Document




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, 2017
 
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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11711681&doc=13
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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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
 
 
Emerging growth company
o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 2017, there were 240,555,086 shares of the registrant’s common stock, $0.01 par value, outstanding.
 



QEP Resources, Inc.
Form 10-Q for the Quarter Ended June 30, 2017

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,
 
2017
 
2016
 
2017
 
2016
REVENUES
(in millions, except per share amounts)
Oil sales
$
216.0

 
$
207.7

 
$
437.7

 
$
351.5

Gas sales
134.2

 
79.2

 
268.7

 
164.3

NGL sales
22.8

 
22.8

 
51.8

 
36.4

Other revenue (loss)
2.7

 
(0.5
)
 
6.7

 
1.8

Purchased oil and gas sales
8.0

 
24.5

 
38.9

 
41.0

Total Revenues
383.7

 
333.7

 
803.8

 
595.0

OPERATING EXPENSES
 

 
 

 
 
 
 
Purchased oil and gas expense
9.1

 
26.8

 
38.5

 
43.7

Lease operating expense
70.0

 
52.6

 
139.2

 
112.6

Transportation and processing costs
72.2

 
69.5

 
142.4

 
143.1

Gathering and other expense
1.8

 
1.6

 
3.3

 
2.9

General and administrative
31.3

 
42.9

 
64.9

 
91.4

Production and property taxes
28.5

 
20.7

 
57.6

 
38.5

Depreciation, depletion and amortization
191.5

 
209.7

 
383.3

 
449.7

Exploration expenses

 
0.4

 
0.4

 
0.7

Impairment

 
0.8

 
0.1

 
1,183.2

Total Operating Expenses
404.4

 
425.0

 
829.7

 
2,065.8

Net gain (loss) from asset sales
19.8

 
(0.8
)
 
19.8

 
(0.3
)
OPERATING INCOME (LOSS)
(0.9
)
 
(92.1
)
 
(6.1
)
 
(1,471.1
)
Realized and unrealized gains (losses) on derivative contracts (Note 7)
106.7

 
(180.5
)
 
267.6

 
(129.6
)
Interest and other income (expense)
1.8

 
(1.1
)
 
2.4

 
1.0

Interest expense
(34.9
)
 
(36.6
)
 
(68.7
)
 
(73.3
)
INCOME (LOSS) BEFORE INCOME TAXES
72.7

 
(310.3
)
 
195.2

 
(1,673.0
)
Income tax (provision) benefit
(27.3
)
 
113.3

 
(72.9
)
 
612.2

NET INCOME (LOSS)
$
45.4

 
$
(197.0
)
 
$
122.3

 
$
(1,060.8
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share
 
 
 

 
 
 
 
Basic
$
0.19

 
$
(0.90
)
 
$
0.51

 
$
(5.21
)
Diluted
$
0.19

 
$
(0.90
)
 
$
0.51

 
$
(5.21
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 
 

 
 
 
 
Used in basic calculation
240.5

 
217.7

 
240.4

 
203.7

Used in diluted calculation
240.6

 
217.7

 
240.5

 
203.7

Dividends per common share
$

 
$

 
$

 
$


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,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Net income (loss)
$
45.4

 
$
(197.0
)
 
$
122.3

 
$
(1,060.8
)
Other comprehensive income, net of tax:
 

 
 

 
 
 
 
Postretirement medical plan change(1)

 

 
1.6

 

Pension and other postretirement plans adjustments:
 

 
 

 
 
 
 
Amortization of prior service costs(2)
0.2

 
0.3

 
0.3

 
0.4

Amortization of actuarial losses(3)
(0.1
)
 
0.1

 
0.1

 
0.2

Other comprehensive income
0.1

 
0.4

 
2.0

 
0.6

Comprehensive income (loss)
$
45.5

 
$
(196.6
)
 
$
124.3

 
$
(1,060.2
)
____________________________
(1) 
Presented net of income tax expense of $1.0 million during the six months ended June 30, 2017.
(2) 
Presented net of income tax expense of $0.1 million and $0.2 million during the three and six months ended June 30, 2017, respectively. Presented net of income tax expense of $0.2 million and $0.3 million during the three and six months ended June 30, 2016, respectively.
(3) 
Presented net of income tax expense of $0.1 million during the six months ended June 30, 2017. Presented net of income tax expense of $0.1 million during the three and six months ended June 30, 2016, respectively.

See Notes accompanying the Condensed Consolidated Financial Statements.

3




QEP RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
2017
 
December 31,
2016
ASSETS
(in millions)
Current Assets
 
 
 
Cash and cash equivalents
$
178.8

 
$
443.8

Accounts receivable, net
165.0

 
155.7

Income tax receivable
12.9

 
18.6

Fair value of derivative contracts
48.8

 

Hydrocarbon inventories, at lower of average cost or net realizable value
8.6

 
10.4

Prepaid expenses and other
10.2

 
11.6

Total Current Assets
424.3

 
640.1

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

 
 

Proved properties
14,840.2


14,232.5

Unproved properties
729.6


871.5

Gathering and other
305.8


301.8

Materials and supplies
39.0


32.7

Total Property, Plant and Equipment
15,914.6

 
15,438.5

Less Accumulated Depreciation, Depletion and Amortization
 
 
 

Exploration and production
9,069.9


8,797.7

Gathering and other
107.4


101.8

Total Accumulated Depreciation, Depletion and Amortization
9,177.3

 
8,899.5

Net Property, Plant and Equipment
6,737.3

 
6,539.0

Fair value of derivative contracts
28.6

 

Other noncurrent assets
75.3

 
66.3

TOTAL ASSETS
$
7,265.5


$
7,245.4

LIABILITIES AND EQUITY
 
 
 

Current Liabilities
 

 
 

Checks outstanding in excess of cash balances
$
11.9

 
$
12.3

Accounts payable and accrued expenses
305.9

 
269.7

Production and property taxes
33.0

 
30.1

Interest payable
32.9

 
32.9

Fair value of derivative contracts
1.4

 
169.8

Current portion of long-term debt
134.0

 

Total Current Liabilities
519.1

 
514.8

Long-term debt
1,889.0

 
2,020.9

Deferred income taxes
894.3

 
825.9

Asset retirement obligations
225.6

 
225.8

Fair value of derivative contracts
0.1

 
32.0

Other long-term liabilities
102.4

 
123.3

Commitments and contingencies (Note 9)


 


EQUITY
 
 
 

Common stock – par value $0.01 per share; 500.0 million shares authorized; 
242.2 million and 240.7 million shares issued, respectively
2.4

 
2.4

Treasury stock – 1.7 million and 1.1 million shares, respectively
(30.3
)
 
(22.9
)
Additional paid-in capital
1,382.1

 
1,366.6

Retained earnings
2,295.6

 
2,173.3

Accumulated other comprehensive income (loss)
(14.8
)
 
(16.7
)
Total Common Shareholders' Equity
3,635.0

 
3,502.7

TOTAL LIABILITIES AND EQUITY
$
7,265.5

 
$
7,245.4

 

See Notes accompanying the Condensed Consolidated Financial Statements.

