QEP-2013.3.31-10Q



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

FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

For the quarterly period ended March 31, 2013

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______

Commission File Number: 001-34778

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  ý    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  ý    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:
 
Large accelerated filer
ý
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  ý
 
At March 31, 2013, there were 179,264,719 shares of the registrant’s common stock, $0.01 par value, outstanding.

 



QEP Resources, Inc.
Form 10-Q for the Quarter Ended March 31, 2013

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
 
 
ITEM 3.
 
 
 
 
 
ITEM 4.
 
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
ITEM 1A.
 
 
 
 
 
ITEM 2.
 
 
 
 
 
ITEM 3.
 
 
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 5.
 
 
 
 
 
ITEM 6.
 
 

1



PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(in millions, except per share amounts)
REVENUES
Natural gas sales
$
197.6

 
$
161.2

Oil sales
194.2

 
110.8

NGL sales
68.4

 
97.4

Gathering, processing and other
45.6

 
49.8

Purchased gas, oil and NGL sales
190.7

 
184.0

Total Revenues
696.5

 
603.2

OPERATING EXPENSES
 

 
 

Purchased gas, oil and NGL expense
196.8

 
188.4

Lease operating expense
38.9

 
40.1

Natural gas, oil and NGL transportation and other handling costs
34.0

 
34.5

Gathering, processing and other
20.6

 
23.7

General and administrative
46.0

 
36.0

Production and property taxes
35.9

 
24.7

Depreciation, depletion and amortization
254.2

 
199.3

Exploration expenses
5.1

 
2.0

Impairment

 
6.5

Total Operating Expenses
631.5

 
555.2

Net (loss) gain from asset sales
(0.2
)
 
1.5

OPERATING INCOME
64.8

 
49.5

Realized and unrealized (losses) gains on derivative contracts (See Note 7)
(34.6
)
 
216.3

Interest and other income
2.0

 
1.7

Income from unconsolidated affiliates
1.3

 
1.9

Interest expense
(39.4
)
 
(24.7
)
(LOSS) INCOME BEFORE INCOME TAXES
(5.9
)
 
244.7

Income tax benefit (provision)
2.2

 
(88.7
)
NET (LOSS) INCOME
(3.7
)
 
156.0

Net income attributable to noncontrolling interest
(0.6
)
 
(0.8
)
NET (LOSS) INCOME ATTRIBUTABLE TO QEP
$
(4.3
)
 
$
155.2

 
 
 
 
Earnings Per Common Share Attributable to QEP
 

 
 

Basic total
$
(0.02
)
 
$
0.87

Diluted total
$
(0.02
)
 
$
0.87

 
 
 
 
Weighted-average common shares outstanding
 

 
 

Used in basic calculation
177.0

 
177.4

Used in diluted calculation
177.0

 
178.5

Dividends per common share
$
0.02

 
$
0.02


See notes accompanying the condensed consolidated financial statements.

2



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) 
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(in millions)
Net (loss) income
$
(3.7
)
 
$
156.0

Other comprehensive (loss) income, net of tax:
 

 
 

Reclassification of previously deferred derivative gains(1)
(20.1
)
 
(47.0
)
Pension and other postretirement plans adjustments:
 

 
 

Amortization of net actuarial loss (2)
0.4

 
0.1

Amortization of prior service cost (3)
0.8

 
0.9

Total pension and other postretirement plans adjustments
1.2

 
1.0

Other comprehensive loss
(18.9
)
 
(46.0
)
Comprehensive (loss) income
(22.6
)
 
110.0

Comprehensive income attributable to noncontrolling interests
(0.6
)
 
(0.8
)
Comprehensive (loss) income attributable to QEP
$
(23.2
)
 
$
109.2

____________________________
(1) 
Presented net of income tax benefit of $11.9 million and $27.8 million during the three months ended March 31, 2013 and 2012, respectively.
(2) 
Presented net of income tax expense of $0.2 million and $0.1 million during the three months ended March 31, 2013 and 2012, respectively.
(3) 
Presented net of income tax expense of $0.5 million and $0.5 million during the three months ended March 31, 2013 and 2012, respectively.

See notes accompanying the condensed consolidated financial statements.


3



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2013
 
December 31,
2012
ASSETS
(in millions)
Current Assets
 
 
 
Cash and cash equivalents
$

 
$

Accounts receivable, net
432.3

 
387.5

Fair value of derivative contracts
85.6

 
188.7

Gas, oil and NGL inventories, at lower of average cost or market
7.1

 
13.1

Prepaid expenses and other
50.0

 
60.4

Deferred income taxes
18.1

 

Total Current Assets
593.1

 
649.7

Property, Plant and Equipment (successful efforts method for gas and oil properties)
 

 
 

Proved properties
10,502.4

 
10,234.3

Unproved properties
961.4

 
937.9

Midstream field services
1,647.2

 
1,634.9

Marketing and other
69.1

 
64.6

Material and supplies
60.9

 
61.9

Total Property, Plant and Equipment
13,241.0

 
12,933.6

Less Accumulated Depreciation, Depletion and Amortization
 

 
 

Exploration and production
4,458.1

 
4,258.1

Midstream field services
372.5

 
357.9

Marketing and other
19.7

 
18.1

Total Accumulated Depreciation, Depletion and Amortization
4,850.3

 
4,634.1

Net Property, Plant and Equipment
8,390.7

 
8,299.5

Investment in unconsolidated affiliates
41.0

 
41.2

Goodwill
59.5

 
59.5

Fair value of derivative contracts
2.5

 
4.1

Other noncurrent assets
57.1

 
54.5

TOTAL ASSETS
$
9,143.9

 
$
9,108.5

LIABILITIES AND EQUITY


 
 

Current Liabilities
 

 
 

Checks outstanding in excess of cash balances
$
99.7

 
$
39.7

Accounts payable and accrued expenses
455.5

 
635.9

Production and property taxes
46.0

 
41.8

Interest payable
34.0

 
36.9

Fair value of derivative contracts
15.5

 
2.6

Deferred income taxes

 
5.0

Total Current Liabilities
650.7

 
761.9

Long-term debt
3,367.5

 
3,206.9

Deferred income taxes
1,496.1

 
1,493.5

Asset retirement obligations
197.1

 
191.4

Fair value of derivative contracts
3.2

 
3.6

Other long-term liabilities
141.5

 
137.5

Commitments and contingencies


 


EQUITY
 

 
 

Common stock - par value $0.01 per share; 500.0 million shares authorized; 
179.6 million and 178.5 million shares issued, respectively
1.8

 
1.8

Treasury stock - 0.3 million and 0.1 million shares, respectively
(11.9
)
 
(3.7
)
Additional paid-in capital
472.0

 
462.1

Retained earnings
2,765.2

 
2,773.0

Accumulated other comprehensive income
13.9

 
32.8

Total Common Shareholders' Equity
3,241.0

 
3,266.0

Noncontrolling interest
46.8

 
47.7

Total Equity
3,287.8

 
3,313.7

TOTAL LIABILITIES AND EQUITY
$
9,143.9

 
$
9,108.5

 

See notes accompanying the condensed consolidated financial statements.

