QEP-2015.06.30-10Q



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 June 30, 2015
 
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 June 30, 2015, there were 176,667,217 shares of the registrant’s common stock, $0.01 par value, outstanding.

 



QEP Resources, Inc.
Form 10-Q for the Quarter Ended June 30, 2015

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
REVENUES
(in millions, except per share amounts)
Gas sales
$
111.9

 
$
215.1

 
$
233.9

 
$
437.6

Oil sales
250.4

 
358.8

 
429.2

 
647.5

NGL sales
26.1

 
65.0

 
45.2

 
128.2

Other revenue
5.2

 
(0.8
)
 
9.6

 
1.7

Purchased gas and oil sales
215.0

 
249.1

 
382.3

 
489.7

Total Revenues
608.6

 
887.2

 
1,100.2

 
1,704.7

OPERATING EXPENSES
 

 
 

 
 

 
 

Purchased gas and oil expense
217.2

 
249.2

 
386.6

 
487.1

Lease operating expense
57.1

 
59.5

 
118.9

 
115.9

Gas, oil and NGL transportation and other handling costs
73.0

 
67.5

 
138.1

 
127.4

Gathering and other expense
1.4

 
1.8

 
3.1

 
3.4

General and administrative
51.3

 
52.3

 
98.7

 
97.6

Production and property taxes
32.7

 
53.5

 
60.5

 
101.4

Depreciation, depletion and amortization
215.8

 
235.2

 
411.2

 
461.1

Exploration expenses
0.8

 
1.7

 
1.9

 
3.9

Impairment
0.5

 
1.5

 
20.5

 
3.5

Total Operating Expenses
649.8

 
722.2

 
1,239.5

 
1,401.3

Net gain (loss) from asset sales
24.5

 
(200.9
)
 
(6.0
)
 
(198.5
)
OPERATING INCOME (LOSS)
(16.7
)
 
(35.9
)
 
(145.3
)
 
104.9

Realized and unrealized gains (losses) on derivative contracts (Note 8)
(66.0
)
 
(88.0
)
 
14.9

 
(168.9
)
Interest and other income
3.8

 
0.8

 
1.2

 
3.7

Income from unconsolidated affiliates


0.1




0.1

Interest expense
(36.2
)
 
(45.0
)
 
(73.0
)
 
(86.9
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(115.1
)
 
(168.0
)
 
(202.2
)
 
(147.1
)
Income tax (provision) benefit
38.8

 
61.9

 
70.3

 
53.7

NET INCOME (LOSS) FROM CONTINUING OPERATIONS
(76.3
)
 
(106.1
)
 
(131.9
)
 
(93.4
)
Net income from discontinued operations, net of income tax

 
13.8

 

 
40.8

NET INCOME (LOSS)
$
(76.3
)
 
$
(92.3
)
 
$
(131.9
)
 
$
(52.6
)
 
 
 
 
 
 
 
 
Earnings (Loss) Per Common Share
 

 
 

 
 

 
 

Basic from continuing operations
$
(0.43
)
 
$
(0.59
)
 
$
(0.75
)
 
$
(0.52
)
Basic from discontinued operations

 
0.08

 

 
0.23

Basic total
$
(0.43
)
 
$
(0.51
)
 
$
(0.75
)
 
$
(0.29
)
Diluted from continuing operations
$
(0.43
)
 
$
(0.59
)
 
$
(0.75
)
 
$
(0.52
)
Diluted from discontinued operations

 
0.08

 

 
0.23

Diluted total
$
(0.43
)
 
$
(0.51
)
 
$
(0.75
)

$
(0.29
)
Weighted-average common shares outstanding
 

 
 

 
 

 
 

Used in basic calculation
176.7

 
180.1

 
176.4

 
179.9

Used in diluted calculation
176.7

 
180.1

 
176.4

 
179.9

Dividends per common share
$
0.02

 
$
0.02

 
$
0.04

 
$
0.04


See Notes accompanying the Condensed Consolidated Financial Statements.

2



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Net income (loss)
$
(76.3
)
 
$
(92.3
)
 
$
(131.9
)
 
$
(52.6
)
Other comprehensive income, net of tax:
 

 
 

 
 

 
 

Pension and other postretirement plans adjustments:
 

 
 

 
 

 
 

Amortization of net actuarial loss (1)

 
0.1

 
0.2

 
0.2

Amortization of prior service cost (2)
0.1

 
0.8

 
0.6

 
1.7

Other comprehensive income
0.1

 
0.9

 
0.8

 
1.9

Comprehensive income (loss)
$
(76.2
)
 
$
(91.4
)

$
(131.1
)

$
(50.7
)
____________________________
(1) 
Presented net of income tax expense of $0.1 million during the six months ended June 30, 2015, and $0.1 million and $0.2 million during the three and six months ended June 30, 2014, respectively.
(2) 
Presented net of income tax expense of $0.1 million and $0.4 million during the three and six months ended June 30, 2015, respectively, and $0.5 million and $1.0 million during the three and six months ended June 30, 2014, respectively.

See Notes accompanying the Condensed Consolidated Financial Statements.