4




QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
June 30,
 
2017
 
2016
OPERATING ACTIVITIES
(in millions)
Net income (loss)
$
122.3

 
$
(1,060.8
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization
383.3

 
449.7

Deferred income taxes
67.2

 
(559.9
)
Impairment
0.1

 
1,183.2

Bargain purchase gain from acquisition
0.4

 

Share-based compensation
7.7

 
19.1

Amortization of debt issuance costs and discounts
3.1

 
3.2

Net (gain) loss from asset sales
(19.8
)
 
0.3

Unrealized (gains) losses on marketable securities
(1.4
)
 
(0.5
)
Unrealized (gains) losses on derivative contracts
(277.6
)
 
243.5

Changes in operating assets and liabilities
9.9

 
(58.2
)
Net Cash Provided by (Used in) Operating Activities
295.2

 
219.6

INVESTING ACTIVITIES
 

 
 

Property acquisitions
(76.6
)
 
(23.6
)
Acquisition deposit held in escrow

 
(30.0
)
Property, plant and equipment, including dry exploratory well expense
(477.9
)
 
(276.6
)
Proceeds from disposition of assets
2.3

 
23.7

Net Cash Provided by (Used in) Investing Activities
(552.2
)

(306.5
)
FINANCING ACTIVITIES
 

 
 

Checks outstanding in excess of cash balances
(0.5
)
 
(29.8
)
Long-term debt issuance costs paid
(1.1
)
 

Treasury stock repurchases
(6.4
)
 
(3.1
)
Other capital contributions

 
0.2

Proceeds from issuance of common stock, net

 
781.6

Excess tax (provision) benefit on share-based compensation

 
0.2

Net Cash Provided by (Used in) Financing Activities
(8.0
)
 
749.1

Change in cash and cash equivalents
(265.0
)

662.2

Beginning cash and cash equivalents
443.8

 
376.1

Ending cash and cash equivalents
$
178.8

 
$
1,038.3

 
 
 
 
Supplemental Disclosures:
 

 
 

Cash paid for interest, net of capitalized interest
$
64.3

 
$
68.6

Cash paid (refund received) for income taxes, net
$

 
$
32.4

Non-cash Investing Activities:
 

 
 

Change in capital expenditure accruals and other non-cash adjustments
$
42.4

 
$
(27.7
)
 
See Notes accompanying the Condensed Consolidated Financial Statements.

5




QEP RESOURCES, INC.
NOTES ACCOMPANYING THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 – Basis of Presentation

Nature of Business

QEP Resources, Inc. is an independent crude oil and natural gas exploration and production company focused in two regions of the United States: the Northern Region (primarily in North Dakota, Wyoming and Utah) and the Southern Region (primarily in Texas and Louisiana). Unless otherwise specified or the context otherwise requires, all references to "QEP" or the "Company" are to QEP Resources, Inc. and its subsidiaries on a consolidated basis. QEP's corporate headquarters are located in Denver, Colorado and shares of QEP's common stock trade on the New York Stock Exchange (NYSE) under the ticker symbol "QEP".

Basis of Presentation of Interim Condensed 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 Generally Accepted Accounting Principles (GAAP) in the United States and with the instructions for Quarterly Reports on Form 10-Q and Regulation S-X. 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, 2016.
 
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, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

Reclassifications

Certain prior period balances on the Condensed Consolidated Statement of Operations have been reclassified to conform to the current year presentation. Such reclassifications had no effect on the Company's net income, earnings per share, cash flows or retained earnings previously reported.

Impairment of Long-Lived Assets

During the six months ended June 30, 2016, QEP recorded impairment charges of $1,183.2 million, of which $1,167.9 million was related to proved properties due to lower future oil and gas prices, $11.6 million was related to expiring leaseholds on unproved properties and $3.7 million was related to an impairment of goodwill. Of the $1,167.9 million impairment on proved properties, $1,164.0 million related to Pinedale properties, $3.5 million related to Other Northern properties and $0.4 million related to QEP's Other Southern properties.


6




New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 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. In addition, new and enhanced disclosures will be required. The amendment is effective prospectively for reporting periods beginning on or after December 15, 2017, and early adoption is permitted for periods beginning on or after December 15, 2016. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company has selected the modified retrospective method and is currently assessing the impact of the ASU on the Company's Condensed Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize the lease assets and lease liabilities classified as operating leases on the balance sheet and disclosing key quantitative and qualitative information about leasing arrangements. The amendment will be effective for reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently assessing the impact of the ASU on the Company's Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and hedging (Topic 815): Contingent put and call options in debt instruments, which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The amendment will be effective prospectively for reporting periods beginning on or after December 15, 2016, and early adoption is permitted. The Company adopted this standard in the first quarter of 2017 and the adoption of this new standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to employee share-based payment accounting, which includes provisions intended to simplify various aspects related to how share-based compensation payments are accounted for and presented in the financial statements. This amendment was effective prospectively for reporting periods beginning after December 15, 2016, and early adoption was permitted. The Company adopted this standard in the first quarter of 2017 and the adoption of this new standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The amendment will be effective prospectively for reporting periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently assessing the impact of the ASU on the Company's Condensed Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the test for goodwill impairment, which eliminates the requirement to calculate implied fair value of goodwill to measure the goodwill impairment charge. The amendment will be effective prospectively for reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company early adopted this standard in the first quarter of 2017 and the adoption of this new standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost, which changes how employers of a defined benefit plan present net periodic benefit cost in the statement of operations. The amendment will be effective retrospectively for reporting periods beginning after December 15, 2017, and early adoption is permitted. The Company early adopted this standard in the first quarter of 2017 and the adoption of this new standard did not have a material impact on the Company's Condensed Consolidated Financial Statements. See Note 11 – Employee Benefits for additional information regarding the Company's postretirement benefit plan.


7




Note 2 – Acquisitions and Divestitures

2016 Permian Basin Acquisition

In October 2016, QEP acquired oil and gas properties in the Permian Basin for an aggregate purchase price of approximately $591.0 million, subject to customary post-closing purchase price adjustments (the 2016 Permian Basin Acquisition). The 2016 Permian Basin Acquisition consists of approximately 9,600 net acres in Martin County, Texas, which are primarily held by production from existing vertical wells. The 2016 Permian Basin Acquisition was funded with cash on hand, which included proceeds from an equity offering in June 2016.

The 2016 Permian Basin Acquisition meets the definition of a business combination under ASC 805, Business Combinations, as it includes significant proved properties. QEP allocated the cost of the 2016 Permian Basin Acquisition to assets acquired and liabilities assumed based on fair values as of the acquisition date. Revenues of $15.1 million and $19.8 million and net income of $2.1 million and $1.6 million were generated from the acquired properties during the three and six months ended June 30, 2017, respectively, and are included in QEP's Condensed Consolidated Statements of Operations. In conjunction with the 2016 Permian Basin Acquisition, the Company recorded an $18.2 million bargain purchase gain in 2016. The acquisition resulted in a bargain purchase gain primarily as a result of an increase in future oil prices from the execution of the purchase and sale agreement to the closing date of the acquisition. During the six months ended June 30, 2017, the Company reduced the bargain purchase gain by $0.4 million due to purchase price adjustments. The bargain purchase gain is reported on the Condensed Consolidated Statements of Operations within "Interest and other income (expense)".

The following table presents a summary of the Company's purchase accounting entries (in millions) as of June 30, 2017:
Consideration:
 
 
Total consideration
 
$
591.0

 
 
 
Amounts recognized for fair value of assets acquired and liabilities assumed:
 
 
Proved properties
 
$
406.2

Unproved properties
 
214.2

Asset retirement obligations
 
(11.6
)
Bargain purchase gain
 
(17.8
)
Total fair value
 
$
591.0


The following unaudited, pro forma results of operations are provided for the three and six months ended June 30, 2016. Pro forma results are not provided for the three and six months ended June 30, 2017, because the 2016 Permian Basin Acquisition occurred during the fourth quarter of 2016, and therefore, the results are included in QEP's results of operations for the three and six months ended June 30, 2017. 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 periods 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 condensed consolidated results of operations for the three and six months ended June 30, 2016, 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 2016 Permian Basin Acquisition or any estimated costs that have been or will be incurred by the Company to integrate the acquired properties.


8




 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
 
Actual
 
Pro forma
 
Actual
 
Pro forma
 
(in millions, except per share amounts)
Revenues
$
333.7

 
$
338.7

 
$
595.0

 
$
604.6

Net income (loss)
$
(197.0
)
 
$
(197.5
)
 
$
(1,060.8
)
 
$
(1,062.0
)
Earnings (loss) per common share
 
 
 
 
 
 
 
Basic
$
(0.90
)
 
$
(0.91
)
 
$
(5.21
)
 
$
(5.21
)
Diluted
$
(0.90
)
 
$
(0.91
)
 
$
(5.21
)
 
$
(5.21
)

Other Acquisitions

During the six months ended June 30, 2017, QEP acquired various oil and gas properties, primarily proved and unproved leaseholds and additional surface acreage in the Permian Basin, for an aggregate purchase price of $76.6 million. In conjunction with these acquisitions, the Company recorded $5.3 million of goodwill. The goodwill is reported on the Condensed Consolidated Balance Sheets within "Other noncurrent assets".

