Company Quick10K Filing
Quick10K
QEP Resources
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$7.53 238 $1,790
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-14 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-04-24 Earnings, Exhibits
8-K 2019-02-20 Leave Agreement, Earnings, Regulation FD, Exhibits
8-K 2019-01-11 Amend Bylaw, Exhibits
8-K 2019-01-10 M&A, Regulation FD, Exhibits
8-K 2018-12-05 Officers, Regulation FD, Exhibits
8-K 2018-11-17 Officers
8-K 2018-11-16 Enter Agreement, Regulation FD, Exhibits
8-K 2018-11-07 Earnings, Exhibits
8-K 2018-11-06 Enter Agreement, Regulation FD, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-05-15 Officers, Shareholder Vote, Exhibits
8-K 2018-03-01 Officers
MDT Medtronic 118,210
HSY Hershey 26,200
DXCM Dexcom 10,670
PVH PVH 9,050
UHAL AMERCO 7,570
MANT ManTech International 1,680
ATRC Atricure 1,150
CORV Correvio Pharma 112
SREV ServiceSource 98
KBSGI KBS Growth & Income REIT 0
QEP 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation
Note 2 - Revenue
Note 3 - Acquisitions and Divestitures
Note 4 - Earnings per Share
Note 5 - Asset Retirement Obligations
Note 6 - Fair Value Measurements
Note 7 - Derivative Contracts
Note 8 - Leases
Note 9 - Restructuring
Note 10 - Debt
Note 11 - Commitments and Contingencies
Note 12 - Share-Based Compensation
Note 13 - Employee Benefits
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 qep-20190331ex311.htm
EX-31.2 qep-20190331ex312.htm
EX-32.1 qep-20190331ex321.htm

QEP Resources Earnings 2019-03-31

QEP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 qep-20190331x10xq.htm 10-Q 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 March 31, 2019

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
qepresourcesstackcmykra40.jpg
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 every Interactive Data File required to be submitted 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 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
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 March 31, 2019, there were 238,045,328 shares of the registrant's common stock, $0.01 par value, outstanding.
 




QEP Resources, Inc.
Form 10-Q for the Quarter Ended March 31, 2019

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

1



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
March 31,
 
2019
 
2018
REVENUES
(in millions, except per share amounts)
Oil and condensate, gas and NGL sales
$
275.6

 
$
409.8

Other revenues
3.7

 
5.0

Purchased oil and gas sales
1.3

 
14.1

Total Revenues
280.6

 
428.9

OPERATING EXPENSES
 
 
 
Purchased oil and gas expense
1.4

 
15.5

Lease operating expense
51.5

 
72.5

Transportation and processing costs
10.9

 
34.0

Gathering and other expense
3.8

 
2.8

General and administrative
63.3

 
60.1

Production and property taxes
24.0

 
28.9

Depreciation, depletion and amortization
123.3

 
196.5

Impairment
5.0

 
0.7

Total Operating Expenses
283.2

 
411.0

Net gain (loss) from asset sales, inclusive of restructuring costs
(13.2
)
 
3.5

OPERATING INCOME (LOSS)
(15.8
)
 
21.4

Realized and unrealized gains (losses) on derivative contracts (Note 7)
(181.7
)
 
(53.2
)
Interest and other income (expense)
2.8

 
(0.7
)
Interest expense
(34.0
)
 
(35.0
)
INCOME (LOSS) BEFORE INCOME TAXES
(228.7
)
 
(67.5
)
Income tax (provision) benefit
112.0

 
13.9

NET INCOME (LOSS)
$
(116.7
)
 
$
(53.6
)
 
 
 
 
Earnings (loss) per common share
 
 
 
Basic
$
(0.49
)
 
$
(0.22
)
Diluted
$
(0.49
)
 
$
(0.22
)
 
 
 
 
Weighted-average common shares outstanding
 
 
 
Used in basic calculation
237.1

 
240.9

Used in diluted calculation
237.1

 
240.9


Refer to Notes accompanying the Condensed Consolidated Financial Statements.

2



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(in millions)
Net income (loss)
$
(116.7
)
 
$
(53.6
)
Other comprehensive income (loss), net of tax:
 
 
 
Fair value of plan assets adjustment(1)

 
0.3

Pension and other postretirement plans adjustments:
 
 
 
Amortization of prior service costs
0.1

 
0.1

Amortization of actuarial losses(2)
0.1

 
0.2

Net curtailment(3)
(0.4
)
 

Other comprehensive income
(0.2
)
 
0.6

Comprehensive income (loss)
$
(116.9
)
 
$
(53.0
)
____________________________
(1) 
Adjustment recorded during the three months ended March 31, 2018, related to a change in the fair value of plan assets as of December 31, 2017.
(2) 
Presented net of income tax benefit of $0.1 million during the three months ended March 31, 2018.
(3) 
Presented net of income tax expense of $0.1 million during the three months ended March 31, 2019.

Refer to Notes accompanying the Condensed Consolidated Financial Statements.

3



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2019
 
December 31,
2018
ASSETS
(in millions)
Current Assets
 
 
 
Cash and cash equivalents
$
89.9

 
$

Accounts receivable, net
80.2

 
104.3

Income tax receivable
68.8

 
75.9

Fair value of derivative contracts

 
87.5

Prepaid expenses
7.3

 
12.7

Other current assets
0.2

 
0.2

Total Current Assets
246.4

 
280.6

Property, Plant and Equipment (successful efforts method for oil and gas properties)
 
 
 
Proved properties
9,250.1


9,096.9

Unproved properties
706.5


705.5

Gathering and other
171.3


167.7

Materials and supplies
29.8


29.9

Total Property, Plant and Equipment
10,157.7

 
10,000.0

Less Accumulated Depreciation, Depletion and Amortization
 
 
 
Exploration and production
4,994.3


4,882.4

Gathering and other
61.0


58.1

Total Accumulated Depreciation, Depletion and Amortization
5,055.3

 
4,940.5

Net Property, Plant and Equipment
5,102.4

 
5,059.5

Fair value of derivative contracts
6.7

 
35.4

Operating lease right-of-use assets, net
61.4

 

Other noncurrent assets
53.3

 
49.6

Noncurrent assets held for sale

 
692.7

TOTAL ASSETS
$
5,470.2


$
6,117.8

LIABILITIES AND EQUITY
 
 
 

Current Liabilities
 
 
 
Checks outstanding in excess of cash balances
$
10.3

 
$
14.6

Accounts payable and accrued expenses
216.0

 
258.1

Production and property taxes
22.0

 
24.1

Current portion of long term debt
51.7

 

Interest payable
33.0

 
32.4

Fair value of derivative contracts
60.3

 

Current operating lease liabilities
20.1

 

Asset retirement obligations
5.9

 
5.1

Total Current Liabilities
419.3

 
334.3

Long-term debt
2,026.7

 
2,507.1

Deferred income taxes
151.2

 
269.2

Asset retirement obligations
96.2

 
96.9

Fair value of derivative contracts
1.5

 
0.7

Operating lease liabilities
49.4

 

Other long-term liabilities
89.8

 
97.4

Other long-term liabilities held for sale

 
61.3

Commitments and contingencies (Note 11)


 


EQUITY
 
 
 
Common stock – par value $0.01 per share; 500.0 million shares authorized; 242.0 million and 239.8 million shares issued, respectively
2.4

 
2.4

Treasury stock – 3.9 million and 3.1 million shares, respectively
(51.8
)
 
(45.6
)
Additional paid-in capital
1,440.2

 
1,431.9

Retained earnings
1,259.8

 
1,376.5

Accumulated other comprehensive income (loss)
(14.5
)
 
(14.3
)
Total Common Shareholders' Equity
2,636.1

 
2,750.9

TOTAL LIABILITIES AND EQUITY
$
5,470.2

 
$
6,117.8

 

Refer to Notes accompanying the Condensed Consolidated Financial Statements.

