Quicksilver Resources (KWK)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

QUICKSILVER RESOURCES INC.

(Exact name of registrant as specified in its charter)

Delaware		75-2756163
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
777 West Rosedale St., Fort Worth, Texas		76104
(Address of principal executive offices)		(Zip Code)

817-665-5000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $0.01 par value per share		New York Stock Exchange
Preferred Share Purchase Rights,
$0.01 par value per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ       No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o       No þ

     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 þ       No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

     As of June 30, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $4,067,732,259 based on the closing sale price of $38.64 as reported on the New York Stock Exchange.

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at February 13, 2009
Common Stock, $0.01 par value per share		168,752,835 shares

Document		Parts Into Which Incorporated
Proxy Statement for the Registrant’s May 20,		Part III
2009 Annual Meeting of Stockholders

 

 

Explanatory Note

This Amendment No. 2 to the Annual Report on Form 10-K of Quicksilver Resources Inc. (“Quicksilver”) for the year ended December 31, 2008, originally filed on March 3, 2009 (“Original Form 10-K”) is being filed to provide audited financial statements and footnotes in accordance with SEC Rule 3-16 of Regulation S-X for the following entities:

		•		Quicksilver Resources Canada Inc. (“QRCI”);
		•		Cowtown Pipeline Funding, Inc.; and
		•		Quicksilver Gas Services Holdings LLC.

In addition, this Amendment No. 2 includes the audited financial statements and related footnotes of BreitBurn Energy Partners L.P. (“BBEP”), which were filed as an exhibit under “Item 15. Exhibits and Financial Statement Schedules” of Amendment No. 1 to the Original Form 10-K. The management of BBEP is solely responsible for the form and content of the BBEP financial statements. Quicksilver has no responsibility for the form or content of the BBEP financial statements since it does not control BBEP and is not involved in the management of BBEP. The consents of Schlumberger Data and Consulting Services, Netherland, Sewell & Associates, Inc., Deloitte and Touche LLP and PricewaterhouseCoopers LLP and new certifications of Quicksilver’s principal chief executive officer and principal financial officer are also filed as exhibits to this Amendment No. 2 under Item 15.

This Amendment No. 2 does not reflect events occurring after March 3, 2009. This Amendment also does not update or modify in any way Quicksilver’s results of operations, financial position, cash flows or other disclosures in the Original Form 10-K.

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

Financial Statement Schedules

The following Consolidated Financial Statements and related footnotes are filed as part of this report:

		i.)		Audited financial statements and related footnotes of Quicksilver Resources Canada Inc. (“QRCI”) for the years ended December 31, 2008, 2007 and 2006. (1)
		ii.)		Consolidated audited financial statements and related footnotes of Cowtown Pipeline Funding Inc. for the years ended December 31, 2008, 2007 and 2006. (1)
		iii.)		Consolidated audited financial statements and related footnotes of Quicksilver Gas Services Holdings LLC for the years ended December 31, 2008, 2007 and 2006. (1)
		iv.)		Consolidated audited financial statements and related footnotes of Quicksilver’s equity method investment in BreitBurn Energy Partners L.P. (“BBEP”). (2)

QUICKSILVER RESOURCES CANADA INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ending December 31, 2008, 2007 and 2006

		Page
Independent Auditors’ Report			2
Consolidated Balance Sheets as of December 31, 2008 and 2007			3
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2008, 2007 and 2006			4
Consolidated Statements of Stockholder’s Equity for the Years Ended December 31, 2008, 2007 and 2006			5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006			6
Notes to Consolidated Financial Statements for the Years Ended December 31, 2008, 2007 and 2006			7

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholder of
Quicksilver Resources Canada Inc.
Fort Worth, Texas

We have audited the accompanying consolidated balance sheets of Quicksilver Resources Canada Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income and comprehensive income, stockholder’s equity and of cash flows for each of the three years in the period ended December 31, 2008. These financial statements 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 of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of Quicksilver Resources Canada Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared from the separate records maintained by Quicksilver Resources Inc. and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated entity. Portions of certain expenses represent allocations made from, and are applicable to, Quicksilver Resources Inc. as a whole.

Fort Worth, Texas
May 29, 2009

		2008				2007
ASSETS
Current assets
Cash and cash equivalents		$	866			$	89
Accounts receivable — net of allowance for doubtful accounts			29,169				38,648
Advances to Quicksilver			30				118
Derivative assets at fair value			59,245				419
Other current assets			13,063				18,739
Total current assets			102,373				58,013
Investment in equity affiliate at cost			68,604				—
Property, plant and equipment
Oil and gas properties, full cost method (including unevaluated costs of $9,832 and $21,170, respectively)			437,563				533,401
Other property and equipment			42,585				38,566
Property, plant and equipment — net			480,148				571,967
Other assets			910				1,205
		$	652,035			$	631,185
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
Accounts payable		$	19,587			$	9,396
Accrued liabilities			7,612				21,679
Derivative liabilities at fair value			1,865				—
Deferred income taxes			15,843				62
Total current liabilities			44,907				31,137
Long-term debt			252,868				310,710
Asset retirement obligations			17,608				14,278
Deferred income taxes			56,948				46,572
Stockholder’s equity
Common stock			1,817				1,817
Paid in capital in excess of par value			28,118				28,118
Accumulated other comprehensive income			33,809				43,870
Retained earnings			215,960				154,683
Total stockholder’s equity			279,704				228,488
		$	652,035			$	631,185

The accompanying notes are an integral part of these consolidated financial statements.

