Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 8 – 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. QEP's Level 2 fair value measurements consist of fixed-price swaps of natural gas, oil and NGL. Level 3 inputs are unobservable inputs for the asset or liability. QEP's Level 3 measurements are made up of costless collars for natural gas and oil. The Level 2 fair value of derivative contracts (see Note 9) 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. The Level 3 fair value of derivative contracts is based on NYMEX market prices in combination with unobservable volatility inputs and industry-standard option pricing 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.

Certain of QEP's derivative instruments, however, 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 a counterparty exists.

QEP did not have any assets or liabilities measured at fair value on a non-recurring basis, other than ARO's, at September 30, 2011, or at December 31, 2010. The fair value of assets and liabilities at September 30, 2011, is shown in the table below:

	Fair Value Measurements September 30, 2011
	Level 2		Level 3		Netting Adjustments			Total
	(in millions)
Assets
Derivative contracts - short term	$	258.1	$	10.7	$	(43.4	)	$	225.4
Derivative contracts - long term		116.4		-		-			116.4
Total assets	$	374.5	$	10.7	$	(43.4	)	$	341.8
Liabilities
Derivative contracts - short term	$	83.2	$	-	$	(43.4	)	$	39.8
Derivative contracts - long term		-		-		-			-
Total liabilities	$	83.2	$	-	$	(43.4	)	$	39.8

The change in the fair value of Level 3 assets and liabilities for the nine months ended September 30, 2011, is shown below:

	Derivative contracts 2011
	(in millions)
Balance at January 1,	$	36.3
Realized gains and losses included in revenues		10.7
Unrealized gains and losses included in other comprehensive income		(25.6	)
Settlements		(10.7	)
Balance at September 30,	$	10.7

The fair value of assets and liabilities at December 31, 2010, is shown in the table below:

	Fair Value Measurements December 31, 2010
	Level 2		Level 3		Netting Adjustments			Total
	(in millions)
Assets
Derivative contracts - short term	$	374.6	$	37.9	$	(155.2	)	$	257.3
Derivative contracts - long term		121.1		-		(0.3	)		120.8
Total assets	$	495.7	$	37.9	$	(155.5	)	$	378.1
Liabilities
Derivative contracts - short term	$	292.9	$	1.6	$	(155.2	)	$	139.3
Derivative contracts - long term		0.6		-		(0.3	)		0.3
Total liabilities	$	293.5	$	1.6	$	(155.5	)	$	139.6

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		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	September 30, 2011				December 31, 2010
	(in millions)
Financial assets
Cash and cash equivalents	$	-	$	-	$	-	$	-
Financial liabilities
Checks outstanding in excess of cash balances		26.7		26.7		19.5		19.5
Long-term debt		1,582.7		1,640.5		1,530.8		1,575.8

The carrying amounts of cash, cash equivalents and checks outstanding in excess of cash balances approximate 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.