form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q 

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarter ended June 30, 2012
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______
 

QEP RESOURCES, INC.

 
(Exact name of registrant as specified in its charter)
 
STATE OF DELAWARE 001-34778 87-0287750
(State or other jurisdiction of
(Commission
(I.R.S. Employer
incorporation or organization
File Number)
Identification No.)
 
1050 17th Street, Suite 500, Denver, Colorado 80265
(Address of principal executive offices)
 
Registrant’s telephone number, including area code (303) 672-6900
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
Accelerated filer
o
       
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
 
At June 30, 2012, there were 177,769,238 shares of the registrant’s common stock, $0.01 par value, outstanding.
 


 
 

 
 
QEP Resources, Inc.
Form 10-Q for the Quarter Ended June 30, 2012
 
TABLE OF CONTENTS
 
 
 
 
Page
2
       
 
ITEM 1.
2
       
 
 
2
 
     
 
 
3
 
     
 
 
4
       
 
 
5
       
 
 
6
       
 
ITEM 2.
25
       
 
ITEM 3.
48
       
 
ITEM 4.
51
   
51
       
 
ITEM 1.
51
       
 
ITEM 1A.
52
       
 
ITEM 2.
52
       
 
ITEM 3.
52
       
 
ITEM 4.
52
       
 
ITEM 5.
52
       
 
ITEM 6.
52
   
53
 

PART I. FINANCIAL INFORMATION
 
ITEM 1.
QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in millions, except per share amounts)
 
REVENUES
                       
Natural gas sales
  $ 138.9     $ 298.7     $ 300.1     $ 611.3  
Oil sales
    107.2       80.7       218.0       143.7  
NGL sales
    82.1       63.8       179.5       111.7  
Gathering, processing and other
    45.8       58.9       95.6       105.5  
Purchased gas, oil and NGL sales
    125.3       306.0       309.3       453.8  
Total Revenues
    499.3       808.1       1,102.5       1,426.0  
OPERATING EXPENSES
                               
Purchased gas, oil and NGL expense
    124.9       303.9       313.3       450.6  
Lease operating expense
    40.5       34.3       80.6       67.1  
Natural gas, oil and NGL transportation and other handling costs
    40.7       24.0       75.2       45.7  
Gathering, processing and other
    20.6       27.2       44.3       52.4  
General and administrative
    36.8       28.7       72.8       60.4  
Production and property taxes
    19.4       27.1       44.1       50.8  
Depreciation, depletion and amortization
    214.1       186.6       413.3       377.4  
Exploration expenses
    2.1       2.3       4.1       5.1  
Abandonment and impairment
    55.7       5.3       62.3       10.7  
Total Operating Expenses
    554.8       639.4       1,110.0       1,120.2  
Net gain from asset sales
    -       0.2       1.5       0.2  
OPERATING (LOSS) INCOME
    (55.5 )     168.9       (6.0 )     306.0  
Realized and unrealized gains on derivative contracts (See Note 6)
    82.3       -       298.6       -  
Interest and other income (loss)
    0.9       (0.4 )     2.6       0.2  
Income from unconsolidated affiliates
    1.4       1.3       3.3       2.2  
Loss from early extinguishment of debt
    (0.6 )     -       (0.6 )     -  
Interest expense
    (28.2 )     (22.1 )     (52.9 )     (44.2 )
INCOME BEFORE INCOME TAXES
    0.3       147.7       245.0       264.2  
Income taxes
    (0.1 )     (54.2 )     (88.8 )     (96.9 )
NET INCOME
    0.2       93.5       156.2       167.3  
Net income attributable to noncontrolling interest
    (0.9 )     (0.7 )     (1.7 )     (1.3 )
NET (LOSS) INCOME ATTRIBUTABLE TO QEP
  $ (0.7 )   $ 92.8     $ 154.5     $ 166.0  
                                 
Earnings Per Common Share Attributable to QEP
                               
Basic total
  $ -     $ 0.52     $ 0.87     $ 0.94  
Diluted total
  $ -     $ 0.52     $ 0.87     $ 0.93  
                                 
Weighted-average common shares outstanding
                               
Used in basic calculation
    177.7       176.6       177.6       176.4  
Used in diluted calculation
    177.7       178.6       178.5       178.5  
Dividends per common share
  $ 0.02     $ 0.02     $ 0.04     $ 0.04  
                                 

See notes accompanying the condensed consolidated financial statements.
 
 
QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in millions)
 
Net income
  $ 0.2     $ 93.5     $ 156.2     $ 167.3  
Other comprehensive (loss) income, net of tax:
                               
Reclassification of previously deferred derivative gains(1)
    (44.7 )     (2.5 )     (91.7 )     (50.3 )
Pension and other postretirement plans adjustments:
                               
Amortization of net actuarial loss (2)
    0.1       -       0.2       -  
Amortization of prior service cost (3)
    0.8       1.7       1.7       1.7  
Total pension and other postretirement plans adjustments
    0.9       1.7       1.9       1.7  
Other comprehensive loss
    (43.8 )     (0.8 )     (89.8 )     (48.6 )
Comprehensive (loss) income
    (43.6 )     92.7       66.4       118.7  
Comprehensive income attributable to noncontrolling interests
    (0.9 )     (0.7 )     (1.7 )     (1.3 )
Comprehensive (loss) income attributable to QEP
  $ (44.5 )   $ 92.0     $ 64.7     $ 117.4  
 
(1)
Presented net of income tax benefit of $26.5 million and $54.3 million during the three and six months ended June 30, 2012, respectively, and net of income tax benefit of $1.5 million and $29.8 million during the three and six months ended June 30, 2011, respectively.
(2)
Presented net of income tax expense of $0.1 million and $0.2 million during the three and six months ended June 30, 2012, respectively,.
(3)
Presented net of income tax expense of $0.5 million and $1.1 million during the three and six months ended June 30, 2012, respectively, and net of income tax expense of $1.1 million during the three and six months ended June 30, 2011, respectively.
 
See notes accompanying the condensed consolidated financial statements.
 