		2008				2007				2006
Revenue
Natural gas, NGL and crude oil		$	181,994			$	154,372			$	117,831
Other			4,840				6,174				721
Total revenue			186,834				160,546				118,552
Operating expenses
Oil and gas production expense			38,153				35,931				26,237
Depletion, depreciation and accretion			44,821				39,287				29,012
General and administrative			3,673				2,499				1,790
Total expenses			86,647				77,717				57,039
Operating income			100,187				82,829				61,513
Other income (expense) — net			(2,994	)			(427	)			108
Interest expense			(13,978	)			(14,773	)			(12,593	)
Income before income taxes			83,215				67,629				49,028
Income tax expense			(21,938	)			(11,129	)			(8,777	)
Net income		$	61,277			$	56,500			$	40,251
Other comprehensive income
Reclassification adjustments related to settlements of derivative contracts — net of income tax			160				(18,043	)			(6,030	)
Net change in derivative fair value — net of income tax			38,478				5,012				33,747
Foreign currency translation adjustment			(48,699	)			29,018				(1,236	)
Comprehensive income		$	51,216			$	72,487			$	66,732

The accompanying notes are an integral part of these consolidated financial statements.

										Accumulated
						Additional				Other
		Common				Paid-in				Comprehensive				Retained
		Stock				Capital				Income				Earnings				Total
Balances at December 31, 2005		$	1,817			$	28,118			$	1,402			$	57,932			$	89,269
Net income			—				—				—				40,251				40,251
Hedge derivative contract settlements reclassified into earnings from accumulated other comprehensive income, net of income tax of $3,636			—				—				(6,030	)			—				(6,030	)
Net change in derivative fair value, net of income tax benefit of $17,884			—				—				33,747				—				33,747
Foreign currency translation adjustment			—				—				(1,236	)			—				(1,236	)
Balances at December 31, 2006		$	1,817			$	28,118			$	27,883			$	98,183			$	156,001
Net income			—				—				—				56,500				56,500
Hedge derivative contract settlements reclassified into earnings from accumulated other comprehensive income, net of income tax of $7,550			—				—				(18,043	)			—				(18,043	)
Net change in derivative fair value, net of income tax benefit of $2,229			—				—				5,012				—				5,012
Foreign currency translation adjustment			—				—				29,018				—				29,018
Balances at December 31, 2007		$	1,817			$	28,118			$	43,870			$	154,683			$	228,488
Net income			—				—				—				61,277				61,277
Hedge derivative contract settlements reclassified into earnings from accumulated other comprehensive income, net of income tax benefit of $65			—				—				160				—				160
Net change in derivative fair value, net of income tax of $15,715			—				—				38,478				—				38,478
Foreign currency translation adjustment			—				—				(48,699	)			—				(48,699	)
Balances at December 31, 2008		$	1,817			$	28,118			$	33,809			$	215,960			$	279,704

The accompanying notes are an integral part of these consolidated financial statements.

		2008				2007				2006
Operating activities:
Net income		$	61,277			$	56,500			$	40,251
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation and accretion			44,821				39,287				29,012
Deferred income tax expense			21,938				11,129				8,777
Non-cash loss from hedging and derivative activities			(2,544	)			(193	)			—
Loss from the sale of equipment			—				—				936
Non-cash interest expense			295				297				316
Changes in assets and liabilities
Accounts receivable			9,479				9,763				2,503
Advances to/from Quicksilver			88				(446	)			(8,326	)
Other assets			2,324				(3,318	)			487
Accounts payable			1,977				(78	)			(2,928	)
Accrued liabilities			(2,650	)			(447	)			3,567
Net cash provided by operating activities			137,005				112,494				74,595
Investing activities:
Purchases of property, plant and equipment			(136,057	)			(147,195	)			(131,470	)
Proceeds from sales of property, plant and equipment			618				—				3,778
Net cash used for investing activities			(135,439	)			(147,195	)			(127,692	)
Financing activities:
Issuance of debt			208,161				218,321				56,182
Repayment of debt			(209,734	)			(190,691	)			(9,908	)
Debt issuance costs			—				(664	)			—
Net cash (used for) provided by financing activities			(1,573	)			26,966				46,274
Effect of exchange rate changes in cash			784				5,423				(514	)
Net increase (decrease) in cash			777				(2,312	)			(7,337	)
Cash and cash equivalents at beginning of period			89				2,401				9,738
Cash and cash equivalents at end of period		$	866			$	89			$	2,401

The accompanying notes are an integral part of these consolidated financial statements.

     Quicksilver Resources Canada Inc. (“QRCI “or the “Company”) was previously called MGV Energy Inc., which was formed upon the amalgamation of MGV Energy Inc., Gatens Holdings Inc. and Voneiff Holdings Inc. on August 19, 1999 under the Alberta Business Corporations Act. The name was changed to Quicksilver Resources Canada Inc. on April 10, 2006. QRCI is a wholly-owned subsidiary of Quicksilver Resources Inc. (“Quicksilver” or the “parent company”). QRCI is engaged in the exploration, development and production of petroleum and natural gas reserves.