4



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(in millions)
OPERATING ACTIVITIES
 

 
 

Net (loss) income
$
(3.7
)
 
$
156.0

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation, depletion and amortization
254.2

 
199.3

Deferred income taxes
(9.3
)
 
69.1

Impairment

 
6.5

Share-based compensation
6.1

 
5.7

Amortization of debt issuance costs and discounts
1.5

 
1.1

Dry exploratory well expense

 
0.1

Net loss (gain) from asset sales
0.2

 
(1.5
)
Income from unconsolidated affiliates
(1.3
)
 
(1.9
)
Distributions from unconsolidated affiliates and other
1.5

 
1.6

Unrealized loss (gain) on derivative contracts
85.3

 
(128.3
)
Changes in operating assets and liabilities
(162.4
)
 
20.8

Net Cash Provided by Operating Activities
172.1

 
328.5

INVESTING ACTIVITIES
 

 
 

Property acquisitions
(23.6
)
 
(1.4
)
Property, plant and equipment, including dry exploratory well expense
(361.0
)
 
(336.5
)
Proceeds from disposition of assets
1.5

 
3.3

Net Cash Used in Investing Activities
(383.1
)
 
(334.6
)
FINANCING ACTIVITIES
 

 
 

Checks outstanding in excess of cash balances
60.0

 
29.2

Long-term debt issued

 
500.0

Long-term debt issuance costs paid

 
(6.9
)
Proceeds from credit facility
545.5

 
120.0

Repayments of credit facility
(385.0
)
 
(626.0
)
Treasury stock repurchases
(7.5
)
 
(9.3
)
Other capital contributions
2.1

 
2.4

Dividends paid
(3.6
)
 
(3.6
)
Excess tax benefit on share-based compensation
1.0

 
2.0

Distribution to noncontrolling interest
(1.5
)
 
(1.7
)
Net Cash Provided by Financing Activities
211.0

 
6.1

Change in cash and cash equivalents

 

Beginning cash and cash equivalents

 

Ending cash and cash equivalents
$

 
$

 
 
 
 
Supplemental Disclosures:
 

 
 

Cash paid for interest, net of capitalized interest
$
40.7

 
$
39.1

Cash paid (received) for income taxes
4.9

 
(2.6
)
Non-cash investing activities
 

 
 

Change in capital expenditure accrual balance
$
42.6

 
$
3.5

 
See notes accompanying the condensed consolidated financial statements.

5



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;
QEP Marketing Company (QEP Marketing) markets affiliate and third-party natural gas and oil, and owns and operates an underground gas-storage reservoir.
 
Operations are focused in two major regions: the Northern Region (primarily in North Dakota, Wyoming and Utah) 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, 2012.
 
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 months ended March 31, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
 
New accounting pronouncements
  
In February of 2013, the FASB issued ASU 2013-02, Other Comprehensive Income (Topic 220: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income), which seeks to improve the reporting of entities by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments are effective prospectively for reporting periods beginning on or after December 15, 2012. The Company adopted this standard noting it did not have a significant impact on the Company's consolidated financial statements.

In December of 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, 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. Additionally, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies the implementation of ASU 2011-01. The amendments are required for annual reporting periods beginning after

6



January 1, 2013, and interim periods within those annual periods. The Company adopted this standard effective January 1, 2013. It did not have a significant impact on the Company's consolidated financial statements.

In July of 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment, which revises the way an entity can test indefinite-lived intangible assets for impairment by allowing an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If there is no indication of impairment from the qualitative impairment test, the entity is not required to complete a quantitative impairment test of determining and comparing the fair value with the carrying amount of the indefinite-lived asset. Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment in any period and proceed directly to performing the quantitative impairment test, while retaining the ability to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard has allowed the Company to more efficiently complete the annual goodwill impairment test but has not had a significant impact on the Company's consolidated financial statements.
 
Note 3 - Acquisition

On September 27, 2012, QEP Energy completed an acquisition of oil and gas properties in the Williston Basin for an aggregate purchase price of approximately $1.4 billion, subject to post-closing adjustments (the 2012 Acquisition). The properties are located in Williams and McKenzie counties of North Dakota, approximately 12 miles west of QEP's existing core acreage in the Williston Basin.

The 2012 Acquisition meets the definition of a business combination under ASC 805, Business Combinations, as it included proved properties. QEP allocated the cost of the 2012 Acquisition to assets acquired and liabilities assumed based on fair values as of the acquisition date. Revenues of $57.6 million and net income of $13.1 million generated from the acquired properties during the first quarter of 2013 are included in QEP's Condensed Consolidated Statements of Operations.

QEP Energy recorded the 2012 Acquisition on its Condensed Consolidated Balance Sheet; however, the final purchase price is subject to revision based on the settlement of post-closing adjustments. The following table presents a summary of the Company's preliminary purchase accounting entries:
 
As of March 31, 2013
 
(in millions)
Consideration given:
 
Cash consideration
$
1,394.2

Amounts recognized for preliminary fair value of assets acquired and liabilities assumed:
 
Proved properties
$
713.8

Unproved properties
684.9

Asset retirement obligations
(0.9
)
Liabilities assumed
(4.4
)
Other assets
0.8

Total fair value
$
1,394.2


The following unaudited, pro forma results of operations are provided for the three months ended March 31, 2012. These supplemental pro forma results of operations are provided for illustrative purposes only and may not be indicative of the actual results that would have been achieved by the properties for the period presented or that may be achieved by the properties in the future. Future results may vary significantly from the results reflected in this pro forma financial information because of future events and transactions, as well as other factors. The pro forma information is based on QEP's consolidated results of operations for the three months ended March 31, 2012, on the acquired properties' historical results of operations and on estimates of the effect of the transaction on the combined results. The pro forma results of operations have been prepared by adjusting the historical results of QEP to include the historical results of the acquired properties based on information provided by the seller and the impact of the preliminary purchase price allocation. The pro forma results of operations do not include any cost savings or other synergies that may result from the 2012 Acquisition or any estimated costs that have been or will be incurred by the Company to integrate the properties.

7



 
Three Months Ended
 
March 31, 2012
 
Actual
 
Pro forma
 
(in millions, except per share data)
 
 
 
 
Revenues
$
603.2

 
$
637.9

Net income attributable to QEP
155.2

 
173.0

Earnings per common share attributable to QEP
 
 
 
Basic
$
0.87

 
$
0.97

Diluted
0.87

 
0.97


Note 4 – 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 March 31, 2013, 0.3 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 three months ended March 31, 2012.
 
A reconciliation of the components of basic and diluted shares used in the EPS calculation follows:
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(in millions)
Weighted-average basic common shares outstanding
177.0

 
177.4

Potential number of shares issuable upon exercise of in-the-money stock options under the Long-term Stock Incentive Plan


 
1.1

Average diluted common shares outstanding
177.0

 
178.5


Note 5 – 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 oil and gas 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.