4



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


 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income(Loss)
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(in millions)
Balance at December 31, 2018
239.8

 
$
2.4

 
(3.1
)
 
$
(45.6
)
 
$
1,431.9

 
$
1,376.5

 
$
(14.3
)
 
$
2,750.9

Net income (loss)

 

 

 

 

 
(116.7
)
 

 
(116.7
)
Share-based compensation
2.2

 

 
(0.8
)
 
(6.2
)
 
8.3

 

 

 
2.1

Change in pension and postretirement liability, net of tax

 

 

 

 

 

 
(0.2
)
 
(0.2
)
Balance at March 31, 2019
242.0

 
$
2.4

 
(3.9
)
 
$
(51.8
)
 
$
1,440.2

 
$
1,259.8

 
$
(14.5
)
 
$
2,636.1


 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income(Loss)
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(in millions)
Balance at December 31, 2017
243.0

 
$
2.4

 
(2.0
)
 
$
(34.2
)
 
$
1,398.2

 
$
2,442.6

 
$
(11.1
)
 
$
3,797.9

Net income (loss)

 

 

 

 

 
(53.6
)
 

 
(53.6
)
Common stock repurchased and retired
(5.6
)
 
(0.1
)
 

 

 

 
(52.7
)
 

 
(52.8
)
Share-based compensation
2.9

 
0.1

 
(0.6
)
 
(5.3
)
 
9.8

 

 

 
4.6

Change in pension and postretirement liability, net of tax

 

 

 

 

 

 
0.6

 
0.6

Balance at March 31, 2018
240.3

 
$
2.4

 
(2.6
)
 
$
(39.5
)
 
$
1,408.0

 
$
2,336.3

 
$
(10.5
)
 
$
3,696.7



Refer to Notes accompanying the Condensed Consolidated Financial Statements.

5



QEP RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
March 31,
 
2019
 
2018
OPERATING ACTIVITIES
(in millions)
Net income (loss)
$
(116.7
)
 
$
(53.6
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization
123.3

 
196.5

Deferred income taxes (benefit)
(117.9
)
 
(14.1
)
Impairment
5.0

 
0.7

Non-cash share-based compensation
8.0

 
9.2

Amortization of debt issuance costs and discounts
1.3

 
1.3

Net (gain) loss from asset sales, inclusive of restructuring costs
13.2

 
(3.5
)
Unrealized (gains) losses on marketable securities
(1.9
)
 
0.1

Unrealized (gains) losses on derivative contracts
175.8

 
10.0

Changes in operating assets and liabilities
(11.8
)
 
13.8

Net Cash Provided by (Used in) Operating Activities
78.3

 
160.4

INVESTING ACTIVITIES
 
 
 
Property acquisitions
(0.6
)
 
(36.2
)
Property, plant and equipment, including exploratory well expense
(164.6
)
 
(370.7
)
Proceeds from disposition of assets
617.4

 
33.3

Net Cash Provided by (Used in) Investing Activities
452.2


(373.6
)
FINANCING ACTIVITIES
 
 
 
Checks outstanding in excess of cash balances
(4.3
)
 
(24.2
)
Proceeds from credit facility
44.5

 
1,068.5

Repayments of credit facility
(474.5
)
 
(772.5
)
Common stock repurchased and retired

 
(52.8
)
Treasury stock repurchases
(5.8
)
 
(4.7
)
Net Cash Provided by (Used in) Financing Activities
(440.1
)
 
214.3

Change in cash, cash equivalents and restricted cash(1)
90.4


1.1

Beginning cash, cash equivalents and restricted cash(1)
28.1

 
23.4

Ending cash, cash equivalents and restricted cash(1)
$
118.5

 
$
24.5

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash paid for interest, net of capitalized interest
$
31.5

 
$
26.0

Cash paid for amounts included in the measurement of lease liabilities
$
6.6

 
$

Non-cash Operating Activities:
 
 
 
Right-of-use assets obtained in exchange for operating lease obligations
$
6.9

 
$

Non-cash Investing Activities:
 
 
 
Change in capital expenditure accruals and other non-cash adjustments
$
2.6

 
$
48.1

____________________________
(1) 
Refer to Cash, Cash Equivalents and Restricted Cash in Note 1 – Basis of Presentation.

Refer to Notes accompanying the Condensed Consolidated Financial Statements.

6



QEP RESOURCES, INC.
NOTES ACCOMPANYING THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Basis of Presentation

Nature of Business

QEP Resources, Inc. (QEP or the Company) is an independent crude oil and natural gas exploration and production company with operations in two regions of the United States: the Southern Region (primarily in Texas) and the Northern Region (primarily in North Dakota). 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, 2018.

The preparation of the Condensed Consolidated Financial Statements and Notes in conformity with GAAP requires that management make estimates and assumptions that affect revenues, expenses, assets and liabilities, and disclosure of contingent assets and liabilities. Actual results could differ from estimates. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Reclassifications

Certain prior period balances on the Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year presentation. Such reclassifications had no effect on the Company's net income (loss), earnings (loss) per share or retained earnings previously reported.

Cash, Cash Equivalents and Restricted Cash

Cash equivalents consist principally of highly liquid investments in securities with original maturities of three months or less made through commercial bank accounts that result in available funds the next business day. Restricted cash are funds that are legally or contractually reserved for a specific purpose and therefore not available for immediate or general business use.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows:


7



 
March 31,
 
2019
 
2018
 
(in millions)
Cash and cash equivalents
$
89.9

 
$

Restricted cash(1)
28.6

 
24.5

Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows
$
118.5

 
$
24.5

_______________________
(1) As of March 31, 2019 and 2018, the restricted cash balance related to cash deposited into an escrow account for a title dispute between outside parties in the Williston Basin, and the restricted cash balance is recorded within "Other noncurrent assets" on the Condensed Consolidated Balance Sheets.

New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 disclose key quantitative and qualitative information about leasing arrangements. The FASB subsequently issued various ASUs which provided additional implementation guidance. The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective approach and elected to not adjust periods prior to January 1, 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed the carry forward of the historical lease classification, including accounting treatment for land easements. This standard does not apply to QEP's leases that provide the right to explore for minerals, oil or natural gas resources. The adoption of this guidance resulted in the recognition of net operating lease right-of-use assets and operating lease liabilities on QEP's Condensed Consolidated Balance Sheets. These leases primarily relate to office buildings, compressors and generators. This guidance did not have a significant impact on the Condensed Consolidated Statement of Operations or the Condensed Consolidated Statement of Cash Flows. Refer to Note 8 – Leases for more information.

Note 2 – Revenue

Revenue Recognition

QEP recognizes revenue from the sales of oil and condensate, gas and NGL in the period that the performance obligations are satisfied. QEP's performance obligations are satisfied when the customer obtains control of product, when QEP has no further obligations to perform related to the sale, when the transaction price has been determined and when collectability is probable. The sales of oil and condensate, gas and NGL are made under contracts with customers, which typically include consideration that is based on pricing tied to local indices and volumes delivered in the current month. Reported revenues include estimates for the two most recent months using published commodity price indices and volumes supplied by field operators. Performance obligations under our contracts with customers are typically satisfied at a point in time through monthly delivery of oil and condensate, gas and/or NGL. Our contracts with customers typically require payment for oil and condensate, gas and NGL sales within 30 days following the calendar month of delivery.

QEP's oil is typically sold at specific delivery points under contract terms that are common in the industry. QEP's gas and NGL are also sold under contract types that are common in the industry; however, under these contracts, the gas and its components, including NGL, may be sold to a single purchaser or the residue gas and NGL may be sold to separate purchasers. Regardless of the contract type, the terms of these contracts compensate the Company for the value of the residue gas and NGL constituent components at market prices for each product. QEP also purchases and resells oil and gas primarily to mitigate credit risk related to third party purchasers, to fulfill volume commitments when production does not fulfill contractual commitments and to capture additional margin from subsequent sales of third party purchases. QEP recognizes revenue from these resale activities in the period that the performance obligations are satisfied.

The following table presents QEP's revenues that are disaggregated by revenue source and by geographic area. Transportation and processing costs in the following table are not all of the transportation and processing costs that the Company incurs, only the expenses that are netted against revenues pursuant to ASC Topic 606.