3



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
2015
 
December 31,
2014
ASSETS
(in millions)
Current Assets
 
 
 
Cash and cash equivalents
$
445.6

 
$
1,160.1

Accounts receivable, net
330.8

 
441.9

Income taxes receivable
55.7

 

Fair value of derivative contracts
163.6

 
339.0

Gas, oil and NGL inventories, at lower of average cost or market
10.4

 
13.7

Prepaid expenses and other
38.0

 
46.8

Total Current Assets
1,044.1

 
2,001.5

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

 
 

Proved properties
12,686.4

 
12,278.7

Unproved properties
814.1

 
825.2

Marketing and other
298.1

 
293.8

Material and supplies
41.6

 
54.3

Total Property, Plant and Equipment
13,840.2

 
13,452.0

Less Accumulated Depreciation, Depletion and Amortization
 

 
 

Exploration and production
6,415.1

 
6,153.0

Marketing and other
77.7

 
67.8

Total Accumulated Depreciation, Depletion and Amortization
6,492.8

 
6,220.8

Net Property, Plant and Equipment
7,347.4

 
7,231.2

Fair value of derivative contracts
6.1

 
9.9

Other noncurrent assets
35.5

 
44.2

TOTAL ASSETS
$
8,433.1

 
$
9,286.8

LIABILITIES AND EQUITY


 
 

Current Liabilities
 

 
 

Checks outstanding in excess of cash balances
$
7.4

 
$
54.7

Accounts payable and accrued expenses
463.3

 
575.4

Income taxes payable

 
532.1

Production and property taxes
59.3

 
61.7

Interest payable
36.4

 
36.4

Fair value of derivative contracts
1.0

 

Deferred income taxes
36.9

 
84.5

Total Current Liabilities
604.3

 
1,344.8

Long-term debt
2,218.5

 
2,218.1

Deferred income taxes
1,381.4

 
1,362.7

Asset retirement obligations
184.9

 
193.8

Fair value of derivative contracts
1.6

 

Other long-term liabilities
94.7

 
92.1

Commitments and contingencies (Note 10)


 


EQUITY
 

 
 

Common stock - par value $0.01 per share; 500.0 million shares authorized; 
177.0 million and 176.2 million shares issued, respectively
1.8

 
1.8

Treasury stock - 0.4 million and 0.8 million shares, respectively
(11.5
)
 
(25.4
)
Additional paid-in capital
538.1

 
535.3

Retained earnings
3,442.8

 
3,587.9

Accumulated other comprehensive income (loss)
(23.5
)
 
(24.3
)
Total Common Shareholders' Equity
3,947.7

 
4,075.3

TOTAL LIABILITIES AND EQUITY
$
8,433.1


$
9,286.8

 

See Notes accompanying the Condensed Consolidated Financial Statements.

4



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
June 30,
 
2015
 
2014
 
(in millions)
OPERATING ACTIVITIES
 

 
 

Net income (loss)
$
(131.9
)
 
$
(52.6
)
Net income attributable to noncontrolling interest

 
10.8

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

 
 

Depreciation, depletion and amortization
411.2

 
489.9

Deferred income taxes
(29.4
)
 
15.8

Impairment
20.5

 
3.5

Share-based compensation
15.6

 
14.6

Pension curtailment loss
11.2

 

Amortization of debt issuance costs and discounts
3.3

 
3.4

Net (gain) loss from asset sales
6.0

 
198.6

Income from unconsolidated affiliates

 
(3.4
)
Distributions from unconsolidated affiliates and other

 
6.3

Unrealized (gains) losses on derivative contracts
181.8

 
98.2

Changes in operating assets and liabilities
(490.9
)
 
75.2

Net Cash (Used in) Provided by Operating Activities
(2.6
)
 
860.3

INVESTING ACTIVITIES
 

 
 

Property acquisitions

 
(949.4
)
Property, plant and equipment, including dry exploratory well expense
(651.3
)
 
(779.0
)
Proceeds from (payments for) disposition of assets
(2.4
)
 
706.3

Acquisition deposit held in escrow

 
50.0

Net Cash Used in Investing Activities
(653.7
)

(972.1
)
FINANCING ACTIVITIES
 

 
 

Checks outstanding in excess of cash balances
(47.3
)
 
(85.2
)
Long-term debt issued

 
300.0

Long-term debt issuance costs paid

 
(1.1
)
Proceeds from credit facility

 
3,151.0

Repayments of credit facility

 
(2,538.0
)
Treasury stock repurchases
(1.9
)
 
(5.5
)
Other capital contributions
(0.1
)
 
4.1

Dividends paid
(7.1
)
 
(7.3
)
Excess tax (provision) benefit on share-based compensation
(1.8
)
 
(0.6
)
Distribution to noncontrolling interest

 
(15.2
)
Net Cash (Used in) Provided by Financing Activities
(58.2
)
 
802.2

Change in cash and cash equivalents
(714.5
)

690.4

Beginning cash and cash equivalents
1,160.1

 
11.9

Ending cash and cash equivalents
$
445.6

 
$
702.3

 
 
 
 
Supplemental Disclosures:
 

 
 

Cash paid for interest, net of capitalized interest
$
69.7

 
$
84.9

Cash paid for income taxes
548.5

 
0.2

Non-cash investing activities:
 

 
 

Change in capital expenditure accrual balance
$
(91.6
)
 
$
26.3

 
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 principal 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 a gas gathering system and an underground gas storage facility and corporate (QEP Marketing and Other).

QEP's operations are focused in two geographic regions: the Northern Region (primarily in Wyoming, North Dakota and Utah) and the Southern Region (primarily in Texas and Louisiana) 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 (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/A for the year ended December 31, 2014.
 
The preparation of the Condensed Consolidated Financial Statements and Notes in conformity with GAAP requires that management make estimates and assumptions that affect revenues, expenses, assets and liabilities, and disclosure of contingent assets and liabilities. Actual results could differ from estimates. The results of operations for the three and six months ended June 30, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

Impairment of Long-Lived Assets

During the six months ended June 30, 2015, QEP Energy recorded impairment charges of $20.5 million, of which $19.4 million was related to proved properties due to lower future prices and $1.1 million was related to expiring leaseholds on unproved properties. Of the $19.4 million impairment on proved properties, $14.5 million related to oil and gas properties in the Southern Region and $4.9 million related to oil and gas properties in the Northern Region.