     A wholly-owned subsidiary of QRCI was dissolved December 15, 2006. The subsidiary did not hold any assets at the time of dissolution. Prior to this date, the financial statements of QRCI were consolidated and included the accounts of the Company and its subsidiary. We eliminate all inter-company balances and transactions in preparing consolidated financial statements. QRCI accounts for its ownership in unincorporated partnerships and companies under the cost method as it has significant influence over those entities, but because of terms of the ownership agreements, it does not meet the criteria for control which would trigger consolidation of the entities. QRCI also consolidates its share of oil and gas joint ventures.

     The QRCI financial statements presented herein have been translated from Canadian dollars to U.S. dollars as QRCI uses the Canadian dollar as its functional currency. Unless otherwise noted, all financial information presented herein is reported in U.S. dollars.

     The preparation of financial statements in conformity with GAAP in the U.S. requires QRCI’s management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses, including stock compensation expense, during each reporting period. QRCI’s management believes its estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties, which may cause actual results to differ materially from QRCI’s estimates. Significant estimates underlying these financial statements include the estimated quantities of proved natural gas, NGL and crude oil reserves used to compute depletion expense and future net cash flows from reserve production, estimates of current revenue based upon expectations for actual deliveries and prices received, the estimated fair value of financial derivative instruments and the estimated fair value of asset retirement obligations.

     Cash equivalents consist of time deposits and liquid debt investments with original maturities of three months or less at the time of purchase.

     The Company’s customers are natural gas, NGL and crude oil purchasers. Each customer and/or counterparty of the Company is reviewed as to credit worthiness prior to the extension of credit and on a regular basis thereafter. Although the Company does not require collateral, appropriate credit ratings are required and, in some instances, parental guarantees are obtained. Receivables are generally due in 30-60 days. When collections of specific amounts due are no longer reasonably assured, an allowance for doubtful accounts is established.

     Quicksilver enters into financial derivative instruments on behalf of QRCI to mitigate risk associated with the prices received from its natural gas, NGL and crude oil production. All derivatives are recognized as either an asset or liability on the balance sheet measured at their fair value determined by reference to published future market prices and interest rates. For derivatives instruments that qualify as cash flow hedges, the effective portions of gains and losses are deferred in other comprehensive income and recognized in revenue or interest expense in the period in which the hedged transaction is recognized. Gains or losses on derivative instruments terminated prior to their original expiration date are deferred and

recognized as earnings during the period in which the hedged transaction is recognized. If the hedged transaction becomes probable of not occurring, the deferred gain or loss would be immediately recorded to earnings. Changes in value of ineffective portions of hedges, if any, are recognized currently as a component of other revenue.

Parts and Supplies

     Parts and supplies consist of well equipment, spare parts and supplies carried on a first-in, first-out basis at the lower of cost or market.

     QRCI accounts for its preferred interests in 1373159 Alberta Ltd. using the cost method. QRCI carries the investment at historical cost and reviews the investment for impairment whenever circumstances or events indicate that the investment’s carrying value will not be recoverable.

Property, Plant, and Equipment

     QRCI follows the full cost method in accounting for its oil and gas properties. Under the full cost method, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized and accumulated in a country-wide cost center. This includes any internal costs that are directly related to development and exploration activities, but does not include any costs related to production, general corporate overhead or similar activities. Proceeds received from disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production method, based on proved oil and gas reserves. Excluded from amounts subject to depletion are costs associated with unevaluated properties.

     Under the full cost method, net capitalized costs are limited to the lower of unamortized cost reduced by the related net deferred tax liability and asset retirement obligations or the cost center ceiling. The cost center ceiling is defined as the sum of (i) estimated future net revenue, discounted at 10% per annum, from proved reserves, based on unescalated year-end prices and costs, adjusted for contract provisions, financial derivatives that hedge QRCI’s oil and gas revenue and asset retirement obligations, (ii) the cost of properties not being amortized, (iii) the lower of cost or market value of unproved properties included in the cost being amortized less (iv) income tax effects related to differences between the book and tax basis of the natural gas and crude oil properties. If the net book value reduced by the related net deferred income tax liability and asset retirement obligations exceeds the cost center ceiling limitation, a non-cash impairment charge is required.

     All other properties and equipment are stated at original cost and depreciated using the straight-line method based on estimated useful lives ranging from five to forty years.

Revenue Recognition

     Revenue is recognized when title to the products transfer to the purchaser. QRCI uses the “sales method” to account for its production revenue, whereby QRCI recognizes revenue on all natural gas, NGL or crude oil sold to its purchasers, regardless of whether the sales are proportionate to the Company’s ownership in the property. A receivable or liability is recognized only to the extent that the Company has an imbalance on a specific property greater than the expected remaining proved reserves. As of December 31, 2008 and 2007, QRCI’s aggregate production imbalances were not material.

Environmental Compliance and Remediation

     Environmental compliance costs, including ongoing maintenance and monitoring, are expensed as incurred. Environmental remediation costs, which improve the condition of a property, are capitalized.

Income Taxes

     Deferred income taxes are established for all temporary differences between the book and the tax basis of assets and liabilities. In addition, deferred tax balances must be adjusted to reflect tax rates expected to be in effect in years in which the temporary differences reverse.

