QEP-2013.9.30-10Q



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 September 30, 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
 
87-0287750
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
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 September 30, 2013, there were 179,281,102 shares of the registrant’s common stock, $0.01 par value, outstanding.

 



QEP Resources, Inc.
Form 10-Q for the Quarter Ended September 30, 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
REVENUES
(in millions, except per share amounts)
Natural gas sales
$
194.8

 
$
170.3

 
$
610.5

 
$
470.4

Oil sales
253.8

 
117.7

 
656.3

 
335.7

NGL sales
71.3

 
67.5

 
215.0

 
247.0

Gathering, processing and other
46.9

 
46.3

 
135.1

 
141.9

Purchased gas, oil and NGL sales
206.0

 
140.6

 
603.4

 
449.9

Total Revenues
772.8

 
542.4

 
2,220.3

 
1,644.9

OPERATING EXPENSES
 

 
 

 
 

 
 

Purchased gas, oil and NGL expense
205.0

 
142.6

 
608.8

 
455.9

Lease operating expense
45.0

 
42.2

 
127.4

 
122.8

Natural gas, oil and NGL transportation and other handling costs
34.5

 
36.3

 
105.8

 
111.5

Gathering, processing and other
22.4

 
22.1

 
66.5

 
66.4

General and administrative
49.3

 
41.7

 
136.2

 
114.5

Production and property taxes
42.5

 
24.3

 
117.7

 
68.4

Depreciation, depletion and amortization
253.1

 
234.6

 
757.1

 
648.3

Exploration expenses
1.8

 
2.2

 
9.5

 
6.3

Impairment
3.8

 
9.0

 
4.0

 
70.9

Total Operating Expenses
657.4

 
555.0

 
1,933.0

 
1,665.0

Net gain from asset sales
12.8

 

 
113.0

 
1.5

OPERATING INCOME (LOSS)
128.2

 
(12.6
)
 
400.3

 
(18.6
)
Realized and unrealized (losses) gains on derivative contracts (See Note 8)
(27.8
)
 
36.1

 
51.6

 
334.7

Interest and other income (loss)
4.0

 
(0.2
)
 
9.1

 
2.4

Income from unconsolidated affiliates
0.8

 
2.3

 
3.7

 
5.6

Loss from early extinguishment of debt

 

 

 
(0.6
)
Interest expense
(41.7
)
 
(30.0
)
 
(122.5
)
 
(82.9
)
INCOME (LOSS) BEFORE INCOME TAXES
63.5

 
(4.4
)
 
342.2

 
240.6

Income tax (provision) benefit
(22.4
)
 
2.3

 
(125.0
)
 
(86.5
)
NET INCOME (LOSS)
41.1

 
(2.1
)
 
217.2

 
154.1

Net income attributable to noncontrolling interest
(3.8
)
 
(1.0
)
 
(5.8
)
 
(2.7
)
NET INCOME (LOSS) ATTRIBUTABLE TO QEP
$
37.3

 
$
(3.1
)
 
$
211.4

 
$
151.4

 
 
 
 
 
 
 
 
Earnings Per Common Share Attributable to QEP
 

 
 

 
 

 
 

Basic total
$
0.21

 
$
(0.02
)
 
$
1.18

 
$
0.85

Diluted total
$
0.21

 
$
(0.02
)
 
$
1.18

 
$
0.85

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 

 
 

 
 

 
 

Used in basic calculation
179.3

 
177.9

 
179.2

 
177.6

Used in diluted calculation
179.5

 
177.9

 
179.4

 
178.6

Dividends per common share
$
0.02

 
$
0.02

 
$
0.06

 
$
0.06


See notes accompanying the condensed consolidated financial statements.

2



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Net income (loss) attributable to QEP
$
41.1

 
$
(2.1
)
 
$
217.2

 
$
154.1

Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

Reclassification of previously deferred derivative gains(1)
(19.7
)
 
(42.1
)
 
(60.4
)
 
(133.8
)
Pension and other postretirement plans adjustments:
 

 
 

 
 

 
 

Amortization of net actuarial loss (2)
0.4

 
0.5

 
1.1

 
0.7

Amortization of prior service cost (3)
0.8

 
0.9

 
2.5

 
2.6

Total pension and other postretirement plans adjustments
1.2

 
1.4

 
3.6

 
3.3

Other comprehensive loss
(18.5
)
 
(40.7
)
 
(56.8
)
 
(130.5
)
Comprehensive income (loss)
22.6

 
(42.8
)
 
160.4

 
23.6

Comprehensive income attributable to noncontrolling interests
(3.8
)
 
(1.0
)
 
(5.8
)
 
(2.7
)
Comprehensive income (loss) attributable to QEP
$
18.8

 
$
(43.8
)
 
$
154.6

 
$
20.9

____________________________
(1) 
Presented net of income tax benefit of $11.7 million and $35.8 million during the three and nine months ended September 30, 2013 and $24.9 million and $79.2 million during the three and nine months ended September 30, 2012, respectively.
(2) 
Presented net of income tax expense of $0.2 million and $0.7 million during the three and nine months ended September 30, 2013 and $0.2 million and $0.4 million during the three and nine months ended September 30, 2012, respectively.
(3) 
Presented net of income tax expense of $0.5 million and $1.5 million and during the three and nine months ended September 30, 2013 and $0.5 million and $1.6 million during the three and nine months ended September 30, 2012, respectively.

See notes accompanying the condensed consolidated financial statements.


