UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

or

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: 001-14837

Quicksilver Resources Inc.

(Exact name of registrant as specified in its charter)

Delaware		75-2756163
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

801 Cherry Street, Suite 3700, Unit 19, Fort Worth, Texas		76102
(Address of principal executive offices)		(Zip Code)

(817) 665-5000
(Registrant’s telephone number, including area code)

777 West Rosedale, Fort Worth, Texas, 76104
(Former name, former address and former fiscal year, if changed since last report)

     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 þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Title of Class		Outstanding as of October 22, 2010
Common Stock, $0.01 par value		170,316,266

 

 

DEFINITIONS

As used in this quarterly report unless the context otherwise requires:

“Bbl” or “Bbls” means barrel or barrels

“Bbld” means barrel or barrels per day

“Bcf” means billion cubic feet

“Canada” means our oil and natural gas operations located in Canada

“DD&A” means Depletion, Depreciation and Accretion

“LIBOR” means London Interbank Offered Rate

“MBbl” or “MBbls” means thousand barrels

“MBbld” means thousand barrels per day

“MMBbls” means million barrels

“MMBtu” means million British Thermal Units, a measure of heating value approximately equal to 1 Mcf of natural gas

“MMBtud” means million Btu per day

“Mcf” means thousand cubic feet

“Mcfe” means Mcf natural gas equivalents calculated as one Bbl of oil or NGLs equaling six Mcf of natural gas

“MMcf” means million cubic feet

“MMcfd” means million cubic feet per day

“MMcfe” means MMcf of natural gas equivalents calculated as one Bbl of oil or NGLs equaling six Mcf of natural gas

“MMcfed” means MMcfe per day

“NGL” or “NGLs” means natural gas liquids

“NYMEX” means New York Mercantile Exchange

“Oil” includes crude oil and condensate

COMMONLY USED TERMS

Other commonly used terms and abbreviations include:

“ABR” means adjusted base rate

“AOCI” means accumulated other comprehensive income

“Alliance Leasehold” means the natural gas leasehold and royalty interests acquired on August 8, 2008 in northern Tarrant and southern Denton counties of Texas and developed thereafter

“Alliance Midstream Assets” means the natural gas gathering system and processing facility purchased by KGS from Quicksilver in January 2010

“BBEP” means BreitBurn Energy Partners L.P.

“Crestwood” means Crestwood Holdings LLC

“Crestwood Transaction” means the sale to Crestwood of all our interests in KGS, consisting of 100% of the general partner units, including incentive distribution rights, all of our common and subordinated units and the subordinated note due from KGS

“Eni” means either or both Eni Petroleum US LLC and Eni US Operating Co. Inc., which are subsidiaries of Eni SpA

“Eni Production” means production attributable to Eni pursuant to the Eni Transaction

“Eni Transaction” means the June 19, 2009 conveyance of a 27.5% interest in our Alliance Leasehold

“FASB” means the Financial Accounting Standards Board, which promulgates accounting standards in the U.S.

“FASC” means the FASB Accounting Standards Codification, which is the single source of authoritative U.S. GAAP not promulgated by the SEC

“GAAP” means accounting principles generally accepted in the U.S.

“Gas Purchase Commitment” means the commitment pursuant to the Eni Transaction to purchase Eni Production through December 2010

“HCDS” means Hill County Dry System

“KGS” means Quicksilver Gas Services LP, a publicly traded partnership, which we formerly owned that traded under the ticker symbol of “KGS” and subsequent to the Crestwood Transaction renamed itself Crestwood Midstream Partners LP and trades under the ticker symbol “CMLP”

“KGS Credit Facility” means the KGS senior secured revolving credit facility

“KGS Secondary Offering” means the public offering of 4,000,000 KGS common units on December 16, 2009 and the underwriters’ purchase of an additional 549,200 KGS common units in January 2010

“Lake Arlington Project” means our natural gas leasehold and royalty interests in the Lake Arlington area of Tarrant County that we have developed and also includes an additional 25% working interest we purchased on May 11, 2010