 
QEP RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(in millions)
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 146.4     $ -  
Accounts receivable, net
    236.9       397.4  
Fair value of derivative contracts
    268.2       273.7  
Inventories, at lower of average cost or market
               
Gas, oil and NGL
    11.6       16.2  
Materials and supplies
    90.0       87.6  
Prepaid expenses and other
    42.5       43.7  
Total Current Assets
    795.6       818.6  
Property, Plant and Equipment (successful efforts method for gas and oil properties)
               
Proved properties
    8,822.3       8,172.4  
Unproved properties
    305.4       326.8  
Midstream field services
    1,550.1       1,463.6  
Marketing and other
    53.6       49.8  
Total Property, Plant and Equipment
    10,731.4       10,012.6  
Less Accumulated Depreciation, Depletion and Amortization
               
Exploration and production
    3,763.7       3,339.2  
Midstream field services
    327.8       297.5  
Marketing and other
    16.3       14.6  
Total Accumulated Depreciation, Depletion and Amortization
    4,107.8       3,651.3  
Net Property, Plant and Equipment
    6,623.6       6,361.3  
Investment in unconsolidated affiliates
    41.9       42.2  
Goodwill
    59.5       59.5  
Fair value of derivative contracts
    76.2       123.5  
Other noncurrent assets
    40.8       37.6  
TOTAL ASSETS
  $ 7,637.6     $ 7,442.7  
                 
LIABILITIES AND EQUITY
               
Current Liabilities
               
Checks outstanding in excess of cash balances
  $ -     $ 29.4  
Accounts payable and accrued expenses
    373.8       457.3  
Production and property taxes
    47.2       40.0  
Interest payable
    33.0       24.4  
Fair value of derivative contracts
    2.3       1.3  
Deferred income taxes
    31.0       85.4  
Total Current Liabilities
    487.3       637.8  
Long-term debt
    1,866.6       1,679.4  
Deferred income taxes
    1,563.1       1,484.7  
Asset retirement obligations
    172.2       163.9  
Fair value of derivative contracts
    2.4       -  
Other long-term liabilities
    129.8       124.8  
Commitments and contingencies
               
EQUITY
               
Common stock - par value $0.01 per share; 500.0 million shares authorized; 178.5 million and 177.2 million shares issued, respectively
    1.8       1.8  
Treasury stock - 0.7 million and 0.4 million shares, respectively
    (24.0 )     (13.1 )
Additional paid-in capital
    450.4       431.4  
Retained earnings
    2,820.7       2,673.5  
Accumulated other comprehensive income
    118.1       207.9  
Total Common Shareholders' Equity
    3,367.0       3,301.5  
Noncontrolling interest
    49.2       50.6  
Total Equity
    3,416.2       3,352.1  
TOTAL LIABILITIES AND EQUITY
  $ 7,637.6     $ 7,442.7  
 
See notes accompanying the condensed consolidated financial statements.
 
 
QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
   
(in millions)
 
OPERATING ACTIVITIES
           
Net income
  $ 156.2     $ 167.3  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    413.3       377.4  
Deferred income taxes
    77.1       95.7  
Abandonment and impairment
    62.3       10.7  
Share-based compensation
    12.3       10.8  
Amortization of debt issuance costs and discounts
    2.4       1.5  
Dry exploratory well expense
    0.1       0.5  
Net gain from asset sales
    (1.5 )     (0.2 )
Income from unconsolidated affiliates
    (3.3 )     (2.2 )
Distributions from unconsolidated affiliates and other
    3.5       2.6  
Non-cash loss on early extinguishment of debt
    0.1       -  
Unrealized gain on derivative contracts
    (89.9 )     (58.8 )
Changes in operating assets and liabilities
    61.7       23.3  
Net Cash Provided by Operating Activities
    694.3       628.6  
INVESTING ACTIVITIES
               
Property acquisitions
    (4.0 )     (29.8 )
Property, plant and equipment, including dry exploratory well expense
    (681.5 )     (632.0 )
Proceeds from disposition of assets
    3.6       1.6  
Net Cash Used in Investing Activities
    (681.9 )     (660.2 )
FINANCING ACTIVITIES
               
Checks outstanding in excess of cash balances
    (29.4 )     (1.5 )
Long-term debt issued
    800.0       -  
Long-term debt issuance costs paid
    (8.8 )     -  
Long-term debt repaid
    (6.7 )     (58.5 )
Proceeds from credit facility
    194.5       200.0  
Repayments of credit facility
    (801.0 )     (100.0 )
Other capital contributions
    (6.4 )     (0.4 )
Dividends paid
    (7.1 )     (7.1 )
Excess tax benefit on share-based compensation
    2.0       1.4  
Distribution from Questar
    -       0.2  
Distribution to noncontrolling interest
    (3.1 )     (2.5 )
Net Cash Provided by Financing Activities
    134.0       31.6  
Change in cash and cash equivalents
    146.4       -  
Beginning cash and cash equivalents
    -       -  
Ending cash and cash equivalents
  $ 146.4     $ -  
                 
Supplemental Disclosures:
               
Cash paid for interest
  $ 42.7     $ 64.6  
Cash paid (received) for income taxes
    8.0       (7.2 )
Non-cash investing activities
               
Change in capital expenditure accrual balance
  $ 45.3     $ 12.3  
 
See notes accompanying the condensed consolidated financial statements.
 
 
QEP RESOURCES, INC.
NOTES ACCOMPANYING THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 – Nature of Business
 
QEP Resources, Inc. (QEP or the Company) is a holding company with three major lines of business – natural gas and crude oil exploration and production; midstream field services; and energy marketing. These businesses are conducted through the Company’s three principal subsidiaries:
 
§
QEP Energy Company (QEP Energy) acquires, explores for, develops, and produces natural gas, oil, and natural gas liquids (NGL);
 
§
QEP Field Services Company (QEP Field Services) provides midstream field services; including natural gas gathering, processing, compression, and treating services, for affiliates and third parties; and
 
§
QEP Marketing Company (QEP Marketing) markets affiliate and third-party natural gas and oil, provides risk–management services, and owns and operates an underground gas-storage reservoir.
 
Operations are focused in two major regions, the Northern Region (primarily in the Rockies) and the Southern Region (primarily Oklahoma, Louisiana, and the Texas Panhandle) of the United States. QEP’s corporate headquarters are located in Denver, Colorado.
 
Shares of QEP Resources’ common stock trade on the New York Stock Exchange under the ticker symbol “QEP”.
 