3



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2013
 
December 31,
2012
ASSETS
(in millions)
Current Assets
 
 
 
Cash and cash equivalents
$
123.0

 
$

Accounts receivable, net
321.9

 
387.5

Fair value of derivative contracts
39.4

 
188.7

Gas, oil and NGL inventories, at lower of average cost or market
13.1

 
13.1

Prepaid expenses and other
49.4

 
68.0

Deferred income taxes

 

Total Current Assets
546.8

 
657.3

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

 
 

Proved properties
11,038.8

 
10,234.3

Unproved properties
911.8

 
937.9

Midstream field services
1,670.4

 
1,634.9

Marketing and resources
80.4

 
64.6

Material and supplies
63.4

 
61.9

Total Property, Plant and Equipment
13,764.8

 
12,933.6

Less Accumulated Depreciation, Depletion and Amortization
 

 
 

Exploration and production
4,747.4

 
4,258.1

Midstream field services
394.7

 
357.9

Marketing and resources
20.3

 
18.1

Total Accumulated Depreciation, Depletion and Amortization
5,162.4

 
4,634.1

Net Property, Plant and Equipment
8,602.4

 
8,299.5

Investment in unconsolidated affiliates
39.0

 
41.2

Goodwill
59.5

 
59.5

Fair value of derivative contracts
5.8

 
4.1

Other noncurrent assets
53.2

 
46.9

TOTAL ASSETS
$
9,306.7

 
$
9,108.5

LIABILITIES AND EQUITY


 
 

Current Liabilities
 

 
 

Checks outstanding in excess of cash balances
$
1.6

 
$
39.7

Accounts payable and accrued expenses
593.6

 
643.4

Production and property taxes
58.0

 
41.8

Interest payable
34.6

 
36.9

Fair value of derivative contracts
10.1

 
2.6

Deferred income taxes
9.5

 
5.0

Total Current Liabilities
707.4

 
769.4

Long-term debt
2,882.3

 
3,206.9

Deferred income taxes
1,494.7

 
1,493.5

Asset retirement obligations
168.4

 
191.4

Fair value of derivative contracts

 
3.6

Other long-term liabilities
129.0

 
130.0

Commitments and contingencies (see Note 11)


 


EQUITY
 

 
 

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

 
1.8

Treasury stock - 0.4 million and 0.1 million shares, respectively
(14.7
)
 
(3.7
)
Additional paid-in capital
489.3

 
462.1

Retained earnings
2,973.7

 
2,773.0

Accumulated other comprehensive (loss) income
(24.0
)
 
32.8

Total Common Shareholders' Equity
3,426.1

 
3,266.0

Noncontrolling interest
498.8

 
47.7

Total Equity
3,924.9

 
3,313.7

TOTAL LIABILITIES AND EQUITY
$
9,306.7

 
$
9,108.5

 

See notes accompanying the condensed consolidated financial statements.

4



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2013
 
2012
 
(in millions)
OPERATING ACTIVITIES
 

 
 

Net income
$
217.2

 
$
154.1

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

 
 

Depreciation, depletion and amortization
757.1

 
648.3

Deferred income taxes
39.3

 
54.7

Impairment
4.0

 
70.9

Share-based compensation
20.0

 
19.5

Amortization of debt issuance costs and discounts
4.7

 
3.7

Net gain from asset sales
(113.0
)
 
(1.5
)
Income from unconsolidated affiliates
(3.7
)
 
(5.6
)
Distributions from unconsolidated affiliates and other
5.9

 
6.1

Unrealized loss (gain) on derivative contracts
55.5

 
(32.8
)
Changes in operating assets and liabilities
(8.1
)
 
54.6

Net Cash Provided by Operating Activities
978.9

 
972.0

INVESTING ACTIVITIES
 

 
 

Property acquisitions
(39.3
)
 
(1,400.3
)
Property, plant and equipment, including dry exploratory well expense
(1,089.6
)
 
(1,040.7
)
Proceeds from disposition of assets
208.3

 
5.3

Net Cash Used in Investing Activities
(920.6
)
 
(2,435.7
)
FINANCING ACTIVITIES
 

 
 

Checks outstanding in excess of cash balances
(38.1
)
 
(1.9
)
Long-term debt issued

 
1,450.0

Long-term debt issuance costs paid
(3.0
)
 
(17.0
)
Long-term debt repaid

 
(6.7
)
Proceeds from credit facility
1,075.0

 
933.5

Repayments of credit facility
(1,400.0
)
 
(876.0
)
Treasury stock repurchases
(8.7
)
 

Net proceeds from the issuance of QEPM common units
449.6

 

Other capital contributions
3.6

 
(4.2
)
Dividends paid
(10.8
)
 
(10.7
)
Excess tax benefit on share-based compensation
1.3

 
2.0

Distribution to noncontrolling interest
(4.2
)
 
(5.3
)
Net Cash Provided by Financing Activities
64.7

 
1,463.7

Change in cash and cash equivalents
123.0

 

Beginning cash and cash equivalents

 

Ending cash and cash equivalents
$
123.0

 
$

 
 
 
 
Supplemental Disclosures:
 

 
 

Cash paid for interest, net of capitalized interest
$
120.1

 
$
79.8

Cash paid for income taxes
49.4

 
28.0

Non-cash investing activities:
 

 
 

Change in capital expenditure accrual balance
$
53.7

 
$
97.5

 
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, which includes the ownership and operations of QEP Midstream Partners, LP (QEP Midstream)), 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.
 
QEP's operations are focused in two major regions: the Northern Region (primarily in North Dakota, Wyoming and Utah) and the Southern Region (primarily in Oklahoma, Louisiana and the Texas Panhandle) of the United States. QEP’s corporate headquarters are located in Denver, Colorado.
 
