QEP-2014.9.30-10Q



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, 2014
 
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 800, 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, 2014, there were 180,149,080 shares of the registrant’s common stock, $0.01 par value, outstanding.

 



QEP Resources, Inc.
Form 10-Q for the Quarter Ended September 30, 2014

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,
 
2014
 
2013
 
2014
 
2013
REVENUES
(in millions, except per share amounts)
Gas sales
$
171.6

 
$
194.8

 
$
609.2

 
$
610.5

Oil sales
393.5

 
253.8

 
1,041.0

 
656.3

NGL sales
51.1

 
47.7

 
179.3

 
144.4

Other revenue
3.4

 
2.8

 
5.1

 
8.7

Purchased gas, oil and NGL sales
290.4

 
220.4

 
780.1

 
644.9

Total Revenues
910.0

 
719.5

 
2,614.7

 
2,064.8

OPERATING EXPENSES
 

 
 

 
 

 
 

Purchased gas, oil and NGL expense
288.4

 
219.5

 
775.5

 
650.3

Lease operating expense
61.1

 
43.5

 
177.0

 
130.2

Gas, oil and NGL transportation and other handling costs
71.1

 
58.6

 
198.5

 
158.5

Gathering and other expense
1.4

 
2.1

 
4.8

 
6.4

General and administrative
49.4

 
40.7

 
147.0

 
116.8

Production and property taxes
59.4

 
40.6

 
160.8

 
113.7

Depreciation, depletion and amortization
251.4

 
238.4

 
712.5

 
719.3

Exploration expenses
0.8

 
1.8

 
4.7

 
9.5

Impairment
0.1

 
3.8

 
3.6

 
4.0

Total Operating Expenses
783.1

 
649.0

 
2,184.4

 
1,908.7

Net gain (loss) from asset sales
(11.8
)
 
12.8

 
(210.3
)
 
113.4

OPERATING INCOME
115.1

 
83.3

 
220.0

 
269.5

Realized and unrealized gains (losses) on derivative contracts (Note 8)
155.7

 
(27.8
)
 
(13.2
)
 
51.6

Interest and other income
4.2

 
6.1

 
7.8

 
22.7

Income from unconsolidated affiliates
0.1

 

 
0.2

 

Interest expense
(41.5
)
 
(41.4
)
 
(128.4
)
 
(124.7
)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
233.6

 
20.2

 
86.4

 
219.1

Income tax provision
(79.9
)
 
(8.1
)
 
(26.1
)
 
(82.5
)
NET INCOME FROM CONTINUING OPERATIONS
153.7

 
12.1

 
60.3

 
136.6

Net income from discontinued operations, net of income tax
17.4

 
25.2

 
58.2

 
74.8

NET INCOME ATTRIBUTABLE TO QEP
$
171.1

 
$
37.3

 
$
118.5

 
$
211.4

 
 
 
 
 
 
 
 
Earnings Per Common Share Attributable to QEP
 

 
 

 
 

 
 

Basic from continuing operations
$
0.85

 
$
0.07

 
$
0.34

 
$
0.76

Basic from discontinued operations
0.10

 
0.14

 
0.32

 
0.42

Basic total
$
0.95

 
$
0.21

 
$
0.66

 
$
1.18

Diluted from continuing operations
$
0.84

 
$
0.07

 
$
0.34

 
$
0.76

Diluted from discontinued operations
0.10

 
0.14

 
0.32

 
0.42

Diluted total
$
0.94

 
$
0.21

 
$
0.66

 
$
1.18

Weighted-average common shares outstanding
 

 
 

 
 

 
 

Used in basic calculation
180.1

 
179.3

 
180.0

 
179.2

Used in diluted calculation
180.6

 
179.5

 
180.4

 
179.4

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,
 
2014
 
2013
 
2014
 
2013
 
(in millions)
Net income attributable to QEP
$
171.1

 
$
37.3

 
$
118.5

 
$
211.4

Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

Reclassification of previously deferred derivative gains(1)

 
(19.7
)
 

 
(60.4
)
Pension and other postretirement plans adjustments:
 

 
 

 
 

 
 

Amortization of net actuarial loss (2)
0.2

 
0.4

 
0.4

 
1.1

Amortization of prior service cost (3)
0.7

 
0.8

 
2.4

 
2.5

Total pension and other postretirement plans adjustments
0.9

 
1.2

 
2.8

 
3.6

Other comprehensive income (loss)
0.9

 
(18.5
)
 
2.8

 
(56.8
)
Comprehensive income attributable to QEP
$
172.0

 
$
18.8

 
$
121.3

 
$
154.6

____________________________
(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, respectively.
(2) 
Presented net of income tax expense of $0.2 million during the nine months ended September 30, 2014 and $0.2 million and $0.7 million during the three and nine months ended September 30, 2013, respectively.
(3) 
Presented net of income tax expense of $0.5 million and $1.5 million during the three and nine months ended September 30, 2014, respectively, and $0.5 million and $1.5 million during the three and nine months ended September 30, 2013, respectively.

See notes accompanying the condensed consolidated financial statements.


3



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2014
 
December 31,
2013
ASSETS
(in millions)
Current Assets
 
 
 
Cash and cash equivalents
$

 
$
11.9

Accounts receivable, net
599.4

 
316.3

Fair value of derivative contracts
32.6

 
0.2

Gas, oil and NGL inventories, at lower of average cost or market
16.4

 
13.4

Deferred income taxes - current

 
27.9

Prepaid expenses and other
50.8

 
45.4

Current assets of discontinued operations held for sale
138.3

 
122.0

Total Current Assets
837.5

 
537.1

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

 
 

Proved properties
11,723.0

 
11,571.4

Unproved properties
1,120.5

 
665.1

Midstream
197.5

 
197.3

Marketing and resources
95.2

 
85.5

Material and supplies
55.3

 
54.3

Total Property, Plant and Equipment
13,191.5

 
12,573.6

Less Accumulated Depreciation, Depletion and Amortization
 

 
 

Exploration and production
4,915.0

 
4,930.9

Midstream
34.3

 
28.1

Marketing and resources
29.8

 
22.1

Total Accumulated Depreciation, Depletion and Amortization
4,979.1

 
4,981.1

Net Property, Plant and Equipment
8,212.4

 
7,592.5

Fair value of derivative contracts
12.7

 
1.0

Restricted cash


50.0

Other noncurrent assets
39.4

 
46.6

Noncurrent assets of discontinued operations held for sale
1,174.2

 
1,167.7

TOTAL ASSETS
$
10,276.2

 
$
9,394.9

LIABILITIES AND EQUITY


 
 