During the six months ended June 30, 2016, QEP acquired various oil and gas properties, which primarily included additional interests in QEP's operated wells and the associated leasehold in the Permian and Williston basins, for an aggregate purchase price of $29.8 million. In conjunction with the acquisitions, the Company recorded $3.7 million of goodwill, all of which was subsequently impaired in 2016.

Divestitures

During the six months ended June 30, 2017, QEP received proceeds of $2.3 million and recorded accounts receivable of $36.7 million, resulting in a pre-tax gain on sale of $19.8 million, primarily related to the divestiture of certain non-core properties in the Other Northern area. Gains and losses are reported on the Condensed Consolidated Statements of Operations within "Net gain (loss) from asset sales".

During the six months ended June 30, 2016, QEP received proceeds of $23.7 million and recorded a pre-tax loss on sale of $0.3 million, primarily related to the divestiture of certain non-core properties in the Other Southern area.

Note 3 – 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 share awards are included in weighted-average basic common shares outstanding because, once the shares are granted, the restricted share awards are considered issued and outstanding, the historical forfeiture rate is minimal and the restricted share awards are eligible to 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 share 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 share awards do 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, 2017, there were no anti-dilutive shares. During the three and six months ended June 30, 2016, there were anti-dilutive shares of 0.1 million not included in diluted common shares outstanding as they were anti-dilutive to QEP's net loss.


9




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,
 
2017

2016
 
2017
 
2016
 
(in millions)
Weighted-average basic common shares outstanding
240.5

 
217.7

 
240.4

 
203.7

Potential number of shares issuable upon exercise of in-the-money stock options under the Long-Term Stock Incentive Plan
0.1

 

 
0.1

 

Average diluted common shares outstanding
240.6

 
217.7

 
240.5

 
203.7


Note 4 – Capitalized Exploratory Well Costs

Net changes in capitalized exploratory well costs are presented in the table below. The balance at June 30, 2017, represents the amount of capitalized exploratory well costs that are pending the determination of proved reserves.

 
 
Capitalized Exploratory Well Costs
 
 
2017
 
 
(in millions)
Balance at January 1,
 
$
14.2

Additions to capitalized exploratory well costs pending the determination of proved reserves
 
10.0

Balance at June 30,
 
$
24.2

 
 
 
Capitalized exploratory well costs that have been capitalized for a period of one year or less
 
$
10.4

Capitalized exploratory well costs that have been capitalized for a period greater than one year
 
13.8

Total capitalized exploratory well costs
 
$
24.2

 
 
 
Number of projects with exploratory well costs that have been capitalized for a period greater than one year
 
1


Central Basin Platform exploration project. As of June 30, 2017, QEP had approximately $13.8 million of exploratory well costs that are older than one year, all of which related to the Central Basin Platform exploration project in the Permian Basin targeting the Woodford Formation. QEP completed one exploratory well related to this project in the first quarter of 2016 and drilled a second exploratory well that was completed in the first half of 2017. In addition to the exploratory well costs, QEP has $28.6 million of unproved leasehold costs related to the Central Basin Platform exploration project as of June 30, 2017. QEP will continue to evaluate the performance of both wells to determine the ultimate economic feasibility of this exploration project.

Note 5 – Asset Retirement Obligations
 
QEP records asset retirement obligations (ARO) 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 $231.7 million and $231.6 million ARO liability for the periods ended June 30, 2017 and December 31, 2016, respectively, $6.0 million and $5.8 million, respectively, were included as a liability within "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
 
2017
 
(in millions)
ARO liability at January 1,
$
231.6

Accretion
4.3

Additions
3.3

Revisions
0.2

Liabilities settled
(7.7
)
ARO liability at June 30,
$
231.7


Note 6 – Fair Value Measurements
 
QEP measures and discloses fair values in accordance with the provisions of ASC 820, Fair Value Measurements and Disclosures. This guidance defines fair value in applying GAAP, establishes a framework for measuring fair value and expands disclosures about fair value measurements. 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 7 – 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, 2017 and December 31, 2016, 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
 
 
 
June 30, 2017
Financial Assets
(in millions)
Fair value of derivative contracts – short-term
$

 
$
63.0

 
$

 
$
(14.2
)
 
$
48.8

Fair value of derivative contracts – long-term

 
28.6

 

 

 
28.6

Total financial assets
$

 
$
91.6

 
$

 
$
(14.2
)
 
$
77.4


 
 
 
 
 
 
 
 
 
Financial Liabilities
 

 
 

 
 

 
 

 
 

Fair value of derivative contracts – short-term
$

 
$
15.6

 
$

 
$
(14.2
)
 
$
1.4

Fair value of derivative contracts – long-term

 
0.1

 

 

 
0.1

Total financial liabilities
$

 
$
15.7

 
$

 
$
(14.2
)
 
$
1.5

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
Financial Assets
 
 
 
 
 
 
 
 
 
Fair value of derivative contracts – short-term
$

 
$

 
$

 
$

 
$

Fair value of derivative contracts – long-term

 

 

 

 

Total financial assets
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 

 
 

 
 

 
 

 
 

Fair value of derivative contracts – short-term
$

 
$
169.8

 
$

 
$

 
$
169.8

Fair value of derivative contracts – long-term

 
32.0

 

 

 
32.0

Total financial liabilities
$


$
201.8


$


$


$
201.8

_______________________
(1) 
The Company nets its derivative contract assets and liabilities outstanding with the same counterparty on the Condensed Consolidated Balance Sheets, for the contracts that contain netting provisions. See Note 7 – 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 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q:
 
Carrying Amount
 
Level 1 Fair Value
 
Carrying Amount
 
Level 1 Fair Value
 
June 30, 2017
 
December 31, 2016
Financial Assets
(in millions)
Cash and cash equivalents
$
178.8

 
$
178.8

 
$
443.8

 
$
443.8

Financial Liabilities
 

 
 

 
 

 
 

Checks outstanding in excess of cash balances
$
11.9

 
$
11.9

 
$
12.3

 
$
12.3

Long-term debt
$
2,023.0

 
$
2,036.4

 
$
2,020.9

 
$
2,104.3


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.


12




The initial measurement of ARO at fair value is calculated using discounted cash flow techniques and is based on internal estimates of future retirement costs associated with property, plant and equipment. Significant Level 3 inputs used in the calculation of ARO includes plugging costs and reserve lives. A reconciliation of the Company’s ARO is presented in Note 5 – Asset Retirement Obligations.

Nonrecurring Fair Value Measurements

The provisions of the fair value measurement standard are also applied to the Company's nonrecurring measurements. The Company utilizes fair value on a nonrecurring basis to review its proved oil and gas properties for potential impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such property. During the six months ended June 30, 2017, the Company recorded no impairments on proved oil and gas properties. During the six months ended June 30, 2016, the Company recorded impairments on certain proved oil and gas properties of $1,167.9 million resulting in a reduction of the associated carrying value to fair value. The fair value of the property was measured utilizing the income approach and utilizing inputs that are primarily based upon internally developed cash flow models discounted at an appropriate weighted average cost of capital. Given the unobservable nature of the inputs, fair value calculations associated with proved oil and gas property impairments are considered Level 3 within the fair value hierarchy.

Acquisitions of proved and unproved properties are also measured at fair value on a nonrecurring basis. The Company utilizes a discounted cash flow model to estimate the fair value of acquired property as of the acquisition date which utilizes the following inputs to estimate future net cash flows: (i) estimated quantities of oil, gas and NGL reserves; (ii) estimates of future commodity prices; and (iii) estimated production rates, future operating and development costs, which are based on the Company's historic experience with similar properties. In some instances, market comparable information of recent transactions is used to estimate fair value of unproved acreage. Due to the unobservable characteristics of the inputs, the fair value of the acquired properties is considered Level 3 within the fair value hierarchy. See Note 2 – Acquisitions and Divestitures for additional information on the fair value of acquired properties.