8



 
Oil and condensate sales
 
Gas sales
 
NGL sales
 
Transportation and processing costs included in revenue
 
Oil and condensate, gas and NGL sales, as reported
 
(in millions)
 
Three Months Ended March 31, 2019
Northern Region
 
Williston Basin
$
109.9

 
$
12.5

 
$
7.4

 
$
(10.1
)
 
$
119.7

Other Northern
0.4

 
0.2

 

 

 
0.6

Southern Region
 
 
 
 
 
 
 
 
 
Permian Basin
139.2

 
4.6

 
9.5

 
(3.7
)
 
149.6

Other Southern

 
5.7

 

 

 
5.7

Total oil and condensate, gas and NGL sales
$
249.5

 
$
23.0

 
$
16.9

 
$
(13.8
)
 
$
275.6

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
Northern Region
 
Williston Basin
$
160.5

 
$
9.8

 
$
11.8

 
$
(9.9
)
 
$
172.2

Uinta Basin
8.4

 
10.1

 
1.7

 

 
20.2

Other Northern
1.9

 
1.0

 
(0.2
)
 

 
2.7

Southern Region
 
 
 
 
 
 
 
 
 
Permian Basin
129.8

 
4.6

 
6.5

 
(2.8
)
 
138.1

Haynesville/Cotton Valley
0.4

 
76.4

 

 

 
76.8

Other Southern
(0.3
)
 
0.1

 

 

 
(0.2
)
Total oil and condensate, gas and NGL sales
$
300.7

 
$
102.0

 
$
19.8

 
$
(12.7
)
 
$
409.8



9



Note 3 – Acquisitions and Divestitures

Acquisitions

During the three months ended March 31, 2019, QEP acquired various oil and gas properties, which primarily included proved leasehold acreage in the Permian Basin for an aggregate purchase price of $0.6 million, subject to post-closing purchase price adjustments.

During the three months ended March 31, 2018, QEP acquired various oil and gas properties, which primarily included proved leasehold acreage in the Permian Basin for an aggregate purchase price of $36.2 million. Of the $36.2 million, $35.7 million was related to acquisitions from various entities that owned additional oil and gas interests in certain properties included in the 2017 acquisition of oil and gas properties in the Permian Basin (the 2017 Permian Basin Acquisition) on substantially the same terms and conditions as the 2017 Permian Basin Acquisition.

Divestitures

In February 2018, QEP's Board of Directors unanimously approved certain strategic and financial initiatives (2018 Strategic Initiatives) including plans to market its assets in the Williston Basin, the Uinta Basin and Haynesville/Cotton Valley and focus its activities in the Permian Basin. The Company subsequently closed the sale of its Uinta Basin assets in the third quarter of 2018 and the sale of the Haynesville/Cotton Valley assets in the first quarter of 2019. In November 2018, the Company's wholly owned subsidiary, QEP Energy Company, entered into a purchase and sale agreement for its assets in the Williston Basin, however, in February 2019, the Company agreed with the buyer to terminate the purchase and sale agreement.

Haynesville/Cotton Valley Divestiture

In November 2018, the Company's wholly owned subsidiaries, QEP Energy Company, QEP Marketing Company, and QEP Oil & Gas Company, entered into a definitive agreement to sell their assets in Haynesville/Cotton Valley for a purchase price of $735.0 million, subject to purchase price adjustments, including adjustments for certain title and environmental defects asserted prior to the closing (Haynesville Divestiture). In January 2019, QEP closed the Haynesville Divestiture for net cash proceeds of $615.3 million, subject to post-closing purchase price adjustments, and recorded a pre-tax loss on sale of $18.0 million. Of the $18.0 million pre-tax loss on sale, $15.0 million was recognized during the three months ended March 31, 2019, and $3.0 million was recognized during the fourth quarter of 2018 within "Net gain (loss) from asset sales, inclusive of restructuring costs" on the Condensed Consolidated Statements of Operations. Included in the $15.0 million pre-tax loss on sale is $1.4 million of restructuring costs related to the Haynesville Divestiture during the three months ended March 31, 2019. Refer to Note 9 – Restructuring for more information. As of March 31, 2019, $22.1 million remained in escrow due to title defects asserted prior to closing, to be resolved pursuant to the purchase and sale agreement's title dispute resolution procedures, of which $5.8 million was included in "Accounts receivable, net" on the Condensed Consolidated Balance Sheets. As of December 31, 2018, it was deemed unlikely that there will be any significant changes to the Haynesville Divestiture. Accordingly, the assets and liabilities associated with the Haynesville Divestiture were classified as noncurrent assets and liabilities held for sale, on the Condensed Consolidated Balance Sheets.

QEP accounted for revenues and expenses related to Haynesville/Cotton Valley, including the pre-tax loss on sale of $15.0 million, during the three months ended March 31, 2019, as income from continuing operations on the Condensed Consolidated Statements of Operations because the Haynesville Divestiture did not cause a strategic shift for the Company and as a result, did not qualify as discontinued operations under ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. For the three months ended March 31, 2019, QEP recorded net loss before income taxes related to the divested Haynesville/Cotton Valley properties of $11.1 million, which includes the pre-tax loss on sale of $15.0 million. For the three months ended March 31, 2018, QEP recorded net income before income taxes related to the divested Haynesville/Cotton Valley properties of $12.3 million.

10




The following table presents the carrying amounts of the major classes of assets and liabilities related to the Haynesville Divestiture classified as noncurrent assets and liabilities held for sale on the Condensed Consolidated Balance Sheets:
 
December 31, 2018(1)
 
(in millions)
Assets
 
Current assets, total
$
1.2

Property, Plant and Equipment
683.7

Other noncurrent assets
7.8

Noncurrent assets held for sale
$
692.7

Liabilities
 
Current liabilities, total
$
3.4

Asset retirement obligations, current
0.7

Asset retirement obligations, long-term
56.9

Other long-term liabilities
0.3

Other long-term liabilities held for sale
$
61.3

____________________________
(1) 
The Haynesville Divestiture closed in January 2019, therefore there are no assets and liabilities held for sale as of March 31, 2019.

Uinta Basin Divestiture

In September 2018, QEP sold its natural gas and oil producing properties, undeveloped acreage and related assets located in the Uinta Basin for net cash proceeds of $153.0 million, subject to post-closing purchase price adjustments (Uinta Basin Divestiture). During the three months ended March 31, 2019, QEP recorded a pre-tax gain on sale of $2.2 million, due to post-closing purchase price adjustments, which were recorded within "Net gain (loss) from asset sales, inclusive of restructuring costs". For the three months ended March 31, 2018, QEP recorded net loss before income taxes related to the divested Uinta Basin assets of $5.0 million.

Pinedale Divestiture

In September 2017, QEP sold its Pinedale assets (Pinedale Divestiture) for net cash proceeds (after purchase price adjustments) of $718.2 million. During the three months ended March 31, 2018, QEP recorded a pre-tax gain on sale of $1.0 million, due to post-closing purchase price adjustments, which were recorded within "Net gain (loss) from asset sales, inclusive of restructuring costs".

QEP agreed to reimburse the buyer of its Pinedale assets 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. As of March 31, 2019, the remaining liability associated with estimated future payments for this commitment was $5.9 million and is reported on the Condensed Consolidated Balance Sheets within "Accounts payable and accrued expenses".

Other Divestitures

During the three months ended March 31, 2019, QEP received net cash proceeds of $2.1 million and recorded a net pre-tax loss on sale of $0.4 million related to the divestiture of properties outside its main operating areas.

During the three months ended March 31, 2018, QEP received net cash proceeds of $33.3 million and recorded a pre-tax gain on sale of $2.5 million, primarily related to the divestiture of properties outside its main operating areas in the Williston Basin and Other Northern areas.

These gains and losses were recorded within "Net gain (loss) from asset sales, inclusive of restructuring costs" on the Condensed Consolidated Statements of Operations.


11



Note 4 – Earnings Per Share

Basic earnings (loss) per share (EPS) are computed by dividing net income (loss) 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 (loss) 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 (loss) 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 (loss) per common share. During the three months ended March 31, 2019 and 2018, there were no anti-dilutive shares.

The following is a reconciliation of the components of basic and diluted shares used in the EPS calculation:
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(in millions)
Weighted-average basic common shares outstanding
237.1

 
240.9

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

 

Average diluted common shares outstanding
237.1

 
240.9


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.

The Condensed Consolidated Balance Sheet line items of QEP's ARO liability are presented in the table below:
 
Asset Retirement Obligations
 
March 31,
 
December 31,
 
2019
 
2018
Balance Sheet line item
(in millions)
Current:
 
 
 
Asset retirement obligations, current liability
$
5.9

 
$
5.1

Long-term:
 
 
 
Asset retirement obligations
96.2

 
96.9

Other long-term liabilities held for sale

 
57.6

Total ARO Liability
$
102.1

 
$
159.6



12



The following is a reconciliation of the changes in the Company's ARO for the period specified below:
 
Asset Retirement Obligations
 
(in millions)
ARO liability at January 1, 2019
$
159.6

Accretion
1.1

Additions
0.1

Revisions
(0.3
)
Liabilities related to assets sold(1)
(58.1
)
Liabilities settled
(0.3
)
ARO liability at March 31, 2019
$
102.1

_______________________
(1) 
Liabilities related to assets sold during the three months ended March 31, 2019, includes $57.6 million related to the Haynesville Divestiture (refer to Note 3 – Acquisitions and Divestitures for more information).

