Derivative Contracts

3 Months Ended

Mar. 31, 2012

Derivative Contracts [Abstract]

Derivative Contracts

Note 7 – Derivative Contracts

QEP uses commodity price derivative instruments in the normal course of business. QEP has established policies and procedures for managing commodity price volatility through the use of derivative instruments. 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 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. 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 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 derivative transactions that do not have margin requirements or collateral provisions that would require payments prior to the scheduled 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 avoids concentration of credit exposure by transacting with multiple counterparties.

All derivative instruments are recorded on the Condensed Consolidated Balance Sheets as either assets or liabilities measured at their fair values. Reporting changes in the fair value of derivatives depend upon whether the derivative instrument has been designated as a cash flow hedge and 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. Through December 31, 2011, QEP designated most of its natural gas, oil and NGL derivative contracts as cash flow hedges, whose unrealized fair value gains and losses were recorded to Accumulated Other Comprehensive Income (AOCI). Effective January 1, 2012, QEP elected to de-designate all of its natural gas, oil and NGL derivative contracts that had previously been designated as cash flow hedges and discontinue hedge accounting prospectively. As a result, as of January 1, 2012, QEP will recognize 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. At December 31, 2011, AOCI consisted of $395.9 million ($248.6 million after tax) of unrealized gains, representing the mark-to-market value of QEP's cash flow hedges at December 31, 2011, less any ineffectiveness recognized. As a result of discontinuing hedge accounting on January 1, 2012, the mark-to-market values at December 31, 2011 are frozen in AOCI as of the de-designation date and will be reclassified into the statement of income in future periods as the original hedged transactions occur and effect earnings. QEP expects to reclassify into earnings from AOCI the frozen value related to de-designated natural gas, oil and NGL hedges during the remainder of 2012 and in 2013. In addition, in connection with QEP's election to discontinue hedge accounting, all realized and unrealized gains and losses from derivative instruments incurred after January 1, 2012 will be presented in the statement of income in “Realized and unrealized gains on commodity derivative contracts” below operating income.

QEP derivative contracts as a percentage of reported production

The following table details the percentage of reported production subject to commodity price derivative contracts for QEP Energy and QEP Field Services.

	Three Months Ended
	March 31,
	2012			2011
QEP Energy
Natural gas derivative volumes as a percent of QEP Energy natural gas production
Fixed price swaps		60	%		43	%
Costless collars		0	%		12	%
Oil derivative volumes as a percent of QEP Energy oil production
Fixed price swaps		37	%		0	%
Costless collars		15	%		35	%
NGL derivative volumes as a percent of QEP Energy NGL production
Fixed price swaps		16	%		0	%
Costless collars		0	%		0	%
QEP Field Services
Ethane derivative volumes as a percent of ethane volumes - QEP Field Services
Fixed price swaps		13	%		0	%
Propane derivative volumes as a percent of propane volumes - QEP Field Services
Fixed price swaps		71	%		0	%

QEP Energy Outstanding Derivative Contracts

The following table sets forth QEP Energy's volumes and average prices for its commodity derivative contracts as of March 31, 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		57.8	$	4.72
2012	Swap	IFPEPL (1)		6.1		4.47
2012	Swap	IFNPCR (2)		65.4		4.69
2012	Swap	IFCNPTE (3)		7.7		2.67
2013	Swap	NYMEX		29.2		3.68
2013	Swap	IFNPCR (2)		65.7		5.66
Oil sales			(Bbls)
2012	Swap	NYMEX WTI		1.4	$	97.03
2012	Collar	NYMEX WTI		1.1			$	87.50	$	115.36
2013	Swap	NYMEX WTI		0.2		105.80
NGL sales			(Gals)
2012	Swap	Mt. Belvieu Ethane		11.6	$	0.64
2012	Swap	Mt. Belvieu Propane		17.3	$	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 Outstanding 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 March 31, 2012:

Year	Type of Contract	Index	Total Volumes		Average Swap price per gallon
			(in millions)
NGL sales			(Gals)
2012	Swap	Mt. Belvieu Ethane		11.6	$	0.64
2012	Swap	Mt. Belvieu Propane		9.6	$	1.35

QEP Marketing Outstanding Derivative Contracts

QEP Marketing enters into commodity derivative transactions to lock in a margin on natural gas volumes placed into storage and to lock in a fixed price for some of its customers. The following table sets forth QEP Marketing's volumes and swap prices for its commodity derivative contracts as of March 31, 2012:

Year	Type of Contract	Index	Total Volumes		Average Swaps price per MMBtu
			(in millions)
Natural gas sales			(MMBtu)
2012	Swaps	IFNPCR (1)		1.7	$	4.15
2013	Swaps	IFNPCR (1)		1.2		4.57
Natural gas purchases			(MMBtu)
2012	Swaps	IFNPCR (1)		1.1	$	2.80

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

The following table presents the balance sheet location of QEP's outstanding commodity 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	March 31, 2012		December 31, 2011		Balance Sheet line item	March 31, 2012		December 31, 2011
		(in millions)					(in millions)
Current
Commodity	Fair value of derivative contracts	$	347.5	$	284.1	Fair value of derivative contracts	$	13.7	$	11.7
Long-term:
Commodity	Fair value of derivative contracts		115.8		123.5	Fair value of derivative contracts		0.3		-
Total commodity derivative instruments		$	463.3	$	407.6		$	14.0	$	11.7

The effects and location of derivative transactions on the Condensed Consolidated Income Statements are summarized in the following tables.

		Three Months Ended March 31,
Derivatives not designated as hedging instruments	Location of gain (loss) recognized in earnings	2012			2011
		(in millions)
Realized gain (loss) on commodity derivative contracts
QEP Energy
Natural gas derivative contracts		$	85.7		$	(31.2	)
Oil derivative contracts			(2.7	)		-
NGL derivative contracts			0.4			-
QEP Field Services
NGL derivative contracts			1.1			-
QEP Marketing
Natural gas derivative contracts			3.5			-
Total realized gain (loss)	Realized and unrealized gains on commodity derivative instruments		88.0			(31.2	)

Unrealized gain (loss) on commodity derivative contracts
QEP Energy
Natural gas derivative contracts			132.3			31.2
Oil derivative contracts			(11.5	)		-
NGL derivative contracts			2.9			-
QEP Field Services
NGL derivative contracts			3.0			-
QEP Marketing
Natural gas derivative contracts			1.6			-
Total unrealized gain (loss)	Realized and unrealized gains on commodity derivative instruments		128.3			31.2
Total realized and unrealized gain (loss)	Realized and unrealized gains on commodity derivative instruments	$	216.3		$	-

		Three Months Ended March 31,
Cash flow hedge derivative instruments	Location of gain (loss) recognized in earnings	2012		2011
Commodity derivatives			(in millions)
Gain (loss) on derivative instruments for the effective portion of hedge recognized in AOCI	Accumulated other comprehensive income (loss)	$	-	$	0.2
Gain (loss) reclassified from AOCI into income for effective portion of hedge	Natural gas sales		-		73.1
Gain (loss) reclassified from AOCI into income for effective portion of hedge	Oil sales		-		-
Gain (loss) reclassified from AOCI into income for effective portion of hedge	NGL sales		-		-
Gain (loss) reclassified from AOCI into income for effective portion of hedge	Marketing purchases		-		3.4
Gain (loss) recognized in income for the ineffective portion of hedges	Interest and other income		-		(0.2	)

It is estimated that derivative contracts that had a fair value at December 31, 2011 of $144.2 million will be settled and reclassified from AOCI to the Condensed Consolidated Statements of Income during the next twelve months.