Note 7 – Derivative Contracts

QEP has established policies and procedures for managing commodity price volatility through the use of derivative instruments. In the normal course of business, QEP uses commodity price derivative instruments to reduce the impact of potential downward movements in commodity prices on cash flow, returns on capital investment, and other financial results. However, these instruments typically limit gains from favorable price movements. The volume of production subject to commodity derivative instruments and the mix of the instruments are frequently evaluated and adjusted by management in response to changing market conditions. QEP may enter into commodity derivative contracts for up to 100% of forecasted production, but generally, QEP enters into commodity derivative contracts for approximately 50% to 75% 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 storage transactions. QEP does not enter into commodity derivative contracts 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 oil or gas between the parties at settlement. All 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. 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. Gas price derivative instruments are typically structured as fixed-price swaps or collars at regional price indices. QEP also enters into oil and gas basis swaps to achieve a fixed-price swap for a portion of its oil and gas sales at prices that reference specific regional index prices.

QEP does not currently have any commodity derivative transactions that have margin requirements or collateral provisions that would require payments prior to the scheduled settlement dates. QEP's commodity derivative contract counterparties are typically 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, actively monitoring counterparties' public credit ratings and avoiding the concentration of credit exposure by transacting with multiple counterparties. The Company has master-netting agreements with some counterparties that allow the offsetting of receivables and payables in a default situation.

13





Derivative Contracts Production
The following table presents QEP’s volumes and average prices for its commodity derivative swap contracts as of June 30, 2017:
Year
 
Index
 
Total Volumes
 
Average Swap Price per Unit
 
 
 
 
(in millions)
 
 
Oil sales
 
 
 
(bbls)

 
($/bbl)

2017
 
NYMEX WTI
 
7.2

 
$
51.51

2018
 
NYMEX WTI
 
9.9

 
$
53.59

Gas sales
 
 
 
(MMBtu)

 
($/MMBtu)

2017
 
 NYMEX HH
 
49.7

 
$
2.87

2017
 
 IFNPCR
 
16.6

 
$
2.51

2018
 
NYMEX HH
 
98.6

 
$
2.99

2019
 
NYMEX HH
 
3.7

 
$
2.85


The following table presents QEP's volumes and average prices for its commodity derivative gas collars as of June 30, 2017:
Year
 
Index
 
Total Volumes
 
Average Price Floor
 
Average Price Ceiling
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
(MMBtu)

 
($/MMBtu)

 
($/MMBtu)

2017
 
NYMEX HH
 
5.5

 
$
2.50

 
$
3.50


QEP uses oil and gas basis swaps, combined with NYMEX WTI and NYMEX HH fixed price swaps, to achieve fixed price swaps for the location at which it sells its physical production. The following table presents details of QEP's oil and gas basis swaps as of June 30, 2017:
Year
 
Index Less Differential
 
Index
 
Total Volumes
 
Weighted-Average Differential
 
 
 
 
 
 
(in millions)
 
 
Oil sales
 
 
 
 
 
(bbls)

 
($/bbl)

2017
 
NYMEX WTI
 
Argus WTI Midland
 
2.2

 
$
(0.67
)
2018
 
NYMEX WTI
 
Argus WTI Midland
 
6.2

 
$
(1.09
)
2019
 
NYMEX WTI
 
Argus WTI Midland
 
0.4

 
$
(1.10
)
Gas sales
 
 
 
 
 
(MMBtu)

 
($/MMBtu)

2017
 
NYMEX HH
 
IFNPCR
 
25.8

 
$
(0.18
)
2018
 
NYMEX HH
 
IFNPCR
 
7.3

 
$
(0.16
)

Derivative Contracts Gas Storage
QEP enters into commodity derivative transactions to lock in a margin on gas volumes placed into storage. The following table presents QEP’s volumes and average prices for its storage commodity derivative swap contracts as of June 30, 2017:
Year
 
Type of Contract
 
Index
 
Total Volumes
 
Average Swap Price per Unit
 
 
 
 
 
 
(in millions)
 
 
Gas sales
 
 
 
 
 
(MMBtu)

 
($/MMBtu)

2017
 
SWAP
 
IFNPCR
 
1.1

 
$
2.83


 

14




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 on 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,
2017
 
December 31, 2016
 
June 30,
2017
 
December 31, 2016
Current:
 
 
(in millions)
Commodity
Fair value of derivative contracts
 
$
63.0

 
$

 
$
15.6

 
$
169.8

Long-term:
 
 
 

 
 

 
 
 
 

Commodity
Fair value of derivative contracts
 
28.6

 

 
0.1

 
32.0

Total derivative instruments
 
$
91.6

 
$

 
$
15.7

 
$
201.8


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 contracts not designated as cash flow hedges
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Realized gains (losses) on commodity derivative contracts
 
(in millions)
Production
 
 
 
 
 
 
 
 
Oil derivative contracts
 
$
11.5

 
$
19.9

 
$
9.5

 
$
60.7

Gas derivative contracts
 
(5.1
)
 
28.9

 
(19.3
)
 
50.4

Gas Storage
 
 

 
 

 
 
 
 
Gas derivative contracts
 

 
0.7

 
(0.2
)
 
2.8

Total realized gains (losses) on commodity derivative contracts
 
6.4

 
49.5

 
(10.0
)
 
113.9

Unrealized gains (losses) on commodity derivative contracts
 
 
 
 
 
 
 
 
Production
 
 

 
 

 
 
 
 
Oil derivative contracts
 
70.5

 
(107.7
)
 
174.8

 
(135.6
)
Gas derivative contracts
 
29.4

 
(120.2
)
 
100.5

 
(104.8
)
Gas Storage
 
 

 
 

 
 
 
 
Gas derivative contracts
 
0.4

 
(2.1
)
 
2.3

 
(3.1
)
Total unrealized gains (losses) on commodity derivative contracts
 
100.3

 
(230.0
)
 
277.6

 
(243.5
)
Total realized and unrealized gains (losses) on commodity derivative contracts
 
$
106.7

 
$
(180.5
)
 
$
267.6

 
$
(129.6
)


15




Note 8 – Debt

As of the indicated dates, the principal amount of QEP’s debt consisted of the following:
 
June 30,
2017
 
December 31,
2016
 
(in millions)
Revolving Credit Facility due 2019
$

 
$

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

Less: unamortized discount and unamortized debt issuance costs
(22.0
)
 
(24.1
)
Total principal amount of debt (including current portion)
2,023.0

 
2,020.9

Less: current portion of long-term debt
(134.0
)
 

Total long-term debt outstanding
$
1,889.0

 
$
2,020.9


Of the total debt outstanding on June 30, 2017, the 6.80% Senior Notes due April 1, 2018, the 6.80% Senior Notes due March 1, 2020 and the 6.875% Senior Notes due March 1, 2021, will mature within the next five years. In addition, 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. The credit agreement contains financial covenants (that are defined in the credit agreement) that limit the amount of debt the Company can incur and may limit the amount available to be drawn under the credit facility including: (i) a net funded debt to capitalization ratio that may not exceed 60%; (ii) a leverage ratio under which net funded debt may not exceed 4.25 times consolidated EBITDA (as defined in the credit agreement) for the fiscal quarters ending on and prior to December 31, 2017, 4.00 times for the quarters in fiscal year 2018, and 3.75 times thereafter and (iii) during a ratings trigger period, a present value coverage ratio which requires that the present value of the Company’s proved reserves must exceed net funded debt by 1.25 times at any time prior to January 1, 2018, and 1.50 times at any time on or after January 1, 2018. The Company is currently not subject to the present value coverage ratio. At June 30, 2017 and December 31, 2016, QEP was in compliance with the covenants under the credit agreement.

During the six months ended June 30, 2017 and 2016, QEP had no borrowings under the credit facility. Additionally, as of June 30, 2017 and December 31, 2016, QEP had no borrowings outstanding under the credit facility and had $1.0 million and $2.8 million, respectively, in letters of credit outstanding under the credit facility.

