colorado, Texas, Oklahoma, and Louisiana (5). Distribution is throughout the United States.
QUESTAR OPERATIONS multi-faceted holding company formed through reorganization in 1984 into an energy company to distinguish non-utility services (5). Crude resources from fossil fuels (oil, natural gas) are developed through drilling for interstate transmission, storage and distribution. The resource division involves gas, oil, natural gas for marketing, cost analysis of gas development, risk management, and distribution for the wholesale / retail industry (5). 1. Market Resources is the major producer of income driving segments of the business. Natural gas (non regulated) is 86% of its focal point on evaluating crude resources for process through "gas management" (5).
2. Questar Pipeline (regulated) is responsible for transportation and storage. This includes the development of pipeline. Business is dependent on acquiring leases and the use of land.
Operations at well sites can have a life of 20-40 years. 3. Questar Gas (regulated) involves retail distribution. Sales are based on seasonal usage and economic factors such as the market's going rate (5). RISK ASSESSMENT Resources: Price Risk and Land Opportunity o Crude resources are a distinct global market. Questar is a profitable and reliable enterprise with all three segments highly revenue driven, secured by federal and state government regulations.
Wholesale figures fluctuate within the industry by a minimal amount for distribution nationwide, but this type of commodity requires prices to be set by the market nationwide and not the company. o Competition in this industry is the ability to secure land rights for drilling. Government regulations have restricted areas containing crude resources for development by 40% (7). 90% of natural gas used by the lower 48 states is produced in the United States (11). Accounting: Reliance on Company Engineers for Accounting Figures From an accountants' perspective it is very difficult to depend on the reliability of energy reserves.
There is a value at risk created by the enormous amount of data analyzed on tangible assets for this and many other industries. Accountants depend on company engineers for energy reserve information; creating a loss of internal control for number crunchers in this billion dollar industry. In response to the $150 million overstatement of energy reserves by Royal Dutch/Shell group, the Securities and Exchange Commission is evaluating energy companies. This could create a new standardization for accountants in reviewing financial's (9). o Restatements for improper revenue recognition result in larger drops in market capitalization than any other type of restatement... the leading three [companies] lost 20 billion in market value in just three days following disclosure of revenue recognition problems.
Reporting of higher revenue amounts may affect stock valuations (10). Financial Analysis: o The fluctuation of the economic market sets the price for energy companies nationwide. Price fluctuations become target for legal and financial analysis. In 2003 the Attorney General's office investigated the natural gas market because of a 180% increase over a two day period over national spot market prices. They concluded that individual and institutional traders, who operate in the natural gas markets, were reacting to information and perceptions about market conditions, see attachment (11).
o No financial data is available on the international sale of crude resources. Land: New development so Opening remote areas to drilling creates new land-use patterns (7). This is detrimental to the environment with additional waste management issues (land, water, air). Developing communities generates jobs and housing projects. Conversely, environmental concerns by individuals and conservation organizations will limit energy companies, or impede progress, possibly through litigation (6). Energy companies can shut down unexpectedly.
Environment: Separate set of standards o Environment regulations can monitor energy companies in areas of clean air and water, and environmental impact assessment (4). This is done before, during, and after drilling, and is regulated at the national level. To avoid excessive exploitation of land, Questar uses multiple drills at one site. This endeavor helps to keep the harmony of the natural wilderness (5).
INDUSTRY POSITION Questar's primary NAICS code is 211111, Oil and Gas extraction (mining). According to Business Rankings Annual 2004, Questar is 6 th in the industry of largest natural gas companies by net income based on latest filings for 2001 at $158 million. COMPANY OUTLOOK Standard & Poor's analysis is optimistic about the future of energy companies predicting a bull market (13). Based on the value of goods and services increasing (GDP), post 9/11, energy demands will increase. S&P predicted U. S.
Henry Hub natural gas prices to be $4. 70/MMBtu in 2004. Below are actual figures for the week ending 6 October 2004 (2). 30-Sep 1-Oct 4-Oct 5-Oct 6-Oct Henry Hub 6. 43 5.