New Accounting Pronouncements

In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2015-07, Fair Value Measurement (Topic 820), which removes the requirement to categorize investments for which fair values are measured using the net asset value per share practical expedient. It also limits disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. The Company is currently assessing the ASU and does not believe there will be a significant impact on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40), which assists entities in evaluating the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sales or license of software. The amendment will be effective prospectively for reporting periods beginning on or after December 15, 2015, and early adoption is permitted. The Company is currently assessing the ASU and does not believe there will be a significant impact on the Company's consolidated financial statements.


6



In April 2015, the FASB issued ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30), which simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The amendments will be effective retrospectively for reporting periods beginning on or after December 15, 2015, and early adoption is permitted. The Company plans to implement the ASU effective January 1, 2016 and does not believe there will be a significant impact on the Company's consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810), which amends the current consolidation guidance. The amendment affects both the variable interest entity and voting interest entity consolidation models. The amendment will be effective prospectively for reporting periods beginning on or after December 15, 2015, and early adoption is permitted. The Company is currently assessing the ASU and does not believe there will be a significant impact on the Company's consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement — Extraordinary and Unusual Items (Subtopic 225-20), which eliminates the concept of extraordinary items from GAAP. The amendment will be effective for reporting periods beginning on or after December 15, 2015, and early adoption is permitted. Additionally, a reporting entity also may apply the amendment retrospectively for all periods presented in the financial statements. The Company is currently assessing the ASU and does not believe there will be a significant impact on the Company's consolidated financial statements.

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. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year and the amendments are now effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The Company is currently assessing the impact on the Company's Consolidated 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 (the Permian Basin Acquisition). The acquired properties consisted 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 $40.1 million and $69.6 million and net income of $2.4 million and $0.9 million were generated from the acquired properties during the three and six months ended June 30, 2015. Revenues of $61.9 million and net income of $14.0 million were generated from the acquired properties from February 25, 2014, to June 30, 2014, and are included in QEP's Condensed Consolidated Statements of Operations.

The following table presents a summary of the Company's purchase accounting entries (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


7




The following unaudited, pro forma results of operations are provided for the six months ended June 30, 2014. Pro forma results are not provided for the three months ended June 30, 2014, or the three and six months ended June 30, 2015, because the Permian Basin Acquisition occurred during the first quarter of 2014, and therefore there is no pro forma impact on the these periods. 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 six months ended June 30, 2014, 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 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.
 
 
Six Months Ended
 
 
June 30, 2014
 
 
Actual
 
Pro forma
 
(in millions, except per share data)
Revenues
 
$
1,704.7

 
$
1,730.8

Net income
 
$
(52.6
)
 
$
(45.6
)
Earnings per common share
Basic
 
$
(0.29
)
 
$
(0.25
)
Diluted
 
$
(0.29
)
 
$
(0.25
)

Divestitures

In December 2014, QEP Energy sold its interest in certain non-core properties in southern Oklahoma for aggregate proceeds of $96.3 million, subject to post-closing purchase price adjustments, and recorded a pre-tax gain on sale of $53.3 million for the year ended December 31, 2014. QEP Energy recorded a pre-tax loss on sale of $1.1 million and $2.9 million for the three and six months ended June 30, 2015, respectively, due to post-closing purchase price adjustments.

In June 2014, QEP Energy sold its interest in certain non-core properties in the Midcontinent area and other non-core assets in the Williston Basin for aggregate proceeds of $668.2 million, subject to post-closing purchase price adjustments, and recorded a pre-tax loss of $199.4 million for the year ended December 31, 2014. QEP recorded a pre-tax gain on sale of $0.4 million and a pre-tax loss on sale of $26.4 million for the three and six months ended June 30, 2015, respectively, due to post-closing purchase price adjustments. These gains and losses are reported on the Condensed Consolidated Statements of Operations in "Net gain (loss) from asset sales".

Note 4 - Discontinued Operations

In October 2014, the Company announced that its wholly owned subsidiary, QEP Field Services Company (QEP Field Services), had entered into a definitive agreement to sell substantially all of its midstream business, including its ownership interest in QEP Midstream Partners, LP (QEP Midstream) to Tesoro Logistics LP (Tesoro). On December 2, 2014, QEP closed the sale of its midstream business to Tesoro (Midstream Sale) for total cash proceeds of approximately $2.5 billion, including $230.0 million to refinance debt at QEP Midstream, subject to post-closing adjustments, and QEP recorded a pre-tax gain of approximately $1.8 billion for the year ended December 31, 2014.

The operating results of QEP Field Services, excluding the Haynesville Gathering System (the Discontinued Operations of QEP Field Services), have been classified as discontinued operations on the Condensed Consolidated Statements of Operations and Notes accompanying the Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014. QEP will have continuing cash outflows to the entities sold as a part of the Midstream Sale for gathering, processing and water handling costs in Pinedale, the Uinta Basin and a portion of its Williston Basin operations. The contracts related to these cash flows 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 but are now reflected as part of the continuing operations for QEP. For the six months ended June 30, 2015 and 2014, cash outflows for these transactions included in continuing operations were $69.3 million and $74.0 million, respectively.

8




In connection with QEP's plan to separate its midstream business, 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 occurred, 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 recognized $10.4 million of costs under this retention plan in 2014, of which $2.6 million and $4.8 million was included in "Discontinued operations, net of income tax" on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014, respectively.