Senior Notes
At June 30, 2017, the Company had $2,045.0 million principal amount of senior notes outstanding with maturities ranging from April 2018 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 9 – Commitments and Contingencies

The Company is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. In each reporting period, the Company assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its Condensed Consolidated Financial Statements. In accordance with ASC 450, Contingencies, an accrual is recorded for a material 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.

16





Legal proceedings are inherently unpredictable and unfavorable resolutions can occur. Assessing contingencies is highly subjective and requires judgment about uncertain future events. When evaluating contingencies related to legal proceedings, the Company may be unable to estimate losses due to a number of factors, including potential defenses, the procedural status of the matter in question, the presence of complex legal and/or factual issues, the ongoing discovery and/or development of information important to the matter.

Claims of Former Limited Partners The Company received a demand from certain former limited partners of terminated drilling partnerships of the Company (acting as the general partner). The former limited partners allege that distributions to which they were entitled from the drilling partnerships were not made or were calculated incorrectly. Other former limited partners may assert claims. No litigation has been filed, and the Company continues to evaluate the allegations and its defenses.

Department of Interior and Department of Justice Investigation regarding Indian Royalties – Pursuant to regulations published by the Office of Natural Resources Revenue (ONRR) of the Department of the Interior (DOI), certain of the Company’s Indian leases are subject to “dual accounting” and “major portion” requirements.  The Company must initially report royalties on production from these leases based upon its actual sales arrangements and, once ONRR publishes the major portion price (approximately 18 months after a calendar year), the Company must recalculate its previously reported royalties for the applicable calendar year and pay additional royalties if the dual accounting or major portion pricing results in higher royalties. In July 2016, the Company was notified that the Office of Inspector General of the DOI was investigating the Company’s compliance with ONRR dual accounting and major portion requirements to recalculate royalties for 2013 on production from certain Indian leases. In June 2017, the Company was notified by the Department of Justice that it was working with the DOI on the investigation due to the Company’s failure to pay gas royalties to tribal and allotted mineral interest owners through ONRR for 2013 and 2014.

EPA Request for Information In July 2015, QEP received an information request from the Environmental Protection Agency (EPA) pursuant to Section 114(a) of the Clean Air Act. The information request sought facts and data about certain tank batteries in QEP’s Williston Basin operations. QEP timely responded to the information requests. In August 2016, the EPA requested a conference to review this matter. In addition, since February 2016, the North Dakota Department of Health (NDDH) has engaged with the oil and gas production industry in North Dakota to address potential noncompliance associated with emissions from tank batteries. QEP has participated in these discussions. While no formal federal or state enforcement action has been commenced in connection with the tank batteries to date, other operators have been assessed penalties following similar information requests. QEP anticipates that resolution of these matters will likely result in penalties and require QEP to incur additional capital expenditures to correct noncompliance issues.

To the extent that the Company can reasonably estimate losses for contingencies where the risk of a material loss (in excess of accruals, if any) is reasonably possible, the Company estimates such losses could total between zero and approximately $25.0 million.

Note 10 – Share-Based Compensation
 
QEP issues stock options, restricted share awards and restricted share units 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 the expense over the vesting periods for the stock options, restricted share awards, restricted share units and performance share units. There were 5.5 million shares available for future grants under the LTSIP at June 30, 2017.


17




Share-based compensation expense is recognized within "General and administrative" expense on the Condensed Consolidated Statements of Operations and is summarized in the table below:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Stock options
$
0.6

 
$
0.5

 
$
1.2

 
$
1.2

Restricted share awards
6.0

 
5.7

 
13.3

 
12.2

Performance share units
(4.9
)
 
4.8

 
(6.8
)
 
5.6

Restricted share units

 
0.1

 

 
0.1

Total share-based compensation expense
$
1.7

 
$
11.1

 
$
7.7

 
$
19.1


Stock Options
QEP uses the Black-Scholes-Merton mathematical model to estimate the fair value of stock option awards at the date of 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 calculating the value of options not 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, 2017:
 
Stock Option Assumptions
Weighted-average grant date fair value of awards granted during the period
$
6.52

Weighted-average risk-free interest rate
1.81
%
Weighted-average expected price volatility
43.8
%
Expected dividend yield
%
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, 2016
2,151,957

 
$
25.26

 
 
 
 
Granted
409,549

 
16.98

 
 
 
 
Canceled
(202,260
)
 
27.55

 
 
 
 
Outstanding at June 30, 2017
2,359,246

 
$
23.63

 
4.07
 
$

Options Exercisable at June 30, 2017
1,535,515

 
$
28.04

 
3.05
 
$

Unvested Options at June 30, 2017
823,731

 
$
15.42

 
5.97
 
$

 
During the six months ended June 30, 2017 and 2016, there were no exercises of stock options. As of June 30, 2017, $2.8 million of unrecognized compensation cost related to stock options granted under the LTSIP, which is included within "Additional paid-in capital" on the Condensed Consolidated Balance Sheets, is expected to be recognized over a weighted-average period of 2.43 years.
 

18




Restricted Share Awards
Restricted share award 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 share awards that vested during the six months ended June 30, 2017 and 2016 was $20.3 million and $21.4 million, respectively. The weighted-average grant date fair value of restricted share awards was $16.69 per share and $10.25 per share for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, $28.5 million of unrecognized compensation cost related to restricted share awards granted under the LTSIP, which is included within "Additional paid-in capital" on the Condensed Consolidated Balance Sheets, is expected to be recognized over a weighted-average vesting period of 2.38 years.

Transactions involving restricted share awards under the terms of the LTSIP are summarized below:
 
Restricted Share Awards Outstanding
 
Weighted-Average Grant Date Fair Value
 
 
 
(per share)
Unvested balance at December 31, 2016
3,208,503

 
$
14.32

Granted
1,520,435

 
16.69

Vested
(1,237,333
)
 
16.41

Forfeited
(66,873
)
 
15.19

Unvested balance at June 30, 2017
3,424,732

 
$
14.60

 
Performance Share Units
The payouts for performance share units 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 and have historically been delivered in cash. 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, 2017, the Company expects to settle all awards in cash. These awards are classified as liabilities and are included within "Other long-term liabilities" on the Condensed Consolidated Balance Sheets. As these awards are dependent upon the Company's total shareholder return and stock price, they are remeasured at fair value at the end of each reporting period. The weighted-average grant date fair value of the performance share units was $16.98 per share and $10.12 per share for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, $0.4 million of unrecognized compensation cost, which represents the unvested portion of the fair market value of performance shares granted, is expected to be recognized over a weighted-average vesting period of 2.22 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
 
 
 
(per share)
Unvested balance at December 31, 2016
1,027,280

 
$
17.24

Granted
401,480

 
16.98

Vested and Paid
(215,439
)
 
31.63

Unvested balance at June 30, 2017
1,213,321

 
$
14.60


Restricted Share Units
Restricted share units vest over a three-year period and are deferred into the Company's nonqualified, unfunded deferred compensation plan at the time of vesting. These awards are ultimately delivered in cash. They are classified as liabilities and are included in "Other long-term liabilities" on the Condensed Consolidated Balance Sheets and are measured at fair value at the end of each reporting period. The weighted-average grant date fair value of the restricted share units was $16.98 and $10.12 per share for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, $0.1 million of unrecognized compensation cost, which represents the unvested portion of the fair market value of restricted share units granted, is expected to be recognized over a weighted-average vesting period of 1.88 years.

19





Transactions involving restricted share units under the terms of the LTSIP are summarized below:
 
Restricted Share Units Outstanding
 
Weighted-Average Grant Date Fair Value
 
 
 
(per share)
Unvested balance at December 31, 2016
18,034

 
$
10.12

Granted
9,924

 
16.98

Vested
(6,012
)
 
10.12

Unvested balance at June 30, 2017
21,946

 
$
13.22


Note 11 – 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 (the SERP), and a postretirement medical plan (the Medical Plan).