8



The following is a reconciliation of the changes in the Company's asset retirement obligation from January 1, 2013, to March 31, 2013:
 
Asset Retirement Obligations
 
2013
 
(in millions)
ARO liability at January 1,
$
193.1

Accretion
3.0

Liabilities incurred
3.3

Revisions
0.1

Liabilities settled
(0.8
)
ARO liability at March 31,
$
198.7


Note 6 – Fair Value Measurements
 
QEP measures and discloses fair values in accordance with the provisions of ASC 820 “Fair Value Measurements and Disclosures”. This guidance defines fair value in applying GAAP, establishes a framework for measuring fair value and expands disclosures about fair-value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. ASC 820 also establishes a fair-value hierarchy. Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. 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 7 - Derivative Contracts) is based on market prices posted on the NYMEX on the last trading day of the reporting period and industry standard discounted cash flow models. 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 of the Company's 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 interest rate swaps that it has determined are Level 2 financial instruments. 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.


9



The fair value of financial assets and liabilities at March 31, 2013, is shown in the table below:
 
Fair Value Measurements
 
March 31, 2013
 
Gross Amounts of Assets and Liabilities
 
Netting
Adjustments(1)
 
Net Amounts Presented on the Condensed Consolidated Balance Sheet
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in millions)
Financial Assets
 
 
 
 
 
 
 
 
 
Commodity derivative instruments - short-term
$

 
$
93.7

 
$

 
$
(8.1
)
 
$
85.6

Commodity derivative instruments - long-term

 
2.7

 

 
(0.2
)
 
2.5

Total financial assets
$

 
$
96.4

 
$

 
$
(8.3
)
 
$
88.1

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity derivative instruments - short-term
$

 
$
21.1

 
$

 
$
(8.1
)
 
$
13.0

Interest rate swaps - short-term

 
2.5

 

 

 
2.5

Commodity derivative instruments - long-term

 
0.2

 

 
(0.2
)
 

Interest rate swaps - long-term

 
3.2

 

 

 
3.2

Total financial liabilities
$

 
$
27.0

 
$

 
$
(8.3
)
 
$
18.7

 ____________________________
(1) The Company nets its derivative contract assets and liabilities outstanding with the same counterparty on the Condensed Consolidated Balance Sheet as the contracts contain netting provisions. Refer to Note 7 - Derivative Contracts, for additional information regarding the Company's derivative contracts.

The fair value of financial assets and liabilities at December 31, 2012, is shown in the table below:
 
Fair Value Measurements
 
December 31, 2012
 
Gross Amounts of Assets and Liabilities
 
Netting
Adjustments(1)
 
Net Amounts Presented on the Condensed Consolidated Balance Sheet
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in millions)
Financial Assets
 
 
 
 
 
 
 
 
 
Commodity derivative instruments - short-term
$

 
$
189.7

 
$

 
$
(1.0
)
 
$
188.7

Commodity derivative instruments - long-term

 
4.2

 

 
(0.1
)
 
4.1

Total financial assets
$

 
$
193.9

 
$

 
$
(1.1
)
 
$
192.8

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity derivative instruments - short-term
$

 
$
1.0

 
$

 
$
(1.0
)
 
$

Interest rate swaps - short-term

 
2.6

 

 

 
2.6

Commodity derivative instruments - long-term

 
0.1

 

 
(0.1
)
 

Interest rate swaps - long-term

 
3.6

 

 

 
3.6

Total financial liabilities
$

 
$
7.3

 
$

 
$
(1.1
)
 
$
6.2

_______________________
(1) The Company nets its derivative contract assets and liabilities outstanding with the same counterparty on the Condensed Consolidated Balance Sheet as the contracts contain netting provisions. Refer to Note 7 - Derivative Contracts, for additional information regarding the Company's derivative contracts.


10



The following table discloses the fair value and related carrying amount of certain financial instruments not disclosed in other notes to the condensed consolidated financial statements in this quarterly report on Form 10-Q:
 
Carrying
Amount
 
Level 1
Fair Value
 
Carrying
Amount
 
Level 1
Fair Value
 
March 31, 2013
 
December 31, 2012
 
(in millions)
Financial liabilities
 

 
 

 
 

 
 

Checks outstanding in excess of cash balances
$
99.7

 
$
99.7

 
$
39.7

 
$
39.7

Long-term debt
$
3,367.5

 
$
3,535.7

 
$
3,206.9

 
$
3,420.7


The carrying amount of checks outstanding in excess of cash balances approximates 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 because the floating interest rate paid on such debt was set for periods of one month.

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 5 – Asset Retirement Obligations.

Note 7 – 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 March 31, 2013, AOCI consisted of $91.4 million ($57.4 million after tax) of unrealized gains. During the three months ended March 31, 2013 and 2012, $20.1 million and $47.0 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 hedges over the remainder of 2013. Currently, QEP

11



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 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 March 31, 2013:
 
 
 
 
 
 
 
 
 
Swaps
Year
 
Type of Contract
 
Index
 
Total
Volumes
 
Average price per unit
 
 
 
 
 
 
(in millions)
 
 
Natural gas sales
 
 
 
 
 
(MMBtu)

 
 
2013
 
Swap
 
IFNPCR (1)
 
52.3

 
$
5.57

2013
 
Swap
 
NYMEX
 
44.0

 
$
3.81

2014
 
Swap
 
IFNPCR (1)
 
29.2

 
$
3.98

2014
 
Swap
 
NYMEX
 
25.6

 
$
4.19

Oil sales
 
 
 
 
 
(Bbls)

 
 

2013
 
Swap
 
NYMEX WTI
 
4.4

 
$
98.33

2013
 
Swap
 
BRENT ICE
 
0.3

 
$
107.80

2014
 
Swap
 
NYMEX WTI
 
4.7

 
$
92.99

____________________________
(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 March 31, 2013:
Year
 
Type of Contract
 
Index
 
Total
Volumes
 
Average Swap price
per MMBtu
 
 
 
 
 
 
(in millions)
 
 
Natural gas sales
 
 
 
 
 
(MMBtu)

 
 
2013
 
Swap
 
IFNPCR
 
2.1

 
$
3.52

Natural gas purchases
 
 
 
 
 
(MMBtu)

 
 

2013
 
Swap
 
IFNPCR
 
0.1

 
$
2.96

2014
 
Swap
 
IFNPCR
 
0.1

 
$
3.02



12



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 March 31, 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 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
 
March 31,
2013
 
December 31, 2012
 
March 31,
2013
 
December 31, 2012
 
 
 
(in millions)
 
(in millions)
Current:
 
 
 
 
 
 
 
 
 
Commodity
Fair value of derivative contracts
 
$
93.7

 
$
189.7

 
$
21.1

 
$
1.0

Interest rate swaps
Fair value of derivative contracts
 

 

 
2.5

 
2.6

Long-term:
 
 
 

 
 

 
 

 
 

Commodity
Fair value of derivative contracts
 
2.7

 
4.2

 
0.2

 
0.1

Interest rate swaps
Fair value of derivative contracts
 

 

 
3.2

 
3.6

Total derivative instruments
 
$
96.4

 
$
193.9

 
$
27.0

 
$
7.3



13



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 March 31,
Derivative instruments not designated as cash flow hedges
 