Condensed Consolidated Statement of Operations

The Discontinued Operations of QEP Field Services are summarized below:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2014
 
(in millions)
REVENUES
 
 
 
NGL sales
$
27.8

 
$
65.8

Other revenue
34.9

 
76.8

Purchased gas and oil sales(1)
(13.2
)
 
(26.6
)
Total Revenues
49.5

 
116.0

OPERATING EXPENSES
 
 
 
Purchased gas and oil expense(1)
(13.3
)
 
(27.1
)
Lease operating expense(1)
(2.0
)
 
(3.1
)
Natural gas, oil and NGL transport and other handling costs(1)
(13.1
)
 
(29.5
)
Gathering, processing, and other
22.8

 
47.1

General and administrative
11.9

 
23.2

Production and property taxes
2.5

 
4.0

Depreciation, depletion and amortization
14.5

 
28.8

Total Operating Expenses
23.3

 
43.4

Net loss from asset sales
(0.1
)
 
(0.1
)
OPERATING INCOME
26.1

 
72.5

Income from unconsolidated affiliates
1.1

 
3.3

Interest expense
(0.7
)
 
(1.3
)
INCOME FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (2)
26.5

 
74.5

Income tax provision
(7.7
)
 
(22.9
)
NET INCOME FROM DISCONTINUED OPERATIONS
18.8

 
51.6

Net income attributable to noncontrolling interest
(5.0
)
 
(10.8
)
NET INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX
$
13.8

 
$
40.8

(1) 
Includes discontinued intercompany eliminations.
(2) 
Includes income from discontinued operations before income taxes attributable to QEP from QEP Midstream (of which QEP owned 57.8%) of $5.7 million and $12.5 million for the three and six months ended June 30, 2014, respectively.

Condensed Consolidated Statement of Cash Flows

The impact of the Discontinued Operations of QEP Field Services on the Condensed Consolidated Statement of Cash Flows for "Depreciation, depletion and amortization" contained in "Cash flows from operating activities" was $14.5 million and $28.8 million for the three and six months ended June 30, 2014, respectively. The impact on cash used for "Property, plant and equipment, including dry exploratory well expense" contained in "Cash flows from investing activities" was $24.4 million and $37.1 million for the three and six months ended June 30, 2014, respectively.


9



Note 5 – Earnings Per Share
 
Basic earnings per share (EPS) are computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the potential increase in the number of outstanding shares that could result from the exercise of in-the-money stock options. QEP’s unvested restricted shares are included in weighted-average basic common shares outstanding because once the shares are granted, the restricted shares are considered issued and outstanding, the historical forfeiture rate is minimal and the restricted shares receive dividends.
 
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method. The Company’s unvested restricted stock awards contain non-forfeitable dividend rights and participate equally with common stock with respect to dividends issued or declared. However, the Company’s unvested restricted stock does not have a contractual obligation to share in losses of the Company. The Company’s unexercised stock options do not contain rights to dividends. Under the two-class method, the earnings used to determine basic earnings per common share are reduced by an amount allocated to participating securities. When the Company records a net loss, none of the loss is allocated to the participating securities since the securities are not obligated to share in Company losses. Use of the two-class method has an insignificant impact on the calculation of basic and diluted earnings per common share. During the three and six months ended June 30, 2014, 0.4 million and 0.3 million shares, respectively, were not included in diluted common shares outstanding as they were anti-dilutive due to QEP's net loss. During the three and six months ended June 30, 2015, 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015

2014
 
2015
 
2014
 
(in millions)
Weighted-average basic common shares outstanding
176.7

 
180.1

 
176.4

 
179.9

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

 

 

 

Average diluted common shares outstanding
176.7

 
180.1

 
176.4

 
179.9



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 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 $185.9 million and $195.1 million ARO liability for the periods ended June 30, 2015 and December 31, 2014, $1.0 million and $1.3 million were included, respectively, as a current liability in "Accounts payable and accrued expenses" on the Condensed Consolidated Balance Sheets.


10



The following is a reconciliation of the changes in the Company's ARO for the period specified below:
 
Asset Retirement Obligations
 
2015
 
(in millions)
ARO liability at January 1,
$
195.1

Accretion
4.3

Additions
1.9

Revisions
0.2

Liabilities related to divestitures
(14.6
)
Liabilities settled
(1.0
)
ARO liability at June 30,
$
185.9


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.

11




The fair value of financial assets and liabilities at June 30, 2015 and December 31, 2014, is shown in the table below:
 
Fair Value Measurements
 
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)
 
June 30, 2015
Financial Assets
 
 
 
 
 
 
 
 
 
Commodity derivative instruments - short-term
$

 
$
170.7

 
$

 
$
(7.1
)
 
$
163.6

Commodity derivative instruments - long-term

 
7.0

 

 
(0.9
)
 
6.1

Total financial assets
$

 
$
177.7

 
$

 
$
(8.0
)
 
$
169.7

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity derivative instruments - short-term
$

 
$
8.1

 
$

 
$
(7.1
)
 
$
1.0

Commodity derivative instruments - long-term

 
2.5

 

 
(0.9
)
 
1.6

Total financial liabilities
$

 
$
10.6

 
$

 
$
(8.0
)
 
$
2.6

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Financial Assets
 
 
 
 
 
 
 
 
 
Commodity derivative instruments - short-term
$

 
$
339.3

 
$

 
$
(0.3
)
 
$
339.0

Commodity derivative instruments - long-term

 
9.9

 

 

 
9.9

Total financial assets
$

 
$
349.2

 
$

 
$
(0.3
)
 
$
348.9

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity derivative instruments - short-term
$

 
$
0.3

 
$

 
$
(0.3
)
 
$

Total financial liabilities
$

 
$
0.3

 
$

 
$
(0.3
)
 
$

_______________________
(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 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
 
June 30, 2015
 
December 31, 2014
 
(in millions)
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
445.6

 
$
445.6

 
$
1,160.1

 
$
1,160.1

Financial liabilities
 

 
 

 
 

 
 

Checks outstanding in excess of cash balances
$
7.4

 
$
7.4

 
$
54.7

 
$
54.7

Long-term debt
$
2,218.5

 
$
2,230.9

 
$
2,218.1

 
$
2,171.6


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.