During the six months ended June 30, 2017, the Company changed the eligibility requirements for active employees eligible for the Medical Plan, as well as retirees currently enrolled. Effective July 1, 2017, the Company will no longer offer the Medical Plan to retirees and/or spouses that are Medicare eligible. The Company will no longer offer life insurance to anyone retiring on or after July 1, 2017.

The Pension Plan is a closed, qualified, defined-benefit pension plan that is funded and provides pension benefits to certain QEP employees. During the six months ended June 30, 2017, the Company made contributions of $4.0 million to the Pension Plan and does not expect to make additional contributions to the Pension Plan during the remainder of 2017. Contributions to the Pension Plan increase plan assets. The Pension Plan was amended in June 2015 and was frozen effective January 1, 2016, such that employees do not earn additional defined benefits for future services.

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, 2017, the Company made contributions of $1.8 million to its SERP and expects to contribute an additional $0.2 million to its SERP during the remainder of 2017. Contributions to the SERP are used to fund current benefit payments. The SERP was amended and restated in June 2015 and was 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 QEP employees. During the six months ended June 30, 2017, the Company made contributions of $0.1 million to its Medical Plan and expects to contribute an additional $0.1 million to its Medical Plan during the remainder of 2017. Contributions to the Medical Plan are used to fund current benefit payments.


20




In accordance with the adoption of ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost, the Company recognizes service costs related to SERP and Medical Plan benefits within "General and administrative" expense on the Condensed Consolidated Statements of Operations. All other expenses related to the Pension Plan, SERP and Medical Plan are recognized within "Interest and other income (expense)" on the Condensed Consolidated Statements of Operations.

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,
 
2017
 
2016
 
2017
 
2016
Pension Plan and SERP benefits
(in millions)
Service cost
$
0.1

 
$
0.4

 
$
0.4

 
$
0.6

Interest cost
1.2

 
1.4

 
2.4

 
2.6

Expected return on plan assets
(1.4
)
 
(1.4
)
 
(2.7
)
 
(2.8
)
Amortization of prior service costs(1)
0.3

 
0.4

 
0.6

 
0.6

Amortization of actuarial losses(1)
(0.1
)
 
0.3

 
0.2

 
0.4

Periodic expense
$
0.1

 
$
1.1

 
$
0.9

 
$
1.4

 
 
 
 
 
 
 
 
Medical Plan benefits
 
 
 
 
 
 
 
Interest cost
$
0.1

 
$

 
$
0.1

 
$
0.1

Amortization of prior service costs(1)

 
0.1

 
(0.1
)
 
0.1

Periodic expense
$
0.1

 
$
0.1

 
$

 
$
0.2

____________________________
(1) 
Amortization of prior service costs out of accumulated other comprehensive income are recognized on the Condensed Consolidated Statements of Operations within "Interest and other income (expense)".

Note 12 – Subsequent Event

In July 2017, QEP entered into a purchase and sale agreement to sell its assets in Pinedale for an aggregate purchase price of approximately $740.0 million, subject to customary purchase price adjustments. As part of the purchase and sale agreement, QEP has agreed to reimburse the buyer for certain deficiency charges it incurs related to gas processing and NGL transportation and fractionation contracts, if any, between the effective date of the sale and December 31, 2019, in an aggregate amount not to exceed $45.0 million. The net book value of the Pinedale properties being sold is approximately $488.0 million as of June 30, 2017, which primarily consists of property, plant and equipment included on the Consolidated Balance Sheet. QEP expects to close the transaction in the third quarter of 2017.

QEP also entered into a definitive agreement to acquire oil and gas properties in the Permian Basin for an aggregate purchase price of $732.1 million, subject to customary purchase price adjustments. The transaction is expected to be funded with proceeds from the Pinedale divestiture, cash on hand and borrowings under the credit facility, if needed, and is expected to close in the fourth quarter of 2017. In addition, in July 2017, QEP closed a separate transaction to acquire oil and gas properties in the Permian Basin for an aggregate purchase price of $15.9 million, subject to customary purchase price adjustments.

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

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

The following information updates the discussion of QEP's financial condition provided in its Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Form 10-K) and analyzes the changes in the results of operations between the three

21




and six months ended June 30, 2017 and 2016. For definitions of commonly used oil and gas terms found in this Quarterly Report on Form 10-Q, please refer to the "Glossary of Terms" provided in the 2016 Form 10-K.

OVERVIEW

QEP Resources, Inc. is an independent crude oil and natural gas exploration and production company focused in two regions of the United States: the Northern Region (primarily in North Dakota, Wyoming and Utah) and the Southern Region (primarily in Texas and Louisiana). Unless otherwise specified or the context otherwise requires, all references to "QEP" or the "Company" are to QEP Resources, Inc. and its subsidiaries on a consolidated basis. QEP's corporate headquarters are located in Denver, Colorado and shares of QEP's common stock trade on the New York Stock Exchange (NYSE) under the ticker symbol "QEP".

The Company has substantial acreage positions and operations in some of the most prolific hydrocarbon resource plays in the continental United States, including the Williston Basin, Permian Basin, Pinedale Anticline, Uinta Basin and Haynesville Shale. These resource plays are characterized by unconventional oil or gas accumulations in continuous tight sands, carbonates or shales that underlie broad geographic areas. The lateral continuity of such resource plays means that, aside from wells abandoned due to mechanical issues, the Company does not expect to drill many unsuccessful wells as it develops these resource plays. Resource plays allow the Company the opportunity to gain considerable operational efficiencies through high-density, repeatable drilling and completion operations. The Company believes it has a large inventory of lower-risk, predictable development drilling locations across its acreage holdings in the onshore U.S., which provide a solid base for organic growth in production and reserves.

While historically the Company has been more natural gas weighted, in recent years the Company has increased its focus on growing oil production and reserves. Since the beginning of 2012, the Company has acquired over $3.0 billion of oil-weighted properties and invested approximately 60% of its capital expenditures (excluding property acquisitions) on its oil-weighted properties. The Company has emphasized development of its oil-weighted Permian Basin assets increasing its oil production by 21% during the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

Outlook

Since the commodity price downturn in late 2014, the Company has focused on lowering operating costs, reducing capital investment and preserving its liquidity. We believe our strong balance sheet and ample liquidity will allow us to grow oil production, primarily in the Permian Basin, and gas production, primarily in Haynesville/Cotton Valley, during 2017. We remain focused on continuing to grow our oil assets both organically and through acquisitions.

Based on current commodity prices, we expect to be able to fund our 2017 planned capital program with cash on hand and cash flow from operating activities and borrowings under our credit facility. Our total capital expenditures (excluding property acquisitions), for 2017 are expected to be approximately $1,075.0 million, an increase of approximately 100% from 2016 capital expenditures. We continuously evaluate our level of drilling and completion activity in light of drilling results, commodity prices and changes in our operating and development costs and may make adjustments to our capital investment program based on such evaluations. See "Cash Flow from Investing Activities" for further discussion of our capital expenditures.

Acquisitions and Divestitures

While QEP believes its extensive inventory of identified drilling locations provides a solid base for growth in production and reserves, the Company continues to evaluate and acquire properties in its existing areas of operations to add additional acreage and facilitate the drilling of long lateral wells. QEP believes that its experience, expertise and presence in its core operating areas, combined with its low-cost operating model and financial strength, enhances its ability to pursue acquisition opportunities. The Company continuously evaluates potential acquisition, divestiture and joint venture opportunities that align with its strategic objectives.

Acquisitions
In July 2017, QEP entered into a definitive agreement to acquire oil and gas properties in the Permian Basin for an aggregate purchase price of $732.1 million, subject to customary purchase price adjustments. The transaction is expected to be funded with proceeds from the Pinedale divestiture, cash on hand and borrowings under the credit facility, if needed, and is expected to close in the four quarter of 2017. In addition, in July 2017, QEP closed a separate transaction to acquire oil and gas properties in the Permian Basin for an aggregate purchase price of $15.9 million, subject to customary purchase price adjustments.