Current Liabilities
 

 
 

Checks outstanding in excess of cash balances
$
36.8

 
$
109.1

Accounts payable and accrued expenses
691.4

 
361.9

Production and property taxes
73.5

 
49.4

Interest payable
34.1

 
37.2

Fair value of derivative contracts
4.5

 
26.7

Deferred income taxes
2.9

 

Current liabilities of discontinued operations held for sale
161.6

 
75.3

Total Current Liabilities
1,004.8

 
659.6

Long-term debt
3,115.5

 
2,997.5

Deferred income taxes
1,500.8

 
1,364.9

Asset retirement obligations
162.3

 
163.3

Fair value of derivative contracts
0.2

 

Other long-term liabilities
90.3

 
94.5

Noncurrent liabilities of discontinued operations held for sale
402.0

 
238.3

Commitments and contingencies (Note 11)


 


EQUITY
 

 
 

Common stock - par value $0.01 per share; 500.0 million shares authorized; 
180.9 million and 179.7 million shares issued, respectively
1.8

 
1.8

Treasury stock - 0.8 million and 0.4 million shares, respectively
(25.1
)
 
(14.9
)
Additional paid-in capital
527.2

 
498.4

Retained earnings
3,025.4

 
2,917.8

Accumulated other comprehensive loss
(23.7
)
 
(26.5
)
Total Common Shareholders' Equity
3,505.6

 
3,376.6

Noncontrolling interest
494.7

 
500.2

Total Equity
4,000.3

 
3,876.8

TOTAL LIABILITIES AND EQUITY
$
10,276.2

 
$
9,394.9

 

See notes accompanying the condensed consolidated financial statements.

4



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
 
(in millions)
OPERATING ACTIVITIES
 

 
 

Net income attributable to QEP
$
118.5

 
$
211.4

Net income attributable to noncontrolling interest
17.6

 
5.8

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

 
 

Depreciation, depletion and amortization
755.8

 
757.1

Deferred income taxes
91.5

 
39.3

Impairment
3.6

 
4.0

Equity-based compensation
20.7

 
20.0

Amortization of debt issuance costs and discounts
5.1

 
4.7

Net loss (gain) from asset sales
210.3

 
(113.0
)
Income from unconsolidated affiliates
(4.6
)
 
(3.7
)
Distributions from unconsolidated affiliates and other
5.1

 
5.9

Unrealized (gain) loss on derivative contracts
(65.9
)
 
55.5

Changes in operating assets and liabilities
62.0

 
(8.1
)
Net Cash Provided by Operating Activities
1,219.7

 
978.9

INVESTING ACTIVITIES
 

 
 

Property acquisitions
(949.7
)
 
(39.3
)
Property, plant and equipment, including dry exploratory well expense
(1,270.4
)
 
(1,089.6
)
Proceeds from disposition of assets
706.2

 
208.3

Acquisition deposit held in escrow
50.0

 

Other investing activities
3.2

 

Net Cash Used in Investing Activities
(1,460.7
)

(920.6
)
FINANCING ACTIVITIES
 

 
 

Checks outstanding in excess of cash balances
(81.1
)
 
(38.1
)
Long-term debt issued
300.0

 

Long-term debt issuance costs paid
(1.1
)
 
(3.0
)
Proceeds from credit facility
4,509.0

 
2,132.5

Repayments of credit facility
(4,461.5
)
 
(2,457.5
)
Treasury stock repurchases
(6.6
)
 
(8.7
)
Net proceeds from the issuance of QEP Midstream common units

 
449.6

Other capital contributions
5.1

 
3.6

Dividends paid
(10.8
)
 
(10.8
)
Excess tax (provision) benefit on equity-based compensation
(0.6
)
 
1.3

Distribution to noncontrolling interest
(23.3
)
 
(4.2
)
Net Cash Provided by Financing Activities
229.1

 
64.7

Change in cash and cash equivalents
(11.9
)
 
123.0

Beginning cash and cash equivalents
11.9

 

Ending cash and cash equivalents
$

 
$
123.0

 
 
 
 
Supplemental Disclosures:
 

 
 

Cash paid for interest, net of capitalized interest
$
128.9

 
$
120.1

Cash (received) paid for income taxes
(1.1
)
 
49.4

Non-cash investing activities:
 

 
 

Change in capital expenditure accrual balance
$
66.5

 
$
53.7

 
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 two major subsidiaries, QEP Energy Company and QEP Marketing Company, which are engaged in two primary lines of business: (i) oil and gas exploration and production (QEP Energy) and (ii) oil and gas marketing, operation of the Haynesville Gathering System and a underground gas storage reservoir (QEP Marketing and Other).

QEP's operations are focused in two geographic regions: the Northern Region (primarily in North Dakota, Wyoming and Utah) and the Southern Region (primarily in Texas and Louisiana) of the United States. QEP's corporate headquarters are located in Denver, Colorado.
 
In December 2013, QEP's Board of Directors authorized the Company to develop a plan to separate its midstream business, QEP Field Services, including the Company's interest in QEP Midstream Partners, LP (“QEP Midstream”), from QEP. Between December 2013 and September 2014, the Company evaluated transaction alternatives, including selling or merging the midstream business or spinning the midstream business off to its shareholders. In June 2014, QEP filed a registration statement on Form 10 with the U.S. Securities and Exchange Commission (SEC) in preparation for a potential spinoff of QEP Field Services as a separate publicly traded company. Concurrently, the Company evaluated selling or merging its midstream business. In September 2014, based on the proposals received, the Company's Board of Directors authorized QEP's management to engage in the negotiation of terms of a definitive transaction with Tesoro Logistics LP ("Tesoro"). In October 2014, the Company announced that its wholly owned subsidiary, QEP Field Services, had entered into a definitive agreement to sell substantially all of its midstream business, including the Company's ownership interest in QEP Midstream to Tesoro in an all cash transaction valued at $2.5 billion, including $230.0 million to refinance debt at QEP Midstream. The transaction is subject to customary closing conditions and regulatory approvals, and is expected to close before year-end 2014. On October 31, 2014, the Federal Trade Commission granted early termination, ending the Hart Scott Rodino waiting period for the transaction. The decision to sell the midstream business is a result of the Company’s ongoing review of strategic alternatives to maximize shareholder value. QEP will retain ownership of QEP Field Services’ Haynesville Gathering System. As a result of the pending transaction, the QEP Field Services reporting segment, excluding the retained ownership of the Haynesville Gathering System, has been classified as assets and liabilities held for sale on the Condensed Consolidated Balance Sheet and as a discontinued operation on the Condensed Consolidated Statement of Operations and the notes accompanying the Condensed Consolidated Financial Statements. For reporting purposes, the retained Haynesville Gathering System has been combined with QEP Marketing and Other.
Shares of QEP’s common stock trade on the New York Stock Exchange (NYSE) 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 and the year-end balance sheet 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, 2013.
 