Shares of QEP’s 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, including QEP Midstream (see Note 3 - QEP Midstream). 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 and nine months ended September 30, 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 in the first quarter of 2013 and noted that 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

6



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 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 Company adopted this standard January 1, 2013, which 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 – QEP Midstream
 
QEP Midstream is a publicly traded master limited partnership that was formed by QEP to own, operate, acquire and develop midstream energy assets. QEP Midstream's assets currently consist of ownership interests in four gathering systems and two Federal Energy Regulatory Commission (FERC) regulated pipelines, which provide natural gas and crude oil gathering and transportation services. These assets are located in, or within close proximity to, the Green River Basin located in Wyoming and Colorado, the Uinta Basin located in eastern Utah, and the portion of the Williston Basin located in North Dakota.

Initial Public Offering

On August 14, 2013, QEP Midstream completed its initial public offering (the Offering) of 20,000,000 common units, representing limited partner interests in QEP Midstream, at a price to the public of $21.00 per common unit. QEP Midstream received net proceeds of $390.7 million from the sale of the common units, after deducting underwriting discounts and commissions, structuring fees and offering expenses of approximately $29.3 million. Following the Offering, the underwriters exercised their over-allotment option to purchase an additional 3,000,000 common units, at a price of $21.00 per common unit, providing additional net proceeds of $58.9 million, after deducting $4.1 million of underwriters' discounts and commissions and structuring fees, to QEP Midstream.

QEP Midstream used the net proceeds to repay its outstanding debt balance with QEP, which was assumed with the assets contributed to QEP Midstream, pay revolving credit facility origination fees and make a cash distribution to QEP, a portion of which was used to reimburse QEP for certain capital expenditures it incurred with respect to assets contributed to QEP Midstream. The following table is a reconciliation of proceeds from the initial public offering (in millions):
Total proceeds from the Offering
 
$
483.0

Offering costs
 
(33.4
)
Net proceeds from the Offering
 
449.6

Revolving credit facility origination fees
 
(3.0
)
Repayment of outstanding debt with QEP
 
(95.5
)
Net proceeds distributed to QEP from the Offering
 
$
351.1


QEP Midstream Partners GP, LLC (the General Partner), a wholly-owned subsidiary of QEP, serves as the general partner of QEP Midstream. QEP owns a 57.8% interest in QEP Midstream and consolidates QEP Midstream for financial reporting purposes with the portion not owned by QEP reflected as a reduction to net income and equity as noncontrolling interest.

Contribution, Conveyance and Assumption Agreement
On August 14, 2013, in connection with the closing of the Offering, QEP entered into a Contribution, Conveyance and Assumption Agreement (the Contribution Agreement) with QEP Field Services, the General Partner and QEP Midstream Partners Operating, LLC (the Operating Company). Immediately prior to the closing of the Offering, the following transactions, among others, occurred pursuant to the Contribution Agreement:

7




QEP Field Services contributed to the General Partner, as a capital contribution, a limited liability company interest in the Operating Company with a value equal to 2.0% of the equity value of QEP Midstream at the closing of the Offering;
the General Partner contributed to QEP Midstream, as a capital contribution, the limited liability company interest in the Operating Company in exchange for (a) 1,090,000 general partner units representing the continuation of an aggregate 2.0% general partner interest in QEP Midstream and (b) all the incentive distribution rights of QEP Midstream;
QEP Field Services contributed to QEP Midstream, as a capital contribution, its remaining limited liability company interests in the Operating Company in exchange for (a) 6,701,750 common units representing a 12.3% limited partner interest in QEP Midstream, (b) 26,705,000 subordinated units representing a 49.0% limited partner interest in QEP Midstream and (c) the right to receive a distribution from QEP Midstream; and
the public, through the underwriters, contributed $420.0 million in cash (or $390.7 million, net of the underwriters' discounts and commissions, structuring fees and offering expenses of approximately $29.3 million) to QEP Midstream in exchange for the issuance of 20,000,000 common units.

Subsequent to the Offering, the underwriters exercised their over-allotment option to purchase an additional 3,000,000 common units in QEP Midstream, which reduced QEP's limited partner common unit interest in QEP Midstream from 12.3% to 6.8% and QEP's total ownership interest from 63.3% to 57.8%.

Omnibus Agreement
In connection with the Offering, QEP entered into an Omnibus Agreement (the Omnibus Agreement) with QEP Midstream on August 14, 2013, that addresses the following matters:

QEP Midstream's payment of an annual amount to QEP, initially in the amount of approximately $13.8 million, for the provision of certain general and administrative services by QEP and its affiliates to QEP Midstream, including a fixed annual fee of approximately $1.4 million for providing certain executive management services by certain officers of the General Partner. The remaining portion of this annual amount reflects an estimate of the costs QEP and its affiliates expect to incur in providing the services;
QEP Midstream's obligation to reimburse QEP for any out-of-pocket costs and expenses incurred by QEP in providing general and administrative services (which reimbursement is in addition to certain expenses of the General Partner and its affiliates that are reimbursed under QEP Midstream's partnership agreement), as well as any other out-of-pocket expenses incurred by QEP on QEP Midstream's behalf; and
an indemnity by QEP for certain environmental and other liabilities, and QEP Midstream's obligation to indemnify QEP and its subsidiaries for events and conditions associated with the operation of QEP Midstream's assets that occur after the closing of the Offering.

As long as QEP controls the General Partner, the Omnibus Agreement will remain in full force and effect. If QEP ceases to control the General Partner, either party may terminate the Omnibus Agreement, but the indemnification obligations will remain in full force and effect in accordance with their terms.

Fixed Price Condensate Purchase Agreement
On August 14, 2013, QEP entered into a fixed price Condensate Purchase Transaction Agreement (the "Condensate Purchase Agreement") with QEP Midstream. The Condensate Purchase Agreement has a primary term of five years and requires QEP Midstream to sell and QEP to purchase all of the condensate volumes collected on QEP Midstream's gathering systems at a fixed price of $85.25 per barrel.

