Derivative Contracts

9 Months Ended

Sep. 30, 2013

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 extracted NGL volumes in its midstream business and a portion of its natural 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 natural gas, crude 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 periods. 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. QEP also has oil price derivative fixed-price swaps that use Brent crude oil prices as the reference price. Brent crude oil contracts are traded on the IntercontinentalExchange, Inc. (ICE). NGL price derivative instruments are typically structured as Mont Belvieu, Texas fixed-price swaps.

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 natural gas, crude 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 Statement of Operations as the transactions settle and affect earnings. At September 30, 2013, AOCI included $27.3 million ($17.2 million after tax) of unrealized gains that will be settled and reclassified from AOCI to the Condensed Consolidated Statements of Operations during the remainder of 2013. During the nine months endedSeptember 30, 2013 and 2012, $60.4 million and $133.8 million, respectively, of unrealized gains, after tax, were reclassified from AOCI into the Condensed Consolidated Statement of Operations in "Realized and unrealized (losses) gains on derivative contracts" as the transactions settled. QEP expects to reclassify into earnings from AOCI the fixed value related to de-designated natural gas, oil and NGL derivatives over the remainder of 2013. Currently, QEP recognizes 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. All commodity derivative instruments are recorded on the Condensed Consolidated Balance Sheets as either assets or liabilities measured at their fair values and all realized and unrealized gains and losses from derivative instruments incurred after January 1, 2012, are presented in the Condensed Consolidated Statement of Operations in “Realized and unrealized (losses) gains on derivative contracts” below operating income.

QEP also uses interest rate swaps to mitigate a portion of its exposure to interest rate volatility risk. During the second quarter of 2012, QEP entered into variable-to-fixed interest rate swap agreements having a combined notional principal amount of $300.0 million to minimize the interest rate volatility risk associated with its $300.0 million senior, unsecured term loan. QEP locked in a fixed interest rate of 1.07% in exchange for a variable interest rate indexed to the one-month LIBOR rate. The interest rate swaps settle monthly and will mature in March of 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, 2013:

Insert Title Here
Year	Type of Contract	Index	Total Volumes	Average Swap price per unit
			(in millions)
Natural gas			(MMBtu)
2013	Swap	IFNPCR(1)	18.4	$	5.49
2013	Swap	NYMEX	14.7	$	3.81
2014	Swap	IFNPCR(1)	32.9	$	4.00
2014	Swap	NYMEX	25.6	$	4.19
Crude oil			(Bbls)
2013	Swap	NYMEX WTI	2.1	$	98.27
2013	Swap	BRENT ICE	0.1	$	107.80
2014	Swap	NYMEX WTI	8.8	$	93.63

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

QEP Marketing Derivative Contracts

QEP Marketing enters into commodity derivative transactions to lock in a margin on natural 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, 2013:

Year	Type of Contract	Index	Total Volumes	Average Swap price per MMBtu
			(in millions)
Natural gas sales			(MMBtu)
2013	Swap	IFNPCR	1.6	$	3.91
2014	Swap	IFNPCR	3.8	$	3.71
Natural gas purchases			(MMBtu)
2013	Swap	IFNPCR	1.7	$	3.46
2014	Swap	IFNPCR	0.2	$	3.82

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, 2013:

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

QEP Derivative Financial Statement Presentation

The following table identifies the 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, 2013		December 31, 2012		September 30, 2013		December 31, 2012
		(in millions)				(in millions)
Current:
Commodity	Fair value of derivative contracts	$	58.0	$	189.7	$	26.2	$	1.0
Interest rate swaps	Fair value of derivative contracts	—		—		2.5		2.6
Long-term:
Commodity	Fair value of derivative contracts	5.8		4.2		—		0.1
Interest rate swaps	Fair value of derivative contracts	—		—		—		3.6
Total derivative instruments		$	63.8	$	193.9	$	28.7	$	7.3

The effects of the change in fair value and settlement of QEP's derivative contracts recorded in "Realized and unrealized (losses) gains 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,
	2013			2012			2013			2012
Realized gains (losses) on commodity derivative contracts	(in millions)
QEP Energy
Natural gas derivative contracts	$	42.5		$	86.2		$	112.0		$	283.8
Oil derivative contracts	(15.3		)	2.7			(3.7		)	2.2
NGL derivative contracts	—			3.4			—			6.5
QEP Field Services
NGL derivative contracts	—			1.9			—			6.3
QEP Marketing
Natural gas derivative contracts	(0.3		)	(0.4		)	0.7			3.7
Total realized gains on commodity derivative contracts	26.9			93.8			109.0			302.5
Unrealized gains (losses) on commodity derivative contracts
QEP Energy
Natural gas derivative contracts	(6.6		)	(50.6		)	(9.6		)	3.3
Oil derivative contracts	(46.2		)	4.1			(49.1		)	31.2
NGL derivative contracts	—			(4.4		)	—			3.4
QEP Field Services
NGL derivative contracts	—			(2.5		)	—			2.0
QEP Marketing
Natural gas derivative contracts	0.1			(1.4		)	(0.3		)	(0.5		)
Total unrealized (losses) gains on commodity derivative contracts	(52.7		)	(54.8		)	(59.0		)	39.4
Total realized and unrealized (losses) gains on commodity derivative contracts	$	(25.8	)	$	39.0		$	50.0		$	341.9
Realized gains (losses) on interest rate swaps
Realized losses on interest rate swaps	$	(0.6	)	$	(0.6	)	$	(1.9	)	$	(0.6	)
Unrealized gains (losses) on interest rate swaps
Unrealized (losses) gains on interest rate swaps	(1.4		)	(2.3		)	3.5			(6.6		)
Total realized and unrealized (losses) gains on interest rate swaps	$	(2.0	)	$	(2.9	)	$	1.6		$	(7.2	)
Total net realized gains on derivative contracts	$	26.3		$	93.2		$	107.1		$	301.9
Total net unrealized (losses) gains on derivative contracts	(54.1		)	(57.1		)	(55.5		)	32.8
Grand Total	$	(27.8	)	$	36.1		$	51.6		$	334.7