2013
 
2012
Realized gains (losses) on commodity derivative contracts
 
(in millions)
QEP Energy
 
 
 
 
Natural gas derivative contracts
 
$
44.6

 
$
85.7

Oil derivative contracts
 
5.2

 
(2.7
)
NGL derivative contracts
 

 
0.4

QEP Field Services
 
 

 
 

NGL derivative contracts
 

 
1.1

QEP Marketing
 
 

 
 

Natural gas derivative contracts
 
1.5

 
3.5

Total realized gains on commodity derivative contracts
 
51.3

 
88.0

Unrealized gains (losses) on commodity derivative contracts
QEP Energy
 
 

 
 

Natural gas derivative contracts
 
(64.3
)
 
132.3

Oil derivative contracts
 
(19.7
)
 
(11.5
)
NGL derivative contracts
 

 
2.9

QEP Field Services
 
 

 
 

NGL derivative contracts
 

 
3.0

QEP Marketing
 
 

 
 

Natural gas derivative contracts
 
(1.7
)
 
1.6

Total unrealized (losses) gains on commodity derivative contracts
 
(85.7
)
 
128.3

Total realized and unrealized (losses) gains on commodity derivative contracts
 
$
(34.4
)
 
$
216.3

 
 
 
 
 
Realized gains (losses) on interest rate swaps
Realized losses on interest rate swaps
 
$
(0.6
)
 
$

Unrealized gains (losses) on interest rate swaps
Unrealized gains on interest rate swaps
 
0.4

 

Total realized and unrealized losses on interest rate swaps
 
$
(0.2
)
 
$

Total net realized gains on derivative contracts
 
$
50.7

 
$
88.0

Total net unrealized (losses) gains on derivative contracts
 
(85.3
)
 
128.3

Grand Total
 
$
(34.6
)
 
$
216.3

 
The Company estimates that the remaining derivative contracts that were outstanding in AOCI at March 31, 2013, having a fixed fair value of $57.4 million after tax, will be settled and reclassified from AOCI to the Condensed Consolidated Statements of Operations during the remainder of 2013.

Note 8 – Restructuring Costs
 
During the first quarter of 2012, QEP began incurring costs related to the closure of its Oklahoma City office and the subsequent consolidation of its Southern Region operations into a single regional office located in Tulsa. During the second half of 2012, QEP incurred additional restructuring and reorganization costs related to consolidating various corporate and accounting functions to the Denver corporate headquarters. The creation of one office for QEP’s Southern Region as well as the consolidation of corporate and accounting functions is intended to increase efficiency, team-based collaboration and organizational productivity over the long term. As part of the reorganization, QEP incurred and will continue to incur costs associated with the severance, retention and relocation of employees, additional pension expenses, exit costs associated with

14



the termination of operating leases arising from office space that will no longer be utilized by the Company and other expenses. The Company currently estimates that the remaining restructuring costs will be incurred during the remainder of 2013.

The following tables summarize, by line of business, each major type of cost expected to be incurred and the total amounts recorded in "General and administrative" expense on the Condensed Consolidated Statement of Operations for the respective periods indicated:
 
Total Restructuring Costs
 
Total Expected to be Incurred
 
Recognized in Income
 
 
Period from Inception to March 31, 2013
 
Three Months Ended
 
 
 
March 31, 2013
 
March 31, 2012
QEP Energy
(in millions)
One-time termination benefits
$
3.3

 
$
3.2

 
$
0.2

 
$
1.1

Retention & relocation expense
5.1

 
3.5

 
0.1

 
1.6

Lease termination costs
0.6

 
0.6

 

 

Total restructuring costs attributable to QEP Energy
$
9.0

 
$
7.3

 
$
0.3

 
$
2.7

 
 
 
 
 
 
 
 
QEP Field Services
 
 
 
 
 
 
 
One-time termination benefits
$

 
$

 
$

 
$

Retention & relocation expense
0.2

 

 

 

Lease termination costs

 

 

 

Total restructuring costs attributable to QEP Field Services
$
0.2

 
$

 
$

 
$

 
 
 
 
 
 
 
 
QEP Marketing
 
 
 
 
 
 
 
One-time termination benefits
$
0.3

 
$
0.2

 
$
0.1

 
$

Retention & relocation expense
0.2

 

 

 

Lease termination costs

 

 

 

Total restructuring costs attributable to QEP Marketing
$
0.5

 
$
0.2

 
$
0.1

 
$

 
 
 
 
 
 
 
 
Total QEP Resources
 
 
 
 
 
 
 
One-time termination benefits
$
3.6

 
$
3.4

 
$
0.3

 
$
1.1

Retention & relocation expense
5.5

 
3.5

 
0.1

 
1.6

Lease termination costs
0.6

 
0.6

 

 

Total restructuring costs attributable to QEP Resources
$
9.7

 
$
7.5

 
$
0.4

 
$
2.7


The following is a reconciliation of the restructuring liability, by line of business, which is included within “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets:
 
QEP Energy
 
QEP Field Services
 
QEP Marketing
 
Total
 
(in millions)
Balance at December 31, 2012
$
1.0

 
$

 
$

 
$
1.0

Costs incurred and charged to expense
0.3

 

 
0.1

 
0.4

Costs paid or otherwise settled
(0.7
)
 

 
(0.1
)
 
(0.8
)
Balance at March 31, 2013
$
0.6

 

 

 
$
0.6

 

15



Note 9 – Debt
 
As of the indicated dates, the principal amount of QEP’s debt, including amounts outstanding under its revolving credit facility, term loan and senior notes consisted of the following:
 
March 31,
2013
 
December 31,
2012
 
(in millions)
Revolving credit facility due 2016
$
850.5

 
$
690.0

Term loan due 2017
300.0

 
300.0

6.05% Senior Notes due 2016
176.8

 
176.8

6.80% Senior Notes due 2018
134.0

 
134.0

6.80% Senior Notes due 2020
136.0

 
136.0

6.875% Senior Notes due 2021
625.0

 
625.0

5.375% Senior Notes due 2022
500.0

 
500.0

5.25% Senior Notes due 2023
650.0

 
650.0

Total principal amount of debt
3,372.3

 
3,211.8

Less unamortized discount
(4.8
)
 
(4.9
)
Total long-term debt outstanding
$
3,367.5

 
$
3,206.9

 
Of the total debt outstanding on March 31, 2013, amounts outstanding under the revolving credit facility due August 25, 2016, and the term loan due April 18, 2017, as well as the 6.05% Senior Notes due September 1, 2016, will mature within the next five years.
 
Credit Facility
 
QEP’s revolving credit facility agreement, 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 credit facility 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, with the agreement of the lenders.

During the three months ended March 31, 2013 and 2012, QEP’s weighted-average interest rate on borrowings from its credit facility was 2.35% and 2.06%, respectively. At March 31, 2013 and December 31, 2012, QEP was in compliance with the covenants under the credit agreement. At March 31, 2013, there was $850.5 million outstanding and $3.7 million of letters of credit issued under the credit facility.