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, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.


6



Reclassifications

The 2013 financial information has been recast so that the basis of presentation is consistent with that of the 2014 financial information. This recast reflects the financial condition and results of operations, excluding the Haynesville Gathering System, of QEP Field Services as discontinued operations, for all periods presented. For a summary of discontinued operations see Note 4 - Discontinued Operations.

During the first nine months of 2013, QEP presented certain credit facility payments and borrowings on a net basis on the Condensed Consolidated Statements of Cash Flow. These borrowings and payments were reclassified to be presented on a gross basis on the Condensed Consolidated Statements of Cash Flow in order to conform with the current period presentation. This reclassification is entirely within "Financing Activities" and has no effect on other categories or total cash on the Condensed Consolidated Statements of Cash Flows or net income or earnings per share on the Condensed Consolidated Statements of Operations.
 
New accounting pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which broadened the reporting of discontinued operations to a component of an entity that has operations and cash flows that can be clearly distinguished from the rest of the entity. Under this guidance, to be a discontinued operation, a component or group of components must represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The amendments are effective prospectively for reporting periods beginning on or after December 15, 2014 and early adoption is permitted. The Company has chosen to early adopt ASU 2014-08 and implemented the amendments in the quarter ended September 30, 2014.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which seeks to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The amendments are effective prospectively for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently assessing the impact on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Topic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance provides additional information to guide management's evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The update is effective for annual periods beginning on or after December 15, 2016. The Company is currently evaluating the impact of this standard on its financial statements.

Note 3 - Acquisitions and Divestitures

Permian Basin Acquisition

On February 25, 2014, QEP Energy acquired oil and gas properties in the Permian Basin of Texas for an aggregate purchase price of $941.8 million, subject to post-closing purchase price adjustments (the Permian Basin Acquisition). The acquired properties consist of approximately 26,500 net acres of producing and undeveloped oil and gas properties and approximately 270 vertical producing wells in the Permian Basin, which created a new core area of operation for QEP Energy. The acquisition was funded with $50.0 million of restricted cash, $300.0 million from the Company's expanded term loan and the remainder was funded from its revolving credit facility.

The Permian Basin Acquisition meets the definition of a business combination under ASC 805, Business Combinations, as it included significant proved properties. QEP allocated the cost of the Permian Basin Acquisition to assets acquired and liabilities assumed based on fair values as of the acquisition date. Revenues of $114.2 million and net income of $23.1 million were generated from the acquired properties from February 25, 2014, to September 30, 2014, and are included in QEP's Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2014, QEP Energy incurred acquisition-related costs of $0.6 million, which are included in "General and administrative" on the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2014. QEP incurred $1.1 million of debt issuance costs

7



associated with increasing the size of term loan borrowings to fund a portion of the acquisition, which are included in "Other noncurrent assets" on the Condensed Consolidated Balance Sheet as of September 30, 2014.

QEP Energy recorded the Permian Basin Acquisition on its Condensed Consolidated Balance Sheet as of September 30, 2014. The following table presents a summary of the Company's purchase accounting entries:
 
As of September 30, 2014
 
(in millions)
Consideration:
 
Total consideration
$
941.8

 
 
Amounts recognized for fair value of assets acquired and liabilities assumed:
 
Proved properties
$
472.1

Unproved properties
480.6

Asset retirement obligations
(9.7
)
Liabilities assumed
(1.2
)
Total fair value
$
941.8


The following unaudited, pro forma results of operations are provided for the nine months ended September 30, 2014, and the three and nine months ended September 30, 2013. Pro forma results are not provided for the three months ended September 30, 2014, because the Permian Basin Acquisition occurred during the first quarter of 2014, and therefore there is no pro forma impact on the third quarter of 2014. 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, 2014 and 2013, the acquired properties' historical results of operations, and 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 Permian Basin 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,
 
September 30,
 
 
2013
 
2013
 
2014
 
2014
 
2013
 
2013
 
 
Actual
 
Pro forma
 
Actual
 
Pro forma
 
Actual
 
Pro forma
 
 
 
(in millions, except per share data)
Revenues
 
$
719.5

 
$
776.5

 
$
2,614.7

 
$
2,640.8

 
$
2,064.8

 
$
2,195.4

Net income (loss) attributable to QEP
 
37.3

 
54.2

 
118.5

 
125.5

 
211.4

 
240.4

Earnings per common share attributable to QEP
 
 
 
 
 
 
 
 
Basic
 
$
0.21

 
$
0.30

 
$
0.66

 
$
0.70

 
$
1.18

 
$
1.34

Diluted
 
0.21

 
0.30

 
0.66

 
0.70

 
1.18

 
1.34


Divestitures

In June 2014, QEP Energy sold its interests in certain non-core properties in the Midcontinent area and other non-core assets in the Williston Basin for total cash proceeds of $702.3 million, subject to post-closing purchase price adjustments, and recorded a pre-tax loss of $210.4 million on QEP's Statements of Operations and Condensed Consolidated Statement of Operations in "Net loss from asset sales" for the nine months ended September 30, 2014. An additional $28.7 million of consideration is currently being held in escrow related to unresolved title defects.