Note 4 - Acquisition and Divestitures

Acquisitions
On September 27, 2012, QEP Energy completed an acquisition of oil and gas properties in the Williston Basin for an aggregate purchase price of $1.4 billion (the 2012 Acquisition). The properties are located in Williams and McKenzie counties of North Dakota, approximately 12 miles west of QEP's then-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 $76.0 million and $190.1 million and net income of $19.2 million and $42.5 million were generated from the acquired properties during the three and nine months ended September 30, 2013, respectively, and are included in QEP's Condensed Consolidated Statements of Operations.

8




QEP Energy recorded the 2012 Acquisition on its Condensed Consolidated Balance Sheet. The following table presents a summary of the Company's purchase accounting entries:
 
As of September, 2013
 
(in millions)
Consideration given:
 
Cash consideration
$
1,392.7

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

Unproved properties
683.4

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

Total fair value
$
1,392.7


The following unaudited, pro forma results of operations are provided for the three and nine months ended September 30, 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 acquired properties for the period presented or that may be achieved by such 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 and nine months ended September 30, 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 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 acquired properties.
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2012
 
Actual
 
Pro forma
 
Actual
 
Pro forma
 
(in millions, except per share data)
 
 
 
 
 
 
 
 
Revenues
$
542.4

 
$
598.9

 
$
1,644.9

 
$
1,780.4

Net income attributable to QEP
(3.1
)
 
4.8

 
151.4

 
164.9

Earnings per common share attributable to QEP
 
 
 
 
 
 
 
Basic
$
(0.02
)
 
$
0.03

 
$
0.85

 
$
0.93

Diluted
(0.02
)
 
0.03

 
0.85

 
0.93


Divestitures
In June 2013, QEP Energy sold its interests in several non-core oil and gas properties located in QEP's Northern Region for total cash proceeds of $140.2 million and recorded a pre-tax gain on sale of $97.4 million. In September 2013, QEP Energy sold its interests in several non-core properties located in QEP's Southern Region for total cash proceeds of $68.8 million and recorded a pre-tax gain on sale of $17.5 million. Both the cash proceeds and gains on sales are subject to post-closing adjustments. During the quarter and nine months ended September 30, 2013, QEP Energy recorded these gains on its Condensed Consolidated Statement of Operation in "Net gain from asset sales".


9



Note 5 – 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. There were no anti-dilutive shares during the three and nine months ended September 30, 2013, or during the nine months ended September 30, 2012. During the three months ended September 30, 2012, 0.8 million shares were not included in diluted common shares outstanding as they were anti-dilutive due to QEP's net loss.
 
A reconciliation of the components of basic and diluted shares used in the EPS calculation follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Weighted-average basic common shares outstanding
179.3

 
177.9

 
179.2

 
177.6

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

0.2

 

 
0.2

 
1.0

Average diluted common shares outstanding
179.5

 
177.9

 
179.4

 
178.6



Note 6 – 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, midstream assets 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 Company's asset retirement obligation from January 1, 2013, to September 30, 2013:
 
Asset Retirement Obligations
 
2013
 
(in millions)
ARO liability at January 1,
$
193.1

Accretion
7.2

Liabilities incurred
8.7

Revisions
(25.3
)
Liabilities settled
(13.5
)
ARO liability at September 30,
$
170.2



10



Note 7 – 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 8 - Derivative Contracts) is based on market prices posted on the respective commodity exchanges 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.


11



The fair value of financial assets and liabilities at September 30, 2013, is shown in the table below:
 
Fair Value Measurements
 
September 30, 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
$

 
$
58.0

 
$

 
$
(18.6
)
 
$
39.4

Commodity derivative instruments - long-term

 
5.8

 

 

 
5.8

Total financial assets
$

 
$
63.8

 
$

 
$
(18.6
)
 
$
45.2

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity derivative instruments - short-term
$

 
$
26.2

 
$

 
$
(18.6
)
 
$
7.6

Interest rate swaps - short-term

 
2.5

 

 

 
2.5

Total financial liabilities
$

 
$
28.7

 
$

 
$
(18.6
)
 
$
10.1

 ____________________________
(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 8 - 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 8 - Derivative Contracts, for additional information regarding the Company's derivative contracts.


12



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
 
September 30, 2013
 
December 31, 2012
 
(in millions)
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
123.0

 
$
123.0

 
$

 
$

Financial liabilities
 

 
 

 
 

 
 

Checks outstanding in excess of cash balances
$
1.6

 
$
1.6

 
$
39.7

 
$
39.7

Long-term debt
$
2,882.3

 
$
2,900.5

 
$
3,206.9

 
$
3,420.7


The carrying amounts of cash and 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 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 remaining reserve lives. A reconciliation of the Company’s asset retirement obligations is presented in Note 6 – Asset Retirement Obligations.

Note 8 – Derivative Contracts
 
QEP has established policies and procedures for managing commodity price volatility through the use of derivative instruments. In the normal course of business, QEP uses commodity price derivative instruments to reduce the impact of potential downward movements in commodity prices on cash flow, returns on capital investment, and other financial results. However, these instruments typically limit gains from favorable price movements. The volume of production subject to commodity derivative instruments and the mix of the instruments are frequently evaluated and adjusted by management in response to changing market conditions. QEP may enter into commodity derivative contracts for up to 100% of forecasted production from proved reserves. In addition, QEP may enter into commodity derivative contracts on a portion of its extracted NGL volumes in its midstream business and a portion of its natural gas sales and purchases for marketing transactions. QEP does not enter into commodity derivative instruments for speculative purposes.
 
