Derivative Contracts

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Contracts

Derivative Contracts

QEP has established policies and procedures for managing commodity price volatility through the use of derivative instruments. In the normal course of business, QEP uses commodity derivative instruments to reduce the impact of downward movements in commodity prices on cash flow, returns on capital, and other financial results. However, these instruments typically limit gains from favorable price movements. The volume of production subject to commodity derivative instruments and the mix of the instruments are frequently evaluated and adjusted by management in response to changing market conditions. QEP may enter into commodity derivative contracts for up to 100% of forecasted production from proved reserves. In addition, QEP may enter into commodity derivative contracts on a portion of its extracted NGL volumes in its midstream business and a portion of its natural gas sales and purchases for marketing transactions. QEP does not enter into commodity derivative instruments for speculative purposes.

QEP uses commodity derivative instruments known as fixed-price swaps and costless collars to realize a known price or range of prices for a specific volume of production delivered into a regional sales point. Costless collars are combinations of put and call options that have a floor price and a ceiling price and payments are made or received only if the settlement price is outside the range between the floor and ceiling prices. QEP’s commodity derivative instruments do not require the physical delivery of natural gas, crude oil, or NGL between the parties at settlement. Swap and costless collar transactions are settled in cash with one party paying the other for the net difference in prices, multiplied by the contract volume, for the settlement period. Natural gas price derivative instruments are typically structured as fixed-price swaps at regional price indices. Oil price derivative instruments are typically structured as NYMEX fixed-price swaps based at Cushing, Oklahoma. NGL price derivative instruments are typically structured as Mont Belvieu, Texas fixed-price swaps.

QEP enters into commodity derivative transactions that do not have margin requirements or collateral provisions that would require payments prior to the scheduled settlement dates. Commodity derivative contract counterparties are normally financial institutions and energy trading firms with investment-grade credit ratings. QEP routinely monitors and manages its exposure to counterparty risk by requiring specific minimum credit standards for all counterparties and avoids concentration of credit exposure by transacting with multiple counterparties.

Through December 31, 2011, QEP designated the majority of its natural gas, oil and NGL derivative contracts as cash flow hedges, whose unrealized fair value gains and losses were recorded to AOCI. Effective January 1, 2012, QEP elected to de-designate all of its natural gas, crude oil and NGL derivative contracts that were previously designated as cash flow hedges and discontinue hedge accounting prospectively. As a result of discontinuing hedge accounting, the mark-to-market values at December 31, 2011, were fixed in AOCI as of the de-designation date and are being reclassified into the Consolidated Statement of Operations as the transactions settle and affect earnings. At September 30, 2012, AOCI consisted of $182.9 million ($114.9 million after tax) of unrealized gains. QEP expects to reclassify into earnings from AOCI the fixed value related to de-designated natural gas, oil and NGL hedges over the remainder of 2012 and 2013. Currently, QEP recognizes all gains and losses from changes in the fair value of natural gas, oil and NGL derivative contracts immediately in earnings rather than deferring any such amounts in AOCI. All commodity derivative instruments are recorded on the Consolidated Balance Sheets as either assets or liabilities measured at their fair values and  all realized and unrealized gains and losses from derivative instruments incurred after January 1, 2012, are presented in the Consolidated Statement of Operations in “Realized and unrealized gains on derivative contracts” below operating income.

QEP also uses interest rate swaps to mitigate a portion of its exposure to interest rate volatility risk. During the second quarter of 2012, QEP entered into variable-to-fixed interest rate swap agreements having a combined notional principal amount of $300.0 million to minimize the interest rate volatility risk associated with its $300.0 million senior, unsecured term loan. QEP locked in a fixed interest rate in exchange for a variable interest rate indexed to the one-month LIBOR rate. The interest rate swaps settle monthly and will mature in March of 2017.

QEP Energy Derivative Contracts

The following table sets forth QEP Energy’s quantities and average prices for its commodity derivative contracts as of September 30, 2012:

				Swaps		Collars
Year	Type of Contract	Index	Total Volumes	Average price per unit		Floor price		Ceiling price
			(in millions)
Natural gas sales			(MMBtu)
2012	Swap	NYMEX	19.3	$	4.72
2012	Swap	IFPEPL (1)	1.8	$	4.70
2012	Swap	IFNPCR (2)	22.1	$	4.67
2012	Swap	IFCNPTE (3)	2.8	$	2.66
2013	Swap	NYMEX	29.2	$	3.68
2013	Swap	IFNPCR (2)	65.7	$	5.66
Oil sales			(Bbls)
2012	Swap	NYMEX WTI	1.3	$	97.42
2012	Collar	NYMEX WTI	0.4			$	87.50	$	115.36
2013	Swap	NYMEX WTI	5.1	$	98.48
2014	Swap	NYMEX WTI	1.8	$	92.72
NGL sales			(Gals)
2012	Swap	Mt. Belvieu Ethane	3.9	$	0.64
2012	Swap	Mt. Belvieu Propane	5.8	$	1.28

____________________________

⁽¹⁾  Inside FERC monthly settlement index for the Panhandle Eastern Pipeline Company.

⁽²⁾  Inside FERC monthly settlement index for the Northwest Pipeline Corp. Rocky Mountains.

⁽³⁾  Inside FERC monthly settlement index for Centerpoint East.