Term Loan
 
QEP's $300.0 million senior, unsecured term loan agreement provides for borrowings at short-term interest rates and contains covenants, restrictions and interest rates that are substantially the same as the Company’s 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 three months ended March 31, 2013, QEP’s weighted-average interest rate on borrowings from the term loan was 2.26%. At March 31, 2013, and December 31, 2012, QEP was in compliance with the covenants under the term loan credit agreement.
 
Senior Notes

At March 31, 2013, the Company had $2,221.8 million principal amount of senior notes outstanding with maturities ranging from September 2016 to May 2023 and coupons ranging from 5.25% 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 indentures governing QEP’s senior notes contain customary events of default and covenants that may limit QEP’s ability to, among other things, place liens on its property or assets.


16



Note 10 – Contingencies
 
QEP is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. QEP assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. In accordance with ASC 450, Contingencies, an accrual 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. Because legal proceedings are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about uncertain future events. When evaluating contingencies, QEP may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. QEP's litigation loss contingencies are discussed below. QEP is unable to estimate reasonably possible losses in excess of recorded accruals for these contingencies for the reasons set forth above. QEP believes, however, that the resolution of pending proceedings will not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
 
Environmental Claims
 
In October 2009, the Company received a cease and desist order from the U.S. Army Corps of Engineers (COE) to refrain from unpermitted work resulting in the discharge of dredged and/or fill material into waters of the United States at three sites located in Caddo and Red River Parishes, Louisiana. EPA Region 6 has assumed lead responsibility for enforcement of the cease and desist order and any possible future orders for the removal of unauthorized fills and/or civil penalties under the Clean Water Act. In 2012, the Company completed a field audit, which identified 112 additional instances affecting approximately 90 acres where work may have been conducted in violation of the Clean Water Act. The Company has disclosed each of these instances to the EPA under the EPA's Audit Policy (to reduce penalties) and to the COE. The Company is working with the EPA and the COE to resolve these matters, which will require the Company to undertake certain mitigation and permitting activities, and may require the Company to pay a monetary penalty.

In July 2010, the Company received a Notice of Potential Penalty (NOPP) from the Louisiana Department of Environmental Quality (LDEQ) regarding the assumption of ownership and operatorship of a single facility in Louisiana prior to transferring the facility's air quality permit. In 2011, the Company completed an internal audit, which identified 424 facilities in Louisiana for which the Company both failed to submit a complete permit application and to receive approval from the department prior to construction, modification, or operation. The Company has corrected and disclosed all instances of non-compliance to the LDEQ and is working with the department to resolve the NOPP. LDEQ has assumed lead responsibility for enforcement of the NOPP and may require the Company to pay a monetary penalty.

Litigation
 
Chieftain Royalty Company v. QEP Energy Company, Case No CIV-11-0212-R, U. S. District Court for the Western District of Oklahoma. This statewide class action was filed in January 2011 on behalf of QEP's Oklahoma royalty owners asserting various claims for damages related to royalty valuation on all of QEP's Oklahoma wells operated by QEP or from which QEP marketed gas. These claims include breach of contract, breach of fiduciary duty, fraud, unjust enrichment, tortious breach of contract, conspiracy, and conversion, based generally on asserted improper deduction of post-production costs. The Court certified the class as to the breach of contract, breach of fiduciary duty and unjust enrichment claims. The parties successfully mediated the case in January 2013. On February 13, 2013, the parties executed a Stipulation and Agreement of Settlement (the Chieftain Settlement Agreement) providing for a cash payment from QEP to the class in the amount of $115.0 million. In consideration for the settlement payment, QEP will receive a full release of all claims regarding the calculation, reporting and payment of royalties from the sale of natural gas and its constituents for all periods prior to February 28, 2013, and all class members are enjoined from asserting claims related to such royalties. As part of the Chieftain Settlement Agreement, the parties also agreed on the methodology for the calculation and payment of future royalties payable by QEP, or its successors and assigns, under all class leases for the life of such leases. On February 20, 2013, the Court entered a Preliminary Order Approving Class Action Settlement. In accordance with the terms of the Settlement Agreement, QEP paid the $115.0 million into an escrow account in February 2013 pending the Court's final approval of the settlement at the Fairness Hearing scheduled for May 2013. The $115.0 million was included in "Accounts payable and accrued expenses" on the Consolidated Balance Sheet as of December 31, 2012.
 
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

17



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. QGC is disputing the annual calculation of the gathering rate, which is based on a cost of service concept expressed in the 1993 Agreement and in a 1998 amendment, and is netting this disputed amount from its monthly payments of the gathering fees to QEP Field Services. 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. Also, on May 1, 2012, QEP Field Services Company filed a legal action against QGC 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. By agreement of the parties, the Colorado action was withdrawn and its claims were asserted as counterclaims in the Utah action.
 
Note 11 – 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 12.0 million shares available for future grants under the LTSIP at March 31, 2013. Share-based compensation expense is recognized in “General and administrative” on the Condensed Consolidated Statements of Operations. During the three months ended March 31, 2013, QEP recognized $6.1 million in total compensation expense related to share-based compensation compared to $5.7 million during the three months ended March 31, 2012.
 
Stock Options
QEP uses the Black-Scholes-Merton mathematical model to estimate the fair value of stock option awards at the date of the grant. 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 Company utilizes the "simplified" method to estimate the expected term of the stock options granted as there is limited historical exercise data available in estimating the expected term of the stock options. QEP uses a historical volatility method to estimate the fair value of stock option awards and the risk-free interest rate is based on the yield on U.S. Treasury strips with maturities similar to those of the expected term of the stock options. The stock options typically vest in equal installments over a three-year period from the grant date and are exercisable immediately upon vesting through the seventh anniversary of the grant date.
 
The calculated fair value of options granted and major assumptions used in the model at the date of grant are listed below:
 
Stock Option Assumptions
 
Three Months Ended
 
March 31, 2013
Weighted-average grant-date fair value of awards granted during the period
$
15.32

Weighted-average risk-free interest rate
0.97
%
Weighted-average expected price volatility
58.5
%
Expected dividend yield
0.27
%
Expected term in years at the date of grant
5.5



18



Stock option transactions under the terms of the LTSIP are summarized below:
 
Options
Outstanding
 
Weighted-
Average Exercise Price
 
Weighted-Average
Remaining
Contractual Term
 
Aggregate
Intrinsic Value
 
 
 
(per share)
 
(in years)
 
(in millions)
Outstanding at December 31, 2012
1,697,471

 
$
25.23

 
 
 
 
Granted
321,048

 
30.12

 
 
 
 
Exercised
(209,500
)
 
9.60

 
 

 
 

Forfeited

 

 

 
 
Outstanding at March 31, 2013
1,809,019

 
$
27.90

 
4.4

 
$
8.1

Options Exercisable at March 31, 2013
1,231,704

 
$
26.35

 
3.5

 
$
7.7

Unvested Options at March 31, 2013
577,315

 
$
31.22

 
6.4

 
$
0.4

 
The total intrinsic value (the difference between the market price at the exercise date and the exercise price) of options exercised was $4.2 million and $6.9 million during the three months ended March 31, 2013 and 2012, respectively. The Company realized $1.4 million and $2.1 million of income tax benefit for the three months ended March 31, 2013 and 2012, which increased its Additional Paid-in-Capital (APIC) pool by $1.4 million as of March 31, 2013. As of March 31, 2013, $6.6 million of unrecognized compensation cost related to stock options granted under the LTSIP is expected to be recognized over a weighted-average period of 2.6 years. During the three months ended March 31, 2013, QEP received $0.5 million in cash in relation to the exercise of stock options.
 