QEP uses commodity derivative instruments known as fixed-price swaps to realize a known price for a specific volume of production delivered into a regional sales point. QEP’s commodity derivative instruments do not require the physical delivery of natural gas, crude oil, or NGL between the parties at settlement. Swap transactions are settled in cash with one party paying the other for the net difference in prices, multiplied by the contract volume, for the settlement periods. Natural gas price derivative instruments are typically structured as fixed-price swaps at regional price indices. Oil price derivative instruments are typically structured as NYMEX fixed-price swaps based at Cushing, Oklahoma. QEP also has oil price derivative fixed-price swaps that use Brent crude oil prices as the reference price. Brent crude oil contracts are traded on the IntercontinentalExchange, Inc. (ICE). NGL price derivative instruments are typically structured as Mont Belvieu, Texas fixed-price swaps.

QEP enters into commodity derivative transactions that do not have margin requirements or collateral provisions that would require payments prior to the scheduled settlement dates. Commodity derivative contract counterparties are normally financial institutions and energy trading firms with investment-grade credit ratings. QEP routinely monitors and manages its exposure to counterparty risk by requiring specific minimum credit standards for all counterparties and avoids concentration of credit exposure by transacting with multiple counterparties.
 
Effective January 1, 2012, QEP elected to de-designate all of its natural gas, crude oil and NGL derivative contracts that were previously designated as cash flow hedges and discontinue hedge accounting prospectively. As a result of discontinuing hedge accounting, the mark-to-market values at December 31, 2011, were fixed in Accumulated Other Comprehensive Income (AOCI) as of the de-designation date and are being reclassified into the Condensed Consolidated Statement of Operations as the transactions settle and affect earnings. At September 30, 2013, AOCI included $27.3 million ($17.2 million after tax) of unrealized gains that will be settled and reclassified from AOCI to the Condensed Consolidated Statements of Operations

13



during the remainder of 2013. During the nine months ended September 30, 2013 and 2012, $60.4 million and $133.8 million, respectively, of unrealized gains, after tax, were reclassified from AOCI into the Condensed Consolidated Statement of Operations in "Realized and unrealized (losses) gains on derivative contracts" as the transactions settled. QEP expects to reclassify into earnings from AOCI the fixed value related to de-designated natural gas, oil and NGL derivatives over the remainder of 2013. Currently, QEP recognizes all gains and losses from changes in the fair value of natural gas, oil and NGL derivative contracts immediately in earnings rather than deferring any such amounts in AOCI. All commodity derivative instruments are recorded on the Condensed Consolidated Balance Sheets as either assets or liabilities measured at their fair values and all realized and unrealized gains and losses from derivative instruments incurred after January 1, 2012, are presented in the Condensed Consolidated Statement of Operations in “Realized and unrealized (losses) gains on derivative contracts” below operating income.
 
QEP also uses interest rate swaps to mitigate a portion of its exposure to interest rate volatility risk. During the second quarter of 2012, QEP entered into variable-to-fixed interest rate swap agreements having a combined notional principal amount of $300.0 million to minimize the interest rate volatility risk associated with its $300.0 million senior, unsecured term loan. QEP locked in a fixed interest rate of 1.07% in exchange for a variable interest rate indexed to the one-month LIBOR rate. The interest rate swaps settle monthly and will mature in March of 2017.

QEP Energy Derivative Contracts
The following table sets forth QEP Energy’s quantities and average prices for its commodity derivative contracts as of September 30, 2013:
 
Insert Title Here
Year
 
Type of Contract
 
Index
 
Total
Volumes
 
Average Swap price per unit
 
 
 
 
 
 
(in millions)
 
 
Natural gas
 
 
 
 
 
(MMBtu)

 
 
2013
 
Swap
 
IFNPCR(1)
 
18.4

 
$
5.49

2013
 
Swap
 
NYMEX
 
14.7

 
$
3.81

2014
 
Swap
 
IFNPCR(1)
 
32.9

 
$
4.00

2014
 
Swap
 
NYMEX
 
25.6

 
$
4.19

Crude oil
 
 
 
 
 
(Bbls)

 
 

2013
 
Swap
 
NYMEX WTI
 
2.1

 
$
98.27

2013
 
Swap
 
BRENT ICE
 
0.1

 
$
107.80

2014
 
Swap
 
NYMEX WTI
 
8.8

 
$
93.63

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


14



QEP Marketing Derivative Contracts
QEP Marketing enters into commodity derivative transactions to lock in a margin on natural gas volumes placed into storage and for marketing transactions in which QEP Marketing sells gas volumes at a fixed price. The following table sets forth QEP Marketing’s volumes and swap prices for its commodity derivative contracts as of September 30, 2013:
Year
 
Type of Contract
 
Index
 
Total
Volumes
 
Average Swap price
per MMBtu
 
 
 
 
 
 
(in millions)
 
 
Natural gas sales
 
 
 
 
 
(MMBtu)

 
 
2013
 
Swap
 
IFNPCR
 
1.6

 
$
3.91

2014
 
Swap
 
IFNPCR
 
3.8

 
$
3.71

Natural gas purchases
 
 
 
 
 
(MMBtu)

 
 

2013
 
Swap
 
IFNPCR
 
1.7

 
$
3.46

2014
 
Swap
 
IFNPCR
 
0.2

 
$
3.82


QEP's Derivative Contracts
The following table sets forth QEP’s notional amount and interest rate for its interest rate swaps outstanding as of September 30, 2013:
Notional amount
 
Type of Contract
 
Maturity
 
Fixed Rate Paid
 
Variable Rate Received
(in millions)
 
 
 
 
 
 
 
 
$300.0
 
Swap
 
March 2017
 
1.07%
 
One month LIBOR
 
QEP Derivative Financial Statement Presentation
The following table identifies the balance sheet location of QEP’s outstanding derivative contracts on a gross contract basis as opposed to the net contract basis presentation in the Condensed Consolidated Balance Sheets and the related fair values at the balance sheet dates:
 