Note 2 – Basis of Presentation of Interim Consolidated Financial Statements
 
The interim condensed consolidated financial statements contain the accounts of QEP and its majority-owned or controlled subsidiaries. The condensed consolidated financial statements were prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) and with the instructions for quarterly reports on Form 10-Q and Regulations S-X and S-K. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
The condensed consolidated financial statements reflect all normal recurring adjustments and accruals that are, in the opinion of management, necessary for a fair statement of financial position and results of operations for the interim periods presented. Interim condensed consolidated financial statements do not include all of the information and notes required by GAAP for audited annual consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
The preparation of the condensed consolidated financial statements and notes in conformity with GAAP requires that management make estimates and assumptions that affect revenues, expenses, assets and liabilities, and disclosure of contingent assets and liabilities. Actual results could differ from estimates. The results of operations for the three and six months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
 
De-designation of commodity derivative contracts
 
Effective January 1, 2012, QEP elected to discontinue hedge accounting prospectively for all of its derivative instruments. Accordingly, all realized and unrealized gains and losses will be recognized in earnings immediately each quarter as derivative contracts are settled and marked-to-market. For the three and six months ended June 30, 2012, unrealized losses of $38.4 million and unrealized gains of $89.9 million were included in income that, prior to January 1, 2012, would have been deferred in Accumulated Other Comprehensive Income (AOCI) under hedge accounting. Refer to Note 6 – Derivative Contracts for additional information.
 
Transportation and other handling costs
 
In the fourth quarter of 2011, QEP revised its reporting of transportation and handling costs to reflect revenues in accordance with industry practice and GAAP. Transportation and handling costs, previously netted against revenues, were recast on the Condensed Consolidated Statement of Income from “Revenues” to “Natural gas, oil and NGL transportation and other handling costs” for prior periods presented. The impact of this revision was immaterial to the accompanying financial statements and had no effect on income from continuing operations, net income, or earnings per share.
 
 
The following table details the impact for the three and six months ended June 30, 2011, on the Condensed Consolidated Statement of Income.
 
   
Three Months Ended June 30, 2011
   
Six Months Ended June 30, 2011
 
   
As reported (1)
   
As revised
   
Change
   
As reported (1)
   
As revised
   
Change
 
   
(in millions)
   
(in millions)
 
REVENUES
                                   
Natural gas sales
  $ 258.1     $ 298.7     $ 40.6     $ 529.1     $ 611.3     $ 82.2  
Oil sales
    80.0       80.7       0.7       142.3       143.7       1.4  
NGL sales
    61.6       63.8       2.2       107.4       111.7       4.3  
Gathering, processing and other
    78.4       58.9       (19.5 )     147.7       105.5       (42.2 )
OPERATING EXPENSES
                                               
Natural gas, oil and NGL transportation and other handling costs
    -       24.0       24.0       -       45.7       45.7  
 
(1)
The “As reported” numbers reflect QEP Field Services NGL sales of $45.1 million and $73.7 million for the three and six months ended June 30, 2011, which were reclassified from “Gathering, processing and other” into “NGL sales” for consistency with current period presentation. In its second quarter 2011 Form 10-Q, QEP reported “NGL sales” of $16.5 million and $33.7 million, and “Gathering, processing and other” of $123.5 million and $221.4 million for the three and six months ended June 30, 2011, respectively. The QEP Field Services NGL reclassification is all within “Revenues” and has no effect on income from continuing operations, net income or earnings per share.
 
Impairment of long-lived assets
 
Proved gas and oil properties are evaluated on a field-by-field basis for potential impairment. Other properties are evaluated on a specific-asset basis or in groups of similar assets, as applicable. Impairment is indicated when a triggering event occurs and/or the sum of the estimated undiscounted future net cash flows of an evaluated asset is less than the asset’s carrying value. Triggering events could include, but are not limited to, an impairment of gas and oil reserves caused by mechanical problems, faster-than-expected decline of reserves, lease-ownership issues, other-than-temporary decline in natural gas, NGL and crude oil prices and changes in the utilization of midstream gathering and processing assets. If impairment is indicated, fair value is calculated using a discounted-cash flow approach. Cash flow estimates require forecasts and assumptions for many years into the future for a variety of factors, including commodity prices, operating costs, and estimates of probable and possible reserves. Cash flow estimates relating to future cash flows from probable and possible reserves are reduced by additional risk-weighting factors. During the three and six months ended June 30, 2012, QEP Energy recorded non-cash, price-related impairment charges of $48.9 million and $49.3 million, respectively, on some of its proved properties. The impairment charges are related to the reduced value of certain fields resulting from lower natural gas, crude oil and NGL prices. The assets were written down to their estimated fair values. Of the $49.3 million impairment charge during the six months ended June 30, 2012, $48.9 million is related to proved properties in the Southern Region and $0.4 million is related to proved properties in the Northern Region.

The Company also performs periodic assessments of unproved gas and oil properties for impairment and recognizes a loss at the time of impairment. In determining whether an unproved property is impaired the Company considers numerous factors including current development and exploration plans, results of development or exploration activity on adjacent leaseholds, technical personnel evaluations of the properties, and the remaining lease term. During the three and six months ended June 30, 2012, QEP recorded non-cash impairment charges of $6.1 million and $12.1 million, respectively, on some of its unproved properties relating to the various factors described. Of the $6.1 million and $12.1 million impairment charges during the three and six months ended June 30, 2012, $3.1 million and $6.1 million, respectively, related to unproved properties in the Southern Region and $3.0 million and $6.0 million, respectively, related to unproved properties in the Northern Region.
 
Natural gas, NGL and crude oil prices
 
Historically, field-level prices received for QEP’s natural gas, NGL, and crude oil production have been volatile and unpredictable, and that volatility is expected to continue. In recent years, domestic natural gas supply has grown faster than natural gas demand, driven by advances in drilling and completion technologies, including horizontal drilling and multi-stage hydraulic fracturing, which have allowed producers to extract increased quantities of natural gas from shale, tight sand formations, and other unconventional reservoirs. Increased natural gas and NGL drilling and supplies have resulted in downward pressure on natural gas and NGL prices, while concern about the global economy and other factors has created volatility in the price of crude oil. Changes in the market prices for natural gas, crude oil, and NGL directly impact many aspects of QEP’s business, including its financial condition, revenues, results of operations, planned drilling activity and related capital expenditures, liquidity, rate of growth, costs of goods and services required to drill and complete wells, and may impact the carrying value of its oil and natural gas properties.
 
 
New accounting pronouncements
 
In May of 2011, the FASB issued ASU 2011-04, which develops common measurement and disclosure requirements regarding an entity’s fair value measurements and aligns GAAP and International Financial Reporting Standards. The amendments are required for interim and annual reporting periods beginning after December 15, 2011. The adoption of these requirements did not have a material impact on the financial statements of QEP.
 
