Derivative Contracts

9 Months Ended

Sep. 30, 2014

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 price derivative instruments to reduce the impact of potential downward movements in commodity prices on cash flow, returns on capital investment, 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 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 to realize a known price for a specific volume of production delivered into a regional sales point. QEP's commodity derivative instruments do not require the physical delivery of gas, oil, or NGL between the parties at settlement. Swap 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. 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 or oil price swaps that use IntercontinentalExchange, Inc. (ICE), Brent oil prices as the reference price. QEP also enters into crude oil basis swaps to achieve a fixed price swap for a portion of its oil that it sells at prices that reference ICE Brent and Light Louisiana Sweet (LLS).

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.

Effective January 1, 2012, QEP elected to de-designate all of its gas, 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 Accumulated Other Comprehensive Income (AOCI) as of the de-designation date and are being reclassified into the Condensed Consolidated Statements of Operations as the transactions settle and affect earnings. During the nine months endedSeptember 30, 2013, $60.4 million of unrealized gains, after tax, were reclassified from AOCI into the Condensed Consolidated Statements of Operations in "Realized and unrealized losses on derivative contracts" as the transactions settled. All realized and unrealized gains and losses from derivative instruments incurred after January 1, 2012, are presented in the Condensed Consolidated Statements of Operations in "Realized and unrealized losses on derivative contracts" below operating income.

QEP also uses interest rate swaps to mitigate a portion of its exposure to interest rate volatility risk associated with its $600.0 million term loan. For the $300.0 million term loan issued during 2012, QEP locked in a fixed interest rate of 1.07% in exchange for a variable interest rate indexed to the one-month LIBOR. For the incremental $300.0 million borrowed under the term loan during 2014, QEP locked in a fixed interest rate of 0.86%. The average effective interest rate on the $600.0 million term loan when combined with the fixed interest rate swaps for the nine months endedSeptember 30, 2014 was 3.21%. The interest rate swaps settle monthly and will mature in March 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, 2014: 

Year	Type of Contract	Index	Total Volumes	Average Swap price per unit
			(in millions)
Gas sales			(MMBtu)
2014	SWAP	NYMEX	7.4	$	4.22
2014	SWAP	IFNPCR	20.2	$	4.08
2015	SWAP	NYMEX	25.6	$	4.14
2015	SWAP	IFNPCR	11.0	$	4.06
Oil sales			(Bbls)
2014	SWAP	NYMEX WTI	3.1	$	93.54
2015	SWAP	NYMEX WTI	7.7	$	90.04
2015	SWAP	BRENT ICE	0.4	$	104.95
2016	SWAP	NYMEX WTI	0.4	$	90.00

The following table sets forth QEP Energy's oil basis swaps as of September 30, 2014:

Year	Index	Index Less Differential	Total Volumes	Weighted Average Differential
			(in millions)
Oil basis swaps			(Bbls)
2014	NYMEX WTI	ICE Brent	0.2	$	13.78
2014	NYMEX WTI	LLS	0.2	$	4.03
2015	NYMEX WTI	LLS	0.1	$	4.03

QEP Marketing Derivative Contracts

QEP Marketing enters into commodity derivative transactions to lock in a margin on gas volumes placed into storage and for marketing transactions in which QEP Marketing sells 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, 2014:

Year	Type of Contract	Index	Total Volumes	Average Swap price per MMBtu
			(in millions)
Gas sales			(MMBtu)
2014	SWAP	IFNPCR	1.4	$	4.03
2015	SWAP	IFNPCR	2.5	4.07
Gas purchases			(MMBtu)
2014	SWAP	IFNPCR	0.6	$	3.86

QEP's Derivative Contracts

The following table sets forth QEP’s notional amount and interest rate for its interest rate swaps outstanding as of September 30, 2014:

Notional amount	Type of Contract	Maturity	Fixed Rate Paid	Variable Rate Received
(in millions)
$300.0	Swap	March 2017	1.07%	One-month LIBOR
$300.0	Swap	March 2017	0.86%	One-month LIBOR
$600.0			0.96%

QEP Derivative Financial Statement Presentation

The following table identifies the condensed consolidated 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, 2014		December 31, 2013		September 30, 2014		December 31, 2013
		(in millions)				(in millions)
Current:
Commodity	Fair value of derivative contracts	$	36.6	$	5.5	$	4.2	$	29.4
Interest rate swaps	Fair value of derivative contracts	—		—		4.3		2.6
Long-term:
Commodity	Fair value of derivative contracts	9.6		0.4		0.6		—
Interest rate swaps	Fair value of derivative contracts	3.5		0.6		—		—
Total derivative instruments		$	49.7	$	6.5	$	9.1	$	32.0

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

	Three Months Ended						Nine Months Ended
Derivative instruments not designated as cash flow hedges	September 30,						September 30,
	2014			2013			2014			2013
Realized gains (losses) on commodity derivative contracts	(in millions)
QEP Energy
Gas derivative contracts	$	5.5		$	42.5		$	(23.3	)	$	112.0
Oil derivative contracts	(12.2		)	(15.3		)	(50.2		)	(3.7		)
QEP Marketing
Gas derivative contracts	(0.4		)	(0.3		)	(2.4		)	0.7
Total realized gains (losses) on commodity derivative contracts	(7.1		)	26.9			(75.9		)	109.0
Unrealized gains (losses) on commodity derivative contracts
QEP Energy
Gas derivative contracts	27.6			(6.6		)	9.5			(9.6		)
Oil derivative contracts	133.2			(46.2		)	54.3			(49.1		)
QEP Marketing
Gas derivative contracts	0.7			0.1			1.0			(0.3		)
Total unrealized gains (losses) on commodity derivative contracts	161.5			(52.7		)	64.8			(59.0		)
Total realized and unrealized gains (losses) on commodity derivative contracts	$	154.4		$	(25.8	)	$	(11.1	)	$	50.0
Realized gains (losses) on interest rate swaps
Realized losses on interest rate swaps	$	(1.3	)	$	(0.6	)	$	(3.2	)	$	(1.9	)
Unrealized gains (losses) on interest rate swaps
Unrealized gains (losses) on interest rate swaps	2.6			(1.4		)	1.1			3.5
Total realized and unrealized gains (losses) on interest rate swaps	$	1.3		$	(2.0	)	$	(2.1	)	$	1.6
Total net realized gains (losses) on derivative contracts	$	(8.4	)	$	26.3		$	(79.1	)	$	107.1
Total net unrealized gains (losses) on derivative contracts	164.1			(54.1		)	65.9			(55.5		)
Grand Total	$	155.7		$	(27.8	)	$	(13.2	)	$	51.6