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 (refer to Note 7 – Derivative Contracts for more information) 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.

13




The fair value of financial assets and liabilities at March 31, 2019 and December 31, 2018, is shown in the table below:
 
Fair Value Measurements
 
Gross Amounts of Assets and Liabilities
 
Netting Adjustments(1)
 
Net Amounts Presented on the Condensed Consolidated Balance Sheets
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in millions)
Financial Assets
March 31, 2019
Fair value of derivative contracts – short-term
$

 
$

 
$

 
$

 
$

Fair value of derivative contracts – long-term

 
6.7

 

 

 
6.7

Total financial assets
$

 
$
6.7

 
$

 
$

 
$
6.7


 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
Fair value of derivative contracts – short-term
$

 
$
60.3

 
$

 
$

 
$
60.3

Fair value of derivative contracts – long-term

 
1.5

 

 

 
1.5

Total financial liabilities
$

 
$
61.8

 
$

 
$

 
$
61.8

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
Financial Assets
 
 
 
 
 
 
 
 
 
Fair value of derivative contracts – short-term(2)
$

 
$
88.2

 
$

 
$
(0.4
)
 
$
87.8

Fair value of derivative contracts – long-term

 
35.4

 

 

 
35.4

Total financial assets
$

 
$
123.6

 
$

 
$
(0.4
)
 
$
123.2

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
Fair value of derivative contracts – short-term
$

 
$
0.4

 
$

 
$
(0.4
)
 
$

Fair value of derivative contracts – long-term

 
0.7

 

 

 
0.7

Total financial liabilities
$


$
1.1


$


$
(0.4
)

$
0.7

_______________________
(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. Refer to Note 7 – Derivative Contracts for additional information regarding the Company's derivative contracts.
(2) 
Includes fair value of derivative contracts classified as "Noncurrent assets held for sale" of $0.3 million as of
December 31, 2018 on the Condensed Consolidated Balance Sheets related to the Haynesville Divestiture.

The following table discloses the fair value and related carrying amount of certain financial instruments not disclosed in other Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q:
 
Carrying Amount
 
Level 1 Fair Value
 
Carrying Amount
 
Level 1 Fair Value
 
March 31, 2019
 
December 31, 2018
Financial Assets
(in millions)
Cash and cash equivalents
$
89.9

 
$
89.9

 
$

 
$

Financial Liabilities
 
 
 
 
 
 
 
Checks outstanding in excess of cash balances
$
10.3

 
$
10.3

 
$
14.6

 
$
14.6

Total debt outstanding
$
2,078.4

 
$
2,014.2

 
$
2,507.1

 
$
2,350.5


The carrying amounts of cash and cash equivalents and checks outstanding in excess of cash balances approximate fair value. The fair value of fixed-rate long-term debt is based on the trading levels and dollar prices for the Company's debt at the end of the quarter. The carrying amount of variable-rate long-term debt approximates fair value because the floating interest rate paid on such debt was set for periods of one month.

14




The fair value of the deficiency charge obligation associated with the Pinedale Divestiture was measured utilizing an internally developed cash flow model discounted at QEP's weighted average cost of debt. Given the unobservable nature of the inputs, the fair value calculation associated with the deficiency charges is considered Level 3 within the fair value hierarchy. Refer to Note 3 – Acquisitions and Divestitures for more information.

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 periodic basis, at least annually, to review its proved oil and gas properties and operating lease right-of-use assets for potential impairment when events and changes in circumstances indicate that the carrying amount of such property may not be recoverable. The fair value of property is 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. In addition, the signing of a purchase and sale agreement could also trigger an impairment of proved properties. For assets subject to a purchase and sale agreement, the terms of the purchase and sale agreement are used as an indicator of fair value. If a range is estimated for the amount of future cash flows, the fair value of property is measured utilizing a probability-weighted approach in which the likelihood of possible outcomes is taken into consideration. Given the unobservable nature of the inputs, fair value calculations associated with long-term operating lease right-of-use assets and proved oil and gas property impairments are considered Level 3 within the fair value hierarchy. During the three months ended March 31, 2019, there was no impairment related to proved and unproved oil and gas properties. During the three months ended March 31, 2019, the Company recorded impairment charges of $5.0 million related to an office building lease. During the three months ended March 31, 2018, the Company recorded impairments on certain proved oil and gas properties of $0.5 million.

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 and condensate, 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. Refer to Note 3 – Acquisitions and Divestitures for more 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, during the time that QEP owned gas storage facilities or had contracts for gas storage capacity, QEP entered 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 costless 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. Gas price derivative instruments are typically structured as fixed-price swaps or collars at NYMEX Henry Hub or regional price indices. QEP also enters into oil basis swaps to achieve a fixed-price swap for a portion of its oil sales at prices that reference specific regional index prices.

15




QEP does not currently have any commodity derivative instruments 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.

Derivative Contracts Production
The following table presents QEP's volumes and average prices for its commodity derivative swap contracts as of March 31, 2019:
Year
 
Index
 
Total Volumes
 
Average Swap Price per Unit
 
 
 
 
(in millions)
 
 
Oil sales
 
 
 
(bbls)

 
($/bbl)

2019
 
NYMEX WTI
 
9.5

 
$
54.93

2019
 
ICE Brent
 
1.1

 
$
66.54

2020
 
NYMEX WTI
 
5.1

 
$
60.01


QEP uses oil basis swaps, combined with NYMEX WTI 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 basis swaps as of March 31, 2019:
Year
 
Index
 
Basis
 
Total Volumes
 
Weighted-Average Differential
 
 
 
 
 
 
(in millions)
 
 
Oil sales
 
 
 
 
 
(bbls)

 
($/bbl)

2019
 
NYMEX WTI
 
Argus WTI Midland
 
5.0

 
$
(2.22
)
2019
 
NYMEX WTI
 
Argus WTI Houston
 
0.6

 
$
3.75

2020
 
NYMEX WTI
 
Argus WTI Midland
 
2.6

 
$
(0.46
)

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
 
March 31,
2019
 
December 31,
2018
 
March 31,
2019
 
December 31,
2018
Current:
 
 
(in millions)
Commodity(1)
Fair value of derivative contracts
 
$

 
$
88.2

 
$
60.3

 
$
0.4

Long-term:
 
 
 
 
 
 
 
 
 
Commodity
Fair value of derivative contracts
 
6.7

 
35.4

 
1.5

 
0.7

Total derivative instruments
 
$
6.7

 
$
123.6

 
$
61.8

 
$
1.1

_______________________
(1) 
Includes fair value of derivative contracts classified as "Noncurrent assets held for sale" of $0.3 million as of December 31, 2018 on the Condensed Consolidated Balance Sheet related to the Haynesville Divestiture.


16



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
Derivative contracts
March 31,
2019
 
2018
Realized gains (losses) on commodity derivative contracts
(in millions)
Production
 
 
 
Oil derivative contracts
$
(3.0
)
 
$
(44.3
)
Gas derivative contracts
(2.9
)
 
0.9

Gas Storage
 
 
 
Gas derivative contracts

 
0.2

Realized gains (losses) on commodity derivative contracts
(5.9
)
 
(43.2
)
Unrealized gains (losses) on commodity derivative contracts
 
 
 
Production
 
 
 
Oil derivative contracts
(177.3
)
 
(6.9
)
Gas derivative contracts
(0.3
)
 
(2.8
)
Gas Storage
 
 
 
Gas derivative contracts

 
(0.3
)
Unrealized gains (losses) on commodity derivative contracts
(177.6
)
 
(10.0
)
Total realized and unrealized gains (losses) on commodity derivative contracts related to production and storage
$
(183.5
)
 
$
(53.2
)
 
 
 
 
Derivatives associated with Haynesville Divestiture
 
 
 
Unrealized gains (losses) on commodity derivative contracts
 
 
 
Production
 
 
 
Gas derivative contracts
1.8

 

Unrealized gains (losses) on commodity derivative contracts related to divestitures(1)
$
1.8

 
$

 
 
 
 
Total realized and unrealized gains (losses) on commodity derivative contracts
$
(181.7
)
 
$
(53.2
)
_______________________
(1) 
During the three months ended March 31, 2019, the unrealized gains (losses) on commodity derivative contracts related to the Haynesville Divestiture were comprised of derivatives included as part of the Haynesville/Cotton Valley purchase and sale agreement, which were subsequently novated to the buyer upon the closing of the sale in January 2019. Refer to Note 3 – Acquisitions and Divestitures for more information. The unrealized gains (losses) on commodity derivatives associated with the Haynesville Divestiture are offset by an equal amount recorded within "Net gain (loss) from asset sales, inclusive of restructuring costs" on the Condensed Consolidated Statements of Operations.