In June of 2011, the FASB issued ASU 2011-05, which revises the manner in which entities are able to present the components of comprehensive income in their financial statements. The new guidance requires entities to report the components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. However, this ASU does not change the items that are reported in other comprehensive income. The amendments are effective for reporting periods (including interim periods) beginning after December 15, 2011. The adoption of this ASU required minor disclosure changes to QEP’s financial statements and footnotes.
 
In December of 2011, the FASB issued ASU 2011-11, which enhances disclosure requirements regarding an entity’s financial instruments and derivative instruments that are offset or subject to a master netting arrangement. This information about offsetting and related netting arrangements will enable users of financial statements to understand the effect of those arrangements on the entity’s financial position, including the effect of rights of setoff. The amendments are required for annual reporting periods beginning after January 1, 2013, and interim periods within those annual periods. QEP is evaluating the impact of this ASU on its disclosure requirements.
 
Note 3 – Earnings Per Share
 
Basic earnings per share (EPS) are computed by dividing net income attributable to QEP by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the potential increase in the number of outstanding shares that could result from the exercise of in-the-money stock options. QEP’s unvested restricted shares are included in weighted-average basic common shares outstanding because once the shares are granted, the restricted shares are considered issued and outstanding, the historical forfeiture rate is minimal and the restricted shares receive dividends.
 
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method. The Company’s unvested restricted stock awards contain non-forfeitable dividend rights and participate equally with common stock with respect to dividends issued or declared. However, the Company’s unvested restricted stock does not have a contractual obligation to share in losses of the Company. The Company’s unexercised stock options do not contain rights to dividends. Under the two-class method, the earnings used to determine basic earnings per common share are reduced by an amount allocated to participating securities. When the Company records a net loss, none of the loss is allocated to the participating securities since the securities are not obligated to share in Company losses. Use of the two-class method has an insignificant impact on the calculation of basic and diluted earnings per common share. During the three months ended June 30, 2012, 0.9 million shares were not included in diluted common shares outstanding as they were anti-dilutive due to QEP’s net loss. There were no anti-dilutive shares during the six months ended June 30, 2012 and during the three and six months ended June 30, 2011.
 
A reconciliation of the components of basic and diluted shares used in the EPS calculation follows:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in millions)
 
Weighted-average basic common shares outstanding
    177.7       176.6       177.6       176.4  
Potential number of shares issuable upon excerise of in-the-money stock options under the Long-term Stock Incentive Plan
    -       2.0       0.9       2.1  
Average diluted common shares outstanding
    177.7       178.6       178.5       178.5  

Note 4 – Asset Retirement Obligations
 
QEP records asset retirement obligations (ARO) when there are legal obligations associated with the retirement of tangible long-lived assets. The Company’s ARO liability applies primarily to abandonment costs associated with gas and oil wells, production facilities and certain other properties. The fair values of such costs are estimated by Company personnel based on abandonment costs of similar assets and depreciated over the life of the related assets. Revisions to ARO estimates result from changes in expected cash flows or material changes in estimated asset retirement costs. The ARO liability is adjusted to present value each period through an accretion calculation using a credit-adjusted risk-free interest rate.
 
 
The following is a reconciliation of the changes in the asset retirement obligation from January 1, 2012 and 2011 to June 30, 2012 and 2011, respectively:
 
   
Asset Retirement Obligations
 
   
2012
   
2011
 
   
(in millions)
 
ARO liability at January 1,
  $ 163.9     $ 148.3  
Accretion
    5.1       4.8  
Liabilities incurred
    3.6       2.9  
Liabilities settled
    (0.4 )     (0.3 )
ARO liability at June 30,
  $ 172.2     $ 155.7  

Note 5 – 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. Level 3 inputs are unobservable inputs for the asset or liability.
 
QEP has determined its commodity derivative instruments are Level 2. The Level 2 fair value of commodity derivative contracts (see Note 6 - 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. 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. The Company’s policy is to recognize significant transfers between levels at the end of the reporting period.
 
However, certain commodity derivative instruments 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 the counterparty exists.
 
In addition, QEP has Level 2 interest rate swaps. The fair values of the interest rate swaps are determined using the market standard methodology of discounting the future expected cash flows that would occur under the contractual terms of the swap. The variable interest rates used in the calculation of projected cash flows are based on an expectation of future interest rates derived from observable market interest rate curves. QEP incorporates credit valuation adjustments to reflect both its nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. While the credit valuation adjustments are not observable inputs, they are not significant to the overall valuation and the other inputs used to value the interest rate swaps are observable Level 2 inputs.
 
As of June 30, 2012 and December 31, 2011, the Company did not have assets or liabilities classified as Level 1 or Level 3 within the fair value hierarchy.
 
 
The fair value of financial assets and liabilities at June 30, 2012 is shown in the table below:
 
   
Fair Value Measurements
 
   
June 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Netting
Adjustments
   
Total
 
         
(in millions)
 
Financial Assets
                             
Commodity derivative instruments - short-term
  $ -     $ 272.2     $ -     $ (4.0 )   $ 268.2  
Commodity derivative instruments - long-term
    -       77.5       -       (1.3 )     76.2  
Total financial assets
  $ -     $ 349.7     $ -     $ (5.3 )   $ 344.4  
                                         
Financial Liabilities
                                       
Commodity derivative instruments - short-term
  $ -     $ 4.0             $ (4.0 )   $ -  
Interest rate swaps - short-term
    -       2.3               -       2.3  
Commodity derivative instruments - long-term
    -       1.7               (1.3 )     0.4  
Interest rate swaps - long-term
    -       2.0       -               2.0  
Total financial liabilities
  $ -     $ 10.0     $ -     $ (5.3 )   $ 4.7  
 
Fair values related to the Company’s crude oil costless collars were transferred from Level 3 to Level 2 in the second quarter of 2012, due to the enhancements to the Company’s internal valuation process, including the use of observable inputs to assess the fair value. There were no other significant transfers in or out of Levels 1, 2 or 3 for the periods presented herein. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy levels as of the end of the quarterly reporting period in which the event or change in circumstances causing the transfer occurred.

The change in the fair value of Level 3 commodity derivative instruments assets and liabilities for the six months ended June 30, 2012, is shown below:
 
   
Change in Level 3 Fair
Value Measurements
 
   
2012
 
   
(in millions)
 
Balance at January 1,
  $ -  
Realized gains and losses
    0.6  
Unrealized gains and losses
    3.8  
Settlements
    (0.6 )
Transfers out of Level 3
    (3.8 )
Balance at June 30,
  $ -  

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

   
Fair Value Measurements
 
   
December 31, 2011
 
   
Level 1
   
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
 
   
June 30, 2012
   
December 31, 2011
 
   
(in millions)
 
Financial assets
                       
Cash and cash equivalents
  $ 146.4     $ 146.4     $ -     $ -  
Financial liabilities
                               
Checks outstanding in excess of cash balances
  $ -     $ -     $ 29.4     $ 29.4  
Long-term debt
  $ 1,866.6     $ 1,967.2     $ 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.