“Mercury” means Mercury Exploration Company, which is owned by members of the Darden family

“Michigan Sales Contract” means the gas supply contract, which expired in March 2009 under which we agreed to deliver 25 MMcfd at a floor price of $2.49 per Mcf

“OCI” means other comprehensive income

“RSU” means restricted stock unit

“SEC” means the U.S. Securities and Exchange Commission

“Senior Secured Credit Facility” means our U.S. senior secured revolving credit facility and our Canadian senior secured revolving credit facility

QUICKSILVER RESOURCES INC.
INDEX TO FORM 10-Q
For the Period Ending September 30, 2010

PART I. FINANCIAL INFORMATION
		Item 1.		Condensed Consolidated Interim Financial Statements (Unaudited)
		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.		[Removed and Reserved]
		Item 5.		Other Information
		Item 6.		Exhibits
		Signature
EX-2.2
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Except as otherwise specified and unless the context otherwise requires, references to the “Company,” “Quicksilver,” “we,” “us,” and “our” refer to Quicksilver Resources Inc. and its subsidiaries.

Forward-Looking Information

     Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made or to be made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements give our current expectations or forecasts of future events.  Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements.  They can be affected by assumptions used or by known or unknown risks or uncertainties.  Consequently, no forward-looking statements can be guaranteed.  Actual results may vary materially.  You are cautioned not to place undue reliance on any forward-looking statements.  You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.  Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

	•		changes in general economic conditions;
	•		fluctuations in natural gas, NGL and crude oil prices;
	•		failure or delays in achieving expected production from exploration and development projects;
	•		uncertainties inherent in estimates of natural gas, NGL and crude oil reserves and predicting natural gas, NGL and crude oil reservoir performance;
	•		effects of hedging natural gas, NGL and crude oil prices;
	•		fluctuations in the value of certain of our assets and liabilities;
	•		competitive conditions in our industry;
	•		actions taken or non-performance by third parties, including suppliers, contractors, operators, processors, transporters, customers and counterparties;
	•		changes in the availability and cost of capital;
	•		delays in obtaining oilfield equipment and increases in drilling and other service costs;
	•		operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;
	•		the effects of existing and future laws and governmental regulations, including environmental and climate change requirements;
	•		the effects of existing or future litigation;
	•		failure to receive a proposal for a transaction to pursue strategic alternatives for us or that any transaction will be approved or consummated;
	•		costs and expenses associated with our consideration of potential strategic alternatives, including without limitation, any related litigation expense; and,
	•		certain factors discussed elsewhere in this quarterly report.

     This list of factors is not exhaustive, and new factors may emerge or changes to these factors may occur that would impact our business.  Additional information regarding these and other factors may be contained in our filings with the SEC, especially on Forms 10-K, 10-Q and 8-K.  All such risk factors are difficult to predict, and are subject to material uncertainties that may affect actual results and may be beyond our control.  The forward-looking statements included in this report are made only as of the date of this quarterly report, and we undertake no obligation to update any of these forward-looking statements to reflect subsequent events or circumstances except to the extent required by applicable law.

     All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.

PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Interim Financial Statements (Unaudited)

QUICKSILVER RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
In thousands, except for per share data — Unaudited