Stock-based Compensation

     The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors based on their estimated fair value. At the discretion of Quicksilver’s board of directors, QRCI may issue awards payable in cash. For all awards, QRCI recognizes the expense associated with the awards over the vesting period. The liability for fair value of cash awards is reassessed at every balance sheet date, such that the vested portion of the liability is adjusted to reflect revised fair value through compensation expense.

     QRCI’s financial instruments include cash, time deposits, accounts receivable, notes payable, accounts payable, long-term debt and financial derivatives. The fair value of long-term debt is estimated at the present value of future cash flows discounted at rates consistent with comparable maturities for credit risk. The carrying amounts reflected in the balance sheet for financial assets classified as current assets and the carrying amounts for financial liabilities classified as current liabilities are recorded at cost which approximates fair value. SFAS No. 157, Fair Value Measurements, was adopted on January 1, 2008 and applied to fair value measurements of the Company’s financial instruments, including its financial derivative instruments. Additional information regarding the Company’s implementation of the accounting standard is found under “Recently Issued Accounting Standards” in this Note.

     The Company uses the Canadian dollar as its functional currency. All balance sheet accounts of QRCI are translated into U.S. dollars at the period-end rate of exchange and statement of income items are translated at the weighted average exchange rates for the period. The resulting translation adjustments are made directly to a component of accumulated other comprehensive income within stockholder’s equity. Gains and losses from foreign currency transactions are included in the statement of income.

•

Pronouncements Implemented During 2008

     Adoption of SFAS No. 157 — SFAS No. 157, Fair Value Measurements, was issued by the FASB in September 2006. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurement. No new requirements are included in SFAS No. 157, but application of the Statement has changed current practice. On February 12, 2008, the FASB issued FASB Staff Position 157-2 (“FSP 157-2”) which delayed the effective date of SFAS No. 157 for non-financial assets and liabilities. The delay allows companies additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS No. 157. FSP FAS 157-3 was issued by the FASB on October 10, 2008 to clarify application of SFAS No. 157 when determining the fair value of a financial asset when the market for that financial asset is not active. QRCI adopted SFAS No. 157 on January 1, 2008 for new fair value measurements of financial instruments, including its derivative instruments, and recurring fair value measurements of non-financial assets and liabilities. All financial instruments are measured using inputs from three levels of fair value hierarchy. The three levels are as follows:

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 inputs are unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing an asset or liability.

     Adoption of SFAS No. 159 — In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. While SFAS No. 159 became effective on January 1, 2008, QRCI did not elect the fair value measurement option for any of its financial assets or liabilities.

     Adoption of FSP FIN 39-1 — On April 30, 2007, the FASB issued FASB Staff Position (“FSP”) FIN 39-1, Amendment of FASB Interpretation No. (“FIN”) 39. The FSP amends GAAP to replace the terms “conditional contracts” and “exchange contracts” with the term “derivative instruments” as defined in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. It also amends paragraph 10 of Interpretation 39 to permit a reporting entity to offset fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. QRCI adopted FSP FIN 39-1 on January 1, 2008 without significant impact.

     Adoption of SFAS No. 162 — In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements in conformity with GAAP in the United States. This Statement is generally viewed as a necessary step in the ultimate convergence of global accounting rules. This Statement became effective on November 15, 2008, but had no impact on QRCI’s financial statements or related disclosures.

•

Pronouncements Not Yet Implemented

     SFAS No. 141 (revised 2007), Business Combinations, “SFAS No. 141(R)” was issued in December 2007. SFAS No. 141(R) replaces SFAS No. 141, Business Combinations, while retaining its fundamental requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) defines the acquirer as the entity that obtains control in the business combination and it establishes the criteria to determine the acquisition date. SFAS No. 141(R) applies to all transactions and events in which one entity obtains control over one or more other businesses. The Statement also requires an acquirer to recognize the assets acquired and liabilities assumed measured at their fair values as of the acquisition date. In addition, acquisition costs are required to be recognized as period expenses as incurred. The Statement will apply to any acquisition entered into after January 1, 2009, but otherwise had no effect on QRCI’s financial statements upon adoption.

     The FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, in March 2008. Under SFAS No. 161, the Company will be required to disclose the fair value of all derivative and hedging instruments and their gains or losses in tabular format and information about credit risk-related features in derivative agreements, counterparty credit risk, and its strategies and objectives for using derivative instruments. SFAS No. 161 was adopted with prospective application by the Company on January 1, 2009. The adoption of SFAS No. 161 will change the Company’s disclosures about its derivative and hedging instruments, but had no impact on the Company’s previously reported results or financial position.

     Accounts receivable consisted of the following:

		As of December 31,
		2008				2007
		(In thousands)
Accrued production receivables		$	13,435			$	19,728
Joint interest receivables			15,386				16,150
Other receivables			348				2,770
		$	29,169			$	38,648

     In accordance with the fair value hierarchy described in SFAS No. 157, the following table shows the fair value of QRCI’s financial assets and liabilities that are required to be measured at fair value as of December 31, 2008.