Restricted Shares
Restricted share grants typically vest in equal installments over a three-year period from the grant date. The grant date fair value is determined based on the closing bid price of the Company's common stock on the grant date. The total fair value of restricted stock that vested during the three months ended March 31, 2013 and 2012, was $14.8 million and $11.6 million, respectively. The Company realized $0.3 million and $0.1 million of income tax expense for the three months ended March 31, 2013 and 2012, respectively, and decreased the Company's APIC pool by $0.3 million as of March 31, 2013. The weighted average grant-date fair value of restricted stock was $30.12 per share and $30.89 per share for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, $34.8 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 2.6 years.
 
Transactions involving restricted shares under the terms of the LTSIP are summarized below:
 
Restricted Shares
Outstanding
 
Weighted-
Average Grant-Date Fair Value
 
 
 
(per share)
Unvested balance at December 31, 2012
1,300,588

 
$
31.78

Granted
792,086

 
30.12

Vested
(493,449
)
 
31.74

Forfeited
(22,014
)
 
31.56

Unvested balance at March 31, 2013
1,577,211

 
$
30.96

 
Performance Share Units
The 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 $30.12 per share and $30.90 per share for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, $11.1 million of unrecognized compensation cost, representing the fair market value of performance shares granted under the CIP, is expected to be recognized over a weighted-average vesting period of 2.4 years.
 

19



Transactions involving performance share units under the terms of the CIP are summarized below:
 
Performance Share
Units Outstanding
 
Weighted-
Average Grant-Date Fair Value
Unvested balance at December 31, 2012
283,484

 
$
34.01

Granted
217,573

 
30.12

Vested

 

Forfeited

 

Unvested balance at March 31, 2013
501,057

 
$
32.32

 
Note 12 – Employee Benefits
 
The Company maintains closed, defined-benefit pension and postretirement medical plans. QEP's pension plans include a qualified and a nonqualified retirement plan. The Company's postretirement medical plan is unfunded and provides certain health care and life insurance benefits for certain retired employees. During the three months ended March 31, 2013, the Company made contributions of $2.7 million to its funded pension plan, and $0.6 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 2013, the Company expects to contribute approximately $5.4 million to its funded pension plans, approximately $2.7 million to its unfunded pension plans and approximately $0.2 million for retiree health care and life insurance benefits.

The following table sets forth the Company’s pension and postretirement benefits net period benefit costs:
 
Pension
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(in millions)
Service cost
$
1.0

 
$
1.0

Interest cost
1.2

 
1.2

Expected return on plan assets
(1.0
)
 
(0.9
)
Amortization of prior service costs
1.2

 
1.3

Amortization of actuarial loss
0.6

 
0.2

Periodic expense
$
3.0

 
$
2.8

 
Postretirement Benefits
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(in millions)
Service cost
$

 
$

Interest cost
0.1

 
0.1

Amortization of prior service costs
0.1

 
0.1

Recognized net actuarial loss

 

Periodic expense
$
0.2

 
$
0.2

 
Note 13 – Operations by Line of Business
 
QEP’s lines of business include natural gas and oil exploration and production (QEP Energy), midstream field services (QEP Field Services) and marketing (QEP Marketing and other). The lines of business are managed separately and therefore the financial information is presented separately due to the distinct differences in the nature of operations of each line of business, among other factors.

20




The following table is a summary of operating results for the three months ended March 31, 2013, by line of business:
 
QEP Energy
 
QEP Field
Services
 
QEP Marketing
 & Other
 
Eliminations
 
QEP
Consolidated

(in millions)
Revenues
 
 
 
 
 
 
 
 
 
From unaffiliated customers
$
508.2

 
$
64.4

 
$
123.9

 
$

 
$
696.5

From affiliated customers

 
27.6

 
217.2

 
(244.8
)
 

Total Revenues
508.2

 
92.0

 
341.1

 
(244.8
)
 
696.5

Operating expenses
 

 
 

 
 

 
 

 
 

Purchased gas, oil and NGL expense
65.7

 
5.1

 
342.5

 
(216.5
)
 
196.8

Lease operating expense
41.0

 

 

 
(2.1
)
 
38.9

Natural gas, oil and NGL transportation and other handling costs
56.2

 
2.8

 

 
(25.0
)
 
34.0

Gathering, processing and other

 
20.3

 
0.3

 

 
20.6

General and administrative
36.7

 
9.5

 
1.0

 
(1.2
)
 
46.0

Production and property taxes
34.7

 
1.1

 
0.1

 

 
35.9

Depreciation, depletion and amortization
238.1

 
15.8

 
0.3

 

 
254.2

Other operating expenses
5.1

 

 

 

 
5.1

Total operating expenses
477.5

 
54.6

 
344.2

 
(244.8
)
 
631.5

Net gain (loss) from asset sales
0.1

 
(0.3
)
 

 

 
(0.2
)
Operating income (loss)
30.8

 
37.1

 
(3.1
)
 

 
64.8

Realized and unrealized losses on derivative contracts
(34.2
)
 

 
(0.4
)
 

 
(34.6
)
Interest and other income
1.7

 
0.3

 
51.2

 
(51.2
)
 
2.0

Income from unconsolidated affiliates

 
1.3

 

 

 
1.3

Interest expense
(45.3
)
 
(4.0
)
 
(41.3
)
 
51.2

 
(39.4
)
(Loss) income before income taxes
(47.0
)
 
34.7

 
6.4

 

 
(5.9
)
Income tax benefit (provision)
17.2

 
(12.5
)
 
(2.5
)
 

 
2.2

Net (loss) income
(29.8
)
 
22.2

 
3.9

 

 
(3.7
)
Net income attributable to noncontrolling interest

 
(0.6
)
 

 

 
(0.6
)
Net (loss) income attributable to QEP
$
(29.8
)
 
$
21.6

 
$
3.9

 
$

 
$
(4.3
)



21



The following table is a summary of operating results for the three months ended March 31, 2012, by line of business:
 
QEP Energy
 
QEP Field
Services
 
QEP Marketing
& Other
 
Eliminations
 
QEP
Consolidated

(in millions)
Revenues
 
 
 
 
 
 
 
 
 
From unaffiliated customers
$
396.8

 
$
93.6

 
$
112.8

 
$

 
$
603.2

From affiliated customers

 
26.1

 
132.3

 
(158.4
)
 

Total Revenues
396.8

 
119.7

 
245.1

 
(158.4
)
 
603.2

Operating expenses
 

 
 

 
 