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenue
Natural gas, NGL and oil		$	218,249			$	198,287			$	631,499			$	581,156
Sales of purchased natural gas			16,982				5,964				50,027				11,181
Other			2,469				2,406				6,902				6,293
Total revenue			237,700				206,657				688,428				598,630
Operating expense
Oil and gas production expense			39,402				29,064				113,593				92,938
Production and ad valorem taxes			9,170				6,630				26,542				18,437
Costs of purchased natural gas			14,638				2,964				51,701				11,546
Other operating costs			1,320				2,066				3,544				5,337
Depletion, depreciation and accretion			52,542				44,548				149,968				155,210
General and administrative			24,005				17,682				61,745				59,452
Total expense			141,077				102,954				407,093				342,920
Impairment expense			(31,531	)			-				(31,531	)			(967,126	)
Operating income (loss)			65,092				103,703				249,804				(711,416	)
Income (loss) from earnings of BBEP - net			17,024				(43,685	)			24,203				(24,669	)
Other income (expense) - net			14,253				(645	)			67,646				(739	)
Interest expense			(51,532	)			(41,619	)			(142,171	)			(149,901	)
Income (loss) before income tax			44,837				17,754				199,482				(886,725	)
Income tax (expense) benefit			(18,268	)			(15,595	)			(71,569	)			301,125
Net income (loss)			26,569				2,159				127,913				(585,600	)
Net income attributable to noncontrolling interests			(4,766	)			(1,429	)			(11,119	)			(4,411	)
Net income (loss) attributable to Quicksilver		$	21,803			$	730			$	116,794			$	(590,011	)
Other comprehensive income (loss), net of income tax
Reclassification adjustments related to settlements of derivative contracts			(45,356	)			(63,196	)			(117,714	)			(160,183	)
Net change in derivative fair value			59,217				1,030				171,910				113,333
Foreign currency translation adjustment			6,993				11,937				4,238				18,719
Comprehensive income (loss)		$	42,657			$	(49,499	)		$	175,228			$	(618,142	)
Income (loss) per common share - basic			0.13				-				0.69				(3.49	)
Income (loss) per common share - diluted			0.13				-				0.68				(3.49	)
Basic weighted average shares outstanding			170,307				169,021				170,242				168,917
Diluted weighted average shares outstanding			171,037				170,657				180,847				168,917

The accompanying notes are an integral part of these condensed consolidated financial statements.

QUICKSILVER RESOURCES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except for share data — Unaudited

		September 30,				December 31,
		2010				2009
ASSETS
Current assets
Cash and cash equivalents		$	15,078			$	1,037
Accounts receivable - net of allowance for doubtful accounts			35,757				63,738
Derivative assets at fair value			142,389				97,957
Other current assets			32,663				54,652
Total current assets			225,887				217,384
Investment in BBEP			95,124				112,763
Property, plant and equipment
Oil and gas properties, full cost method (including unevaluated costs of $404,783 and $458,037, respectively)			2,707,785				2,338,244
Other property and equipment			205,903				204,601
Property, plant and equipment - net			2,913,688				2,542,845
Assets of midstream operations held for sale			561,924				548,508
Derivative assets at fair value			84,870				14,427
Deferred income taxes			45,179				133,051
Other assets			37,447				43,904
		$	3,964,119			$	3,612,882
LIABILITIES AND EQUITY
Current liabilities
Accounts payable		$	113,509			$	149,766
Accrued liabilities			109,897				153,598
Derivative liabilities at fair value			-				395
Deferred income taxes			51,598				51,675
Total current liabilities			275,004				355,434
Long-term debt			2,396,705				2,302,123
Liabilities of midstream operations held for sale			267,117				148,191
Asset retirement obligations			52,435				48,472
Other liabilities			28,461				20,691
Deferred income taxes			50,988				41,149
Commitments and contingencies (Note 8)			-				-
Equity
Preferred stock, par value $0.01, 10,000,000 shares authorized, none outstanding			-				-
Common stock, $0.01 par value, 400,000,000 shares authorized; 175,543,699 and 174,469,836 shares issued, respectively			1,755				1,745
Paid in capital in excess of par value			753,944				730,265
Treasury stock of 5,046,039 and 4,704,448 shares, respectively			(41,428	)			(36,363	)
Accumulated other comprehensive income			179,770				121,336
Retained deficit			(64,191	)			(180,985	)
Quicksilver stockholders’ equity			829,850				635,998
Noncontrolling interests			63,559				60,824
Total equity			893,409				696,822
		$	3,964,119			$	3,612,882

The accompanying notes are an integral part of these condensed consolidated financial statements.