22




During the six months ended June 30, 2017, QEP acquired various oil and gas properties, primarily proved and unproved leaseholds and additional surface acreage in the Permian Basin, for an aggregate purchase price of $76.6 million. In conjunction with these acquisitions, the Company recorded $5.3 million of goodwill. During the six months ended June 30, 2016, QEP acquired various oil and gas properties, which primarily included additional interests in QEP's operated wells and associated leaseholds in the Permian and Williston basins, for an aggregate purchase price of $29.8 million. In conjunction with these acquisitions, the Company recorded $3.7 million of goodwill, all of which was subsequently impaired in 2016.

In October 2016, QEP acquired oil and gas properties in the Permian Basin for an aggregate purchase price of approximately $591.0 million, subject to customary post-closing purchase price adjustments (the 2016 Permian Basin Acquisition). The 2016 Permian Basin Acquisition consists of approximately 9,600 net acres in Martin County, Texas, which are primarily held by production from existing vertical wells. The 2016 Permian Basin Acquisition was funded with proceeds from an equity offering in June 2016 and cash on hand.

Divestitures
In July 2017, QEP entered into a purchase and sale agreement to sell its assets in Pinedale for an aggregate purchase price of approximately $740.0 million, subject to customary purchase price adjustments. As part of the purchase and sale agreement, QEP has agreed to reimburse the buyer for certain deficiency charges it incurs related to gas processing and NGL transportation and fractionation contracts, if any, between the effective date of the sale and December 31, 2019, in an aggregate amount not to exceed $45.0 million. The net book value of the Pinedale properties being sold is approximately $488.0 million as of June 30, 2017, which primarily consists of property, plant and equipment included on the Consolidated Balance Sheet. QEP expects to close the transaction in the third quarter of 2017.

During the six months ended June 30, 2017, QEP received proceeds of $2.3 million and recorded accounts receivable of $36.7 million, resulting in a pre-tax gain on sale of $19.8 million, primarily related to the divestiture of certain non-core properties in the Other Northern area. During the six months ended June 30, 2016, QEP received proceeds of $23.7 million and recorded a pre-tax loss on sale of $0.3 million, primarily related to the divestiture of certain non-core properties in the Other Southern area.

Financial and Operating Results

During the three months ended June 30, 2017, QEP:

Reported oil production of 4,870.3 Mbbls, including 1,449.6 Mbbls in the Permian Basin and 3,076.5 Mbbls in the Williston Basin;
Increased gas production over 2016 in the Haynesville/Cotton Valley by 86% to 16.7 Bcf due to a successful refracturing program;
Reported realized oil prices of $46.72 per bbl, a 7% increase over 2016;
Reported realized gas prices of $2.82 per Mcf, a 12% increase and realized NGL prices of $16.86 per bbl, a 13% increase over 2016;
Generated net income of $45.4 million, or $0.19 per diluted share; and
Reported Adjusted EBITDA (a non-GAAP financial measure defined and reconciled below) of $177.2 million, a 5% increase over 2016.

During the six months ended June 30, 2017, QEP:

Reported oil production of 9,553.0 Mbbls, including 2,451.3 Mbbls in the Permian Basin and 6,413.2 Mbbls in the Williston Basin;
Increased gas production over 2016 in the Haynesville/Cotton Valley by 60% to 28.9 Bcf due to a successful refracturing program;
Reported realized oil prices of $46.81 per bbl, a 18% increase over 2016;
Reported realized gas prices of $2.83 per Mcf, a 14% increase and realized NGL prices of $19.11 per bbl, a 52% increase over 2016;
Generated net income of $122.3 million, or $0.51 per diluted share;
Reported Adjusted EBITDA (a non-GAAP financial measure defined and reconciled below) of $347.9 million, a 22% increase over 2016; and
Reported $178.8 million of cash and cash equivalents and had no borrowings under its credit facility at June 30, 2017.


23




Factors Affecting Results of Operations

Supply, Demand, Market Risk and their Impact on Oil and Gas Prices
Oil and gas prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by weather conditions, pipeline capacity constraints, inventory storage levels, basis differentials, export capacity, strength of the U.S. dollar and other factors. In recent years, oil and gas prices have been affected by supply growth, particularly in U.S. oil and gas production, driven by advances in drilling and completion technologies, and fluctuations in demand driven by a variety of factors.

Changes in the market prices for oil, gas and NGL directly impact many aspects of QEP's business, including its financial condition, revenues, results of operations, planned drilling and completion activity and related capital expenditures, liquidity, rate of growth, costs of goods and services required to drill, complete and operate wells, and the carrying value of its oil and gas properties. Historically, field-level prices received for QEP’s oil and gas production have been volatile. During the past five years, the posted price for WTI crude oil has ranged from a low of $26.19 per barrel in February 2016 to a high of $110.62 per barrel in September 2013. The Henry Hub spot market price of natural gas has ranged from a low of $1.49 per MMBtu in March 2016 to a high of $8.15 per MMBtu in February 2014. If prices of oil, gas and NGL decline to early 2016 levels or further, our operations, financial condition and level of expenditures for the development of our oil and gas reserves may be materially and adversely affected.

NGL prices have also been volatile due to increased U.S. hydrocarbon production and insufficient domestic demand and export capacity. In addition to commodity price movements, QEP's composite NGL prices are affected by ethane recovery or rejection. When ethane is recovered as a discrete NGL component instead of being sold as part of the natural gas stream, the average sales price of a NGL barrel decreases as the ethane price is generally lower than the prices of the remaining NGL components. As permitted in some of its processing agreements, QEP recovers ethane when gas processing economics support the recovery of ethane from the natural gas stream. When gas processing economics do not support ethane recovery, and processing agreements permit it to do so, QEP elects to reject ethane from the NGL stream. In instances where QEP can make an election, QEP rejected ethane during the six months ended June 30, 2017, and will likely continue to reject ethane for the remainder of 2017.

Global Geopolitical and Macroeconomic Factors
QEP continues to monitor the global economy, including Europe and China's economic outlook; the Organization of Petroleum Exporting Countries (OPEC) countries oil production and policies regarding production quotas; political unrest and economic issues in certain countries in South America, Asia, Europe, the Middle East, and Africa; slowing growth in certain emerging market economies; actions taken by the U.S. Congress and the president of the United States; the U.S. federal budget deficit; changes in regulatory oversight policy; commodity price volatility; the impact of a potential increase in interest rates; volatility in various global currencies; and other factors. A dramatic decline in regional or global economic conditions, a major recession or depression, regional political instability, economic sanctions, war, or other factors beyond the control of QEP could have a significant impact on oil, gas and NGL supply, demand and prices and the Company's ability to continue its planned drilling programs and could materially impact the Company's financial position, results of operations and cash flow from operations. In December 2015, the U.S. lifted a 40-year ban on the export of oil, giving U.S. producers access to a wider market. As a result, the U.S. may in the future become a significant exporter of oil if the necessary infrastructure is built to support oil exports. Disruption to the global oil supply system, political and/or economic instability, fluctuations in currency values, and/or other factors could trigger additional volatility in oil prices.

Due to continued global economic uncertainty and the corresponding volatility of commodity prices, QEP continues to maintain a strong liquidity position to ensure financial flexibility. QEP uses commodity derivatives to reduce the volatility of the prices QEP receives for a portion of its production and to partially protect cash flow and returns on invested capital from a drop in commodity prices. Generally, QEP intends to enter into commodity derivative contracts for approximately 50% to 75% of its forecasted annual production by the end of the first quarter of each fiscal year. At June 30, 2017, QEP forecasted its 2017 annual production to be approximately 58.8 MMboe and had approximately 65% of its forecasted oil production and 74% of its forecasted gas production covered with fixed-price swaps and collars. See Part 1, Item 3 – "Quantitative and Qualitative Disclosures about Market Risk-Commodity Price Risk Management" for further details on QEP’s commodity derivatives transactions.