Note 8 – Leases

Adoption of ASC Topic 842, Leases

On January 1, 2019, QEP adopted ASC Topic 842, Leases, using the modified retrospective approach, which was applied to historical leases that were still effective as of January 1, 2019. Results for reporting periods beginning January 1, 2019, are presented in accordance with ASC Topic 842, while prior period amounts are reported in accordance with historical accounting treatment under ASC Topic 840, Leases.


17



In accordance with the adoption of ASC Topic 842, QEP now records a net operating lease right-of-use asset and operating lease liability on the Condensed Consolidated Balance Sheets for all operating leases with a contract term in excess of 12 months. Prior to the adoption of ASC Topic 842, these same leases were treated as operating leases under ASC Topic 840 and therefore were not recorded on the December 31, 2018 Consolidated Balance Sheets. There was no impact to retained earnings and no significant impact on the Condensed Statement of Operations or the Condensed Consolidated Statement of Cash Flows as a result of adopting ASC Topic 842.

Lease Recognition

QEP has entered into contractual lease arrangements to rent office space, compressors, generators, drilling rigs and other equipment from third-party lessors. Right-of-use (ROU) assets represent QEP’s right to use an underlying asset for the lease term and lease liabilities represent QEP’s obligation to make future lease payments arising from the lease. Operating lease ROU assets and liabilities are recorded at commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. With the exception of generators, QEP does not account for lease components separately from the non-lease components. The contractual consideration provided under QEP's leased generators is allocated between lease components, such as equipment, and non-lease components, such as maintenance service fees, based on estimated costs from the vendor. QEP uses the implicit interest rate when readily determinable. However, most of QEP's lease agreements do not provide an implicit interest rate. As such, QEP uses its incremental borrowing rate based on the information available at commencement date of the contract in determining the present value of future lease payments. The incremental borrowing rate is calculated using a risk-free interest rate adjusted for QEP's risk. The operating lease ROU asset also includes any lease incentives received in the recognition of the present value of future lease payments. Certain of QEP's leases may also include escalation clauses or options to extend or terminate the lease. These options are included in the present value recorded for the leases when it is reasonably certain that QEP will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
QEP determines if an arrangement is a lease at inception of the contract and records the resulting operating lease asset on the Condensed Consolidated Balance Sheets as “Operating lease right-of-use assets, net” with offsetting liabilities recorded as “Current operating lease liabilities” and “Operating lease liabilities”. QEP recognizes a lease in the financial statements when the arrangement either explicitly or implicitly involves property, plant, or equipment (PP&E), the contract terms are dependent on the use of the PP&E, and QEP has the ability or right to operate the PP&E or to direct others to operate the PP&E and receive greater than 10% of the economic benefits of the assets. As of March 31, 2019, QEP does not have any financing leases.

Lease costs represent the straight line lease expense of ROU assets and short-term leases. The components of lease cost are classified as follows:
 
March 31, 2019(1)
Lease Cost included in the Condensed Consolidated Balance Sheets
(in millions)
Property, Plant and Equipment acquisitions(2)
$
4.7

 
 
 
Three Months Ended
 
March 31, 2019(1)
Lease Cost included in the Condensed Consolidated Statement of Operations
(in millions)
Lease operating expense
$
3.1

Gathering and other expense
1.5

General and administrative
1.6

 
 
Total lease cost
$
10.9

 ____________________________
(1) 
Prior periods are not presented as prior period amounts have not been adjusted under the modified retrospective method for the new lease recognition rule. Refer to Note 1 – Basis of Presentation for additional information.
(2) 
Represents short-term lease capital expenditures related to drilling rigs for the three months ended March 31, 2019.


18



Lease term and discount rate related to the Company's leases are as follows:
 
Three Months Ended
 
March 31, 2019(1)
Weighted-average remaining lease term (years)
3.8

Weighted-average discount rate
8.1
%
 ____________________________
(1) 
Prior periods are not presented as prior period amounts have not been adjusted under the modified retrospective method for the new lease recognition rule. Refer to Note 1 – Basis of Presentation for additional information.

Refer to Note 11 – Commitments and Contingencies for a reconciliation of our minimum future lease payments to the Condensed Consolidated Balance Sheets.

Note 9 – Restructuring

In February 2018, QEP's Board of Directors approved certain strategic and financial initiatives and in February 2019, QEP's Board of Directors commenced a comprehensive review of strategic alternatives to maximize shareholder value. In connection with these strategic and financial initiatives, QEP has incurred or expects to incur various restructuring costs associated with contractual termination benefits including severance, accelerated vesting of share-based compensation and other expenses. The termination benefits will be accounted for under ASC 712, Compensation – Nonretirement Postemployment Benefits and ASC 718, Compensation – Stock Compensation.

Restructuring costs recognized are summarized below:
 
Total recognized
 
Recognized in "General and administrative"
 
Recognized in "Net gain (loss) from asset sales, inclusive of restructuring costs"
 
Recognized in "Interest and other income (expense)"
 
Three Months Ended March 31, 2019
 
(in millions)
Termination benefits
$
6.8

 
$
6.7

 
$
0.1

 

Office lease termination costs
0.6

 
0.6

 

 

Accelerated share-based compensation(1)
8.4

 
6.9

 
1.5

 

Retention expense (including share-based compensation)
6.1

 
6.1

 

 

Pension and Medical Plan curtailment
(0.5
)
 

 
(0.2
)
 
(0.3
)
Total restructuring costs
$
21.4

 
$
20.3

 
$
1.4

 
$
(0.3
)
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
(in millions)
Termination benefits
$
3.4

 
$
3.4

 
$

 
$

Office lease termination costs

 

 

 

Accelerated share-based compensation
2.8

 
2.8

 

 

Retention expense (including share-based compensation)
1.7

 
1.7

 

 

Pension and Medical Plan curtailment

 

 

 

Total restructuring costs
$
7.9

 
$
7.9

 
$

 
$

 ____________________________
(1) 
Accelerated share-based compensation represents the additional expense or loss recognized in the Consolidated Statement of Operations for the three months ended March 31, 2019. Total accelerated share based compensation was $8.8 million and was determined based on the contractual vesting date, with $8.4 million recognized during the three months ended March 31, 2019 as shown above, and the remaining amount recognized in prior periods.



19



 
Costs recognized period from inception to March 31, 2019(1)
 
Total remaining costs expected to be incurred
 
 
(in millions)
 
Termination benefits
$
39.0

 
$

(2) 
Office lease termination costs
1.6

 

(2) 
Accelerated share-based compensation(2)
19.7

 

(2) 
Retention expense (including share-based compensation)
24.9

 
15.1

 
Pension and Medical Plan curtailment
(0.4
)
 

(2) 
Total restructuring costs
$
84.8

 
$
15.1

 
 ____________________________
(1) 
Represents costs incurred since February 2018 when QEP's Board of Directors approved certain strategic and financial initiatives.
(2) 
Due to the nature of the strategic initiatives and uncertain factors such as the timing and terms of the potential strategic alternatives, the Company is not able to reasonably estimate the total cost to be incurred as a part of these restructurings.

The following table is a reconciliation of QEP's restructuring liability, which is included within "Accounts payable and accrued expenses" on the Condensed Consolidated Balance Sheets.
 