		Fair Value Measurements as of December 31, 2008
																		Balance Sheet
		Level 1				Level 2				Level 3				Other(1)				Total
		(in thousands)
Derivative assets		$	—			$	61,746			$	—			$	(2,501	)		$	59,245
Derivative liabilities		$	—			$	4,366			$	—			$	(2,501	)		$	1,865

     The change in carrying value of QRCI’s derivatives and the contractual fixed-price sale commitments in the Company’s balance sheet since December 31, 2007 principally resulted from the decrease in market prices for natural gas to the prices in our derivative instruments and, to a lesser degree, from settlements made during 2008. The change in fair value of the effective portion of all cash flow hedges was reflected in accumulated other comprehensive income, net of deferred tax effects. QRCI recognized $2.5 million and $0.2 million of net gains in other revenue as the result of derivative hedge ineffectiveness for the years ended 2008 and 2007, respectively. QRCI had no gains or losses resulting from derivative hedge ineffectiveness during 2006.

     The estimated fair values of all derivatives of QRCI as of December 31, 2008 and 2007 are provided below. The associated carrying values of these derivatives are equal to the estimated fair values for each period presented. The assets and liabilities recorded in the balance sheet are netted where derivatives with both gain and loss positions are held by a single third party where rights of offset exists.

		Asset Derivatives									Liability Derivatives
		December 31,									December 31,
		2008				2007					2008				2007
		(in thousands)									(in thousands)
Derivatives designated as hedging instruments under SFAS 133
Commodity contracts reported in:
Current derivative assets		$	61,746			$	1,643				$	2,501			$	1,224
Current derivative liabilities			—				—					1,865				—
Total derivatives designated as hedging instruments under SFAS 133		$	61,746			$	1,643				$	4,366			$	1,224

     All hedge derivative assets and liabilities have been classified as current at December 31, 2008 based on the maturity of the derivative instruments, resulting in $38.8 million of after-tax gains expected to be reclassified from accumulated other comprehensive income in 2009.

     The following table summarizes the open derivative positions that hedged QRCI’s natural gas production as of December 31, 2008:

															Weighted Avg Price Per
Product			Type				Contract Period				Volume				MMBtu (1)				Fair Value
											(MMBtud)								(In thousands)
Gas			Swap				Jan 2009-Dec 2009					10,000			$	8.45			$	8,536
Gas			Swap				Jan 2009-Dec 2009					20,000				8.46				17,110
Gas			Collar				Jan 2009-Dec 2009					10,000				8.25-10.45				8,290
Gas			Collar				Jan 2009-Dec 2009					10,000				8.25-10.45				8,290
Gas			Collar				Jan 2009-Dec 2009					10,000				11.50-14.48				19,520
Gas			Basis				Jan 2009-Dec 2009					20,000				(2	)			(1,865	)
Gas			Basis				Jan 2009-Dec 2009					20,000				(2	)			(932	)
Gas			Basis				Jan 2009-Dec 2009					15,000				(2	)			(799	)
Gas			Basis				Jan 2009-Dec 2009					15,000				(2	)			(770	)
															Total				$	57,380

     Other current assets consisted of the following:

		As of December 31,
		2008				2007
		(In thousands)
Spare parts and supplies		$	11,399			$	14,751
Prepaid expenses			1,664				3,988
		$	13,063			$	18,739

     On February 4, 2008, QRCI sold its rights and interest in certain oil and gas leases, purchased by QRCI in November 2007, to 1373159 Alberta Ltd. (“1373159”) for consideration of 10 million fully paid, non-assessable, non-voting Series 1 Preferred Shares of 1373159 having an aggregate redemption price of approximately Canadian $30 million. In June 2008, QRCI sold its rights and interests in additional oil and gas leases, purchased by QRCI in March 2008, to 1373159 for consideration of 10 million fully paid, non-assessable, non-voting Series 2 Preferred Shares of 1373159, having an aggregate redemption price of approximately Canadian $53 million. Quicksilver owned 100% of 1373159, which was subsequently amalgamated by QRCI, effective January 1, 2009.

     Property and equipment consisted of the following:

		December 31,				December 31,
		2008				2007
		(In thousands)
Oil and gas properties
Subject to depletion		$	547,249			$	616,192
Unevaluated costs			9,832				21,170
Accumulated depletion			(119,518	)			(103,961	)
Net oil and gas properties			437,563				533,401
Other plant and equipment
Pipelines and processing facilities			51,005				45,213
General properties			3,722				4,240
Accumulated depreciation			(12,142	)			(10,887	)
Net other property and equipment			42,585				38,566
Property, plant and equipment, net of accumulated depletion and depreciation		$	480,148			$	571,967

     Under full cost accounting, QRCI excludes certain unevaluated costs from the amortization base pending determination of whether proved reserves have been discovered or impairment has occurred. A summary of QRCI’s unevaluated properties excluded from natural gas and crude oil properties being amortized at December 31, 2008 and 2007 and the year in which they were incurred is as follows:

		December 31, 2008												December 31, 2007
		Costs Incurred During												Costs Incurred During
		2008				Prior				Total				2007				2006				2005				Prior				Total
		(In thousands)												(In thousands)
Acquisition costs		$	—			$	—			$	—			$	626			$	720			$	575			$	7,085			$	9,006
Exploration costs			9,218				—				9,218				12,164				—				—				—				12,164
Capitalized interest			614				—				614				—				—				—				—				—
Total		$	9,832			$	—			$	9,832			$	12,790			$	720			$	575			$	7,085			$	21,170

     Costs are transferred into the amortization base on an ongoing basis, as the projects are evaluated and proved reserves established or impairment determined. Pending determination of proved reserves attributable to the above costs, QRCI cannot assess the future impact on the amortization rate.