 
 
Gross asset derivative
instruments fair value
 
Gross liability derivative
instruments fair value
 
Balance Sheet
line item
 
September 30,
2013
 
December 31, 2012
 
September 30,
2013
 
December 31, 2012
 
 
 
(in millions)
 
(in millions)
Current:
 
 
 
 
 
 
 
 
 
Commodity
Fair value of derivative contracts
 
$
58.0

 
$
189.7

 
$
26.2

 
$
1.0

Interest rate swaps
Fair value of derivative contracts
 

 

 
2.5

 
2.6

Long-term:
 
 
 

 
 

 
 

 
 

Commodity
Fair value of derivative contracts
 
5.8

 
4.2

 

 
0.1

Interest rate swaps
Fair value of derivative contracts
 

 

 

 
3.6

Total derivative instruments
 
$
63.8

 
$
193.9

 
$
28.7

 
$
7.3



15



The effects of the change in fair value and settlement of QEP's derivative contracts recorded in "Realized and unrealized (losses) gains on derivative contracts" on the Condensed Consolidated Statements of Operations are summarized in the following tables:
 
 
Three Months Ended
 
Nine Months Ended
Derivative instruments not designated as cash flow hedges
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Realized gains (losses) on commodity derivative contracts
 
(in millions)
QEP Energy
 
 
 
 
 
 
 
 
Natural gas derivative contracts
 
$
42.5

 
$
86.2

 
$
112.0

 
$
283.8

Oil derivative contracts
 
(15.3
)
 
2.7

 
(3.7
)
 
2.2

NGL derivative contracts
 

 
3.4

 

 
6.5

QEP Field Services
 
 

 
 

 
 

 
 

NGL derivative contracts
 

 
1.9

 

 
6.3

QEP Marketing
 
 

 
 

 
 

 
 

Natural gas derivative contracts
 
(0.3
)
 
(0.4
)
 
0.7

 
3.7

Total realized gains on commodity derivative contracts
 
26.9

 
93.8

 
109.0

 
302.5

Unrealized gains (losses) on commodity derivative contracts
QEP Energy
 
 

 
 

 
 

 
 

Natural gas derivative contracts
 
(6.6
)
 
(50.6
)
 
(9.6
)
 
3.3

Oil derivative contracts
 
(46.2
)
 
4.1

 
(49.1
)
 
31.2

NGL derivative contracts
 

 
(4.4
)
 

 
3.4

QEP Field Services
 
 

 
 

 
 

 
 

NGL derivative contracts
 

 
(2.5
)
 

 
2.0

QEP Marketing
 
 

 
 

 
 

 
 

Natural gas derivative contracts
 
0.1

 
(1.4
)
 
(0.3
)
 
(0.5
)
Total unrealized (losses) gains on commodity derivative contracts
 
(52.7
)
 
(54.8
)
 
(59.0
)
 
39.4

Total realized and unrealized (losses) gains on commodity derivative contracts
 
$
(25.8
)
 
$
39.0

 
$
50.0

 
$
341.9

 
 
 
 
 
 
 
 
 
Realized gains (losses) on interest rate swaps
Realized losses on interest rate swaps
 
$
(0.6
)
 
$
(0.6
)
 
$
(1.9
)
 
$
(0.6
)
Unrealized gains (losses) on interest rate swaps
Unrealized (losses) gains on interest rate swaps
 
(1.4
)
 
(2.3
)
 
3.5

 
(6.6
)
Total realized and unrealized (losses) gains on interest rate swaps
 
$
(2.0
)
 
$
(2.9
)
 
$
1.6

 
$
(7.2
)
Total net realized gains on derivative contracts
 
$
26.3

 
$
93.2

 
$
107.1

 
$
301.9

Total net unrealized (losses) gains on derivative contracts
 
(54.1
)
 
(57.1
)
 
(55.5
)
 
32.8

Grand Total
 
$
(27.8
)
 
$
36.1

 
$
51.6

 
$
334.7



Note 9 – 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 was intended to increase efficiency, team-based collaboration and organizational productivity over the long term. As part of the reorganization, QEP incurred costs associated with the severance, retention and relocation of employees, additional pension expenses, exit costs associated with the termination of operating

16



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 table summarizes, 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 September 30, 2013
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
 
 
2013
 
2012
 
2013
 
2012
QEP Energy
(in millions)
One-time termination benefits
$
3.3

 
$
3.3

 
$
0.1

 
$
0.2

 
0.4

 
2.1

Retention & relocation expense
3.7

 
3.6

 
0.1

 
0.1

 
0.3

 
3.2

Lease termination costs
0.6

 
0.6

 

 

 

 

Total restructuring costs
$
7.6

 
$
7.5

 
$
0.2

 
$
0.3

 
0.7

 
5.3

 
 
 
 
 
 
 
 
 
 
 
 
QEP Field Services
 
 
 
 
 
 
 
 
 
 
 
One-time termination benefits
$

 
$

 
$

 
$

 

 

Retention & relocation expense
0.1

 
0.1

 
0.1

 

 
0.1

 

Lease termination costs

 

 

 

 

 

Total restructuring costs
$
0.1

 
$
0.1

 
$
0.1

 
$

 
0.1

 

 
 
 
 
 
 
 
 
 
 
 
 
QEP Marketing
 
 
 
 
 
 
 
 
 
 
 
One-time termination benefits
$
0.3

 
$
0.3

 
$

 
$

 
0.1

 

Retention & relocation expense

 

 

 

 

 

Lease termination costs

 

 

 

 

 

Total restructuring costs
$
0.3

 
$
0.3

 
$

 
$

 
0.1

 

 
 
 
 
 
 
 
 
 
 
 
 
Total QEP
 
 
 
 
 
 
 
 
 
 
 