Restructuring liability
 
Termination benefits
 
Office lease termination costs
 
Accelerated share-based compensation
 
Retention expense
 
Pension curtailment
 
Total
 
(in millions)
Balance at December 31, 2018
$
19.5

 
$

 
$

 
$
10.8

 
$

 
$
30.3

Costs incurred and charged to expense
6.8

 
0.6

 
8.4

 
6.1

 
(0.5
)
 
21.4

Costs paid or otherwise settled
(16.3
)
 

 
(8.4
)
 
(15.5
)
 
0.5

 
(39.7
)
Balance at March 31, 2019
$
10.0

 
$
0.6

 
$

 
$
1.4

 
$

 
$
12.0


Note 10 – Debt

As of the indicated dates, the principal amount of QEP's debt consisted of the following:
 
March 31,
2019
 
December 31,
2018
 
(in millions)
Revolving Credit Facility due 2022
$

 
$
430.0

6.80% Senior Notes due 2020
51.7

 
51.7

6.875% Senior Notes due 2021
397.6

 
397.6

5.375% Senior Notes due 2022
500.0

 
500.0

5.25% Senior Notes due 2023
650.0

 
650.0

5.625% Senior Notes due 2026
500.0

 
500.0

Less: unamortized discount and unamortized debt issuance costs
(20.9
)
 
(22.2
)
Total principal amount of debt (including current portion)
2,078.4

 
2,507.1

Less: current portion of long-term debt
(51.7
)
 

Total long-term debt outstanding
$
2,026.7

 
$
2,507.1


Of the total debt outstanding on March 31, 2019, the 6.80% Senior Notes due March 1, 2020, the 6.875% Senior Notes due March 1, 2021, the 5.375% Senior Notes due October 1, 2022 and the 5.25% Senior Notes due May 1, 2023, will mature within the next five years. In addition, the revolving credit facility matures on September 1, 2022.

20




Credit Facility
QEP's revolving credit facility, which matures, subject to satisfaction of certain conditions, in September 2022, provides for loan commitments of $1.25 billion. The credit facility provides for borrowings at short-term interest rates and contains customary covenants and restrictions. The credit agreement governing QEP's revolving credit facility 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 3.75 times consolidated EBITDA (as defined in the credit agreement) and (iii) a present value coverage ratio under which the present value of the Company's proved reserves must exceed net funded debt by 1.40 times through December 31, 2019, and must exceed net funded debt by 1.50 times at any time on or after January 1, 2020. At March 31, 2019 and December 31, 2018, QEP was in compliance with the covenants under the credit agreement.

During the three months ended March 31, 2019, QEP's weighted-average interest rate on borrowings from its credit facility was 4.73%. As of March 31, 2019, QEP had no borrowings outstanding and $1.3 million in letters of credit outstanding under the credit facility. As of December 31, 2018, QEP had $430.0 million of borrowings outstanding and $0.3 million in letters of credit outstanding under the credit facility.

Senior Notes
At March 31, 2019, the Company had $2,099.3 million in principal amount of senior notes outstanding with maturities ranging from March 2020 to March 2026 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 QEP's other existing and future unsecured and senior obligations. QEP may redeem some or all of its senior notes at any time before their maturity at a redemption price based on a make-whole amount plus accrued and unpaid interest to the date of redemption. The indentures governing QEP's senior notes contain customary events of default and covenants that may limit QEP's ability to, among other things, place liens on its property or assets.

Note 11 – 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.

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 and the ongoing discovery and/or development of information important to the matter.

Landowner Litigation – In October 2017, the owners of certain surface and mineral interests in Martin and Andrews County, Texas, filed suit against QEP, alleging QEP improperly used the surface of the properties and failed to correctly pay royalties, and seeking money damages and a declaratory judgment that portions of the oil and gas leases covering the properties are no longer in effect.

Mandan, Hidatsa and Arikara Nation ("MHA Nation") Title Dispute – In June 2018, the MHA Nation notified QEP of its position that QEP has no valid lease covering certain minerals underlying the Missouri and Little Missouri Riverbeds on the Fort Berthold Reservation in North Dakota. The MHA Nation also passed a resolution purporting to rescind those portions of QEP's IMDA lease covering the disputed minerals underlying the Missouri River.  

The Company is unable to make an estimate of the range of reasonably possible loss related to its contingencies.


21



Commitments

QEP has entered into contractual lease arrangements to rent office space, compressors, generators, drilling rigs and other equipment from third-party lessors. On January 1, 2019, QEP adopted ASC Topic 842, Leases, using the modified retrospective approach. Refer to Note 8 – Leases for additional information.

As of March 31, 2019, minimum future payments, including imputed interest, for long-term operating leases under the scope of ASC 842 are as follows:
Year
Amount
 
(in millions)
2019
$
19.5

2020
$
20.3

2021
$
18.1

2022
$
14.1

2023
$
8.9

After 2023
$
0.5

Less: Interest(1)
$
(11.9
)
Present value of lease liabilities(2)
$
69.5

 ____________________________
(1) 
Calculated using the estimated or stated interest rate for each lease.
(2) 
Of the total present value of lease liabilities, $20.1 million was recorded in "Current operating lease liabilities" and $49.4 million was recorded in "Operating lease liabilities" on the Condensed Consolidated Balance Sheets.

As of December 31, 2018, minimum future contractual payments for long-term operating leases under the scope of ASC 840 are as follows:
Year
Amount
 
(in millions)
2019
$
17.4

2020
$
13.8

2021
$
9.1

2022
$
7.4

2023
$
4.5

After 2023
$


Note 12 – Share-Based Compensation

In 2018, QEP's Board of Directors and QEP's shareholders approved the QEP Resources, Inc. 2018 Long-Term Incentive Plan (LTIP), which replaces the 2010 Long-Term Stock Incentive Plan (LTSIP) and provides for the issuance of up to 10.0 million shares such that the Board of Directors may grant long-term incentive compensation. QEP has issued stock options, restricted share awards, and restricted share units under its LTSIP or LTIP and awards performance share units under its Cash Incentive Plan (CIP) to certain officers, employees and non-employee directors. Grants issued prior to May 15, 2018 were under the LTSIP and grants issued on or after May 15, 2018 are under the LTIP. QEP recognizes the expense over the vesting periods for the stock options, restricted share awards, restricted share units and performance share units. There were 8.3 million shares available for future grants under the LTIP at March 31, 2019.


22



Share-based compensation expense is generally recognized within "General and administrative" expense on the Condensed Consolidated Statements of Operations and is summarized in the table below. During the three months ended March 31, 2019, the Company recorded an additional $8.4 million of share-based compensation expense related to the acceleration of vesting that occurred as part of the restructuring program, of which $1.5 million was recorded in "Net gain (loss) from asset sales, inclusive of restructuring costs" on the Condensed Consolidated Statement of Operations and the remaining $6.9 million is included in the table below. During the three months ended March 31, 2018, the Company recorded an additional $2.8 million of share-based compensation expense, related to the acceleration of vesting that occurred as part of the restructuring program, all of which is included in the table below. Refer to Note 9 – Restructuring for additional information.
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(in millions)
Stock options
$
0.3

 
$
0.5

Restricted share awards
6.1

 
8.8

Performance share units
5.2

 
1.9

Restricted share units
0.1

 

Total share-based compensation expense
$
11.7

 
$
11.2


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 stock 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 Company recognizes forfeitures of stock options as they occur. During the three months ended March 31, 2019, QEP did not issue stock options.

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, 2018
2,098,933

 
$
22.27

 
 
 
 
Cancelled
(283,029
)
 
30.90

 
 
 
 
Outstanding at March 31, 2019
1,815,904

 
$
20.93

 
3.05
 
$

Options Exercisable at March 31, 2019
1,754,713

 
$
21.10

 
2.98
 
$

Unvested Options at March 31, 2019
61,191

 
$
16.03

 
4.93
 
$


During the three months ended March 31, 2019 and 2018, there were no exercises of stock options. As of March 31, 2019, $0.1 million of unrecognized compensation expense related to stock options granted under the LTSIP is expected to be recognized over a weighted-average vesting period of 1.00 year. The weighted-average vesting period may be reduced due to accelerated vestings under the restructuring program. Refer to Note 9 – Restructuring for additional information.


23



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 Company recognizes restricted share forfeitures as they occur. The total fair value of restricted share awards that vested during the three months ended March 31, 2019 and 2018 was $22.8 million and $21.0 million, respectively. The weighted-average grant date fair value of restricted share awards was $7.98 per share and $9.55 per share for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, $24.3 million of unrecognized compensation expense related to restricted share awards granted under the LTSIP and LTIP is expected to be recognized over a weighted-average vesting period of 2.50 years. The weighted-average vesting period may be reduced due to accelerated vestings under the restructuring program. Refer to Note 9 – Restructuring for additional information.