     Capitalized overhead costs that directly relate to QRCI’s exploration and development activities were $4.4 million, $4.6 million and $1.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.

     Accrued liabilities consisted of the following:

		As of December 31,
		2008				2007
		(In thousands)
Accrued operating expenses		$	3,881			$	5,985
Accrued capital expenditures			—				11,417
Revenue payable			2,887				3,545
Prepayments from partners			844				732
		$	7,612			$	21,679

     Quicksilver’s Senior Secured Credit Facility matures February 9, 2012, but has the option for Quicksilver to extend the maturity up to two additional years with lender approval. The facility provides for revolving loans, swingline loans and letters of credit from time to time in an aggregate amount not to exceed the borrowing base, which is calculated based on several factors. The borrowing base is subject to at least annual redeterminations. In September 2008, the lenders agreed to a borrowing base of $1.2 billion. The lenders also agreed to $1.2 billion of revolving credit commitments and, with lender approval, the Company has an option to increase the facility to $1.45 billion. The lenders’ commitments under the facility are allocated between U.S. and Canadian funds, with the U.S. currency available for borrowing by U.S. subsidiaries and either U.S. or Canadian currency available for borrowing by QRCI. QRCI borrowings under the facility are guaranteed by Quicksilver and most of Quicksilver’s domestic subsidiaries and are secured by, among other things, QRCI’s, Quicksilver’s and certain of Quicksilver’s domestic subsidiaries’ oil and gas properties and quantities of proved reserves of natural gas, NGLs and crude oil attributable to them.

     At December 31, 2008, QRCI’s allocated borrowing base was $300 million with approximately $45 million of available borrowing capacity. All interest accrued on the facility must be paid quarterly, but there is no fixed payment schedule. Borrowings under the facility bear interest at the lender’s prime rate. In April 2009, the lenders affirmed Quicksilver’s borrowing base at $1.2 billion and the interest spreads under the facility were revised upward. QRCI’s portion of the borrowing base remained at $300 million.

     QRCI records the fair value of the liability for asset retirement obligations in the period in which it is legally or contractually incurred. Upon initial recognition of the asset retirement liability, an asset retirement cost is capitalized by increasing the carrying amount of the asset by the same amount as the liability. In periods subsequent to initial measurement, the asset retirement cost is recognized as expense through depletion or depreciation over the asset’s useful life. Changes in the liability for the asset retirement obligations are recognized for (a) the passage of time and (b) revisions to either the timing or the amount of estimated cash flows. Accretion expense is recognized for the impacts of increasing the discounted fair value to its estimated settlement value.

     The following table provides a reconciliation of the changes in the estimated asset retirement obligation from January 1, 2007 through December 31, 2008.

		December 31,				December 31,
		2008				2007
		(In thousands)
Beginning asset retirement obligations		$	14,278			$	10,117
Incremental liability incurred			1,651				1,586
Accretion expense			830				664
Change in estimates			3,928				—
Currency translation adjustment			(3,079	)			1,911
Ending asset retirement obligations		$	17,608			$	14,278

     Tax rate reductions were enacted during 2007 and 2006 by the Canadian federal government and by Alberta Province. The Company’s Canadian deferred income tax balances were revalued to reflect the changes in these tax rates. The Company recorded $6.3 million and $3.2 million of income tax benefits in 2007 and 2006, respectively, as a result of the enactment of Canadian rate reductions. No further rate changes were enacted in 2008. Significant components of the QRCI’s deferred tax assets and liabilities as of December 31, 2008 and 2007 are as follows:

		As of December 31,
		2008				2007
		(In thousands)
Current
Deferred tax liability on cash flow hedge gains		$	15,843			$	62
Non-current
Deferred tax assets
Net operating loss carry forwards		$	1,644			$	2,033
Total deferred tax assets			1,644				2,033
Deferred tax liabilities
Property, plant and equipment			57,858				48,498
Other			734				107
Total deferred tax liabilities			58,592				48,605
Net deferred tax liabilities		$	56,948			$	46,572

     The components of income tax expense for 2008, 2007 and 2006 are as follows:

		2008				2007				2006
		(In thousands)
Current income tax expense		$	—			$	—			$	—
Deferred income tax expense			21,938				11,129				8,777
Total income tax expense		$	21,938			$	11,129			$	8,777

     The following table reconciles the statutory federal income tax rate to the effective tax rate for 2008, 2007 and 2006

		2008				2007				2006
Income taxes at statutory rate			29.00	%			32.12	%			34.12	%
Enacted future federal rate reductions			(3.96	%)			(7.08	%)			(5.12	%)
Enacted future rate reductions effects for prior years			—				(9.35	%)			(6.62	%)
Permanent differences			1.44	%			0.77	%			(4.48	%)
Other			(0.12	%)			—				—
Effective income tax rate			26.36	%			16.46	%			17.90	%

     QRCI pays Quicksilver for allocations of general and administrative expenses and salary, travel costs and other invoices paid by Quicksilver on the Company’s behalf. During 2008, 2007 and 2006, QRCI paid Quicksilver $3.7 million, $2.5 million and $1.8 million for its portion of general and administrative expenses allocated by Quicksilver. Amounts required for settlement of QRCI’s financial derivatives are paid or received and subsequently settled between Quicksilver and the Company. During 2008, QRCI paid Quicksilver $0.2 million for settlement of derivatives. For 2007 and 2006, Quicksilver paid QRCI $25.6 million and $9.7 million for these settlements. In 2007, QRCI received $11.5 million for the sales of natural gas to Quicksilver. All related party transactions occur in the normal course of business.