8



Note 4 - Discontinued Operations

In December 2013, QEP's Board of Directors authorized the Company to develop a plan to separate its midstream business, QEP Field Services, including the Company's interest in QEP Midstream, from QEP. Between December 2013 and September 2014, the Company evaluated transaction alternatives, including selling or merging the midstream business or spinning the midstream business off to its shareholders. In June 2014, QEP filed a registration statement on Form 10 with the SEC in preparation for a potential spinoff of QEP Field Services as a separate publicly traded company. Concurrently, the Company evaluated selling or merging its midstream business. In September 2014, based on the proposals received, the Company's Board of Directors authorized QEP's management to engage in the negotiation of terms of a definitive transaction with Tesoro. In October 2014, the Company announced that its wholly owned subsidiary, QEP Field Services, had entered into a definitive agreement to sell substantially all of its midstream business, including the Company's ownership interest in QEP Midstream to Tesoro in an all cash transaction valued at $2.5 billion, including $230.0 million to refinance debt at QEP Midstream. The transaction is subject to customary closing conditions and regulatory approvals, and is expected to close before year-end 2014. On October 31, 2014, the Federal Trade Commission granted early termination, ending the Hart Scott Rodino waiting period for the transaction. The decision to sell the midstream business is a result of the Company’s ongoing review of strategic alternatives to maximize shareholder value and represents a significant milestone in the strategic repositioning of the Company. As of September 30, 2014, the operating results and financial position of QEP Field Services, excluding its retained ownership of the Haynesville Gathering System, were classified as discontinued operations as well as assets and liabilities held for sale on its balance sheet. After the transaction closes, QEP will have continuing cash outflows to our discontinued midstream business for gathering, processing and water handling costs in Pinedale, the Uinta Basin and a portion of its Williston Basin operations. These contracts vary in length from month-to-month to over a year and will be reviewed periodically in the normal course of business. Historically, these transactions were eliminated in consolidation, as they represented transactions between two related entities and are now reflected as part of the continuing operations for QEP. For the three months ended September 30, 2014 and 2013, cash outflows for these transactions that are included in continuing operations were $19.0 million and $25.9 million, respectively. For the nine months ended September 30, 2014 and 2013, cash outflows for these transactions that are included in continuing operations were $64.1 million and $67.2 million, respectively.


9



Condensed Consolidated Income Statement
The discontinued operations of QEP Field Services (excluding results of the Haynesville Gathering System) are summarized below:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(in millions, except per share amounts)
REVENUES
 
 
 
 
 
 
 
NGL sales
$
28.8

 
$
23.6

 
$
94.6

 
$
70.6

Other revenue
43.1

 
44.2

 
119.9

 
126.4

Purchased gas, oil and NGL sales(1)
(11.9
)
 
(14.4
)
 
(38.5
)
 
(41.5
)
Total Revenues
60.0

 
53.4

 
176.0

 
155.5

OPERATING EXPENSES
 
 
 
 
 
 
 
Purchased gas, oil and NGL expense(1)
(12.4
)
 
(14.4
)
 
(39.5
)
 
(41.4
)
Lease operating expense(1)
(1.7
)
 
(0.8
)
 
(4.8
)
 
(2.6
)
Natural gas, oil and NGL transport & other handling costs(1)
(10.6
)
 
(21.7
)
 
(40.1
)
 
(53.0
)
Gathering, processing, and other
22.7

 
20.3

 
69.8

 
60.1

General and administrative
11.1

 
8.6

 
34.3

 
19.4

Production and property taxes
2.1

 
1.8

 
6.1

 
4.0

Depreciation, depletion and amortization
14.3

 
14.7

 
43.1

 
37.8

Total Operating Expenses
25.5

 
8.5

 
68.9

 
24.3

Net loss from asset sales

 
(0.1
)
 
(0.1
)
 
(0.5
)
OPERATING INCOME
34.5

 
44.8

 
107.0

 
130.7

Interest income and other loss

 
(2.1
)
 

 
(13.7
)
Income from unconsolidated affiliates
1.1

 
0.8

 
4.4

 
3.7

Interest expense
(1.5
)
 
(0.3
)
 
(2.8
)
 
2.3

INCOME FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (2)
34.1

 
43.2

 
108.6

 
123.0

Income taxes
(9.9
)
 
(14.2
)
 
(32.8
)
 
(42.4
)
NET INCOME FROM DISCONTINUED OPERATIONS
24.2

 
29.0

 
75.8

 
80.6

Net income attributable to noncontrolling interest
(6.8
)
 
(3.8
)
 
(17.6
)
 
(5.8
)
NET INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX
$
17.4

 
$
25.2

 
$
58.2

 
$
74.8

(1) Includes discontinued intercompany eliminations
(2) Includes income from discontinued operations before income taxes attributable to QEP from QEP Midstream (of which QEP owns 57.8%) of $7.9 million and $20.4 million for the three and nine months ended September 30, 2014, respectively, and $7.9 million and $26.2 million for the three and nine months ended September 30, 2013, respectively.





10



Condensed Consolidated Balance Sheet

The current and noncurrent assets and liabilities of QEP Field Services, excluding the retained Haynesville Gathering System, are as follows:

 
September 30,
2014
 
December 31,
2013
Cash and cash equivalents
$
27.1

 
$
18.1

Accounts receivable, net
71.8

 
53.9

Income taxes receivable

 
38.4

Deferred income taxes - current
7.0

 
2.7

Prepaid expenses and other
32.4

 
8.9

Current assets of discontinued operations held for sale
$
138.3

 
$
122.0

 
 
 
 
Property, Plant and Equipment
 
 
 
Midstream field services
$
1,550.5

 
$
1,500.8

Material and supplies
6.5

 
4.8

Total Property, Plant and Equipment
1,557.0

 
1,505.6

Less Accumulated Depreciation, Depletion and Amortization

 

Midstream field services
(422.2
)
 
(381.6
)
Net Property, Plant and Equipment
1,134.8

 
1,124.0

Investment in unconsolidated affiliates
35.9

 
39.0

Other noncurrent assets
3.5

 
4.7

Noncurrent assets of discontinued operations held for sale
$
1,174.2

 
$
1,167.7

 
 
 
 
Accounts payable and accrued expenses
$
85.6

 
$
74.1

Accrued income taxes
70.2

 

Production and property taxes
5.4

 
1.2

Interest payable
0.4

 

Current liabilities of discontinued operations held for sale
$
161.6

 
$
75.3

 
 
 
 
Long-term debt
$
230.0

 
$

Deferred income taxes
126.5

 
195.7

Asset retirement obligations
29.9

 
28.5

Other long-term liabilities
15.6

 
14.1

Noncurrent liabilities of discontinued operations held for sale
$
402.0

 
$
238.3


Condensed Consolidated Statement of Cash Flows

The impact of the QEP Field Services discontinued operations, excluding the Haynesville Gathering System, on the Condensed Consolidated Statement of Cash Flows for "Depreciation, depletion and amortization" contained in "Cash flows from operating activities" was $43.1 million and $37.8 million for the nine months ended September 30, 2014 and 2013, respectively. The impact on cash used for "Property, plant and equipment, including dry exploratory well expense" contained in "Cash flows from investing activities" was $45.6 million and $57.4 million for the nine months ended September 30, 2014 and 2013, respectively.