12



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 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, but generally, QEP intends to enter into commodity derivative contracts for approximately 50% of its forecasted annual production by the end of the first quarter of each fiscal year. 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 or collars to realize a known price or price range 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 or collars 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 Intercontinental Exchange, Inc. (ICE) Brent oil prices as the reference price. QEP also enters into crude oil and natural gas basis swaps to achieve a fixed price swap for a portion of its oil and gas that it sells at prices that reference specific index prices.

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.

During 2014, QEP also used interest rate swaps to mitigate a portion of its exposure to interest rate volatility 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%. These interest rate swaps were terminated in December 2014 in conjunction with the extinguishment of QEP's term loan.

13



QEP Energy Derivative Contracts
The following table sets forth QEP Energy’s quantities and average prices for its commodity derivative swap contracts as of June 30, 2015
Year
 
Index
 
Total
Volumes
 
Average Swap price per unit
 
 
 
 
(in millions)
 
 
Gas sales
 
 
 
(MMBtu)

 
 
2015
 
 NYMEX HH
 
35.0

 
$
3.48

2015
 
 IFNPCR
 
23.9

 
$
3.55

2016
 
NYMEX HH
 
18.3

 
$
3.24

2016
 
IFNPCR
 
25.6

 
$
2.92

Oil sales
 
 
 
(bbls)

 
 

2015
 
NYMEX WTI
 
5.2

 
$
82.09

2015
 
ICE Brent
 
0.2

 
$
104.95

2016
 
NYMEX WTI
 
3.3

 
$
65.43


The following table sets forth details of QEP Energy's gas collars as of June 30, 2015:
 
 
 
 
Total Volume
 
Average Price
 
Average Price
Year
 
Index
 
 
Floor
 
Ceiling
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
(MMBtu)

 
($/MMBtu)
 
($/MMBtu)
2016
 
NYMEX HH
 
7.3

 
$
2.75

 
$
3.89


QEP uses gas basis swaps, combined with NYMEX HH fixed price swaps, to achieve fixed price swaps at the location at which it sells its physical production.

The following table sets forth details of QEP Energy's gas basis swaps as of June 30, 2015:
Year
 
Index
 
Index Less Differential
 
Total Volumes
 
Weighted Average Differential
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
(MMBtu)

 
($/MMBtu)

2015
 
NYMEX HH
 
IFNPCR
 
22.1

 
$
(0.28
)

14




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 June 30, 2015:
Year
 
Type of Contract
 
Index
 
Total
Volumes
 
Average Swap price
per MMBtu
 
 
 
 
 
 
(in millions)
 
 
Gas sales
 
 
 
 
 
(MMBtu)

 
 
2015
 
SWAP
 
IFNPCR
 
2.4

 
$
3.25

2016
 
SWAP
 
IFNPCR
 
1.8

 
$
3.19

Gas purchases
 
 
 
 
 
(MMBtu)

 
 

2015
 
SWAP
 
IFNPCR
 
0.9

 
$
2.80


 
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
 
June 30,
2015
 
December 31, 2014
 
June 30,
2015
 
December 31, 2014
 
 
 
(in millions)
Current:
 
 
 
 
 
 
 
 
 
Commodity
Fair value of derivative contracts
 
$
170.7

 
$
339.3

 
$
8.1

 
$
0.3

Long-term:
 
 
 

 
 

 
 
 
 

Commodity
Fair value of derivative contracts
 
7.0

 
9.9

 
2.5

 

Total derivative instruments
 
$
177.7

 
$
349.2

 
$
10.6

 
$
0.3



15



The effects of the change in fair value and settlement of QEP's derivative contracts recorded in "Realized and unrealized gains (losses) on derivative contracts" on the Condensed Consolidated Statements of Operations are summarized in the following table:
 
 
Three Months Ended
 
Six Months Ended
Derivative instruments not designated as cash flow hedges
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Realized gains (losses) on commodity derivative contracts
 
(in millions)
QEP Energy
 
 
 
 
 
 
 
 
Gas derivative contracts
 
$
28.1

 
$
(8.4
)
 
$
46.0

 
$
(28.8
)
Oil derivative contracts
 
64.5

 
(25.1
)
 
148.5

 
(38.0
)
QEP Marketing
 
 

 
 

 
 

 
 

Gas derivative contracts
 
(0.3
)
 
(0.6
)
 
2.2

 
(2.0
)
Total realized gains (losses) on commodity derivative contracts
 
92.3

 
(34.1
)
 
196.7

 
(68.8
)
Unrealized gains (losses) on commodity derivative contracts
QEP Energy
 
 

 
 

 
 

 
 

Gas derivative contracts
 
(34.5
)
 
6.2

 
(23.1
)
 
(18.1
)
Oil derivative contracts
 
(123.7
)
 
(58.0
)
 
(156.8
)
 
(78.9
)
QEP Marketing
 
 

 
 

 
 

 
 

Gas derivative contracts
 
(0.1
)
 
0.7

 
(1.9
)
 
0.4

Total unrealized gains (losses) on commodity derivative contracts
 
(158.3
)
 
(51.1
)
 
(181.8
)
 
(96.6
)
Total realized and unrealized gains (losses) on commodity derivative contracts
 
$
(66.0
)
 
$
(85.2
)
 
$
14.9

 
$
(165.4
)
 
 
 
 
 
 
 
 
 
Realized gains (losses) on interest rate swaps
Realized gains (losses) on interest rate swaps
 
$

 
$
(1.2
)
 
$

 
$
(1.9
)
Unrealized gains (losses) on interest rate swaps
Unrealized gains (losses) on interest rate swaps
 

 
(1.6
)
 

 
(1.6
)
Total realized gains (losses) on interest rate swaps
 
$

 
$
(2.8
)
 
$

 
$
(3.5
)
Total net realized gains (losses) on derivative contracts
 
$
92.3

 
$
(35.3
)
 