QUICKSILVER RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
In thousands — Unaudited

		Quicksilver Resources Inc. Stockholders
														Accumulated
						Additional								Other				Retained
		Common				Paid-in				Treasury				Comprehensive				Earnings				Noncontrolling
		Stock				Capital				Stock				Income				(Deficit)				Interests				Total
Balances at December 31, 2008		$	1,717			$	656,958			$	(35,441	)		$	185,104			$	376,488			$	26,737			$	1,211,563
Net income (loss)			-				-				-				-				(590,011	)			4,411				(585,600	)
Hedge derivative contract settlements reclassified into earnings from accumulated other comprehensive income, net of income tax of $74,629			-				-				-				(160,183	)			-				-				(160,183	)
Net change in derivative fair value, net of income tax of $52,317			-				-				-				113,333				-				-				113,333
Foreign currency translation adjustment			-				-				-				18,719				-				-				18,719
Issuance and vesting of stock compensation			23				14,695				(868	)			-				-				1,228				15,078
Stock option exercises			-				822				-				-				-				-				822
Distributions paid on KGS common units			-				-				-				-				-				(7,344	)			(7,344	)
Balances at September 30, 2009		$	1,740			$	672,475			$	(36,309	)		$	156,973			$	(213,523	)		$	25,032			$	606,388
Balances at December 31, 2009		$	1,745			$	730,265			$	(36,363	)		$	121,336			$	(180,985	)		$	60,824			$	696,822
Net income			-				-				-				-				116,794				11,119				127,913
Hedge derivative contract settlements reclassified into earnings from accumulated other comprehensive income, net of income tax of $61,975			-				-				-				(117,714	)			-				-				(117,714	)
Net change in derivative fair value, net of income tax of $87,312			-				-				-				171,910				-				-				171,910
Foreign currency translation adjustment			-				-				-				4,238				-				-				4,238
Issuance and vesting of stock compensation			8				15,333				(4,851	)			-				-				858				11,348
Stock option exercises			2				1,600				(214	)			-				-				-				1,388
Issuance of KGS common units			-				6,746				-				-				-				4,308				11,054
Distributions paid on KGS common units			-				-				-				-				-				(13,550	)			(13,550	)
Balances at September 30, 2010		$	1,755			$	753,944			$	(41,428	)		$	179,770			$	(64,191	)		$	63,559			$	893,409

The accompanying notes are an integral part of these condensed consolidated financial statements.

QUICKSILVER RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands — Unaudited

		For the Nine Months Ended
		September 30,
		2010				2009
Operating activities:
Net income (loss)		$	127,913			$	(585,600	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Impairment expense			31,531				967,126
Depletion, depreciation and accretion			149,968				155,210
Deferred income tax expense (benefit)			71,569				(313,556	)
Stock-based compensation			17,343				16,007
Non-cash (gain) loss from commodity derivative activities			(45,801	)			2,845
Non-cash interest expense			13,372				40,553
(Income) loss from BBEP in excess of cash distributions, net of impairment			(9,416	)			35,770
Gain on sale and disposition of BBEP units			(49,850	)			-
Other			(337	)			684
Changes in assets and liabilities
Accounts receivable			25,101				67,555
Derivative assets at fair value			30,816				54,896
Other assets			4,974				4,490
Accounts payable			(18,793	)			(34,543	)
Accrued and other liabilities			(1,000	)			39,156
Net cash provided by operating activities			347,390				450,593
Investing activities:
Purchases of property, plant and equipment			(494,338	)			(561,120	)
Proceeds from sale of BBEP units			22,498				-
Proceeds from sales of property and equipment			1,030				221,038
Net cash used for investing activities			(470,810	)			(340,082	)
Financing activities:
Issuance of debt			661,232				1,377,525
Repayments of debt			(491,043	)			(1,507,137	)
Debt issuance costs paid			(109	)			(30,995	)
Gas Purchase Commitment assumed			-				58,294
Gas Purchase Commitment repayments			(25,900	)			(3,804	)
Issuance of KGS common units - net of offering costs			11,054				-
Distributions paid on KGS common units			(13,550	)			(7,344	)
Proceeds from exercise of stock options			1,388				822
Taxes paid for equity-based compensation vesting			(1,144	)			(63	)
Purchase of treasury stock for stock-based compensation vesting			(4,851	)			(868	)
Net cash provided by (used for) financing activities			137,077				(113,570	)
Effect of exchange rate changes on changes in cash			(306	)			1,779
Net increase (decrease) in cash and cash equivalents			13,351				(1,280	)
Cash and cash equivalents at beginning of period			1,785				2,848
Cash and cash equivalents at end of period		$	15,136			$	1,568

The accompanying notes are an integral part of these condensed consolidated financial statements.

