Derivative Contracts

9 Months Ended

Sep. 30, 2011

Derivative Contracts [Abstract]

Derivative Contracts

Note 9 – Derivative Contracts

QEP uses commodity price derivative instruments in the normal course of business. QEP has established policies and procedures for managing commodity price risks through the use of derivative instruments. The Company follows the provisions of ASC 815 “Derivatives and Hedging,” which require detailed information about derivative transactions including the location and effect on the primary condensed consolidated financial statements.

QEP uses derivative instruments to reduce the impact of downward movements in commodity prices on cash flow, returns on capital, and other financial results. However, these same instruments typically limit future gains from favorable price movements. The volume of production subject to 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 derivative contracts for up to 100% of forecasted production from proved reserves when prices meet return on invested capital and cash flow objectives. QEP does not enter into derivative instruments for speculative purposes.

QEP uses 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 derivative instruments do not require the physical delivery of natural gas, crude oil, or NGL between the parties at settlement. Swap and 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. In the past, QEP Energy has used natural gas basis-only swaps to protect cash flow, project returns, and other financial results from widening natural gas price basis differentials. As of December 31, 2009, all of the Company's natural gas basis-only swaps had been paired with NYMEX gas fixed-price swaps or costless collars and re-designated as cash flow hedges.

QEP generally enters into derivative instruments that do not have margin requirements or collateral provisions that would require payments prior to the scheduled cash settlement dates. 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 by transacting with multiple counterparties.

All derivative instruments are recorded on the balance sheet as either assets or liabilities measured at their fair values. Reported changes in the fair value of derivatives depend upon whether the derivative instrument qualifies for hedge accounting. A derivative instrument qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying unhedged cash flows. Generally, QEP's derivative instruments are matched to company-owned gas, oil and NGL production and are therefore highly effective, thus qualifying as cash flow hedges. Changes in the fair value of effective cash flow hedges are recorded as a component of AOCI in the Condensed Consolidated Balance Sheets and reclassified to earnings as gas, oil and NGL sales when the underlying contract is settled. Gas hedges are typically structured as fixed-price swaps into regional pipelines, locking in basis and hedge effectiveness. Oil hedges are typically structured as NYMEX Calendar fixed-price swaps based at Cushing, Oklahoma. Oil fixed-priced swaps inherently contain ineffectiveness because physical sales are priced at the purchaser's published regional prices. NGL hedges are typically structured as Mont Belvieu, Texas fixed-price swaps.  Since most of our NGL sales are also based upon Mont Belvieu prices, there is no ineffectiveness. Costless collars qualify for cash flow hedge accounting. Basis-only swaps do not qualify for hedge accounting treatment. Changes in the fair value of these derivative instruments subsequent to their re-designation were recorded in AOCI, while changes in their fair value occurring prior to their re-designation were recorded in the Consolidated Statement of Income. QEP regularly reviews the effectiveness of derivative instruments. The ineffective portion of cash flow hedges and the mark-to-market adjustment in the value of basis-only swaps are recognized in the determination of net income. The effects of derivative transactions are summarized in the tables below:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in millions)
Effect of derivative instruments designated as cash flow hedges
Gains (losses) recognized in AOCI for the effective portion of hedges	$	129.6		$	221.4		$	191.1		$	597.3
Gains (losses) reclassified from AOCI into income for the effective portion of hedges
Natural gas sales		71.6			97.6			209.1			240.7
Oil sales		0.9			(1.4	)		1.0			(5.2	)
Gathering, processing and other		(0.3	)		-			(0.3	)		-
Purchased gas and oil sales		-			-			-			-
Purchased gas and oil expense		0.4			0.3			4.3			2.7
Loss recognized in income for the ineffective portion of hedges
Interest and other income		(2.7	)		(0.1	)		(2.6	)		(0.2	)
Effect of derivative instruments not designated as hedges
Unrealized gain on basis-only swaps		27.9			27.9			86.7			90.0
Realized loss on basis-only swaps		(27.9	)		(27.9	)		(86.7	)		(90.0	)

Based on prices as of September 30, 2011, it is estimated that $137.7 million will be settled and reclassified from AOCI to the Consolidated Statements of Income during the next twelve months.

The following table discloses the fair value of derivative contracts on a gross contract basis as opposed to the net contract basis presentation in the Condensed Consolidated Balance Sheets.

	September 30, 2011		December 31, 2010
	(in millions)
Assets
Fixed-price swaps	$	258.1	$	374.6
Costless collars		10.7		37.9
Fair value of derivative instruments - short term	$	268.8	$	412.5
Fixed-price swaps	$	116.4	$	121.1
Costless collars		-		-
Fair value of derivative instruments - long-term	$	116.4	$	121.1
Liabilities
Fixed-price swaps	$	52.2	$	175.2
Costless collars		-		1.6
Basis-only swaps		31.0		117.7
Fair value of derivative instruments - short term	$	83.2	$	294.5
Fixed-price swaps	$	-	$	0.6
Costless collars		-		-
Basis-only swaps		-		-
Fair value of derivative instruments - long-term	$	-	$	0.6

QEP Energy Production

The following table sets forth QEP Energy's volumes and average net-to-the-well prices (see definition below table) for its commodity derivative contracts as of September 30, 2011:

Year	Time period	Quantity	Average Price per Mcf or Bbl, Net to the Well (1)
			(estimated)
	Gas Fixed-price Swaps (Bcf)
2011	3 months	33.8	$4.40
2012	12 months	112.7	4.63
2013	12 months	50.3	5.44
	Gas Costless Collars (Bcf)
			Floor - Ceiling
2011	3 months	7.3	$4.04 - $5.97
	Oil Fixed-price Swaps (Mbbl)
2011	3 months	46.0	$98.00
2012	12 months	915.0	96.10
2013	12 months	182.5	103.80
	Oil Costless Collars (Mbbl)
			Floor - Ceiling
2011	3 months	276.0	$51.73 - $ 102.10

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(1) The fixed-price swap and collar prices are adjusted for basis differential, gathering costs and product quality to determine the net-to-the-well price.

QEP Field Services NGL Volumes

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, 2011:

Year	Time period	Quantity	Average Price per Gallon
Propane Sales Fixed-price Swaps (millions of gallons)
2011	3 months	3.9	$1.45
2012	6 months (1)	7.6	1.45

_____________________

(1) The swaps outstanding as of September 30, 2011, extend through the first six months of 2012.

QEP Marketing Transactions

QEP Marketing enters into commodity derivative transactions to lock in a margin on natural gas volumes placed into storage. The following table sets forth QEP Marketing's volumes and swap prices for its commodity derivative contracts as of September 30, 2011:

Year	Time period	Quantity	Average Price per MMBtu
Gas Sales Fixed-price Swaps (millions of MMBtu)
2011	3 months	2.1	$4.67
2012	12 months	2.7	4.55
2013	12 months	0.9	4.77
Gas Purchases Fixed-price Swaps (millions of MMBtu)
2011	3 months	2.0	$3.85