$
196.7

 
$
(70.7
)
Total net unrealized gains (losses) on derivative contracts
 
(158.3
)
 
(52.7
)
 
(181.8
)
 
(98.2
)
Grand Total
 
$
(66.0
)
 
$
(88.0
)
 
$
14.9

 
$
(168.9
)


16



Note 9 – Debt
 
As of the indicated dates, the principal amount of QEP’s debt, including amounts outstanding under QEP's revolving credit facility and senior notes, consisted of the following:
 
June 30,
2015
 
December 31,
2014
 
(in millions)
Revolving Credit Facility due 2019
$

 
$

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
2,221.8

 
2,221.8

Less unamortized discount
(3.3
)
 
(3.7
)
Total long-term debt outstanding
$
2,218.5

 
$
2,218.1

 
Of the total debt outstanding on June 30, 2015, the 6.05% Senior Notes due September 1, 2016, the 6.80% Senior Notes due April 1, 2018 and the 6.80% Senior Notes due March 1, 2020, will mature within the next five years. The revolving credit facility matures on December 2, 2019.
 
Credit Facility
QEP’s revolving credit facility, which matures in December 2019, provides for loan commitments of $1.8 billion from a group of financial institutions. The credit facility provides for borrowings at short-term interest rates and contains customary covenants and restrictions.

On December 2, 2014, QEP entered into the Fourth Amendment to its Credit Agreement, which increased the aggregate principal amount of commitments to $1.8 billion, extended the maturity date to December 2, 2019, and made minor adjustments to other provisions and covenants.

During the six months ended June 30, 2014, QEP’s weighted-average interest rate on borrowings from its credit facility was 2.20%. At June 30, 2015 and December 31, 2014, QEP had no borrowings outstanding under the credit facility, had $3.7 million in letters of credit outstanding under the credit facility and was in compliance with the covenants under the credit facility.

Senior Notes
At June 30, 2015, 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 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 10 - Contingencies

QEP is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. QEP assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its Consolidated Financial Statements. In accordance with ASC 450, Contingencies, an accrual is recorded for a loss contingency when its occurrence is probable and damages are reasonably estimable 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 can 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, the ongoing discovery and/or development of information important to the matter. QEP is unable to estimate reasonably possible losses (in excess of recorded accruals, if any) for its loss contingencies for the reasons set forth above. QEP believes, however,

17



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.

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 burdens 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. At the conclusion of a trial in February 2015, and after being instructed by the Court that the overriding royalty interest burdened QEP’s lease, a jury rendered a verdict against QEP and awarded Rocky Mountain damages in the amount of $16.7 million, including interest. QEP believes that the Court’s ruling on summary judgment and the resulting jury instructions are in error and will appeal to the Wyoming Supreme Court. On March 27, 2015, defendants filed a Motion for New Trial arguing that the verdict is not sustained by sufficient evidence, is contrary to law and resulted from errors of law occurring at the trial. The Court has taken the motion under advisement. Post-judgment interest accrues at the statutory rate of 10%. QEP estimates that, notwithstanding the verdict, the range of reasonably possible losses is still zero to $20.0 million.

Yannick Gagné and others similarly situated v. QEP Resources, Inc., et al., 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, including the rail company that transported the crude oil (which filed for bankruptcy protection in August 2013). The plaintiffs contend that QEP, 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 took place in June 2014, and a court order regarding class certification is pending. Many of the defendants, including QEP, and their insurers have reached an agreement with Trustees in both Canadian and U.S. Bankruptcy Courts to resolve all of these claims. The terms of the agreement are confidential and are contingent upon the approval of the courts. In addition, on July 15, 2015, QEP was served with a complaint entitled Samuel Audet, et al. vs. Devlar Energy Marketing, LLC, et al., No. DC-15-06428, District Court of Dallas County, Texas, 95th Judicial District. The plaintiffs, defendants, allegations, and damages sought are materially similar to those in the Yannick Gagné case, and plaintiffs state that this lawsuit is filed to preserve claims under the applicable two-year statute of limitations. Plaintiffs also filed a motion to stay proceedings in this case for 90 days pending the outcome of the global settlement discussions described above in the Yannick Gagné case. The court's order on this request for a stay is pending.


18



Note 11 – Share-Based Compensation
 
QEP issues stock options and restricted shares under its Long-Term Stock Incentive Plan (LTSIP) and awards performance share units under its Cash Incentive Plan (CIP) to certain officers, employees, and non-employee directors. QEP recognizes expense over the vesting periods for the stock options, restricted shares, and performance share units. Deferred share-based compensation is included in additional paid-in capital in the Condensed Consolidated Balance Sheets. There were 9.2 million shares available for future grants under the LTSIP at June 30, 2015. Share-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 "Net income from discontinued operations, net of income tax". During the three and six months ended June 30, 2015, QEP recognized $6.5 million and $15.6 million, respectively, in total compensation expense related to share-based compensation for continuing operations, compared to $5.9 million and $12.3 million, respectively, during the three and six months ended June 30, 2014. During the three and six months ended June 30, 2014, QEP recognized $1.2 million and $2.3 million, respectively, in total compensation expense related to share-based compensation for discontinued operations.
 
