Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 6 – 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. At March 31, 2012, the Company does not have Level 1 fair value measurements since it uses a broker to access the futures market. 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 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. The Level 3 fair value of derivative contracts is computed by QEP's risk management group using the Black-Scholes option pricing model with observable inputs from the NYMEX futures prices, LIBOR one year interest rates, credit default swap rates, and unobservable input of volatility computed from historical prices using the Black-Scholes model.

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 and property, plant and equipment values for purposes of determining the impairment calculation, at March 31, 2012, or at December 31, 2011. The fair value of financial assets and financial liabilities at March 31, 2012, is shown in the table below:

	Fair Value Measurements
	March 31, 2012
	Level 2		Level 3		Netting Adjustments			Total
	(in millions)
Financial Assets
Commodity derivative instruments - short-term	$	347.5	$	-	$	(13.7	)	$	333.8
Commodity derivative instruments - long-term		115.8		-		(0.2	)		115.6
Total financial assets	$	463.3	$	-	$	(13.9	)	$	449.4
Financial Liabilities
Commodity derivative instruments - short-term	$	11.6	$	2.1	$	(13.7	)	$	-
Commodity derivative instruments - long-term		0.3		-		(0.2	)		0.1
Total financial liabilities	$	11.9	$	2.1	$	(13.9	)	$	0.1

The change in the fair value of Level 3 commodity derivative instruments assets and liabilities for the three months ended March 31, 2012, is shown below:

	Change in Level 3 Fair Value Measurements
	2012			2011
	(in millions)
Balance at January 1,	$	-		$	36.3
Realized gains and losses		-			17.9
Unrealized gains and losses		(2.1	)		(13.1	)
Settlements		-			(17.9	)
Balance at March 31,	$	(2.1	)	$	23.2

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

	Fair Value Measurements
	December 31, 2011
	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
	March 31, 2012				December 31, 2011
	(in millions)
Financial assets
Cash and cash equivalents	$	-	$	-	$	-	$	-
Financial liabilities
Checks outstanding in excess of cash balances	$	58.6	$	58.6	$	29.4	$	29.4
Long-term debt		1,673.5		1,770.8		1,679.4		1,754.9

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.