11



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 equity-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 and nine months ended September 30, 2014 and 2013, there were no anti-dilutive shares.

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,
 
2014
 
2013
 
2014
 
2013
 
(in millions)
Weighted-average basic common shares outstanding
180.1

 
179.3

 
180.0

 
179.2

Potential number of shares issuable upon exercise of in-the-money stock options under the Long-term Stock Incentive Plan
0.5

 
0.2

 
0.4

 
0.2

Average diluted common shares outstanding
180.6

 
179.5

 
180.4

 
179.4



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, 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 the 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. Of the $163.2 million and $165.1 million ARO liability for continuing operations for the periods ended September 30, 2014 and December 31, 2013, $0.9 million and $1.8 million was included, respectively, as a current liability in "Accounts payable and accrued expenses" on the Condensed Consolidated Balance Sheets.
















12



The following is a reconciliation of the changes in the Company's ARO for continuing operations for the periods specified below:
 
Asset Retirement Obligations
 
2014
 
(in millions)
ARO liability at January 1, (1)
$
165.1

Accretion
4.9

Additions(2)
15.5

Revisions
(0.3
)
Liabilities settled(3)
(22.0
)
ARO liability at September 30,(4)
$
163.2

____________________________
(1) Excludes $28.5 million of ARO classified as liabilities held for sale on the Condensed Consolidated Balance Sheet.
(2) Additions include $9.7 million related to the Permian Basin Acquisition (see Note 3 - Acquisitions and Divestitures).
(3) Settlements include $20.2 million related to the property sales in the second quarter of 2014 (see Note 3 - Acquisitions and Divestitures).
(4) Excludes $29.9 million of ARO classified as liabilities held for sale on the Condensed Consolidated Balance Sheet.

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. 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 that 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 exchange 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.
 
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.


13



The fair value measurements of financial assets and liabilities at September 30, 2014, are shown in the table below:
 
Fair Value Measurements
 
September 30, 2014
 
Gross Amounts of Assets and Liabilities
 
Netting
Adjustments(1)
 
Net Amounts Presented on the Condensed Consolidated Balance Sheets
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in millions)
Financial Assets
 
 
 
 
 
 
 
 
 
Commodity derivative instruments - short-term
$

 
$
36.6

 
$

 
$
(4.0
)
 
$
32.6

Commodity derivative instruments - long-term

 
9.6

 

 
(0.4
)
 
9.2

Interest rate swaps - long-term

 
3.5

 

 

 
3.5

Total financial assets
$

 
$
49.7

 
$

 
$
(4.4
)
 
$
45.3

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity derivative instruments - short-term
$

 
$
4.2

 
$

 
$
(4.0
)
 
$
0.2

Interest rate swaps - short-term

 
4.3

 

 

 
4.3

Commodity derivative instruments - long-term

 
0.6

 

 
(0.4
)
 
0.2

Total financial liabilities
$

 
$
9.1

 
$

 
$
(4.4
)
 
$
4.7

 ____________________________
(1) The Company nets its derivative contract assets and liabilities outstanding with the same counterparty on the Condensed Consolidated Balance Sheets 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, 2013, is shown in the table below:
 
Fair Value Measurements
 
December 31, 2013
 
Gross Amounts of Assets and Liabilities
 
Netting
Adjustments(1)
 
Net Amounts Presented on the Condensed Consolidated Balance Sheets
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in millions)
Financial Assets
 
 
 
 
 
 
 
 
 
Commodity derivative instruments - short-term
$

 
$
5.5

 
$

 
$
(5.3
)
 
$
0.2

Commodity derivative instruments - long-term

 
0.4

 

 

 
0.4

Interest rate swaps - long-term

 
0.6

 

 

 
0.6

Total financial assets
$

 
$
6.5

 
$

 
$
(5.3
)
 
$
1.2

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity derivative instruments - short-term
$

 
$
29.4

 
$

 
$
(5.3
)
 
$
24.1

Interest rate swaps - short-term

 
2.6

 

 

 
2.6

Total financial liabilities
$

 
$
32.0

 
$

 
$
(5.3
)
 
$
26.7

_______________________
(1) The Company nets its derivative contract assets and liabilities outstanding with the same counterparty on the Condensed Consolidated Balance Sheets as the contracts contain netting provisions. Refer to Note 8 - Derivative Contracts, for additional information regarding the Company's derivative contracts.


14



The following table discloses the fair value and related carrying amount of certain financial instruments not disclosed in other notes accompanying 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, 2014
 
December 31, 2013
 
(in millions)
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
11.9

 
$
11.9

Financial liabilities
 

 
 

 
 

 
 

Checks outstanding in excess of cash balances
$
36.8

 
$
36.8

 
$
109.1

 
$
109.1

Long-term debt
$
3,115.5

 
$
3,209.3

 
$
2,997.5

 
$
3,034.9


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 ARO 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 ARO 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 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 gas, 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 period. 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 or oil price swaps that use IntercontinentalExchange, Inc. (ICE), Brent oil prices as the reference price. QEP also enters into crude oil basis swaps to achieve a fixed price swap for a portion of its oil that it sells at prices that reference ICE Brent and Light Louisiana Sweet (LLS).

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 gas, 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 Statements of Operations as the transactions settle and affect earnings. During the nine months ended September 30, 2013, $60.4 million of unrealized gains, after tax, were reclassified from AOCI into the Condensed Consolidated Statements of Operations in "Realized and unrealized losses on derivative contracts" as the transactions settled. All realized and unrealized gains and losses from derivative instruments

15



incurred after January 1, 2012, are presented in the Condensed Consolidated Statements of Operations in "Realized and unrealized losses on derivative contracts" below operating income.