     QRCI has a retirement plan available to all Canadian employees. The plan provides for a match of employees’ contributions by the Company and a fixed annual contribution. Expenses associated with QRCI contributions were $0.8 million, $0.7 million and $0.5 million for 2008, 2007 and 2006, respectively.

     QRCI leases office space and other property under operating leases. Future minimum lease payments, for operating leases with initial non-cancelable lease terms in excess of one year as of December 31, 2008, were as follows:

in thousands
2009		$	1,246
2010			369
2011			41
Thereafter			—
		$	1,656

     Rent expense for operating leases with terms exceeding one month was $1.8 million in 2008, $1.5 million in 2007 and $0.9 million in 2006.

     QRCI had approximately $2.6 million in letters of credit to fulfill contractual, legal or regulatory requirements. All letters of credit have annual renewable options.

     QRCI is involved in various claims arising in the normal course of business. While the outcome of these matters is uncertain there can be no assurance that such matter will be resolved in the Company’s favor. QRCI does not currently believe that a material adverse outcome is likely related to these matters.

		Shares				Book
		Issued				Value
						(In thousands)
Unlimited number of Class A common voting shares			—			$	—
Unlimited number of Class B common voting shares			2,495,646				1,785
Unlimited number of Class C common non-voting, exchangeable shares			394,482				32
Balance at December 31, 2008 and 2007			2,890,128			$	1,817

     QRCI Class C common shares are exchangeable on a one-for-one basis for Quicksilver common shares. Class C common shares are entitled to preference over the Class B common shares upon certain events of liquidation or distribution of the assets of the Company.

     Paid in capital in excess of par value at December 31, 2008 and 2007 is comprised of $2.1 million relating to the acquisition of the remaining non-controlling interest in the Company (10.2%) by Quicksilver in 2000, and cash of $26.0 million contributed by Quicksilver.

     Cash paid for interest and income taxes is as follows:

		Years Ended December 31,
		2008				2007				2006
		(In thousands)
Interest		$	14,374			$	15,547			$	13,004
Income taxes			—				—				—

     Other significant non-cash transactions are as follows:

		Years Ended December 31,
		2008				2007				2006
		(In thousands)
Working capital related to acquisition of property, plant and equipment			16,450			$	19,653			$	39,189
Preferred interests in 1373159 Alberta Ltd.			82,542				—				—

16. SUBSEQUENT EVENT

     Under the full cost method in accounting for oil and gas properties, QRCI must perform a quarterly ceiling test for its country-wide cost center. In determining the ceiling limitation, the ceiling test incorporates pricing, costs and discount rates over which management has no influence. The 2009 first quarter Canadian ceiling amount was computed using a natural gas benchmark price of $2.92 per MMBtu and the mandated 10% discount rate. Upon calculation of the present value of QRCI’s natural gas reserves, including its hedge derivatives, the carrying value of its oil and gas properties exceeded the ceiling limit by $109.6 million (pre-tax) which was recorded in the first quarter of 2009.

COWTOWN PIPELINE FUNDING, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Independent Auditors’ Report			19
Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and 2006			20
Consolidated Balance Sheets as of December 31, 2008 and 2007			21
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006			22
Consolidated Statements of Changes in Stockholder’s Equity for the Years ended December 31, 2008, 2007 and 2006			23
Notes to Consolidated Financial Statements for the Years Ended December 31, 2008, 2007 and 2006			24

INDEPENDENT AUDITORS’ REPORT

To the Stockholders of
Cowtown Pipeline Funding, Inc.
Fort Worth, Texas

We have audited the accompanying consolidated balance sheets of Cowtown Pipeline Funding, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, cash flows and changes in stockholder’s equity for each of the three years in the period ended December 31, 2008. These financial statements 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 of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of Cowtown Pipeline Funding, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared from the separate records maintained by Quicksilver Resources Inc. and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated entity. Portions of certain expenses represent allocations made from, and are applicable to, Quicksilver Resources Inc. as a whole.

Fort Worth, Texas
May 29, 2009

		Year Ended December 31,
		2008				2007				2006
Revenues
Gathering and transportation revenue — Quicksilver		$	36,061			$	15,089			$	6,460
Gathering and transportation revenue			6,118				1,773				53
Gas processing revenue — Quicksilver			30,127				16,564				7,342
Gas processing revenue			5,366				1,990				63
Other revenue — Quicksilver			900				525				—
Total revenues			78,572				35,941				13,918
Expenses
Operations and maintenance — Quicksilver			21,638				12,037				7,567
General and administrative — Quicksilver			6,407				3,379				1,278
Depreciation and accretion			15,134				8,146				2,999
Total expenses			43,179				23,562				11,844
Impairment Expense			9,200				—				—
Operating income			26,193				12,379				2,074
Other income			11				236				12
Interest expense			4,154				2,022				—
Income before income taxes			22,050				10,593				2,086
Income tax provision			7,861				3,591				730
Minority interest			4,716				1,092				99
Net income		$	9,473			$	5,910			$	1,257

The accompanying notes are an integral part of these consolidated financial statements.