 
 

 
 

Purchased gas, oil and NGL expense
72.5

 

 
247.6

 
(131.7
)
 
188.4

Lease operating expense
40.8

 

 

 
(0.7
)
 
40.1

Natural gas, oil and NGL transportation and other handling costs
50.4

 
8.8

 

 
(24.7
)
 
34.5

Gathering, processing and other

 
23.4

 
0.2

 
0.1

 
23.7

General and administrative
32.4

 
4.4

 
0.6

 
(1.4
)
 
36.0

Production and property taxes
22.9

 
1.7

 
0.1

 

 
24.7

Depreciation, depletion and amortization
183.7

 
15.4

 
0.2

 

 
199.3

Other operating expenses
8.5

 

 

 

 
8.5

Total operating expenses
411.2

 
53.7

 
248.7

 
(158.4
)
 
555.2

Net gain from asset sales
1.5

 

 

 

 
1.5

Operating (loss) income
(12.9
)
 
66.0

 
(3.6
)
 

 
49.5

Realized and unrealized gains on derivative contracts
207.2

 
4.1

 
5.0

 

 
216.3

Interest and other income
1.7

 

 
25.9

 
(25.9
)
 
1.7

Income from unconsolidated affiliates

 
1.9

 

 

 
1.9

Interest expense
(23.6
)
 
(2.3
)
 
(24.7
)
 
25.9

 
(24.7
)
Income before income taxes
172.4

 
69.7

 
2.6

 

 
244.7

Income taxes
(64.3
)
 
(23.5
)
 
(0.9
)
 

 
(88.7
)
Net income
108.1

 
46.2

 
1.7

 

 
156.0

Net income attributable to noncontrolling interest

 
(0.8
)
 

 

 
(0.8
)
Net income attributable to QEP
$
108.1

 
$
45.4

 
$
1.7

 
$

 
$
155.2



Note 14 – Subsequent Event

In April 2013, the Company entered into Purchase and Sale Agreements related to the disposition of some of its non-core properties in the Northern Region for total consideration of $145.0 million before purchase price adjustments. The Company expects to record a gain on the sale of these assets of approximately $100.0 million and to close the transactions in the second quarter of 2013.



22



ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of the financial statements with a narrative from the perspective of management on the financial condition, results of operations, liquidity and certain other factors that may affect the Company’s operating results. MD&A should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q.

The following information updates the discussion of QEP’s financial condition provided in its 2012 Annual Report on Form 10-K filing and analyzes the changes in the results of operations between the three-month periods ended March 31, 2013 and 2012. For definitions of commonly used gas and oil terms found in this Quarterly Report on Form 10-Q, please refer to the “Glossary of Commonly Used Terms” provided in QEP’s 2012 Annual Report on Form 10-K.

OVERVIEW

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, crude 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, and owns and operates an underground gas storage reservoir.

Strategies

We create value for our shareholders through returns-focused growth, superior execution, and a low cost structure. To achieve these objectives we strive to:

operate in a safe and environmentally responsible manner;
allocate capital to those projects that generate the highest returns;
acquire businesses and assets that complement or expand our current business;
maintain a sustainable, diverse inventory of low-cost, high-margin resource plays;
be in the highest-potential areas of the resource plays in which we operate;
build contiguous acreage positions that drive operating efficiencies;
be the operator of our assets, whenever possible;
be the low-cost driller and producer in each area where we operate;
own a controlling interest in and operate midstream infrastructure in our core producing areas to capture value downstream of the wellhead;
build gas processing plants to extract liquids from our natural gas streams;
own or control assets to gather, compress and treat our production to drive down costs;
support the growth of our midstream business with the intention of forming a Master Limited Partnership;
actively market our QEP Energy production to maximize value;
utilize derivative contracts to mitigate the impact of natural gas, crude oil or NGL price volatility, while locking in acceptable cash flows required to support future capital expenditures;
attract and retain the best people; and
maintain a capital structure that allows us the necessary financial flexibility with which to invest in organic growth and potential acquisition opportunities, as they may arise.


23



Outlook

The Company has substantial acreage positions and operations in some of the most prolific hydrocarbon resource plays in the continental United States, including the Williston Basin, Pinedale Anticline, Uinta Basin, Woodford "Cana" and Haynesville Shale. These resource plays are characterized by unconventional oil or natural gas accumulations in continuous tight sands or shales that underlie broad geographic areas. The lateral continuity of such resource plays means that aside from wells abandoned due to mechanical issues, the Company does not expect to drill many unsuccessful wells as it develops these resource plays. Resource plays allow the Company the opportunity to gain considerable operational efficiencies through high-density, repeatable drilling and completion operations. The Company has a large inventory of lower-risk, predictable development drilling locations across its acreage holdings in the onshore United States that provide a solid base for consistent growth in organic production and reserves. QEP believes that it has one of the lowest cash operating structures among its exploration and production company peers. However, in certain of its resource plays, QEP, along with its peers, has experienced increased drilling and completion costs which could impact future drilling plans.

While historically a natural gas producer, the Company has increased its focus on growing the relative proportion of crude oil and NGL production in its exploration and production business. As part of the Company's liquids growth strategy, during the third quarter of 2012, QEP Energy acquired oil and gas properties in the Williston Basin for an aggregate purchase price of $1.4 billion, subject to post-closing adjustments (the 2012 Acquisition). During the first quarter of 2013, QEP Energy increased its crude oil and NGL (natural gas liquids) production by 33% compared to the first quarter of 2012. During the first quarter of 2013, crude oil and NGL revenue accounted for approximately 55% of QEP Energy’s field-level production revenues, compared to 50% during the first quarter of 2012.

While QEP believes that it can grow production and reserves from its extensive inventory of identified drilling locations, the Company continues to evaluate acquisition opportunities that might create significant long-term value. QEP believes that its experience, expertise, and substantial presence in its core operating areas, combined with its low-cost operating model and financial strength, enhance its ability to pursue acquisition opportunities. In addition, the Company is seeking to divest select non-core portfolio assets to redirect capital towards higher-return projects.

QEP owns and operates gathering and natural gas processing and treatment facilities in the majority of its core producing areas. These assets enable the Company to promptly connect its wells, better control its costs, and generate a significant, consistent revenue stream by providing gathering and processing services to third parties.

In January 2013, QEP announced that its Board of Directors had authorized the formation of a Master Limited Partnership (MLP) to support the growth of QEP's midstream business. The Company expects to file a registration statement with the SEC in the second quarter of 2013 for an initial public offering of common units of the MLP. QEP plans to contribute a majority of its gathering assets in Wyoming and North Dakota to the MLP. QEP expects to sell a minority interest in the MLP and raise $300 million to $400 million in gross proceeds. QEP plans to use the proceeds from the offering to fund ongoing operations, to repay debt under the Company's revolving credit facility and for general corporate purposes. QEP's announcement of this plan did not, and this disclosure does not, constitute an offer to sell or the solicitation of an offer to buy any securities and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction.