QEP Field Services Derivative Contracts

QEP Field Services enters into commodity derivative transactions to manage price risk on extracted NGL volumes. The following table sets forth QEP Field Services’ volumes and swap prices for its commodity derivative contracts as of September 30, 2012:

Year	Type of Contract	Index	Total Volumes	Average Swap price per gallon
			(in millions)
NGL sales			(Gals)
2012	Swap	Mt. Belvieu Ethane	3.9	$	0.64
2012	Swap	Mt. Belvieu Propane	1.9	$	1.28

QEP Marketing Derivative Contracts

QEP Marketing enters into commodity derivative transactions to lock in a margin on natural gas volumes placed into storage and for marketing transactions in which QEP Marketing is required to sell gas volumes at a fixed price. The following table sets forth QEP Marketing’s volumes and swap prices for its commodity derivative contracts as of September 30, 2012:

Year	Type of Contract	Index	Total Volumes	Average Swap price per MMBtu
			(in millions)
Natural gas sales			(MMBtu)
2012	Swap	IFNPCR (1)	2.1	$	3.93
2013	Swap	IFNPCR (1)	3.1	$	3.77
Natural gas purchases			(MMBtu)
2012	Swap	IFNPCR (1)	1.5	$	2.76
2013	Swap	IFNPCR (1)	0.1	$	2.59

____________________________

⁽¹⁾  Inside FERC monthly settlement index for the Northwest Pipeline Corp. Rocky Mountains.

QEP Resources Derivative Contracts

In the second quarter of 2012, QEP Resources entered into interest rate swap agreements to effectively lock in a fixed interest rate on debt outstanding under its Term Loan.

The following table sets forth QEP Resources’ notional amounts and interest rates for its interest rate swaps outstanding as of September 30, 2012:

Notional amount	Type of Contract	Maturity	Fixed Rate Paid	Variable Rate Received
(in millions)
$300.0	Swap	March 2017	1.07%	One month LIBOR

QEP Derivative Financial Statement Presentation

The following table presents the balance sheet location of QEP’s outstanding derivative contracts on a gross contract basis as opposed to the net contract basis presentation in the Condensed Consolidated Balance Sheets and the related fair values at the balance sheet dates:

		Gross asset derivative instruments fair value				Gross liability derivative instruments fair value
	Balance Sheet line item	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
		(in millions)				(in millions)
Current:
Commodity	Fair value of derivative contracts	$	199.4	$	284.1	$	12.3	$	11.7
Interest rate swaps	Fair value of derivative contracts	—		—		2.6		—
Long-term:
Commodity	Fair value of derivative contracts	38.2		123.5		3.0		—
Interest rate swaps	Fair value of derivative contracts	—		—		4.1		—
Total derivative    instruments		$	237.6	$	407.6	$	22.0	$	11.7

The effects and location of the change in fair value and settlement of QEP's derivative contracts on the Condensed Consolidated Statements of Operations are summarized in the following tables:

Derivative instruments not designated as cash flow hedges	Location of gain (loss) recognized in earnings	Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
		(in millions)
Realized gain (loss) on commodity derivative contracts
QEP Energy
Natural gas derivative contracts		$	86.2		$	(27.9	)	$	283.8		$	(86.7	)
Oil derivative contracts		2.7			—			2.2			—
NGL derivative contracts		3.4			—			6.5			—
QEP Field Services
NGL derivative contracts		1.9			—			6.3			—
QEP Marketing
Natural gas derivative contracts		(0.4		)	—			3.7			—
Total realized gain (loss) on commodity derivative contracts		93.8			(27.9		)	302.5			(86.7		)
Unrealized gain (loss) on commodity derivative contracts
QEP Energy
Natural gas derivative contracts		(50.6		)	27.9			3.3			86.7
Oil derivative contracts		4.1			—			31.2			—
NGL derivative contracts		(4.4		)	—			3.4			—
QEP Field Services
NGL derivative contracts		(2.5		)	—			2.0			—
QEP Marketing
Natural gas derivative contracts		(1.4		)	—			(0.5		)	—
Total unrealized (loss) gain on commodity derivative contracts		(54.8		)	27.9			39.4			86.7
Total realized and unrealized gain on commodity derivative contracts		$	39.0		$	—		$	341.9		$	—
Realized gain (loss) on interest rate swaps
Realized loss on interest rate swaps		$	(0.6	)	$	—		$	(0.6	)	$	—
Unrealized gain (loss) on interest rate swaps
Unrealized loss on interest rate swaps		(2.3		)	—			(6.6		)	—
Total realized and unrealized loss on interest rate swaps		$	(2.9	)	$	—		$	(7.2	)	$	—
Grand Total	Realized and unrealized gains on derivative contracts	$	36.1		$	—		$	334.7		$	—

Derivative instruments classified as cash flow hedges	Location of gain (loss) recognized in earnings	Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2012		2011			2012		2011
Commodity derivatives		(in millions)
Gain on derivative instruments for the effective portion of hedge recognized in AOCI	Accumulated other comprehensive income	$	—	$	129.6		$	—	$	191.1
Gain reclassified from AOCI into income for effective portion of hedge	Natural gas sales	—		71.6			—		209.1
Gain reclassified from AOCI into income for effective portion of hedge	Oil sales	—		0.9			—		1.0
Gain reclassified from AOCI into income for effective portion of hedge	NGL sales	—		(0.3		)	—		(0.3		)
Gain reclassified from AOCI into income for effective portion of hedge	Marketing sales	—		—			—		—
Gain reclassified from AOCI into income for effective portion of hedge	Marketing purchases	—		0.4			—		4.3
Gain recognized in income for the ineffective portion of hedges	Interest and other income	—		(2.7		)	—		(2.6		)

The Company estimates that derivative contracts that were outstanding in AOCI at September 30, 2012, having a fixed fair value of $97.7 million, will be settled and reclassified from AOCI to the Condensed Consolidated Statements of Operations during the next twelve months.