Transactions involving restricted share awards under the terms of the LTSIP and LTIP are summarized below:
 
Restricted Share Awards Outstanding
 
Weighted-Average Grant Date Fair Value
 
 
 
(per share)
Unvested balance at December 31, 2018
3,822,133

 
$
10.76

Granted
2,178,950

 
7.98

Vested
(2,052,013
)
 
11.13

Forfeited
(73,925
)
 
9.40

Unvested balance at March 31, 2019
3,875,145

 
$
9.03


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 paid in cash. The Company has the option to settle earned awards in cash or shares of common stock under the Company's LTIP; however, as of March 31, 2019, the Company expects to settle all awards in cash under the CIP. 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 Company paid $10.9 million and $1.7 million for vested performance share units during the three months ended March 31, 2019 and 2018, respectively. The weighted-average grant date fair value of the performance share units granted during the three months ended March 31, 2019 and 2018 was $7.93 and $9.55 per share, respectively. As of March 31, 2019, $11.6 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 2.51 years. The weighted-average vesting period may be reduced due to accelerated vestings under the restructuring program. Refer to Note 9 – Restructuring for additional information.

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, 2018
1,559,312

 
$
11.47

Granted
589,412

 
7.93

Vested
(1,075,334
)
 
10.70

Unvested balance at March 31, 2019
1,073,390

 
$
9.73


24




Restricted Share Units
Employees may elect to defer their grants of restricted share awards and these deferred awards are designated as 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 paid in cash. They are classified as liabilities 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 $7.93 and $9.55 per share for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, $0.4 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 2.13 years. The weighted-average vesting period may be reduced due to accelerated vestings under the restructuring program. Refer to Note 9 – Restructuring for additional information.

Transactions involving restricted share units under the terms of the LTSIP and LTIP are summarized below:
 
Restricted Share Units Outstanding
 
Weighted-Average Grant Date Fair Value
 
 
 
(per share)
Unvested balance at December 31, 2018
42,675

 
$
10.47

Granted
37,224

 
7.93

Vested
(19,039
)
 
10.67

Unvested balance at March 31, 2019
60,860

 
$
8.85


Note 13 – Employee Benefits

Pension and Other Postretirement Benefits
The Company provides pension and other postretirement benefits to certain employees through three retiree 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).

The Pension Plan is a closed, qualified, defined-benefit pension plan that is funded and provides pension benefits to certain QEP employees. During the three months ended March 31, 2019, the Company made contributions of $2.5 million to the Pension Plan and expects to contribute an additional $2.5 million to the Pension Plan during the remainder of 2019. 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 three months ended March 31, 2019, the Company made contributions of $0.1 million to its SERP and expects to contribute an additional $0.3 million to its SERP during the remainder of 2019. 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 a self-insured plan. It is unfunded and provides other postretirement benefits including certain health care and life insurance benefits for certain retired QEP employees. During the three months ended March 31, 2019, the Company made contributions of $0.1 million to the Medical Plan and expects to contribute $0.1 million to the Medical Plan during the remainder of 2019. Contributions to the Medical Plan are used to fund current benefit payments.

In February 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 no longer offers the Medical Plan to retirees and spouses that are both Medicare eligible. In addition, the Company no longer offers life insurance to individuals retiring on or after July 1, 2017.

The Company's implementation of its strategic initiatives may trigger curtailments related to the Pension Plan, SERP and/or Medical Plan at the closing of the various transactions. Refer to Note 9 – Restructuring for more information. The Company recognized a $0.5 million pension curtailment gain as part of the Haynesville Divestiture included in "Interest and other income (expense)" and "Net gain (loss) from asset sales, inclusive of restructuring costs" on the Condensed Consolidated Statements of Operations.


25



The Company recognizes service costs related to SERP and Medical Plan benefits on the Condensed Consolidated Statements of Operations within "General and administrative" expense. All other expenses related to the Pension Plan, SERP and Medical Plan are recognized on the Condensed Consolidated Statements of Operations within "Interest and other income (expense)".

The following table sets forth the Company's net periodic benefit costs related to its Pension Plan, SERP and Medical Plan:
 
Three Months Ended
 
March 31,
 
2019
 
2018
Pension Plan and SERP benefits
(in millions)
Service cost
$
0.1

 
$
0.2

Interest cost
1.2

 
1.1

Expected return on plan assets
(1.5
)
 
(1.4
)
Amortization of prior service costs(1)
0.1

 
0.2

Amortization of actuarial losses(1)
0.1

 
0.3

Curtailment (gain) loss(2)
0.3

 

Periodic expense
$
0.3

 
$
0.4

 
 
 
 
Medical Plan benefits
 
 
 
Amortization of prior service costs(1)
$

 
$
(0.1
)
Curtailment (gain) loss(2)
(0.8
)
 

Periodic expense
$
(0.8
)
 
$
(0.1
)
____________________________
(1) 
Amortization of prior service costs and actuarial losses out of accumulated other comprehensive income (loss) are recognized on the Condensed Consolidated Statements of Operations within "Interest and other income (expense)".
(2) 
A curtailment is recognized when there is a significant reduction in, or an elimination of, defined benefit accruals for current employees' future services. The net curtailment gain between the SERP and Medical Plan of $0.5 million is related to the Haynesville Divestiture. Of the $0.5 million curtailment gain recognized, $0.3 million was recognized on the Condensed Consolidated Statements of Operations within "Interest and other income (expense)" and $0.2 million was recognized on the Condensed Consolidated Statements of Operations within "Net gain (loss) from asset sales, inclusive of restructuring costs" for the three months ended March 31, 2019.

Employee Investment Plan
QEP employees may participate in the QEP Employee Investment Plan, a defined-contribution plan (the 401(k) Plan). The 401(k) Plan allows eligible employees to make investments, including purchasing shares of QEP common stock, through payroll deduction at the current fair market value on the transaction date. Both employees and QEP make contributions to the 401(k) Plan. The Company may contribute a discretionary portion beyond the Company's matching contribution to employees not in the Pension Plan or SERP. During the three months ended March 31, 2019, the Company made contributions of $1.8 million to the 401(k) Plan and expects to contribute an additional $3.1 million to the 401(k) Plan during the remainder of 2019. The Company recognizes expense equal to its yearly contributions. Due to the Company's strategic initiatives, the amount expected to be contributed to the 401(k) Plan is subject to change. Refer to Note 9 – Restructuring for more information.

As a result of freezing benefits under the Pension Plan, the 401(k) Plan and a nonqualified, unfunded deferred compensation plan (the Wrap Plan) were amended to allow the Company to make discretionary contributions in the form of Company Transition Credits to eligible participants. Eligible participants are certain highly and non-highly compensated employees who were active participants in the Pension Plan on December 31, 2015. During the three months ended March 31, 2019, the Company did not make a discretionary contribution to active participants of the Pension Plan but expects to contribute $0.1 million to eligible participants during the fourth quarter of 2019.


26



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, 2018 (2018 Form 10-K) and analyzes the changes in the results of operations between the three months ended March 31, 2019 and 2018. 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 2018 Form 10-K.

OVERVIEW

QEP Resources, Inc. is an independent crude oil and natural gas exploration and production company with operations in two regions of the United States: the Southern Region (primarily in Texas) and the Northern Region (primarily in North Dakota). 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".

In February 2018, QEP's Board of Directors unanimously approved certain strategic and financial initiatives (2018 Strategic Initiatives), including plans to market its assets in the Williston Basin, Uinta Basin and Haynesville/Cotton Valley and focus its activities in the Permian Basin. The Company sold its Uinta Basin assets in September 2018 (Uinta Basin Divestiture) and closed the sale of the Haynesville/Cotton Valley assets in January 2019 (Haynesville Divestiture). In addition, the Company entered into a purchase and sale agreement for its Williston Basin assets in November 2018. However, in February 2019, the Company agreed with the buyer to terminate the purchase and sale agreement.

In February 2019, QEP's Board of Directors commenced a comprehensive review of strategic alternatives to maximize shareholder value, which could result in a merger or sale of the Company or other transaction involving the Company's assets. Additionally, in light of the reduction of the Company's operational footprint over the last twelve months, QEP continues to reassess its organizational needs and intends to significantly reduce its general and administrative expense (excluding $61.0 million of expenses associated with our 2018 Strategic Initiatives) by approximately 45% to ensure its cost structure is competitive with industry peers. The Company incurred $20.3 million of general and administrative restructuring costs related to organizational changes implemented during the first quarter of 2019 and continues to evaluate reductions in general and administrative expense.

As a part of the 2018 and 2019 strategic initiatives, QEP has incurred or expects to incur additional costs associated with contractual termination benefits, including severance, accelerated vesting of share-based compensation and other expenses. Refer to Note 3 – Acquisitions and Divestitures and Note 9 – Restructuring in Part 1, Item I of this Quarterly Report on Form 10-Q for more information.

Acquisitions and Divestitures

While we believe our inventory of identified drilling locations provides a solid base for growth in production and reserves, we will continue to evaluate and acquire properties in our operating areas to add additional development opportunities and facilitate the drilling of long lateral wells.