QUICKSILVER RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Unaudited

1. ACCOUNTING POLICIES AND DISCLOSURES

     The accompanying condensed consolidated interim financial statements have not been audited.  In management’s opinion, the accompanying condensed consolidated interim financial statements contain all adjustments necessary to fairly present our financial position as of September 30, 2010 and our results of operations for the three and nine months ended September 30, 2010 and 2009 and cash flows for the nine months ended September 30, 2010 and 2009.  All such adjustments are of a normal recurring nature.  The results for interim periods are not necessarily indicative of annual results. 

     Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during each reporting period.  We believe our estimates and assumptions are reasonable, but actual results could differ from our estimates. 

     Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.  Accordingly, these financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our 2009 Annual Report on Form 10-K. 

Recently Issued Accounting Standards

     Accounting standards-setting organizations frequently issue new or revised accounting rules.  We regularly review all new pronouncements to determine their impact, if any, on our financial statements.  No pronouncements materially affecting our financial statements have been issued since the filing of our 2009 Annual Report on Form 10-K. 

2. KGS, CRESTWOOD TRANSACTION AND MIDSTREAM OPERATIONS

     In July 2010, we entered into a definitive agreement to sell all of our interests in KGS.  We completed the sale to Crestwood in October 2010.  The Crestwood Transaction included our conveying:

•

a 100% ownership interest in Quicksilver Gas Services Holdings LLC, which owned;

	•		5,696,752 common units of KGS;
	•		11,513,625 subordinated units of KGS representing limited partner interests in KGS;
	•		100% of the outstanding membership interests in Quicksilver Gas Services GP LLC including 469,949 general partner units in KGS and 100% of the outstanding incentive distribution rights in KGS; and,

•

a subordinated promissory note issued to us by KGS with a carrying value of $58 million at September 30, 2010.

     We received $701 million in cash at closing and recognized a gain of approximately $540 million after consideration of approximately $2.6 million in transaction costs.  We have the right to earn up to an additional $72 million in future earn-out payments in 2012 and 2013. 

     Under the agreements governing the Crestwood Transaction, both parties agreed for two years not to solicit employees of the other party and we agreed not to compete with KGS with respect to the gathering, treating and processing of natural gas and the transportation of natural gas liquids in Denton, Hood, Somervell, Johnson, Tarrant, Parker, Bosque and Erath counties in Texas.  We are entitled to appoint a director to KGS’ general partner’s board of directors until the later of the second anniversary of the closing and such time as we generate less than 50% of their consolidated revenue in any fiscal year.  Pursuant to this right, we have appointed Thomas F. Darden as a director of KGS’ general partner’s board of directors. 

     In connection with the closing of the Crestwood Transaction, we are providing transitional services to KGS for up to six months on customary terms.  KGS and we also entered into an agreement for the joint development of areas governed by certain of our existing commercial agreements and further we amended our existing commercial agreements.  The most significant amendments include extending the terms of all gathering agreements with KGS through 2020 and establishing a fixed gathering rate of $0.55 per Mcf in the Alliance gathering system. 

     In September 2010, our board of directors approved a plan for disposal of our HCDS, a gathering system in Hill County, Texas, which gathers natural gas and delivers it to unaffiliated pipelines for further transport and sale downstream.  As a result of this decision, we conducted an impairment analysis of the HCDS and recognized a charge for impairment. 

     We have continued to report our interests sold in the Crestwood Transaction and the HCDS as part of our continuing operating results because their providing midstream services to us constitutes a “continuation of service” that precludes presentation of those businesses as discontinued operations under GAAP.  The assets and liabilities of these midstream operations have been reclassified and are separately reported in our consolidated balance sheets. 