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 for the six months ended June 30, 2015:
 
Stock Option Assumptions
Weighted-average grant-date fair value of awards granted during the period
$
6.82

Weighted-average risk-free interest rate
1.38
%
Weighted-average expected price volatility
36.8
%
Expected dividend yield
0.37
%
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, 2014
1,996,215

 
$
28.60

 
 
 
 
Granted
425,877

 
21.69

 
 
 
 
Exercised
(15,000
)
 
19.37

 
 
 
 
Forfeited
(2,817
)
 
31.31

 
 
 
 
Canceled
(60,000
)
 
27.84

 
 
 
 
Outstanding at June 30, 2015
2,344,275

 
$
27.42

 
3.48
 
$

Options Exercisable at June 30, 2015
1,658,563

 
$
28.32

 
2.40
 
$

Unvested Options at June 30, 2015
685,712

 
$
25.23

 
6.12
 
$

 
The total intrinsic value (the difference between the market price at the exercise date and the exercise price) of options exercised was $0.1 million and $0.5 million during the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, $3.3 million of unrecognized compensation cost related to stock options granted under the LTSIP is expected to be recognized over a weighted-average period of 2.34 years.

19



 
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 six months ended June 30, 2015 and 2014, was $18.1 million and $15.2 million, respectively. The weighted average grant-date fair value of restricted stock was $21.66 per share and $31.63 per share for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, $33.0 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 2.42 years.

Transactions involving restricted shares under the terms of the LTSIP are summarized below:
 
Restricted Shares
Outstanding
 
Weighted-
Average Grant-Date Fair Value
 
 
 
(per share)
Unvested balance at December 31, 2014
1,426,453

 
$
31.02

Granted
1,373,300

 
21.66

Vested
(585,611
)
 
30.88

Forfeited
(83,590
)
 
27.54

Unvested balance at June 30, 2015
2,130,552

 
$
25.16

 
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 have historically been delivered in cash at the end of the performance period. Beginning with awards granted in 2015, the Company has the option to settle earned awards in cash or shares of common stock under the Company's LTSIP; however, as of June 30, 2015, the Company expects to settle all awards in cash. The weighted average grant-date fair value of the performance share units was $21.69 per share and $31.67 per share for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, $2.5 million of unrecognized compensation cost, representing the fair market value of performance shares granted, is expected to be recognized over a weighted-average vesting period of 2.09 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, 2014
552,209

 
$
30.85

Granted
234,085

 
21.69

Vested and paid out
(131,665
)
 
30.77

Canceled (1)
(14,612
)
 
30.77

Forfeited
(6,792
)
 
28.29

Unvested balance at June 30, 2015
633,225

 
$
27.52

____________________________
(1) 
Represents units that were not paid out due to performance under the plan.

Note 12 – Employee Benefits

Pension and other postretirement benefits
The Company provides pension and other postretirement benefits to certain employees through three retirement benefit plans: the QEP Resources, Inc. Retirement Plan (the Pension Plan), the Supplemental Executive Retirement Plan (SERP), and a postretirement medical plan (the Medical Plan).


20



The Pension Plan is a qualified, closed, defined-benefit pension plan that is funded and provides pension benefits to certain QEP employees. During the six months ended June 30, 2015, the Company made contributions of $2.0 million to the Pension Plan and does not expect to make additional contributions to the Pension Plan during 2015. Contributions to the Pension Plan increase plan assets.

As a result of the Company's 2014 divestitures and expected retirements in 2015, the number of participants in the Pension Plan is expected to fall below 50 employees by December 31, 2015, which is below the minimum number of participants for a plan to be qualified under the Internal Revenue Services' participation rules. In order to prevent disqualification, the Pension Plan was amended in June 2015 and will be frozen effective January 1, 2016, such that employees do not earn additional defined benefits for future services. This change resulted in a non-cash curtailment loss of $11.2 million recognized on the Condensed Consolidated Statements of Operations within "General and administrative" expense during the three and six months ended June 30, 2015.

The SERP is a nonqualified retirement plan that is unfunded and provides pension benefits to certain QEP employees. During the six months ended June 30, 2015, the Company made contributions of $1.8 million to its SERP and expects to contribute an additional $2.6 million to its SERP during the remainder of 2015. Contributions to the SERP are used to fund current benefit payments. The SERP was amended and restated in June 2015 and will be closed to new participants effective, January 1, 2016.

The Medical Plan is unfunded and provides other postretirement benefits including certain health care and life insurance benefits for certain retired employees. During the six months ended June 30, 2015, the Company made contributions of $0.2 million to its Medical Plan and expects to contribute an additional $0.2 million to its Medical Plan during the remainder of 2015. Contributions to the Medical Plan are used to fund current benefit payments.


21



The following table sets forth the Company’s net periodic benefit costs related to its Pension Plan, SERP and Medical Plan:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Pension Plan and SERP benefits
 
 
 
 
 
 
 
Service cost
$
0.4

 
$
0.7

 
$
1.0

 
$
1.4

Interest cost
1.1

 
1.4

 
2.4

 
2.8

Expected return on plan assets
(1.4
)
 
(1.2
)
 
(2.8
)
 
(2.4
)
Amortization of prior service costs (1)
0.1

 
1.2

 
0.9

 
2.5

Amortization of actuarial losses (1)

 
0.2

 
0.3

 
0.4

Curtailment loss (2)
11.2

 
2.0

 
11.2

 
2.0

Special termination benefits (3)

 
0.3

 

 
0.3

Periodic expense
$
11.4

 
$
4.6

 
$
13.0

 
$
7.0

 
 
 
 
 
 
 
 
Medical Plan benefits
 
 
 
 
 
 
 
Interest cost
$

 
$
0.1

 
$
0.1

 
$
0.2

Amortization of prior service costs (1)
0.1

 
0.1

 
0.1

 
0.2

Curtailment loss (2)

 
0.4

 

 
0.4

Periodic expense
$
0.1

 
$
0.6

 
$
0.2

 
$
0.8

____________________________
(1) 
Amortization of prior service costs and actuarial losses out of accumulated other comprehensive income are recognized in the Condensed Consolidated Statements of Operations in "General and administrative."
(2) 
A curtailment is recognized immediately when there is a significant reduction in, or an elimination of, defined benefit accruals for current employees' future services. These expenses are included on the Condensed Consolidated Statements of Operations within "General and administrative" expense for the three and six months ended June 30, 2015, as the expenses incurred in that period related to the Pension Plan amendment (see above), and within "Net gain (loss) from asset sales" for the three and six months ended June 30, 2014, as the expenses incurred in that period related to the Midcontinent property sales (see Note 3 - Acquisitions and Divestitures).
(3) 
During the three and six months ended June 30, 2014, the Company recognized special termination benefits on the Condensed Consolidated Statements of Operations within "Net gain (loss) from asset sales" as the expense related to the Midcontinent property sales (see Note 3 - Acquisitions and Divestitures).