Acquisitions

During the three months ended March 31, 2019, QEP acquired various oil and gas properties, which primarily included proved acreage in the Permian Basin for an aggregate purchase price of $0.6 million, subject to post-closing purchase price adjustments.



27



During the three months ended March 31, 2018, QEP acquired various oil and gas properties, which primarily included proved and unproved leasehold acreage in the Permian Basin for an aggregate purchase price of $36.2 million, subject to post-closing purchase price adjustments. Of the $36.2 million, $35.7 million was related to acquisitions from various entities that owned additional oil and gas interests in certain properties included in the 2017 acquisition of oil and gas properties in the Permian Basin (2017 Permian Basin Acquisition) on substantially the same terms and conditions as the 2017 Permian Basin Acquisition in the fourth quarter of 2017.

Divestitures

In January 2019, QEP closed its previously announced Haynesville Divestiture for net cash proceeds of $615.3 million, subject to post-closing purchase price adjustments, and recorded a pre-tax loss on sale of $18.0 million. Of the $18.0 million pre-tax loss on sale, $15.0 million was recognized during the three months ended March 31, 2019, and $3.0 million was recognized during the fourth quarter of 2018 within "Net gain (loss) from asset sales, inclusive of restructuring costs" on the Condensed Consolidated Statements of Operations. Included in the $15.0 million pre-tax loss on sale is $1.4 million of restructuring costs related to the Haynesville Divestiture during the three months ended March 31, 2019. Refer to Note 9 – Restructuring for more information. As of March 31, 2019, $22.1 million remained in escrow due to title defects asserted prior to closing, to be resolved pursuant to the purchase and sale agreement's title dispute resolution procedures, of which $5.8 million was included in "Accounts receivable, net" on the Condensed Consolidated Balance Sheets. As of December 31, 2018, the Haynesville/Cotton Valley assets were classified in the Company's Condensed Consolidated Financial Statements as held for sale. Refer to Note 3 – Acquisitions and Divestitures in Part 1, Item I of this Quarterly Report on Form 10-Q for more information.

In addition to the Haynesville Divestiture, during the three months ended March 31, 2019, QEP received net cash proceeds of $2.1 million and recorded a net pre-tax loss on sale of $0.4 million related to the divestiture of properties outside our main operating areas.

During the three months ended March 31, 2018, QEP received net cash proceeds of $33.3 million and recorded a pre-tax gain on sale of $3.5 million, primarily related to the divestiture of properties outside our main operating areas in the Williston Basin, Pinedale and Other Northern areas.

Financial and Operating Highlights

During the three months ended March 31, 2019, QEP:

Closed the Haynesville Divestiture, for net cash proceeds of $615.3 million;
Delivered oil and condensate production of 5.1 MMbbls, a 2% increase over the first quarter 2018 volumes;
Increased oil and condensate production in the Permian Basin by 35% to 2.9 MMbbls over the first quarter 2018;
Reported net realized oil price of $48.50 per bbl, a 6% decrease from the first quarter 2018;
Generated a net loss of $116.7 million, or $0.49 per diluted share; and
Reported Adjusted EBITDA (a non-GAAP financial measure defined and reconciled below) of $119.8 million.

Outlook

The Company continues to focus on reducing its operating costs and per well drilling costs and managing its liquidity. We believe our balance sheet and sufficient liquidity will allow us to grow oil and condensate production in our operating areas and achieve our strategic initiatives.

Based on current commodity prices, we expect to be able to fund our planned capital program for 2019 with cash flow from operating activities, cash on hand and borrowings under our credit facility. Our total capital expenditures (excluding property acquisitions) for 2019 are expected to be approximately $640.0 million, a decrease of approximately 46% from 2018 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 will adjust our capital investment program based on such evaluations. See "Cash Flow from Investing Activities" for further discussion of our capital expenditures.


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Factors Affecting Results of Operations

Shareholder Activism
Elliott Management Corporation (Elliott), is a beneficial holder of approximately 4.9% of our common stock (based on Elliott's Form 13F-HR filed on February 14, 2019). On January 7, 2019, Elliott made a proposal to our Board to acquire all of our outstanding shares of common stock for $8.75 per share in cash. Our Board made a decision to engage in a process to explore strategic alternatives, which could result in a merger or sale of the Company or another transaction involving the Company's assets. Our business and/or operations could be adversely affected by these and any future actions of activist shareholders. Responding to actions by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of our management and employees. Activities of activist shareholders could interfere with our ability to execute our strategic plan or realize short- or long-term value from our assets and could interfere with our ability to pursue strategic alternatives to Elliott's proposal. Perceived uncertainties as to our future direction could also result in the loss of potential business opportunities, make it more difficult or costly to attract and retain qualified personnel and affect the trading price of our securities.

Supply, Demand, Market Risk and their Impact on Oil Prices
Oil prices are affected by many factors outside of our control, including changes in 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 prices have been affected by supply growth, particularly in the U.S., 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 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, its proved undeveloped (PUD) reserves conversion rate, 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 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 $107.95 per barrel in June 2014. If oil prices decline to early 2016 levels or further, our operations, financial condition and level of expenditures for the development of our oil reserves may be materially and adversely affected.

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 global economic issues; slowing growth in certain emerging market economies; actions taken by the United States Congress and the president of the United States; the U.S. federal budget deficit; changes in regulatory oversight policy; commodity price volatility; tariffs on goods we use in our operations or on the products we sell; 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. 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 focus on maintaining a sufficient 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 March 31, 2019, QEP forecasted its 2019 annual production to be approximately 29.4 MMboe (mid-point of guidance) and had approximately 64% of its forecasted oil and condensate production covered with fixed price swaps. 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.


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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 oil and gas properties and operating lease right-of-use assets 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 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 drilling 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. The signing of a purchase and sale agreement could also cause the Company to recognize an impairment of proved properties. For assets subject to a purchase and sale agreement, the terms of the purchase and sale agreement are used as an indicator of fair value.

During the three months ended March 31, 2019, there was no impairment related to proved and unproved oil and gas properties. During the three months ended March 31, 2019, the Company recorded impairment charges of $5.0 million related to an office building lease.

During the three months ended March 31, 2018, QEP recorded an impairment charge of $0.7 million, which was primarily related to the impairment of proved properties related to a divestiture in the Other Northern area and expiring leaseholds on unproved properties.

We could be at risk for proved and unproved property and operating lease right-of-use asset impairments if forward oil prices decline from March 31, 2019 levels, we experience negative changes in estimated reserve quantities or from our strategic initiative results. The actual amount of impairment incurred, if any, for these properties will depend on a variety of factors including, but not limited to, subsequent forward price curve changes, the additional risk-adjusted value of probable and possible reserves associated with the properties, weighted-average cost of capital, operating cost estimates and future capital expenditure estimates.

Tax Legislation
The Tax Legislation enacted in December 2017 reduced our federal corporate tax rate from 35% to 21%. In addition, the Tax Legislation eliminated Alternative Minimum Tax (AMT) and QEP has the ability to offset its regular tax liability or claim refunds for taxable years 2018 through 2021 for AMT credits carried forward from prior years. The Company currently anticipates it will realize approximately $148.4 million in AMT credit refunds over the next four years with $74.2 million to be realized in 2019 for tax year 2018, which is included in "Income tax receivable" with the remaining $74.2 million included in "Deferred income taxes" on the Condensed Consolidated Balance Sheet as of March 31, 2019.

Multi-Well Pad Drilling and Completion
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. For example, in the Permian Basin QEP utilizes "tank-style" development, in which we simultaneously develop multiple subsurface targets by drilling and completing all wells in a given "tank" before any individual well is turned to production. We believe this approach maximizes the economic recovery of oil through the simultaneous development of multiple subsurface targets, while improving capital efficiency though shared surface facilities, which we believe will reduce per-unit operating costs and result in expanded operating margins and improve our returns on invested capital. 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 completion of wells and 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. In addition, delays in completion of wells may impact planned conversion of PUD reserves to proved developed reserves.


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Uncertainties Related to Claims
QEP is currently subject to claims that could adversely impact QEP's liquidity, operating results and capital expenditures for a particular reporting period, including, but not limited to those described in Note 11 – 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 2018 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, 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.

Drilling, Completion and Production Activities
The following table presents operated and non-operated wells in the process of being drilled or waiting on completion as of March 31, 2019:
 
 
 
Operated
 
Non-operated
 
Drilling
 
Drilling