     The operating results of these midstream operations, as classified in our statement of income, are summarized below:

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(In thousands)
Revenues		$	4,669			$	1,476			$	12,836			$	5,186
Oil and gas production expense (1)			(22,425	)			(18,956	)			(57,003	)			(56,694	)
Production and ad valorem taxes			1,770				917				3,724				2,804
Cost of natural gas sold			9				17				64				71
Other operating costs			1,229				1,951				3,325				4,108
DD&A			6,453				6,332				18,984				17,583
General and administrative			3,294				696				5,040				2,190
Impairment expense			31,531				-				31,531				-
Operating results of midstream operations			(17,192	)			10,519				7,171				35,124
Interest and other expense			(2,527	)			(1,001	)			(6,917	)			(3,014	)
Results of midstream operations before income tax			(19,719	)			9,518				254				32,110
Income tax (expense) benefit			6,981				(3,718	)			(91	)			(11,975	)
Results of midstream operations, net of income tax		$	(12,738	)		$	5,800			$	163			$	20,135

     Details of balance sheet items for these midstream operations are summarized below:

		As of				As of
		September 30,				December 31,
		2010				2009
Assets:		(In thousands)
Cash		$	58			$	748
Accounts receivable, net			4,716				1,515
Other current assets			14,085				291
Property, plant and equipment, net			540,869				543,095
Other assets			2,196				2,859
Total		$	561,924			$	548,508
Liabilities
Current liabilities		$	16,032			$	11,226
Long-term debt			238,500				125,400
Other non-current liabilities			12,585				11,565
Total		$	267,117			$	148,191

     Prior to the Crestwood Transaction, we completed the KGS Secondary Offering as part of the funding strategy for the drop-down of the Alliance Midstream Assets.  The underwriters purchase of 549,200 newly issued common units in January 2010 yielded cash proceeds of $11.0 million.  We completed the drop-down transaction in January 2010 for $84.4 million. 

3. DERIVATIVES AND FAIR VALUE MEASUREMENTS

     The following table details the estimated fair value of all derivative instruments where “Level 2” inputs are the basis of our fair value estimates at September 30, 2010 and December 31, 2009:

		Significant Other Observable
		Inputs - Level 2
		September 30,				December 31,
		2010				2009
		(in thousands)
Commodity contracts		$	227,259			$	107,881
Interest rate contracts			-				4,108
Gas Purchase Commitment			(665	)			(6,625	)
Total		$	226,594			$	105,364

     The fair value of all derivative instruments included in these disclosures was estimated using prices quoted in active markets for the periods covered by the derivatives and the value reported by counterparties.  Estimates were determined by applying the net differential between the prices in each derivative and market prices for future periods to the amounts stipulated in each contract to arrive at an estimated future value.  This estimated future value was discounted on each contract at rates commensurate with federal treasury instruments with similar contractual lives. 

Commodity Price Derivatives

     As of September 30, 2010, we had price collars and fixed price swaps that hedge 200 MMcfd, 150 MMcfd and 90 MMcfd of our anticipated natural gas production for 2010, 2011 and 2012, respectively.  We also have fixed price swaps that hedge 30 MMcfd of our anticipated natural gas production for 2013 through 2015.  We have hedged our anticipated 2010 and 2011 NGL production with fixed price swaps that cover 10 MBbld and 8 MBbld, respectively. 

     The increase in carrying value of our commodity price derivatives since December 31, 2009 principally resulted from the overall decline in market prices for natural gas and NGLs relative to the prices of our open derivative instruments.  Additional derivatives entered into during 2010 further increased the carrying value.  Monthly settlements received during 2010 have partially offset these increases. 

Interest Rate Derivatives

     In February 2010, we executed the early settlement of the 2009 interest rate swaps that were designated as fair value hedges of our senior notes due 2015 and our senior subordinated notes.  We received cash of $18.0 million in the settlement, including $3.7 million for interest previously accrued and earned, and recognized the remaining $14.3 million as a fair value adjustment to our debt. 