One-time termination benefits
$
3.6

 
$
3.6

 
$
0.1

 
$
0.2

 
$
0.5

 
$
2.1

Retention & relocation expense
3.8

 
3.7

 
0.2

 
0.1

 
0.4

 
3.2

Lease termination costs
0.6

 
0.6

 

 

 

 

Total restructuring costs
$
8.0

 
$
7.9

 
$
0.3

 
$
0.3

 
$
0.9

 
$
5.3


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
0.7

 
0.1

 
0.1

 
0.9

Costs paid or otherwise settled
(1.7
)
 
(0.1
)
 
(0.1
)
 
(1.9
)
Balance at September 30, 2013
$

 

 

 
$

 

17



Note 10 – Debt
 
As of the indicated dates, the principal amount of QEP’s debt, including amounts outstanding under its and QEP Midstream's revolving credit facilities, QEP's term loan and QEP's senior notes consisted of the following:
 
September 30,
2013
 
December 31,
2012
 
(in millions)
QEP's revolving credit facility due 2016
$
365.0

 
$
690.0

QEP Midstream's revolving credit facility due 2018

 

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
2,886.8

 
3,211.8

Less unamortized discount
(4.5
)
 
(4.9
)
Total long-term debt outstanding
$
2,882.3

 
$
3,206.9

 
Of the total debt outstanding on September 30, 2013, amounts outstanding under QEP's revolving credit facility due August 25, 2016, QEP Midstream's revolving credit facility due August 14, 2018, QEP's term loan due April 18, 2017, the 6.05% Senior Notes due September 1, 2016, and the 6.80% Senior Notes due April 1, 2018, will mature within the next five years.
 
Credit Facilities
 
QEP's Credit Facility
QEP’s revolving 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 credit facility 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 nine months ended September 30, 2013 and 2012, QEP’s weighted-average interest rate on borrowings from its credit facility was 2.56% and 2.05%, respectively. At September 30, 2013 and December 31, 2012, QEP was in compliance with the covenants under the credit agreement. At September 30, 2013, there was $365.0 million outstanding and $3.7 million of letters of credit issued under the credit facility.

QEP Midstream's Credit Facility
On August 14, 2013, QEP Midstream entered into a $500.0 million senior secured revolving credit facility with a group of financial institutions, which matures on August 14, 2018. QEP Midstream's credit facility contains an accordion provision that allows for the amount of the facility to be increased to $750.0 million with the agreement of the lenders. QEP Midstream's credit facility is available for QEP Midstream's working capital, capital expenditures, permitted acquisitions and general corporate purposes, including distributions. Substantially all of QEP Midstream's assets, excluding equity in and assets of certain joint ventures and unrestricted subsidiaries, are pledged as collateral under the credit facility. In addition, the credit facility contains restrictions and events of default customary for agreements of this nature.

There have been no borrowings under QEP Midstream's credit facility, and at September 30, 2013, QEP Midstream was in compliance with the covenants under the QEP Midstream credit facility agreement.

QEP is not a borrower or guarantor of QEP Midstream's credit facility. In addition, QEP is not subject to any of the restrictions or covenants contained in QEP Midstream's credit agreement. Outstanding indebtedness under QEP Midstream's credit facility is not included in the definition of indebtedness under QEP's credit facility.


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Term Loan
 
QEP's $300.0 million term loan facility provides for borrowings at short-term interest rates and contains covenants, restrictions and interest rates that are substantially the same as QEP’s revolving credit facility. The term loan matures in April 2017, and the maturity date may be extended one year with the agreement of the lenders. During the nine months ended September 30, 2013 and 2012, QEP’s weighted-average interest rate on borrowings from the term loan was 2.23% and 2.02%, respectively. At September 30, 2013 and December 31, 2012, QEP was in compliance with the covenants under the term loan credit agreement.
 
Senior Notes

At September 30, 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.

Note 11– 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 matter. 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 QEP's consolidated financial position, results of operations or cash flows.
 
Environmental Claims
 
In October 2009, QEP 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. Region 6 of the U.S. Environmental Protection Agency (EPA) 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. On June 28, 2013, the EPA issued to QEP an Administrative Complaint for the alleged violations. QEP and the EPA reached an agreement to settle the alleged violations through an Administrative Order, under the terms of which QEP paid an administrative penalty of $0.2 million. The Administrative Order is final. In 2012, QEP 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. QEP has disclosed each of these instances to the EPA under the EPA's Audit Policy (to reduce penalties) and to the COE. QEP 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 QEP to pay a monetary penalty.

In July 2010, QEP 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, QEP completed an internal audit, which identified 424 facilities in Louisiana for which QEP both failed to submit a complete permit application and to receive approval from the department prior to construction, modification, or operation. QEP has corrected and disclosed all instances of non-compliance to the LDEQ and is working with the department to resolve the NOPP. The 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

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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 received 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 May 31, 2013, the Court issued its order approving the settlement, which is now final.
 
Questar Gas Company v. QEP Field Services Company, Civil No. 120902969, Third Judicial District Court, State of Utah. At the closing of the Offering, the assets and agreement discussed below were assigned to QEP Midstream. QEP Field Services' former affiliate, Questar Gas Company (QGC), filed this complaint in state court in Utah on May 1, 2012, asserting claims for (i) breach of contract, (ii) breach of implied covenant of good faith and fair dealing, (iii) an accounting and (iv) declaratory judgment related to a 1993 gathering agreement (the 1993 Agreement) executed when the parties were affiliates. Under the 1993 Agreement, certain of QEP Field Services' systems provide gathering services to QGC charging an annual gathering rate which is based on cost of service. QGC is disputing the annual calculation of the gathering rate. The annual gathering rate has been calculated in the same manner under the 1993 Agreement since it was amended in 1998, without any prior objection or challenge by QGC. QGC was netting the disputed amount from its monthly payments of the gathering fees to QEP Field Services and has continued to net such amounts from its monthly payment to QEP Midstream. As of September 30, 2013, QEP Midstream has deferred revenue of $7.0 million related to the QGC disputed amount. Specific monetary damages are not asserted. QEP Field Services has filed counterclaims seeking damages and a declaratory judgment relating to its gathering services under the 1993 Agreement. QGC may seek to amend its complaint to add QEP Midstream as a defendant in the litigation. QEP Midstream has been indemnified by QEP for costs, expenses and other losses incurred by QEP Midstream in connection with the QGC dispute, subject to certain limitations, as set forth in the Omnibus Agreement (defined below in "Note 3 - QEP Midstream").
 
