Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

QEP measures and discloses fair values in accordance with the provisions of ASC 820 “Fair Value Measurements and Disclosures”. This guidance defines fair value in applying GAAP, establishes a framework for measuring fair value and expands disclosures about fair-value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. ASC 820 also establishes a fair-value hierarchy. Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.

QEP has determined its commodity derivative instruments are Level 2. The Level 2 fair value of commodity derivative contracts (see Note 7 - Derivative Contracts) is based on market prices posted on the NYMEX on the last trading day of the reporting period and industry standard discounted cash flow models. QEP primarily applies the market approach for recurring fair value measurements and maximizes its use of observable inputs and minimizes its use of unobservable inputs. QEP considers bid and ask prices for valuing the majority of its assets and liabilities measured and reported at fair value. In addition to using market data, QEP makes assumptions in valuing its assets and liabilities, including assumptions about risk and the risks inherent in the inputs to the valuation technique. The Company’s policy is to recognize significant transfers between levels at the end of the reporting period.

However, certain of the Company's commodity derivative instruments are valued using industry standard models that consider various inputs, including quoted forward prices for commodities, time value, volatility, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable prices at which transactions are executed in the marketplace. The determination of fair value for derivative assets and liabilities also incorporates nonperformance risk for counterparties and for QEP. Derivative contract fair values are reported on a net basis to the extent a legal right of offset with the counterparty exists.

In addition, QEP has interest rate swaps that it has determined are Level 2. The fair values of the interest rate swaps are determined using the market standard methodology of discounting the future expected cash flows that would occur under the contractual terms of the swap. The variable interest rates used in the calculation of projected cash flows are based on an expectation of future interest rates derived from observable market interest rate curves. QEP incorporates credit valuation adjustments to reflect both its nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. While the credit valuation adjustments are not observable inputs, they are not significant to the overall valuation and the other inputs used to value the interest rate swaps are observable Level 2 inputs.

The fair value of financial assets and liabilities at September 30, 2012, is shown in the table below:

	Fair Value Measurements
	September 30, 2012
	Level 1		Level 2		Level 3		Netting Adjustments			Total
			(in millions)
Financial Assets
Commodity derivative instruments - short-term	$	—	$	199.4	$	—	$	(12.2	)	$	187.2
Commodity derivative instruments - long-term	—		38.2		—		(3.0		)	$	35.2
Total financial assets	$	—	$	237.6	$	—	$	(15.2	)	$	222.4
Financial Liabilities
Commodity derivative instruments - short-term	$	—	$	12.3	$	—	$	(12.2	)	$	0.1
Interest rate swaps - short-term	—		2.6		—		—			$	2.6
Commodity derivative instruments - long-term	—		3.0		—		(3.0		)	$	—
Interest rate swaps - long-term	—		4.1		—		—			$	4.1
Total financial liabilities	$	—	$	22.0	$	—	$	(15.2	)	$	6.8

Fair values related to the Company’s crude oil costless collars were transferred from Level 3 to Level 2 in the second quarter of 2012, due to the enhancements to the Company’s internal valuation process, including the use of observable inputs to assess the fair value. There were no other significant transfers in or out of Levels 1, 2 or 3 for the periods presented herein.

The change in the fair value of Level 3 commodity derivative instruments assets and liabilities for the nine months ended September 30, 2012, is shown below:

	Change in Level 3 Fair Value Measurements
	2012
	(in millions)
Balance at January 1,	$	—
Realized gains and losses	0.6
Unrealized gains and losses	3.8
Settlements	(0.6		)
Transfers out of Level 3	(3.8		)
Balance at September 30,	$	—

The fair value of financial assets and liabilities at December 31, 2011, is shown in the table below:

	Fair Value Measurements
	December 31, 2011
	Level 1		Level 2		Level 3		Netting Adjustments			Total
			(in millions)
Financial Assets
Commodity derivative instruments - short-term	$	—	$	284.1	$	—	$	(10.4	)	$	273.7
Commodity derivative instruments - long-term	—		123.5		—		—			$	123.5
Total financial assets	$	—	$	407.6	$	—	$	(10.4	)	$	397.2
Financial Liabilities
Commodity derivative instruments - short-term	$	—	$	11.7	$	—	$	(10.4	)	$	1.3
Commodity derivative instruments - long-term	—		—		—		—			$	—
Total financial liabilities	$	—	$	11.7	$	—	$	(10.4	)	$	1.3

The following table discloses the fair value and related carrying amount of certain financial instruments not disclosed in other notes to the condensed consolidated financial statements in this quarterly report on Form 10-Q:

	Carrying Amount		Level 1 Fair Value		Carrying Amount		Level 1 Fair Value
	September 30, 2012				December 31, 2011
	(in millions)
Financial liabilities
Checks outstanding in excess of cash balances	$	27.5	$	27.5	$	29.4	$	29.4
Long-term debt	$	3,180.7	$	3,330.4	$	1,679.4	$	1,754.9

The carrying amount of checks outstanding in excess of cash balances approximates fair value. The fair value of fixed-rate long-term debt is based on the trading levels and dollar prices for the Company’s debt at the end of the quarter. The carrying amount of variable-rate long-term debt approximates fair value because the floating interest rate paid on such debt was set for periods of one month.

The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with property, plant and equipment. Significant Level 3 inputs used in the calculation of asset retirement obligations include plugging costs and reserve lives. A reconciliation of the Company’s asset retirement obligations is presented in Note 5 – Asset Retirement Obligations.

Nonrecurring Fair Value Measurements

The provisions of the fair value measurement standard are also applied to the Company’s nonrecurring, non-financial measurements.  The Company utilizes fair value on a non-recurring basis to review its proved oil and gas properties for potential impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such property. During the nine months ended September 30, 2012 and the year ended December 31, 2011, the Company recorded impairments on certain oil and gas properties resulting in a write down of the associated carrying value to fair value. The fair value of the property was measured utilizing the income approach and utilizing inputs which are primarily based upon internally developed cash flow models. Given the unobservable nature of the inputs, proved oil and gas property impairments are considered Level 3 within the fair value hierarchy. During the nine months ended September 30, 2012, the Company recorded $49.3 million of impairments related to some of its proved properties. The proved properties were written down to their estimated fair values of $36.7 million, at the time of impairment.