     In February 2010, we entered into new interest swaps to hedge the same debt instruments.  We executed early settlement of a portion of the 2010 interest rate swaps in May 2010 and the remaining 2010 interest swaps in July 2010 for $6.8 million and $16.7 million, respectively.  These settlements included $7.0 million for interest previously accrued and earned.  The remaining cash of $16.5 million was recognized as a fair value adjustment to our debt, which will be recognized as a reduction of interest expense over the life of the associated underlying debt instruments. 

     These early settlements of all interest rate swaps will be recognized as a reduction of interest expense over the life of the associated underlying debt instruments currently scheduled as follows:

(In thousands)
2010 (1)		$	3,181
2011			4,897
2012			5,315
2013			5,769
2014			6,261
2015			4,824
2016			569
		$	30,816

     The average effective interest rates on the senior notes due 2015 and the senior subordinated notes were approximately 5.03% and 6.18%, respectively, for the first nine months of 2010.  At September 30, 2010, we had no interest rate swaps outstanding. 

Gas Purchase Commitment

     The Gas Purchase Commitment, which is effective through December 31, 2010, contains an embedded derivative, which we revalue for changes to estimated volumes and prices from June 19, 2009 to September 30, 2010.  At September 30, 2010, we have estimated the remaining liability at $18.9 million, including an embedded derivative liability for cumulative changes in estimates for remaining production months of $0.7 million.  The derivative reflects a 4.4 Bcf reduction of the total estimated volumes we expect to purchase under the commitment offset by a decrease in market prices over the remaining commitment period compared with our December 31, 2009 estimate.  The following summarizes the Gas Purchase Commitment activity during 2010:

(In thousands)
Liability fair value at December 31, 2009		$	50,744
Decrease due to gas volumes purchased			(25,900	)
Embedded derivative increase (decrease) due to:
Price changes			6,384
Volume changes			(12,344	)
Total increase (decrease) in embedded derivative			(5,960	)
Liability fair value at September 30, 2010 (1)		$	18,884

     The estimated fair value of our derivatives at September 30, 2010 and December 31, 2009 were as follows:

		Asset Derivatives									Liability Derivatives
		September 30,				December 31,					September 30,				December 31,
		2010				2009					2010				2009
		(In thousands)									(In thousands)
Derivatives designated as hedges:
Commodity contracts reported in:
Current derivative assets		$	148,334			$	97,883				$	5,771			$	638
Noncurrent derivative assets			84,696				11,031					-				-
Current derivative liabilities			-				243					-				638
Interest rate contracts reported in:
Current derivative assets			-				712					-				-
Noncurrent derivative assets			-				3,396					-				-
Total derivatives designated as hedges		$	233,030			$	113,265				$	5,771			$	1,276
Derivatives not designated as hedges:
Gas Purchase Commitment reported in accrued liabilities		$	-			$	-				$	665			$	6,625
Total derivatives not designated as hedges		$	-			$	-				$	665			$	6,625
Total derivatives		$	233,030			$	113,265				$	6,436			$	7,901

     The changes in the carrying value of our derivatives for the three and nine months ended September 30, 2010 and 2009 are presented below:

		For the Three Months Ended September 30, 2010
		Gas Purchase				Interest Rate				Commodity
		Commitment				Swaps				Hedges				Total
		(In thousands)
Derivative fair value at June 30, 2010		$	(6,161	)		$	13,240			$	193,394			$	200,473
Net change in amounts receivable/payable			-				(4,392	)			(240	)			(4,632	)
Net settlements reported in revenue			-				-				(54,716	)			(54,716	)
Cash settlements reported in long-term debt			-				(12,134	)			-				(12,134	)
Change in fair value of Gas Purchase Commitment reported in costs of purchased gas			5,496				-				-				5,496
Change in fair value of interest rate swaps			-				3,286				-				3,286
Ineffectiveness reported in other revenue			-				-				(806	)			(806	)
Unrealized gains reported in OCI			-				-				89,627				89,627
Derivative fair value at September 30, 2010		$	(665	)		$	-			$	227,259			$	226,594