Potential for Future Asset Impairments
The carrying values of the Company’s properties are sensitive to declines in oil, gas and NGL prices as well as increases in various development and operating costs and expenses and, therefore, are at risk of impairment. The Company uses a cash flow model to assess its proved properties for impairment. The cash flow model includes numerous assumptions, including estimates of future oil, gas and NGL production, estimates of future prices for production that are based on the price forecast that

24




management uses to make investment decisions, including estimates of basis differentials, future operating costs, transportation expenses, production taxes, and development costs that management believes are consistent with its price forecast, and discount rates. Management also considers a number of other factors, including the forward curve for future oil and gas prices, and developments in regional transportation infrastructure when developing its estimate of future prices for production. All inputs for the cash flow model are evaluated at each date of estimate.

We base our fair value estimates on projected financial information that we believe to be reasonably likely to occur. An assessment of the sensitivity of our capitalized costs to changes in the assumptions in our cash flow calculations is not practicable, given the numerous assumptions (e.g., future oil, gas and NGL prices; production and reserves; pace and timing of development plans; timing of capital expenditures; operating costs; drilling and development costs; and inflation and discount rates) that can materially affect our estimates. Unfavorable adjustments to some of the above listed assumptions would likely be offset by favorable adjustments in other assumptions. For example, the impact of sustained reduced oil, gas and NGL prices on future undiscounted cash flows would likely be offset by lower drilling and development costs and lower operating costs.

During the six months ended June 30, 2016, the Company recorded impairments of $1,183.2 million, of which $1,167.9 million was related to proved properties due to lower future prices, primarily in Pinedale, $11.6 million was related to expiring leaseholds on unproved properties and $3.7 million was related to an impairment of goodwill.

Multi-Well Pad Drilling
To reduce the costs of well location construction and rig mobilization and demobilization and to obtain other efficiencies, QEP utilizes multi-well pad drilling where practical. In certain of our producing areas, wells drilled on a pad are not completed and brought into production until all wells on the pad are drilled and the drilling rig is moved from the location. As a result, multi-well pad drilling delays the commencement of production. In addition, existing wells that offset new wells being completed by QEP or offset operators may need to be temporarily shut-in during the completion process. Such delays and well shut-ins have caused and may continue to cause volatility in QEP’s quarterly operating results. 

Uncertainties Related to Claims
QEP is currently subject to claims that could adversely impact QEP’s liquidity, operating results and/or capital expenditures for a particular reporting period, including, but not limited to those described in Note 9 – Commitments and Contingencies, in Item 1 of Part I of this Quarterly Report on Form 10-Q. Given the uncertainties involved in these matters, QEP is unable to predict the ultimate outcomes.

Critical Accounting Estimates
QEP's significant accounting policies are described in Item 7 of Part II of its 2016 Form 10-K. The Company's Condensed Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of the Company's Condensed Consolidated Financial Statements requires management to make assumptions and estimates that affect the reported results of operations and financial position. QEP's accounting policies on oil and gas reserves, successful efforts accounting for oil and gas operations, impairment of long-lived assets, asset retirement obligations, revenue recognition, litigation and other contingencies, environmental obligations, derivative contracts, pension and other postretirement benefits, share-based compensation, income taxes and purchase price allocations, among others, may involve a high degree of complexity and judgment on the part of management.


25




Drilling and Completion Activity
The following table presents operated and non-operated well completions for the three and six months ended June 30, 2017:
 
Operated Completions
 
Non-operated Completions
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2017
 
June 30, 2017
 
June 30, 2017
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Northern Region
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Williston Basin
8

 
6.4

 
23

 
19.2

 
9

 
0.2

 
14

 
0.3

Pinedale
8

 
4.5

 
8

 
4.5

 

 

 

 

Uinta Basin

 

 

 

 

 

 

 

Other Northern

 

 

 

 

 

 

 

Southern Region
 

 
 

 
 
 
 
 
 

 
 

 
 
 
 
Permian Basin
23

 
22.7

 
32

 
31.7

 

 

 

 

Haynesville/Cotton Valley

 

 

 

 

 

 
8

 
0.8

Other Southern

 

 

 

 

 

 

 


The following table presents operated and non-operated wells in the process of being drilled or waiting on completion at June 30, 2017:
 
 
 
Operated
 
Non-operated
 
Drilling
 
Drilling
 
Waiting on completion
 
Drilling
 
Waiting on completion
 
Rigs
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Northern Region
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Williston Basin
1

 
3

 
2.7

 
3

 
2.5

 
2

 
0.0

 
8

 
0.1

Pinedale
1

 
2

 
0.4

 
14

 
4.5

 

 

 

 

Uinta Basin

 

 

 

 

 

 

 

 

Other Northern

 

 

 

 

 

 

 

 

Southern Region
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permian Basin
5

 
26

 
25.9

 
7

 
7.0

 

 

 

 

Haynesville/Cotton Valley

 

 

 

 

 
2

 
0.0

 
4

 
0.0

Other Southern

 

 

 

 

 

 

 

 


The term "gross" refers to all wells or acreage in which QEP has at least a partial working interest and the term "net" refers to QEP's ownership represented by that working interest. Each gross well completed in more than one producing zone is counted as a single well. QEP typically utilizes multi-well pad drilling where practical. Wells drilled are not completed and brought into production until all wells on the pad are drilled and the drilling rig is moved from the location. QEP sometimes suspends completion activities due to adverse weather conditions, operational factors or other macroeconomic circumstances, such as low commodity prices. QEP had 24 gross operated wells waiting on completion as of June 30, 2017.

RESULTS OF OPERATIONS

Net Income

QEP generated net income during the second quarter of 2017 of $45.4 million, or $0.19 per diluted share, compared to a net loss of $197.0 million, or $0.90 per diluted share, in the second quarter of 2016. QEP's increased net income was primarily due to a $330.3 million increase in unrealized derivative gains, a $20.6 million increase in net gain from asset sales, a 6% increase in average realized prices and a 27% decrease in general and administrative expenses. These changes were partially offset by a 38% increase in production and property tax expense and a 33% increase in lease operating expense in the second quarter of 2017 compared to the second quarter of 2016.


26




QEP generated net income during the first half of 2017 of $122.3 million, or $0.51 per diluted share, compared to a net loss of $1,060.8 million, or $5.21 per diluted share, in the first half of 2016. QEP's increased net income was primarily due to a decrease in impairment expense of $1,183.1 million, a 16% increase in average realized prices, a $521.1 million increase in unrealized derivative gains and a 29% decrease in general and administrative expenses. These changes were partially offset by a 3% decrease in oil equivalent production, a 50% increase in production and property tax expense and a 24% increase in lease operating expense in the first half of 2017 compared to the first half of 2016.

Adjusted EBITDA

Management defines Adjusted EBITDA as earnings before interest, income taxes, depreciation, depletion and amortization (EBITDA), adjusted to exclude changes in fair value of derivative contracts, exploration expenses, gains and losses from asset sales, impairment and certain other items. Management uses Adjusted EBITDA to evaluate QEP's financial performance and trends, make operating decisions and allocate resources. Management believes the measure is useful supplemental information for investors because it eliminates the impact of certain nonrecurring, non-cash and/or other items that management does not consider as indicative of QEP's performance from period to period. QEP's Adjusted EBITDA may be determined or calculated differently than similarly titled measures of other companies in our industry, which would reduce the usefulness of this non-GAAP financial measure when comparing our performance to that of other companies.

Below is a reconciliation of net income (loss) (a GAAP measure) to Adjusted EBITDA. This non-GAAP measure should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Net income (loss)
$
45.4

 
$
(197.0
)
 
$
122.3

 
$
(1,060.8
)
Interest expense
34.9

 
36.6

 
68.7

 
73.3

Interest and other (income) expense
(1.8
)
 
1.1

 
(2.4
)
 
(1.0
)
Income tax provision (benefit)
27.3

 
(113.3
)
 
72.9

 
(612.2
)
Depreciation, depletion and amortization
191.5

 
209.7

 
383.3

 
449.7

Unrealized (gains) losses on derivative contracts
(100.3
)
 
230.0

 
(277.6
)
 
243.5

Exploration expenses

 
0.4

 
0.4

 
0.7

Net (gain) loss from asset sales
(19.8
)
 
0.8

 
(19.8
)
 
0.3

Impairment

 
0.8

 
0.1

 
1,183.2

Other(1)