During the three and six months ended June 30, 2015, for continuing operations, QEP recognized $11.5 million and $13.2 million, respectively, in employee benefit expense, compared to $4.1 million and $6.1 million, respectively, during the three and six months ended June 30, 2014. During the three and six months ended June 30, 2014, for discontinued operations, QEP recognized $1.1 million and $1.7 million, respectively, in employee benefit expense.


22



Note 13 – Operations by Line of Business
 
QEP’s lines of business include oil and gas exploration and production (QEP Energy); and oil and gas marketing, operation of the Haynesville Gathering System and an underground storage facility, and corporate (QEP Marketing and Other). The lines of business are managed separately and therefore the financial information is presented separately due to the distinct differences in the nature of operations of each line of business, among other factors.

Our financial results for the three and six months ended June 30, 2014, have been revised, in accordance with GAAP, to reflect the impact of the Midstream Sale. See Note 4 - Discontinued Operations for detailed information on the Midstream Sale.

The following table is a summary of operating results for the three months ended June 30, 2015, by line of business:
 
QEP Energy
 
QEP Marketing
 and Other
 
Eliminations
 
QEP
Consolidated
 
(in millions)
REVENUES
 
 
 
 
 
 
 
From unaffiliated customers
$
407.9

 
$
200.7

 
$

 
$
608.6

From affiliated customers

 
248.1

 
(248.1
)
 

Total Revenues
407.9


448.8


(248.1
)

608.6

OPERATING EXPENSES
 

 
 

 
 

 
 

Purchased gas and oil expense
16.8

 
445.4

 
(245.0
)
 
217.2

Lease operating expense
57.1

 

 

 
57.1

Gas, oil and NGL transportation and other handling costs
75.5

 

 
(2.5
)
 
73.0

Gathering and other expense

 
1.4

 

 
1.4

General and administrative
50.0

 
1.9

 
(0.6
)
 
51.3

Production and property taxes
31.2

 
1.5

 

 
32.7

Depreciation, depletion and amortization
213.2

 
2.6

 

 
215.8

Impairment and exploration expense
1.3

 

 

 
1.3

Total Operating Expenses
445.1

 
452.8

 
(248.1
)
 
649.8

Net gain (loss) from asset sales
26.5

 
(2.0
)
 

 
24.5

OPERATING INCOME (LOSS)
(10.7
)
 
(6.0
)
 

 
(16.7
)
Realized and unrealized gains (losses) on derivative contracts
(65.6
)
 
(0.4
)
 

 
(66.0
)
Interest and other income
3.1

 
53.1

 
(52.4
)
 
3.8

Interest expense
(52.6
)
 
(36.0
)
 
52.4

 
(36.2
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(125.8
)
 
10.7

 

 
(115.1
)
Income tax (provision) benefit
42.4

 
(3.6
)
 

 
38.8

NET INCOME (LOSS)
$
(83.4
)
 
$
7.1

 
$

 
$
(76.3
)


23



The following table is a summary of operating results for the three months ended June 30, 2014, by line of business:
 
QEP Energy
 
QEP Marketing
 and Other
 
Eliminations
 
Discontinued Operations
 
QEP
Consolidated
 
(in millions)
REVENUES
 
 
 
 
 
 
 
 
 
From unaffiliated customers
$
687.2

 
$
200.0

 
$

 
$

 
$
887.2

From affiliated customers

 
411.6

 
(411.6
)
 

 

Total Revenues
687.2

 
611.6

 
(411.6
)
 

 
887.2

OPERATING EXPENSES
 

 
 

 
 

 
 
 
 

Purchased gas and oil expense
50.1

 
605.4

 
(406.3
)
 

 
249.2

Lease operating expense
59.5

 

 

 

 
59.5

Gas, oil and NGL transportation and other handling costs
72.1

 

 
(4.6
)
 

 
67.5

Gathering and other expense

 
1.8

 

 

 
1.8

General and administrative
52.5

 
0.5

 
(0.7
)
 

 
52.3

Production and property taxes
53.1

 
0.4

 

 

 
53.5

Depreciation, depletion and amortization
232.3

 
2.9

 

 

 
235.2

Impairment and exploration expense
3.2

 

 

 

 
3.2

Total Operating Expenses
522.8

 
611.0

 
(411.6
)
 

 
722.2

Net gain (loss) from assets sales
(200.8
)
 
(0.1
)
 

 

 
(200.9
)
OPERATING INCOME (LOSS)
(36.4
)
 
0.5

 

 

 
(35.9
)
Realized and unrealized gains (losses) on derivative contracts
(85.3
)
 
(2.7
)
 

 

 
(88.0
)
Interest and other income
0.6

 
56.7

 
(56.5
)
 

 
0.8

Income from unconsolidated affiliates
0.1

 

 

 

 
0.1

Interest expense
(56.6
)
 
(44.9
)
 
56.5

 

 
(45.0
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(177.6
)
 
9.6

 

 

 
(168.0
)
Income tax (provision) benefit
67.2

 
(5.3
)
 

 

 
61.9

INCOME (LOSS) FROM CONTINUING OPERATIONS
(110.4
)
 
4.3

 

 

 
(106.1
)
Net income from discontinued operations, net of income tax