QEP also uses interest rate swaps to mitigate a portion of its exposure to interest rate volatility risk associated with its $600.0 million term loan. For the $300.0 million term loan issued during 2012, QEP locked in a fixed interest rate of 1.07% in exchange for a variable interest rate indexed to the one-month LIBOR. For the incremental $300.0 million borrowed under the term loan during 2014, QEP locked in a fixed interest rate of 0.86%. The average effective interest rate on the $600.0 million term loan when combined with the fixed interest rate swaps for the nine months ended September 30, 2014 was 3.21%. The interest rate swaps settle monthly and will mature in March 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, 2014

Year
 
Type of Contract
 
Index
 
Total
Volumes
 
Average Swap price per unit
 
 
 
 
 
 
(in millions)
 
 
Gas sales
 
 
 
 
 
(MMBtu)

 
 
2014
 
SWAP
 
 NYMEX
 
7.4

 
$
4.22

2014
 
SWAP
 
 IFNPCR
 
20.2

 
$
4.08

2015
 
SWAP
 
NYMEX
 
25.6

 
$
4.14

2015
 
SWAP
 
IFNPCR
 
11.0

 
$
4.06

Oil sales
 
 
 
 
 
(Bbls)

 
 

2014
 
SWAP
 
NYMEX WTI
 
3.1

 
$
93.54

2015
 
SWAP
 
NYMEX WTI
 
7.7

 
$
90.04

2015
 
SWAP
 
BRENT ICE
 
0.4

 
$
104.95

2016
 
SWAP
 
NYMEX WTI
 
0.4

 
$
90.00


The following table sets forth QEP Energy's oil basis swaps as of September 30, 2014:
Year
 
Index
 
Index Less Differential
 
Total Volumes
 
Weighted Average Differential
 
 
 
 
 
 
(in millions)
 
 
Oil basis swaps
 
 
 
 
 
(Bbls)

 
 
2014
 
NYMEX WTI
 
ICE Brent
 
0.2

 
$
13.78

2014
 
NYMEX WTI
 
LLS
 
0.2

 
$
4.03

2015
 
NYMEX WTI
 
LLS
 
0.1

 
$
4.03


16




QEP Marketing Derivative Contracts
QEP Marketing enters into commodity derivative transactions to lock in a margin on 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, 2014:
Year
 
Type of Contract
 
Index
 
Total
Volumes
 
Average Swap price
per MMBtu
 
 
 
 
 
 
(in millions)
 
 
Gas sales
 
 
 
 
 
(MMBtu)

 
 
2014
 
SWAP
 
IFNPCR
 
1.4

 
$
4.03

2015
 
SWAP
 
IFNPCR
 
2.5

 
4.07

Gas purchases
 
 
 
 
 
(MMBtu)

 
 

2014
 
SWAP
 
IFNPCR
 
0.6

 
$
3.86


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, 2014:
Notional amount
 
Type of Contract
 
Maturity
 
Fixed Rate Paid
 
Variable Rate Received
(in millions)
 
 
 
 
 
 
 
 
$300.0
 
Swap
 
March 2017
 
1.07%
 
One-month LIBOR
$300.0
 
Swap
 
March 2017
 
0.86%
 
One-month LIBOR
$600.0
 
 
 
 
 
0.96%
 
 
 
QEP Derivative Financial Statement Presentation
The following table identifies the condensed consolidated 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,
2014
 
December 31, 2013
 
September 30,
2014
 
December 31, 2013
 
 
 
(in millions)
 
(in millions)
Current:
 
 
 
 
 
 
 
 
 
Commodity
Fair value of derivative contracts
 
$
36.6

 
$
5.5

 
$
4.2

 
$
29.4

Interest rate swaps
Fair value of derivative contracts
 

 

 
4.3

 
2.6

Long-term:
 
 
 

 
 

 
 

 
 

Commodity
Fair value of derivative contracts
 
9.6

 
0.4

 
0.6

 

Interest rate swaps
Fair value of derivative contracts
 
3.5

 
0.6

 

 

Total derivative instruments
 
$
49.7

 
$
6.5

 
$
9.1

 
$
32.0



17



The effects of the change in fair value and settlement of QEP's derivative contracts recorded in "Realized and unrealized losses 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,
 
2014
 
2013
 
2014
 
2013
Realized gains (losses) on commodity derivative contracts
 
(in millions)
QEP Energy
 
 
 
 
 
 
 
 
Gas derivative contracts
 
$
5.5

 
$
42.5

 
$
(23.3
)
 
$
112.0

Oil derivative contracts
 
(12.2
)
 
(15.3
)
 
(50.2
)
 
(3.7
)
QEP Marketing
 
 

 
 

 
 

 
 

Gas derivative contracts
 
(0.4
)
 
(0.3
)
 
(2.4
)
 
0.7

Total realized gains (losses) on commodity derivative contracts
 
(7.1
)
 
26.9

 
(75.9
)
 
109.0

Unrealized gains (losses) on commodity derivative contracts
QEP Energy
 
 

 
 

 
 

 
 

Gas derivative contracts
 
27.6

 
(6.6
)
 
9.5

 
(9.6
)
Oil derivative contracts
 
133.2

 
(46.2
)
 
54.3

 
(49.1
)
QEP Marketing
 
 

 
 

 
 

 
 

Gas derivative contracts
 
0.7

 
0.1

 
1.0

 
(0.3
)
Total unrealized gains (losses) on commodity derivative contracts
 
161.5

 
(52.7
)
 
64.8

 
(59.0
)
Total realized and unrealized gains (losses) on commodity derivative contracts
 
$
154.4

 
$
(25.8
)
 
$
(11.1
)
 
$
50.0

 
 
 
 
 
 
 
 
 
Realized gains (losses) on interest rate swaps
Realized losses on interest rate swaps
 
$
(1.3
)
 
$
(0.6
)
 
$
(3.2
)
 
$
(1.9
)
Unrealized gains (losses) on interest rate swaps
Unrealized gains (losses) on interest rate swaps
 
2.6

 
(1.4
)
 
1.1

 
3.5

Total realized and unrealized gains (losses) on interest rate swaps
 
$
1.3

 
$
(2.0
)
 
$
(2.1
)
 
$
1.6

Total net realized gains (losses) on derivative contracts
 
$
(8.4
)
 
$
26.3

 
$
(79.1
)
 
$
107.1

Total net unrealized gains (losses) on derivative contracts
 
164.1

 
(54.1
)
 
65.9

 
(55.5
)
Grand Total
 
$
155.7

 
$
(27.8
)
 
$
(13.2
)
 
$
51.6



Note 9 – Restructuring Costs

In December 2013, QEP announced its plan to pursue a separation of its midstream business, QEP Field Services. In connection with this announcement, the Board of Directors approved an employee retention plan to provide substantially all QEP Field Services' employees as of December 1, 2013, with a one-time lump-sum cash payment on the earlier of December 31, 2014, or whenever the separation of QEP Field Services occurs, conditioned on continued employment with QEP Field Services or a successor through the payment date unless the employee is terminated prior to such date. QEP expects to recognize $10.3 million of costs under this retention plan and has $7.9 million accrued since inception as of September 30, 2014. During the three and nine months ended September 30, 2014, $2.3 million and $7.1 million, respectively, was accrued under this retention plan, and are included in "Discontinued operations, net of income tax" on the Condensed Consolidated Statements of Operations.
 