Financial and Operating Results

During the three months ended March 31, 2013, QEP Energy grew production, while processing and gathering volumes decreased at QEP Field Services over the same period in 2012. QEP Energy reported total equivalent production of 78.0 Bcfe in the first quarter of 2013, an increase of 5% over the same period in 2012. Crude oil and NGL production in the first quarter of 2013 was 3,247.4 Mbbls, an increase of 33% from the first quarter 2012. The Company's 2012 Acquisition contributed 636.8 Mbbls of liquids production in the first quarter of 2013. During the three months ended March 31, 2013, QEP Field Services' gathering throughput volumes decreased 10%, NGL sales volumes decreased 68% and fee-based processing volumes were 10% lower compared to the first quarter 2012.

During the first quarter of 2013, QEP Energy also benefited from increased average realized prices compared to the first quarter of 2012. QEP Energy’s average total net realized equivalent price (including commodity derivative impact) increased 15% to $6.31 per Mcfe for the three months ended March 31, 2013, compared to $5.47 per Mcfe for the three months ended March 31, 2012. As a result of low ethane prices relative to natural gas prices, QEP Field Services' processing plants are now operating in ethane rejection mode (where ethane is left in the production stream and sold as natural gas). When in ethane rejection mode, NGL volumes are lower and average NGL prices are higher as a result of the remaining components of the NGL stream having a higher price than ethane. During the first quarter of 2013, NGL sales volumes declined, the impact of which was partially

24



offset by an increase in average net realized NGL sales prices of 16%. During the first quarter of 2013, QEP Field Services' fee-based processing rates increased 15% while fee-based gathering rates were flat.

Factors Affecting Results of Operations

Oil, Natural Gas, and NGL 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. These changes have allowed producers to extract increased quantities of natural gas from shale, tight sand formations, and other unconventional reservoirs. Increased natural gas supplies have resulted in downward pressure on natural gas 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, and costs of goods and services required to drill and complete wells, and may impact the carrying value of its oil and natural gas properties.

QEP uses commodity derivatives to reduce the volatility of the prices QEP receives for a portion of its production and to protect cash flow and returns on invested capital from a drop in commodity prices. Generally, QEP intends to enter into commodity derivative contracts for approximately 50% of its forecasted annual production by the end of the first quarter of each fiscal year. At March 31, 2013, assuming 2013 annual production of 314.5 Bcfe, QEP Energy had approximately 51% of its forecasted natural gas, oil and NGL equivalent production covered with fixed-price swaps, including 56% of its forecasted natural gas production and 55% of its forecasted crude oil production covered with fixed-price swaps. See Item 3 “Quantitative and Qualitative Disclosures about Market Risk—Commodity Derivative Transactions” for further details concerning QEP’s commodity derivatives transactions. In addition, as a result of the continued spread between oil and natural gas prices, QEP Energy has allocated approximately 98% of its forecasted 2013 drilling and completion capital expenditure budget to oil and liquids-rich natural gas projects in its portfolio.

Global Geopolitical and Macroeconomic Factors
QEP continues to monitor the outlook of the global economy, including the European debt crisis and its potential impact on global economic growth and the banking and financial sectors, political unrest in the Middle East, a slowing of growth in Asia, the United States federal budget deficit, changes in regulatory oversight policy and commodity price volatility. A dramatic decline in regional or global economic conditions, a major recession or depression, regional political instability, economic sanctions, war, or other factors beyond the control of QEP could have a significant impact on natural gas, NGL and crude oil supply, demand and prices, and could materially impact the Company's financial position, results of operations and cash flow from operations and operating prices.

Supply, Demand and Other Market Risk Factors
U.S. natural gas directed drilling rig count decreased during 2012 as producers reduced drilling for natural gas in response to lower natural gas prices. A reduction in natural gas production has lagged the downturn in the natural gas rig count, because natural gas producers have a significant inventory of drilled wells waiting on completion and new high-rate horizontal wells continue to be completed. As a result of the lag, U.S. natural gas production did not decline in 2012. The U.S. natural gas market entered the storage injection season with record high inventory levels. However, strong natural gas demand from electric power generation resulted in a general firming of natural gas prices during the last half of 2012 and first quarter of 2013. Despite increased natural gas prices during the first quarter of 2013, QEP expects U.S. natural gas prices to remain volatile over the near term. Relatively low natural gas prices have caused U.S. E&P companies, including QEP, to shift capital investments away from predominantly dry gas areas toward plays that are known to have liquids-rich natural gas and crude oil. This shift in focus has caused domestic NGL production to increase dramatically. Increased NGL production, warmer-than-average winters, and price dislocations from infrastructure bottlenecks in certain regions, have all contributed to a weakening in domestic NGL prices, particularly ethane. QEP expects NGL prices to remain volatile for the foreseeable future. QEP anticipates global crude oil prices to remain near current levels, assuming the global economy and socio-political backdrops remain relatively stable. Disruption to the global oil supply system, political and/or economic instability, and/or other factors could trigger additional volatility in crude oil prices. In addition, transportation, refining, or other infrastructure constraints could introduce significant price differentials between regional markets where QEP sells its crude oil production and national (NYMEX or Cushing) and global (Brent or U.S. Gulf Coast) markets. Because of the global and regional price volatility and the uncertainty around the commodity price environment, QEP continues to manage its capital spending program and financial flexibility accordingly.


25



Potential for Future Asset Impairments
The carrying value of the Company's properties is sensitive to declines in natural gas, crude oil and NGL prices. These assets are at risk of impairment if future prices for natural gas, crude oil or NGL prices decline. The cash flow model that the Company uses to assess proved properties for impairment includes numerous assumptions, such as management's estimates of future oil, gas and NGL production, market outlook on forward commodity prices, operating and development costs, and discount rates. All inputs to the cash flow model must be evaluated at each date of estimate. However, a decrease in forward natural gas, crude oil and NGL prices alone could result in an impairment of properties. The Company did not record any impairments during the first quarter of 2013.

Critical Accounting Estimates
QEP’s significant accounting policies are described in Item 7 of Part II of its 2012 Annual Report on Form 10-K. The Company’s Condensed Consolidated Financial Statements are prepared in accordance with United States Generally Accepted Accounting Principles (GAAP). The preparation of the Company’s Condensed Consolidated Financial Statements requires management to make assumptions and estimates that affect the reported results of operations and financial position. QEP’s accounting policies on gas and oil reserves, successful efforts accounting for gas and oil operations, impairment of gas and oil properties, asset retirement obligations, accounting for derivative contracts, revenue recognition, environmental obligations, litigation and other contingencies, benefit plan obligations, share-based compensation, income taxes, and purchase price allocations, among others, may involve a high degree of complexity and judgment on the part of management.

RESULTS OF OPERATIONS

Net Income (Loss)

QEP Resources’ net loss was $4.3 million, or $0.02 per diluted share, compared to net income of $155.2 million, or $0.87 per diluted share, in the first quarter of 2012. The decrease in the first quarter of 2013 was due to a $137.9 million decrease in QEP Energy’s net income and a $23.8 million decrease in QEP Field Services net income. Despite increased total equivalent production and realized equivalent prices, QEP Energy experienced a net loss dur