42 5. 72 6. 07 6. 0 GROWTH STRATEGY: Current to 2025: The Alaskan pipeline will distribute crude resources to all lower 48 states beginning in 2018. The largest increase in production and distribution comes from the Rocky Mountain region, a territory that Questar currently drills (2). Due to Questar's strong financial standing they have announced a $2 billion spending program for exploration and development of acreage in new energy reserves.
The expansion of pipeline by Market Resources is apparent by the 53% increase in revenue for 2003 from 2002 (5). Overall, the company benefited from higher prices for oil and natural gas. Questar Gas has increased its area of transportation in gas increasing revenue. Questar Gas is Questar Pipelines' largest transportation customer. Plant operations are running at 100% (5). MANAGEMENT EFFECTIVENESS Net cash flow from operating activities exceeded the sum of net capital expenditures to include dividends.
Surplus of cash is intended for debt reduction in all operations (5). Questar Gas and its management have recently completed installation of the SPL System. SPL is the industry standard for billing customers with the greatest efficiency (12). Management does not foresee other alternatives for creating energy as they have recently announced a two billion capital spending program for drilling new acreage (7). Even though energy commodities are a lucrative business, management has the ongoing responsibility of developing new ideas and methods for creating energy other than gas, since gas could become limited in the future by current overuse. CONCLUSION My recommendation, if when we accept as client, is to meet with top management at Questar to discuss auditing concerns over estimating crude resources.
This meeting should include engineers from all areas of production to get an overall view of their reporting methods. This will give us a better impression of who we are dealing with and to express our concerns with the recent investigation by the SEC in the energy industry financial reporting methods. Bibliography: 1) "Big, Smart and Well Managed: Questar Corporation." Forbes Online. 12 January 2004. web (8 October 2004). Questar listed as well managed.
External 2) Department of Energy. Energy Information Administration. 6 October 2004. web (8 October 2004). Official energy statistics from the U.
S. government: Natural Gas spot prices $ per MMbtu. External 3) Draper, Deborah. Business Rankings Annual, 2004. New York: Thompson, 2004.
Only listing for Questar as a Natural Gas Producer. External 4) "Environmental Management in Oil and Gas Exploration and Production." UNEP Industry and Environment. 1991. web (8 October 2004). Management approaches to drilling. External 5) "Form 10 k." SEC Edgar.
2003. web STR&CI = 751652&FID = 751652-04-6&SID = 04-00#STR 10 K 4 Q 2003 HTM ITEM 1 BUSINESS> (8 October 2004). Questar financial statement and required disclosures. Internal 6) "Groups Take Action To Protect Adobe Town From Drilling." Center for Native Ecosystems. http: //www. native ecosystems.
org/Adobe%20 Town/040901 release. htm> (8 October 2004). Citizens file suit with Interior Board of Land Appeals to prevent drilling. External 7) "Increased Access to Federal Lands for Energy Development." Questar Corporation: Company Brief. web briefs / a cess. PDF> (8 October 2004).
Production of energy resources restricts admission to land. Internal 8) "Investor Information." Questar Corporation. 2004. web (8 October 2004). This webpage section contains an overview of Questar, an energy company, and its subsidiary companies. Internal 9) Karl, Tiffany.
"Auditing Oil, Gas Reserves Called Impractical - Accountants." Wall Street Journal. 1 Sep 2004. web Reserve%20 Valuation. pdf> (8 October 2004). Industry changes that may affect energy resources financial reporting. External 10) Kie so, Donald E.
, Weygandt, Jerry J. , Warfield, Terry D. Intermediate Accounting. Hoboken, NJ: Current Developments for Audit Committees 2002. Price waterhouse Coopers analysis on recognizing revenue. External 11) "Natural Gas Market Prices." California Energy Commission.
2 April 2003. web. ca. gov/2003 price spikes/2003-04-02 nat gas execs um. html> (8 October 2004). Executive summary on 180% increase within two days on the national spot market for natural gas.
External 12) "Questar Goes Live with the SPL Customer Care and Billing Solution." Factiva Online September 2004. web (8 October 2004). Accounting changes in billing customers. External 13) Standard & Poor's.
Register of Corporations, Directors and Executives. 2003 ed. New York: McGraw-Hill Companies, 2003. The energy sector as a whole. External.