		December 31,				December 31,
		2008				2007
ASSETS
Current assets
Cash and cash equivalents		$	303			$	1,125
Accounts receivable			2,245				882
Accounts receivable from Quicksilver			—				3,494
Prepaid expenses and other current assets			594				690
Total current assets			3,142				6,191
Properties, plant and equipment, net			489,893				284,885
Deferred tax asset			1,303				6,625
Other assets			1,916				965
		$	496,254			$	298,666
LIABILITIES AND EQUITY
Current liabilities
Current maturities of debt		$	1,375			$	1,100
Accounts payable to Quicksilver			12,173				9,079
Accrued additions to property, plant and equipment			17,433				23,624
Accounts payable and other			1,930				2,425
Current tax payable			10,844				10,844
Total current liabilities			43,755				47,072
Long-term debt			174,900				5,000
Note payable to Quicksilver			52,271				50,569
Asset retirement obligations			5,234				2,793
Deferred gain on sale of subsidiary equity			79,316				79,316
Minority interest			31,287				31,487
Commitments and contingent liabilities (Note 7)
Common stock			1				1
Additional paid in capital			91,834				74,245
Retained earnings			17,656				8,183
Total equity			109,491				82,429
		$	496,254			$	298,666

The accompanying notes are an integral part of these consolidated financial statements.

		Year Ended December 31,
		2008				2007				2006
Operating activities:
Net income		$	9,473			$	5,910			$	1,257
Items included in net income not affecting cash:
Depreciation			14,950				8,063				2,978
Impairment of midstream assets			9,200				—				—
Accretion of asset retirement obligation			184				83				21
Deferred income taxes			7,861				3,591				730
Equity-based compensation			1,017				130				—
Amortization of debt issuance costs			243				88				—
Non-cash interest expense			2,802				1,669				—
Minority interest expense			4,716				1,092				99
Changes in assets and liabilities:
Accounts receivable			(1,363	)			(815	)			(66	)
Prepaid expenses and other assets			(612	)			(543	)			(146	)
Accounts receivable from Quicksilver			4,707				(6,046	)			—
Accounts payable and other			(495	)			1,131				1,138
Net cash provided by operating activities			52,683				14,353				6,011
Investing activities:
Capital expenditures			(148,079	)			(74,064	)			(77,539	)
Other			—				—				(821	)
Net cash used in investing activities			(148,079	)			(74,064	)			(78,360	)
Financing activities:
Proceeds from revolving credit facility borrowings			169,900				5,000				—
Debt issuance costs			(486	)			(1,041	)			—
Repayment of subordinated note payable to Quicksilver			(829	)			—				—
Net proceeds from issuance of equity units			—				112,298				—
Issuance costs of equity units paid			—				(2,933	)			—
Distribution to Quicksilver			(65,367	)			(115,074	)			—
Contributions by Quicksilver			—				68,416				67,855
Contributions by minority interests			—				167				7,291
Distributions to minority interests			(8,644	)			(8,794	)			—
Net cash provided by financing activities			94,574				58,039				75,146
Net increase (decrease) in cash			(822	)			(1,672	)			2,797
Cash at beginning of period			1,125				2,797				—
Cash at end of period		$	303			$	1,125			$	2,797
Cash paid for interest		$	2,341				—				—
Cash paid for income taxes		$	332				—				—
Non-cash transactions:
Working capital related to capital expenditures		$	31,920			$	30,809			$	6,608
Debt issuance costs			—				(12	)			—
Cost in connection with the initial public offering			—				(275	)			—
Issuance of subordinated note payable to Quicksilver			—				50,000				—

The accompanying notes are an integral part of these consolidated financial statements.

										Additional
		Common				Retained				Paid In
		Stock				Earnings				Capital				Total Equity
Balance at January 1, 2006		$	1			$	1,016			$	48,595			$	49,612
Contributions			—				—				71,685				71,685
Cash distributions to Quicksilver			—				—				(4,508	)			(4,508	)
Net income			—				1,257				—				1,257
Balance at December 31, 2006			1				2,273				115,772				118,046
Contributions			—				—				121,157				121,157
Reclass Quicksilver’s equity balance to receivable from Quicksilver			—				—				1,971				1,971
Distribution of subordinated note payable to Quicksilver			—				—				(50,000	)			(50,000	)
Cash distributions to Quicksilver			—				—				(114,655	)			(114,655	)
Net income			—				5,910								5,910
Balance at December 31, 2007			1				8,183				74,245				82,429
Contributions			—				—				82,956				82,956
Cash distributions to Quicksilver			—				—				(65,367	)			(65,367	)
Net income			—				9,473				—				9,473
Balance at December 31, 2008		$	1			$	17,656			$	91,834			$	109,491