Note 12 – 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 11.9 million shares available for future grants under the LTSIP at September 30, 2013. Share-based compensation expense is recognized in “General and administrative” on the Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2013, QEP recognized $6.8 million and $20.0 million, respectively, in total compensation expense related to share-based compensation compared to $7.2 million and $19.5 million during the three and nine months ended September 30, 2012, respectively.

QEP Midstream maintains a unit-based compensation plan for officers, directors and employees of the general partner of QEP Midstream and its affiliates and any consultants, affiliates of the general partner, or other individuals who perform services for QEP Midstream. The QEP Midstream 2013 Long-Term Incentive Plan (the QEP Midstream LTIP) permits various types of awards, including awards of restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights, profits interest units and other unit-based awards. Awards granted during 2013 under the QEP Midstream LTIP will be settled with QEP Midstream units. During the three and nine months ended September 30, 2013, QEP recognized $0.1 million in compensation expense related to QEP Midstream LTIP.
 

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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
 
Nine Months Ended
 
September 30, 2013
Weighted-average grant-date fair value of awards granted during the period
$
15.16

Weighted-average risk-free interest rate
1.00
%
Weighted-average expected price volatility
58.3
%
Expected dividend yield
0.27
%
Expected term in years at the date of grant
5.5


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
330,592

 
30.06

 
 
 
 
Exercised
(209,500
)
 
9.60

 
 
 
 

Forfeited

 

 
 
 
 
Outstanding at September 30, 2013
1,818,563

 
$
27.90

 
3.9
 
$
3.6

Options Exercisable at September 30, 2013
1,236,211

 
$
26.36

 
3.0
 
$
3.6

Unvested Options at September 30, 2013
582,352

 
$
31.18

 
5.9
 
$

 
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 $7.1 million during the nine months ended September 30, 2013 and 2012, respectively. The Company realized $1.4 million and $2.2 million of income tax benefit for the nine months ended September 30, 2013 and 2012, respectively, which increased its Additional Paid-in-Capital (APIC) pool by $1.4 million as of September 30, 2013. As of September 30, 2013, $4.4 million of unrecognized compensation cost related to stock options granted under the LTSIP is expected to be recognized over a weighted-average period of 2.1 years. During the nine months ended September 30, 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 nine months ended September 30, 2013 and 2012, was $18.4 million and $16.6 million, respectively. The Company realized $0.4 million and $0.2 million of income tax expense for the nine months ended September 30, 2013 and 2012, respectively, with $0.1 million impact to the Company's APIC pool as of September 30, 2013. The weighted average grant-date fair value of restricted stock was $30.03 per share and $30.59 per share for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, $23.5 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 2.2 years.
 

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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
850,824

 
30.03

Vested
(620,065
)
 
31.42

Forfeited
(75,442
)
 
30.82

Unvested balance at September 30, 2013
1,455,905

 
$
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 nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, $8.5 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 2.0 years.
 
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
223,844

 
30.12

Vested

 

Forfeited
(1,163
)
 
30.12

Unvested balance at September 30, 2013
506,165

 
$
32.30

 
Note 13 – 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 nine months ended September 30, 2013, the Company made contributions of $8.1 million to its funded pension plan, and $2.7 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 $0.4 million to its unfunded pension plans and approximately $0.1 million for retiree health care and life insurance benefits. No additional contributions are planned for the funded pension plan during the remainder of 2013.


22



The following table sets forth the Company’s pension and postretirement benefits net periodic benefit costs:
 
Pension
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Service cost
$
0.7

 
$
1.1

 
$
2.6

 
$
3.0

Interest cost
1.2

 
1.3

 
3.7

 
3.7

Expected return on plan assets
(0.9
)
 
(0.9
)
 
(2.9
)
 
(2.7
)
Amortization of prior service costs
1.2

 
1.3

 
3.7

 
3.9

Amortization of actuarial loss
0.5

 
0.6

 
1.7

 
1.0

Periodic expense
$
2.7

 
$
3.4

 
$
8.8

 
$
8.9

 
Postretirement Benefits
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Service cost
$
0.1

 
$
0.1

 
$
0.1

 
$
0.1

Interest cost

 

 
0.2

 
0.2

Amortization of prior service costs
0.1

 
0.1

 
0.3

 
0.3

Recognized net actuarial loss
0.1

 

 
0.1

 

Periodic expense
$
0.3

 
$
0.2

 
$
0.7

 
$
0.6

 
Note 14 – Operations by Line of Business
 
QEP’s lines of business include natural gas and oil exploration and production (QEP Energy), midstream field services, which includes the ownership and operation of QEP Midstream (QEP Field Services), and marketing and corporate (QEP Marketing & Resources). 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. QEP owns a 57.8% ownership interest in QEP Midstream and it is consolidated under the voting interest model in QEP Field Services' operating results. The outside ownership interest in QEP Midstream is presented separately as a noncontrolling interest.

The following table is a summary of operating results for the three months ended September 30, 2013, by line of business:

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