The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with property, plant and equipment. Significant Level 3 inputs used in the calculation of asset retirement obligations include plugging costs and reserve lives. A reconciliation of the Company’s asset retirement obligations is presented in Note 4 – Asset Retirement Obligations.

Nonrecurring Fair Value Measurements

The provisions of the fair value measurement standard are also applied to the Company’s nonrecurring, non-financial measurements.  The Company utilizes fair value on a non-recurring basis to review its proved oil and gas properties for potential impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such property. During the first half of 2012 and through the period ended December 31, 2011, the Company recorded impairments on certain oil & gas property resulting in a write down of the associated carrying value to fair value. The fair value of the property was measured utilizing the income approach and utilizing inputs which are primarily based upon internally developed cash flow models. Given the unobservable nature of the inputs, proved oil and gas property impairments would be considered Level 3 within the fair value hierarchy.

The following table summarizes the non-financial assets and liabilities measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition and their associated impairment:
 
   
Level 3
Fair Value
   
Impairment
   
Level 3
Fair Value
   
Impairment
 
   
June 30, 2012
   
December 31, 2011
 
   
(in millions)
 
Proved Property
  $ 5,058.6     $ 49.3     $ 4,833.2     $ 195.5  
 
Note 6 – 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 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 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 may enter into commodity derivative contracts on 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 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 commodity 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 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.
 
Through December 31, 2011, QEP designated the majority of its natural gas, oil and NGL derivative contracts as cash flow hedges, whose unrealized fair value gains and losses were recorded to AOCI. 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 frozen in AOCI as of the de-designation date and are being reclassified into the Consolidated Statement of Income as the transactions settle and affect earnings. At June 30, 2012, AOCI consisted of $249.8 million ($156.9 million after tax) of unrealized gains. QEP expects to reclassify into earnings from AOCI the frozen value related to de-designated natural gas, oil and NGL hedges over the remainder of 2012 and 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 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 Consolidated Statement of Income in “Realized and unrealized 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 agreement. QEP locked in a fixed interest rate 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 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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
QEP Energy
                       
Natural gas derivative volumes as a percent of QEP Energy natural gas production
                       
Fixed price swaps
    67 %     46 %     63 %     44 %
Costless collars
    0 %     12 %     0 %     12 %
Oil derivative volumes as a percent of QEP Energy oil production
                               
Fixed price swaps
    35 %     3 %     36 %     2 %
Costless collars
    28 %     31 %     22 %     33 %
NGL derivative volumes as a percent of QEP Energy NGL production
                               
Fixed price swaps
    18 %     0 %     17 %     0 %
                                 
QEP Field Services
                               
Ethane derivative volumes as a percent of ethane volumes - QEP Field Services
                               
Fixed price swaps
    15 %     0 %     27 %     0 %
Propane derivative volumes as a percent of propane volumes - QEP Field Services
                               
Fixed price swaps
    59 %     0 %     76 %     0 %
 
 
QEP Energy Derivative Contracts
 
The following table sets forth QEP Energy’s volumes and average prices for its commodity derivative contracts as of June 30, 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
      39.9     $ 4.66              
2012
 
 Swap
 
IFPEPL (1)
      4.9     $ 4.14              
2012
 
 Swap
 
IFNPCR (2)
      45.4     $ 4.61              
2012
 
 Swap
 
IFCNPTE (3)
      5.5     $ 2.66              
2013
 
 Swap
 
NYMEX
      29.2     $ 3.68              
2013
 
 Swap
 
IFNPCR (2)
      65.7     $ 5.66              
Oil sales
           
(Bbls)
                     
2012
 
 Swap
 
 NYMEX WTI
      0.9     $ 97.03              
2012
 
 Collar
 
 NYMEX WTI
      0.7             $ 87.50     $ 115.36  
2013
 
 Swap
 
 NYMEX WTI
      0.9     $ 104.12                  
NGL sales
           
(Gals)
                         
2012
 
 Swap
 
 Mt. Belvieu Ethane
      7.7     $ 0.64                  
2012
 
 Swap
 
 Mt. Belvieu Propane
      11.6     $ 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 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 June 30, 2012:

Year
 
Type of Contract
 
Index
 
Total
Volumes
   
Average Swap price
per gallon
 
           
(in millions)
       
NGL sales
         
(Gals)
       
2012
 
Swap
 
Mt. Belvieu Ethane
    7.7     $ 0.64  
2012
 
Swap
 
 Mt. Belvieu Propane
    3.9     $ 1.28  

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 is required to deliver 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 June 30, 2012:
 
Year
 
Type of Contract
 
Index
 
Total
Volumes
   
Average Swaps price
per MMBtu
 
           
(in millions)
       
Natural gas sales
         
(MMBtu)
       
2012
 
Swap
 
IFNPCR (1)
    1.8     $ 4.06  
2013
 
Swap
 
IFNPCR (1)
    1.2     $ 4.57  
Natural gas purchases
         
(MMBtu)
         
2012
 
Swap
 
IFNPCR (1)
    0.7     $ 2.97  
2013
 
Swap
 
IFNPCR (1)
    0.1     $ 2.59  
 
 
(1)
 Inside FERC monthly settlement index for the Northwest Pipeline Corp. Rocky Mountains.
 
 
QEP Resources Derivative Contracts
 
In the second quarter of 2012, QEP Resources entered into interest rate swap agreements to effectively lock in a fixed interest rate on debt outstanding under its Term Loan.
 