During 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. Additionally, during 2012, QEP began incurring 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 increased efficiency, team-based collaboration and organizational productivity. As part of the

18



reorganization, QEP incurred costs associated with the severance, retention and relocation of employees, additional pension expenses, exit costs associated with the termination of operating leases arising from office space that will no longer be utilized by the Company and other expenses. All restructuring costs related to the 2012 office consolidations and continued operations were incurred and settled by December 31, 2013.

The following table summarizes, by line of business, each major type of restructuring cost expected to be incurred and the total amounts recorded in "General and administrative" expense on the Condensed Consolidated Statements of Operations for the respective periods indicated:

 
Total Restructuring Costs
 
Total Expected to be Incurred
 
Recognized in Income
 
 
Period from Inception to September 30, 2014
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
2014
 
2013
Continuing Operations:
(in millions)
QEP Energy
 
 
 
 
 
 
 
 
 
 
 
One-time termination benefits
$
3.3

 
$
3.3

 
$

 
$
0.1

 
$

 
$
0.4

Retention & relocation expense
3.7

 
3.7

 

 
0.1

 

 
0.3

Lease termination costs
0.6

 
0.6

 

 

 

 

Total restructuring costs
$
7.6

 
$
7.6

 
$

 
$
0.2

 

 
0.7

 
 
 
 
 
 
 
 
 
 
 
 
QEP Marketing & Other
 
 
 
 
 
 
 
 
 
 
 
One-time termination benefits
$
0.3

 
$
0.3

 
$

 
$
0.1

 
$

 
$
0.1

Total restructuring costs
$
0.3

 
$
0.3

 
$

 
$
0.1

 
$

 
$
0.1

 
 
 
 
 
 
 
 
 
 
 
 
Total QEP
 
 
 
 
 
 
 
 
 
 
 
One-time termination benefits
$
3.6

 
$
3.6

 
$

 
$
0.2

 
$

 
$
0.5

Retention & relocation expense
3.7

 
3.7

 

 
0.1

 

 
0.3

Lease termination costs
0.6

 
0.6

 

 

 

 

Total restructuring costs
$
7.9

 
$
7.9

 
$

 
$
0.3

 
$

 
$
0.8



Note 10 – Debt
 
As of the indicated dates, the principal amount of QEP’s debt, including amounts outstanding under QEP's revolving credit facility, term loan and senior notes, consisted of the following:
 
September 30,
2014
 
December 31,
2013
 
(in millions)
QEP's revolving credit facility due 2016
$
297.5

 
$
480.0

Term loan due 2017
600.0

 
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
3,119.3

 
3,001.8

Less unamortized discount
(3.8
)
 
(4.3
)
Total long-term debt outstanding
$
3,115.5

 
$
2,997.5


19



 
Of the total debt outstanding on September 30, 2014, amounts outstanding under QEP's revolving credit facility due August 25, 2016, 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 unsecured 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 borrowings 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 a provision whereby the maturity can be extended for up to two additional one-year periods, with the agreement of the lenders.

During the nine months ended September 30, 2014 and 2013, QEP’s weighted-average interest rate on borrowings from its credit facility was 2.22% and 2.56%, respectively. At September 30, 2014 and December 31, 2013, QEP was in compliance with the covenants under the credit agreement. At September 30, 2014, there was $297.5 million outstanding and $3.8 million of letters of credit issued under the credit facility.

Term Loan
QEP's $600.0 million unsecured 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. In conjunction with the Permian Basin Acquisition, QEP borrowed an incremental $300.0 million available under the facility and increased total borrowings under the term loan to $600.0 million. There were no changes to the maturity date, pricing or covenants in the credit agreement. QEP incurred $1.1 million of debt issuance costs associated with the new term loan issuance.

During the nine months ended September 30, 2014 and 2013, QEP’s weighted-average interest rate on borrowings from the term loan was 2.26% and 2.23%, respectively. At September 30, 2014 and December 31, 2013, QEP was in compliance with the covenants under the term loan credit agreement.
 
Senior Notes
At September 30, 2014, 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. Except for the Rocky Mountain Resources, the Questar Gas Company, and the XTO Energy Inc. matters discussed below, QEP is unable to estimate reasonably possible losses (in excess of recorded accruals, if any) for these contingencies for the reasons set forth above. QEP believes, however, that the resolution of pending proceedings (after accruals, insurance coverage, and indemnification arrangements) will not be material to QEP's financial position, but could be material to results of operations in a particular quarter or year.

Environmental Claims
 

20



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

Rocky Mountain Resources, LLC v. QEP Energy Company, Wexpro Company, Ultra Resources, Inc. and Lance Oil & Gas Company, Inc., Civil No. 2011-7816, District Court of Sublette County, Wyoming. Rocky Mountain Resources, LLC (Rocky Mountain) filed its complaint on March 30, 2011, seeking determination of the existence of a 4% overriding royalty interest in State of Wyoming oil and gas Lease No. 79-0645 covering Section 16, T32-N R-109-W, Sublette County, Wyoming. QEP and the other defendants are current lessees of Lease 79-0645. Rocky Mountain alleges that the defendants have received benefits from Lease 79-0645 and have failed to pay Rocky Mountain monies associated with the claimed 4% overriding royalty interest since the issuance of the lease by the State of Wyoming in 1980. Rocky Mountain asserts claims for quiet title, declaratory judgment, breach of contract, breach of duty of good faith, conversion, constructive trust and prejudgment interest. On May 7, 2014, the trial court entered its order granting plaintiff's motion for summary judgment on the issue of whether the overriding royalty interest attaches to QEP's lease. On June 17, 2014, the Supreme Court of Wyoming denied QEP's Petition for Writ of Review. On August 21, 2014, the trial court denied QEP’s Motion to Certify Questions of Law to the Wyoming Supreme Court. On October 8, 2014, Rocky Mountain, Ultra Resources, Inc. (Ultra) and Lance Oil and Gas Company (Lance) reached a confidential agreement resolving the application of the 4% override as to production by Ultra and Lance and filed a stipulation to dismiss the lawsuit with respect to Ultra and Lance. The stipulation has no effect on the claims asserted against QEP or Wexpro. There are several affirmative defenses that remain to be tried and QEP continues to vigorously defend the case. A trial date is scheduled for February 2015. QEP estimates, based in part on damages asserted by the plaintiff, that the range of reasonably possible outcomes is no loss to a loss of approximately $20.0 million.