The following table sets forth QEP Resources’ notional amounts and interest rates for its interest rate swaps outstanding as of June 30, 2012:
 
Notional amount
 
Type of Contract
 
Maturity
 
Fixed Rate Paid
 
Variable Rate Received
(in millions)
               
$300.0
 
Swap
 
March 2017
    1.07%  
One month LIBOR
 
The following table presents 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
 
June 30,
2012
   
December 31,
2011
 
Balance Sheet
line item
 
June 30,
2012
   
December 31,
2011
 
 
   
(in millions)
     
(in millions)
 
Current:
                           
Commodity
Fair value of
derivative contracts
  $ 272.2     $ 284.1  
Fair value of
derivative contracts
  $ 4.0     $ 11.7  
Interest rate swaps
Fair value of
derivative contracts
    -       -  
Fair value of
derivative contracts
    2.3       -  
Long-term:
                                   
Commodity
Fair value of
derivative contracts
    77.5       123.5  
Fair value of
derivative contracts
    1.7       -  
Interest rate swaps
Fair value of
derivative contracts
    -       -  
Fair value of
derivative contracts
    2.0       -  
Total derivative
   instruments
    $ 349.7     $ 407.6       $ 10.0     $ 11.7  
 

The effects and location of derivative transactions on the Condensed Consolidated Statements of Income are summarized in the following tables:
 
        Three Months Ended     Six Months Ended  
Derivative instruments not designated
 
Location of gain (loss)
  June 30,     June 30,  
as cash flow hedges  
recognized in earnings
  2012     2011     2012     2011  
        (in millions)  
Realized gain (loss) on commodity derivative contracts
                           
QEP Energy
                           
Natural gas derivative contracts
      $ 111.9     $ (27.6 )   $ 197.6     $ (58.8 )
Oil derivative contracts
        2.2       -       (0.5 )     -  
NGL derivative contracts
        2.7       -       3.1       -  
QEP Field Services
                                   
NGL derivative contracts
        3.3       -       4.4       -  
QEP Marketing
                                   
Natural gas derivative contracts
        0.6       -       4.1       -  
Total realized gain (loss) on commodity derivative contracts
        120.7       (27.6 )     208.7       (58.8 )
Unrealized gain (loss) on commodity derivative contracts
                                   
QEP Energy
                                   
Natural gas derivative contracts
        (78.4 )     27.6       53.9       58.8  
Oil derivative contracts
        38.6       -       27.1       -  
NGL derivative contracts
        4.9       -       7.8       -  
QEP Field Services
                                   
NGL derivative contracts
        1.5       -       4.5       -  
QEP Marketing
                                   
Natural gas derivative contracts
        (0.7 )     -       0.9       -  
Total unrealized (loss) gain on commodity derivative contracts
        (34.1 )     27.6       94.2       58.8  
Total realized and unrealized gain on commodity derivative contracts
 
Realized and unrealized gains on derivative contracts
  $ 86.6     $ -     $ 302.9     $ -  
Unrealized gain (loss) on interest rate swaps
                                   
                                     
Unrealized loss on interest rate swaps
 
Realized and unrealized gains on derivative contracts
  $ (4.3 )   $ -     $ (4.3 )   $ -  
 
        Three Months Ended      
Six Months Ended
 
Derivative instruments classified   Location of gain (loss)   June 30,      
June 30,
 
as cash flow hedges   recognized in earnings   2012      
2011
     
2012
     
2011
 
Commodity derivatives        
(in millions)
 
Gain on derivative instruments for the effective  portion of hedge recognized in AOCI
 
Accumulated other comprehensive income
  $ -     $ 61.3     $ -     $ 61.5  
Gain reclassified from AOCI into income for effective portion of hedge
 
Natural gas sales
    -       64.4       -       137.5  
Gain reclassified from AOCI into income for effective portion of hedge
 
Oil sales
    -       0.1       -       0.1  
Gain reclassified from AOCI into income for effective portion of hedge
 
Marketing purchases
    -       0.5       -       3.9  
Gain recognized in income for the ineffective portion of hedges
 
Interest and other income
    -       0.3       -       0.1  

The Company estimates that derivative contracts that were outstanding and frozen in AOCI at June 30, 2012, having a frozen fair value of $120.0 million will be settled and reclassified from AOCI to the Condensed Consolidated Statements of Income during the next twelve months.
 
 
Note 7 – Restructuring Costs
 
During the first quarter 2012, QEP announced the closure of its Oklahoma City office and the subsequent consolidation of its Southern Region operations into a single regional office located in Tulsa. The creation of one office for QEP’s Southern Region is intended to increase regional efficiency, team-based collaboration and organizational productivity, over the long-term. As part of this restructuring plan and office closure, QEP will incur costs associated with the severance and relocation of employees and other exit costs associated with the termination of the operating lease of its Oklahoma City office space. In addition, QEP has incurred costs from other restructuring and reorganization activities in an effort to centralize and gain efficiencies. All costs will be incurred by QEP Energy and are reported within QEP Energy’s financial statements. QEP anticipates total restructuring costs to be approximately $6.0 million, consisting of $2.1 million in one-time termination benefits, $3.4 million in retention and relocation expenses for certain employees relocating to the Tulsa office, and $0.5 million for the termination of the QEP’s Oklahoma City office space lease. During the three and six months ended June 30, 2012, a total of $2.3 million and $5.0 million, respectively, of restructuring costs were incurred and recorded in “General and administrative” expense on the Condensed Consolidated Statement of Income, of which $0.8 million and $1.9 million, respectively, related to one-time termination benefits. The remaining one-time termination benefits will be recognized ratably over the remaining transition period. QEP expects to recognize the remaining costs not yet incurred in the remainder of 2012. The relocation costs and contract termination costs will be recorded in future periods as the costs are incurred.
 
The following is a reconciliation of QEP Energy’s restructuring liability, which is included within “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets:

   
Restructuring Liability
 
   
(in millions)
 
Balance at December 31, 2011
  $ -  
Costs incurred and charged to expense
    5.0  
Costs paid or otherwise settled
    (4.6 )
Balance at June 30, 2012
  $ 0.4  
 
Note 8 – Debt
 
As of the indicated dates, the principal amount of QEP’s debt, including amounts outstanding under its revolving credit facility, consisted of the following:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(in millions)
 
Revolving Credit Facility due 2016
  $ -     $ 606.5  
Term Loan due 2017
    300.0       -  
6.05% Senior Notes due 2016
    176.8       176.8  
6.80% Senior Notes due 2018
    134.0       138.6  
6.80% Senior Notes due 2020
    136.0       138.0  
6.875% Senior Notes due 2021
    625.0       625.0  
5.375% Senior Notes due 2022
    500.0       -  
Total principal amount of debt
    1,871.8       1,684.9  
Less unamortized discount
    (5.2 )     (5.5 )
Total long-term debt outstanding
  $ 1,866.6     $ 1,679.4  
 
Of the total debt outstanding on June 30, 2012, only the revolving credit facility, due August 25, 2016, the Term Loan due April 18, 2017, and the 6.05% Senior Notes, due September 1, 2016, will mature within the next five years.
 