Gatti et al v. State of Louisiana et al, 589,350, 19th JDC, Parish of East Baton Rouge, Louisiana. In this putative class action arising out of the unitization practices and orders of the Louisiana Commissioner of Conservation (Commissioner), plaintiffs seek to represent a class of all Haynesville Shale mineral owners (alleged to be over 50,000 in number) against the Commissioner and all Haynesville Shale unit operators. Plaintiffs filed their complaint on April 8, 2010, and claim that the Commissioner exceeded his statutory authority in creating and perpetuating units larger than the area that can be efficiently and economically drained by a single well. They seek declaratory relief that would nullify all such improper orders, along with an unspecified amount of monetary damages from the unit operators sufficient to compensate the putative class members for the alleged dilution of their true interest in unit production as a result of "oversized" units and the "cloud on title" caused by having excessive and improperly sized units purport to hold their mineral leases via unit operations. All defendants filed exceptions to the plaintiffs' petition on the primary ground that plaintiffs had failed to comply with the exclusive statutory judicial review procedure (Louisiana Revised Statutes 30:12), which the trial court granted, dismissing the action in its entirety. On January 15, 2014, the Louisiana First Circuit Court of Appeal reversed and reinstated plaintiffs' claims. Defendants asked for review by the Louisiana Supreme Court and on August 25, 2014, the Supreme Court reversed the Court of Appeals and dismissed the plaintiffs’ claim without prejudice as originally ordered by the District Court.

Yannick Gagné and others similarly situated v. QEP Resources, Inc., No. 480-06-1-132, Superior Court, Province of Quebec, Canada. Plaintiffs seek to represent a class of all persons who sustained damages as a result of the July 6, 2013 train derailment in Lac-Mégantic, Quebec, which resulted in substantial loss of life and property. The fourth amended motion to authorize the bringing of a class action was filed on February 19, 2014, and names numerous defendants. The plaintiffs contend that QEP,

21



and other producer defendants, sold Bakken crude oil to third-party purchasers in North Dakota, who resold the oil and transported it on the derailed train. Plaintiffs alleged that QEP and the producer defendants, among other things, failed to ensure that the oil was adequately processed to remove volatile gases and vapors, knowingly added volatile light end petroleum liquids and/or vapors or blended the crude with condensate, failed to conduct adequate well site testing to determine the proper hazard classification of the oil, failed to properly classify the shipping requirements for the oil, failed to take reasonable care to ensure that the oil was properly labeled and shipped, failed to identify the risk of the train derailment and take action to prevent it, and failed to adopt, implement and enforce rules and procedures pertaining to the safe shipment of the oil. The plaintiffs seek damages, but specific monetary damages are not asserted. Class certification hearings are ongoing.

Litigation related to discontinued operations:

In accordance with the terms of the Membership Interest Purchase Agreement, dated as of October 19, 2014, by and between QEP Field Services and Tesoro, Tesoro has agreed to indemnify QEP Field Services and its affiliates for any liabilities or claims associated with Questar Gas Company and XTO Energy litigation. Therefore, following the closing of the Tesoro transaction, QEP believes it will have no significant exposure to liability for the following litigation matters.

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, and an accounting and declaratory judgment related to a 1993 gathering agreement (the 1993 Agreement) executed when the parties were affiliates. Specific monetary damages are not asserted. Under the 1993 Agreement, certain of QEP Field Services' systems provide gathering services to QGC charging an annual gathering rate which is based on the 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. At the closing of the QEP Midstream initial public offering (IPO), the assets and agreement discussed above were assigned to QEP Midstream. QGC amended its complaint to add QEP Midstream as a defendant in the litigation. QEP agreed to indemnify QEP Midstream 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 entered into between QEP Midstream and QEP in connection with the IPO. QGC netted 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, 2014, QEP Midstream has deferred revenue of $13.2 million, which was included in "Current liabilities of discontinued operations held for sale" on the Condensed Consolidated Balance Sheet, related to the QGC disputed amount. QEP Field Services has filed counterclaims seeking damages and a declaratory judgment relating to its gathering services under the 1993 Agreement.

XTO Energy Inc. v. QEP Field Services Company, Civil No. 140900709, Third Judicial District Court, State of Utah. XTO Energy Inc. (XTO), filed this complaint in Utah state court on January 30, 2014, asserting claims for breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment and an accounting related to a 2010 gas processing agreement (the Agreement). QEP Field Services processes XTO’s natural gas on a firm basis under the Agreement. The Agreement requires QEP Field Services to transport, fractionate and market XTO’s natural gas liquids derived from XTO’s processed gas. XTO is seeking monetary damages related to QEP Field Services allocation of charges related to XTO’s share of natural gas liquid transportation, fractionation and marketing costs associated with shortfalls in contractual firm processing volumes.


Note 12 – Equity-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 equity-based compensation is included in additional paid-in capital in the Condensed Consolidated Balance Sheets. There were 10.9 million shares available for future grants under the LTSIP at September 30, 2014. Equity-based compensation expense related to continuing operations is recognized in “General and administrative” on the Condensed Consolidated Statements of Operations, and expenses related to discontinued operations (including compensation expense related to the QEP Midstream Long Term Incentive Plan) are reflected in "Discontinued operations, net of income tax". During the three and nine months ended September 30, 2014 for continuing operations, QEP recognized $6.4 million and $17.7 million in total compensation expense related to equity-based compensation compared to $5.5 million and $17.9 million during the three and nine months ended September 30, 2013, respectively. During the three and nine months ended September 30, 2014 for discontinued operations, QEP recognized $0.9 million and $3.0 million in total compensation expense related to equity-based compensation compared to $1.3 million and $2.1 million during the three and nine months ended September 30, 2013, respectively.

22



 
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 options 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. To fulfill options exercised, QEP either reissues treasury stock or issues new shares.

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, 2014
Weighted-average grant-date fair value of awards granted during the period
$
10.11

Weighted-average risk-free interest rate
1.31
%
Weighted-average expected price volatility
37.1
%
Expected dividend yield
0.25
%
Expected term in years at the date of grant
4.5


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, 2013
1,794,187

 
$
27.90

 
 
 
 
Granted
282,236

 
31.67

 
 
 
 
Exercised
(65,366
)
 
22.24

 
 
 
 

Forfeited