Credit Arrangements
 
QEP’s revolving credit facility agreement (Credit Facility), which matures in August 2016, provides for loan commitments of $1.5 billion from a group of financial institutions. The Credit Facility provides for borrowing at short-term interest rates and contains customary covenants and restrictions. The revolving credit agreement also contains an accordion provision that would allow for the amount of the facility to be increased to $2.0 billion and for the maturity to be extended for up to two additional one-year periods.

During the first half of 2012, QEP’s weighted-average interest rate on borrowings from its Credit Facility was 2.05%. At June 30, 2012 and December 31, 2011, QEP was in compliance with the covenants under the credit agreement. At June 30, 2012, there were no borrowings outstanding and QEP had $4.1 million in letters of credit outstanding under the Credit Facility.
 
 
Term Loan
 
During the second quarter of 2012, QEP entered into a $300.0 million senior, unsecured term loan agreement (Term Loan) with a group of financial institutions. The Term Loan provides for borrowings at short-term interest rates and contains covenants, restrictions and interest rates that are substantially the same as the Company’s existing Credit Facility. The Term Loan matures in April 2017, and the maturity date may be extended one year with the agreement of the lenders. The proceeds from the Term Loan were used to pay down the Credit Facility and for general corporate purposes. During the second quarter of 2012, QEP’s weighted-average interest rate on borrowings from the Term Loan was 2.02%. At June 30, 2012, QEP was in compliance with the covenants under the credit agreement.
 
Senior Notes
 
During the first quarter of 2012, QEP completed a public offering for $500.0 million in aggregate principal amount of 5.375% senior notes due in October 2022 (2022 Senior Notes). The 2022 Senior Notes were issued at face value. Interest on the 2022 Senior Notes will be paid semi-annually, in April and October of each respective year. The net proceeds of $493.1 million were used to repay indebtedness under QEP’s Credit Facility. The finance costs incurred of $6.9 million were deferred and are being amortized over the life of the notes. The amortization of all of the Company’s deferred finance costs is included in “Interest expense” on the Condensed Consolidated Statement of Income.
 
During the second quarter of 2012, QEP repurchased $6.7 million of its senior notes outstanding. QEP recognized a loss on extinguishment of debt from those repurchases and associated write-offs of debt issuance costs, discounts and premiums paid of $0.6 million. At June 30, 2012, the Company had $1,571.8 million principal amount of senior notes outstanding with maturities ranging from September 2016 to October 2022 and coupons ranging from 5.375% to 6.875%. The senior notes pay interest semi-annually, are unsecured senior obligations and rank equally with all of our other existing and future unsecured and senior obligations. QEP may redeem some or all of its senior notes at any time before their maturity at a redemption price based on a make-whole amount plus accrued and unpaid interest to the date of redemption. The indenture governing QEP’s senior notes contains customary events of default and covenants that may limit QEP’s ability to, among other things, place liens on its property or assets.
 
Note 9 – Contingencies
 
QEP is involved in various commercial and regulatory claims and litigation and other legal proceedings that arise in the ordinary course of its business. Management does not believe any of them will have a material adverse effect on the Company’s financial position, results of operations or cash flows. In accordance with ASC 450, a liability is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. QEP’s estimates are based on information known about the claims, experience in contesting, litigating and settling similar claims. Although actual amounts could differ from management’s estimates, QEP believes that the exposure to potential losses, in excess of the amount which has been accrued, from its probable contingencies is immaterial. For claims deemed reasonably possible the Company does not have a range of potential exposure as an estimate cannot be made because the cases are in their early stages or have a large number of plaintiffs. Disclosures are provided for contingencies reasonably possible to occur which would have a material adverse effect on the Company’s financial position, results of operations or cash flows but have not yet been accrued. Some of the claims involve numerous plaintiffs, highly complex issues relating to liability, damages and other matters subject to substantial uncertainties and, therefore, the probability of liability or an estimate of loss cannot be reasonably determined. The following discussion describes the nature of QEP’s major loss contingencies.
 
Environmental Claims
 
United States of America v. QEP Field Services, Civil No. 208CV167, U.S. District Court for Utah. As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and its Quarterly Report on Form 10-Q for the three months ended March 31, 2012, the U.S. Environmental Protection Agency (EPA) alleges that QEP Field Services (f/k/a Questar Gas Management) violated the Clean Air Act (CAA) and seeks substantial penalties and a permanent injunction involving the manner of operation of five compressor stations located in the Uinta Basin of eastern Utah. On May 16, 2012, QEP Field Services settled this matter through the parties’ execution of a consent decree which was subsequently approved by court order. The civil penalty payable to the government is $3.7 million. A contribution of $0.4 million will be payable to a non-profit corporation or trust to be created by the Ute Indian Tribe of the Uintah and Ouray Reservation for the implementation of environmental programs for the benefit of tribal members. The settlement also requires the company to reduce its emissions by removing certain equipment, installing additional pollution controls and replacing the natural gas powered instrument control systems with compressed air control systems, all of which will require capital expenditures of approximately $2.4 million, of which $0.5 million had be spent at June 30, 2012. QEP Field Services will have continuing operational compliance obligations under the consent decree at the affected facilities.
 
 
Litigation
 
Chieftain Royalty Company v. QEP Energy Company, Case No CJ2011-1, U. S. District Court for Oklahoma. This is a class action filed by a royalty owner on behalf of every QEP Energy royalty owner in the state of Oklahoma since 1988 asserting various claims for damages related to royalty valuation, including breach of contract, breach of fiduciary duty, fraud and conversion, based generally on asserted improper deduction of post-production costs. Because this case is in an early stage prior to full discovery, it is difficult to reasonably estimate potential liability. QEP Energy believes it has properly valued and paid royalty under Oklahoma law and will vigorously defend this claim. Because of the complexities and uncertainties of this legal dispute, including the early stage of discovery and the number of plaintiffs, it is difficult to predict all reasonably possible outcomes.
 
Questar Gas Company v. QEP Field Services Company, Civil No. 120902969, Third Judicial District Court, State of Utah. QEP Field Services’ former affiliate Questar Gas Company (QGC) filed this complaint in state court in Utah on May 1, 2012, asserting claims for breach of contract, breach of implied covenant of good faith and fair dealing, for an accounting and declaratory judgment related to a 1993 gathering agreement (1993 Agreement) entered when the parties were affiliates. Under the 1993 Agreement, QEP Field Services provides gathering services for producing properties developed by former affiliate Wexpro Company on behalf of QGC’s utility ratepayers. The core dispute pertains to the annual recalculation of the gathering rate which is based on a cost of service concept expressed in the 1993 Agreement and in a 1998 amendment. The annual gathering rate has been calculated in the same manner under the contract since it was amended in 1998, without any prior objection or challenge by QGC. Specific monetary damages are not asserted. Because of the complexities and uncertainties of this legal dispute in its early stages, it is difficult to predict all reasonably possible outcomes. Also, on May 1, 2012, QEP Field Services Company filed a legal action against Questar Gas entitled QEP Field Services Company v. Questar Gas Company, in the Second District Court in Denver County, Colorado, seeking declaratory judgment relating to its gathering service and charges under the same agreement. While QEP Field Services intends to defend itself against QGC’s claims and vigorously pursue its legal rights, the claims involve complex legal issues and uncertainties that make it difficult to predict the outcome of the cases and therefore management cannot determine at this time whether this litigation may have an adverse material effect on its financial position, results of operations or cash flows.
 
Note 10 – Share-Based Compensation
 
QEP issues stock options and restricted shares under its Long-Term Stock Incentive Plan (LTSIP) and awards performance-based share units under its Cash Incentive Plan (CIP) to certain officers, employees, and non-employee directors. QEP recognizes expense over time as the stock options, restricted shares, and performance-based share units vest. Deferred share-based compensation is included in additional paid-in capital in the Condensed Consolidated Balance Sheets. There were 13.1 million shares available for future grants under the LTSIP at June 30, 2012. Share-based compensation expense is recognized in “General and administrative” on the Condensed Consolidated Statements of Income. During the three and six months ended June 30, 2012, QEP recognized $6.6 million and $12.3 million, respectively, in total compensation expense related to share-based compensation compared to $3.4 million and $10.8 million during the three and six months ended June 30, 2011.
 
Stock Options
 
QEP uses the Black-Scholes-Merton mathematical model to estimate the fair value of stock options for accounting purposes. Fair-value calculations rely upon subjective assumptions used in the mathematical model and may not be representative of future results. The Black-Scholes-Merton model is intended for measuring the value of options traded on an exchange.
 
The calculated fair value of options granted and major assumptions used in the model at the date of grant are listed below:
 
   
Stock Option Variables
Six Months Ended
June 30, 2012
 
Fair value of options at grant date
  $ 14.46  
Risk-free interest rate
    0.81 %
Expected price volatility
    55.9 %
Expected dividend yield
    0.26 %
Expected life in years
    5.0  
 

Stock option transactions under the terms of the LTSIP are summarized below:
 
   
Options
Outstanding
   
Weighted-
Average Price
   
Weighted-Average
Remaining
Contractual Term
   
Aggregate
Intrinsic Value
 
         
(per share)
   
(in years)
   
(in millions)
 
Outstanding at December 31, 2011
    2,003,694     $ 21.23              
Granted
    291,143       30.83              
Exercised
    (313,342 )     8.15              
Forfeited
    -       -       -        
Outstanding at June 30, 2012
    1,981,495     $ 24.71       3.6     $ 12.5  
Options Exercisable at June 30, 2012
    1,500,192     $ 22.19       2.8     $ 12.3  
Unvested Options at June 30, 2012
    481,303     $ 32.56       6.1     $ 0.2  
 
The total intrinsic value (the difference between the market price at the exercise date and the exercise price) of options exercised was $6.9 million and $2.6 million during the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, $4.6 million of unrecognized compensation cost related to stock options granted under the LTSIP is expected to be recognized over a weighted-average period of 2.4 years.
 
Restricted Shares
 
Restricted share grants typically vest in equal installments over a three or four-year period from the grant date. The total fair value of restricted stock that vested during the six months ended June 30, 2012 and 2011, was $12.6 million and $9.9 million, respectively. The weighted average grant-date fair value of restricted stock was $30.74 per share and $39.14 per share for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, $25.3 million of unrecognized compensation cost related to restricted shares granted under the LTSIP is expected to be recognized over a weighted-average vesting period of 2.4 years.
 
Transactions involving restricted shares under the terms of the LTSIP are summarized below:
 
   
Restricted Shares
Outstanding
   
Weighted-
Average Price
 
         
(per share)
 
Unvested balance at December 31, 2011
    1,099,752     $ 32.80  
Granted
    706,221       30.74  
Vested
    (397,204 )     32.31  
Forfeited
    (49,209 )     32.71  
Unvested balance at June 30, 2012
    1,359,560     $ 31.88  
 
Performance Share Units
 
Cash payouts are dependent upon the Company’s total shareholder return compared to a group of its peers over a three-year period. The awards are denominated in share units but delivered in cash at the end of the performance period. The weighted average grant-date fair value of the performance share units was $30.90 per share and $39.07 per share for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, $5.3 million of unrecognized compensation cost, or the fair market value, related to performance shares granted under the CIP is expected to be recognized over a weighted-average vesting period of 2.4 years.
 
Transactions involving performance share units under the terms of the CIP are summarized below:
 
   
Performance Share
Units Outstanding
   
Weighted-
Average Price
 
Unvested balance at December 31, 2011
    115,274     $ 39.07  
Granted
    171,954       30.90  
Vested
    -       -  
Forfeited
    (4,148 )     39.07  
Unvested balance at June 30, 2012
    283,080     $ 34.11  
 
Note 11 – Employee Benefits
 
The Company has a funded qualified defined benefit pension plan and an unfunded supplemental defined benefit pension plan. The Company also has unfunded postretirement benefits that provide certain health care and life insurance benefits for certain retired employees. During the six months ended June 30, 2012, the Company made contributions of $2.7 million to its funded pension plan, and $1.0 million to its unfunded pension plan. Contributions to funded plans increase plan assets while contributions to unfunded plans are used to fund current benefit payments. During the remainder of 2012, the Company expects to contribute approximately $3.6 million to its funded pension plans, and approximately $0.3 million to its unfunded pension plans. In July 2012, Congress passed the Moving Ahead for Progress in the 21st Century Act, which included pension funding stabilization provisions. The measure, which is designed to stabilize the discount rate used to determine funding requirements from the effects of interest rate volatility, may reduce the Company’s United States Pension Plan contributions during 2012 from the planned amounts.
 
 
The following table sets forth the Company’s pension and postretirement benefits net period benefit costs:
 
   
Pension
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in millions)
 
Service cost
  $ 0.9     $ 0.7     $ 1.9     $ 1.4  
Interest cost
    1.2       1.1       2.4       2.2  
Expected return on plan assets
    (0.9 )     (0.6 )     (1.8 )     (1.2 )
Amortization of prior service costs
    1.3       1.3