		For the Three Months Ended September 30, 2009
		Gas Purchase				Interest Rate				Commodity
		Commitment				Swaps				Hedges				Total
		(In thousands)
Derivative fair value at June 30, 2009		$	(3,818	)		$	(266	)		$	257,548			$	253,464
Net settlements reported in revenue			-				-				(92,687	)			(92,687	)
Net settlements reported in interest expense			-				(6,537	)			-				(6,537	)
Change in fair value of Gas Purchase Commitment reported in costs of purchased gas			2,630				-				-				2,630
Change in fair value of interest rate swaps			-				22,845				-				22,845
Ineffectiveness reported in other revenue			-				-				77				77
Unrealized gains reported in OCI			-				-				134				134
Derivative fair value at September 30, 2009		$	(1,188	)		$	16,042			$	165,072			$	179,926

		For the Nine Months Ended September 30, 2010
		Gas Purchase				Interest Rate				Commodity
		Commitment				Swaps				Hedges				Total
		(In thousands)
Derivative fair value at December 31, 2009		$	(6,625	)		$	4,108			$	107,881			$	105,364
Net change in amounts receivable/payable			-				(9,180	)			(1,101	)			(10,281	)
Net settlements reported in revenue			-				-				(136,349	)			(136,349	)
Net settlements reported in interest expense			-				(10,848	)			-				(10,848	)
Cash settlements reported in long-term debt			-				(30,816	)			-				(30,816	)
Change in fair value of Gas Purchase Commitment reported in costs of purchased gas			5,960				-				-				5,960
Change in fair value of interest rate swaps			-				46,736				-				46,736
Ineffectiveness reported in other revenue			-				-				(2,394	)			(2,394	)
Unrealized gains reported in OCI			-				-				259,222				259,222
Derivative fair value at September 30, 2010		$	(665	)		$	-			$	227,259			$	226,594
		For the Nine Months Ended September 30, 2009
		Michigan				Gas Purchase				Interest Rate				Commodity
		Contract				Commitment				Swaps				Hedges				Total
		(In thousands)
Derivative fair value at December 31, 2008		$	(12,901	)		$	-			$	-			$	290,719			$	277,818
Net change in amounts receivable/payable			(3,518	)			-				-				-				(3,518	)
Net settlements			16,479				-				-				-				16,479
Net settlements reported in revenue			-				-				-				(234,812	)			(234,812	)
Net settlements reported in interest expense			-				-				(7,200	)			-				(7,200	)
Change in fair value of Gas Purchase Commitment reported in costs of purchased gas			-				(1,188	)			-				-				(1,188	)
Change in fair value of interest rate swaps			-				-				23,242				-				23,242
Ineffectiveness reported in other revenue			(60	)			-				-				(1,589	)			(1,649	)
Cash settlement reported in OCI			-				-				-				(54,896	)			(54,896	)
Unrealized gains reported in OCI			-				-				-				165,650				165,650
Derivative fair value at September 30, 2009		$	-			$	(1,188	)		$	16,042			$	165,072			$	179,926

     Gains and losses from the effective portion of derivative assets and liabilities held in AOCI expected to be reclassified into earnings over the next twelve months would result in a gain of $94.5 million, net of income taxes.  An additional $8.2 million, net of income taxes, remains from the early settlement of the 2010 natural gas collar settled in 2009 and will be reclassified from AOCI into revenue during the remainder of 2010.  Hedge derivative ineffectiveness resulted in losses of $2.4 million and $1.7 million recorded in other revenue for the nine months ended September 30, 2010 and 2009, respectively. 

4. INVESTMENT IN BREITBURN

     At September 30, 2010, we owned approximately 16.3 million common units, or 31%, of BBEP, a publicly traded limited partnership, whose price closed at $18.27 per unit as of that date.  Note 5 contains additional information regarding the use of 3.6 million BBEP common units as partial consideration in the acquisition of oil and gas properties in May 2010.  We further reduced our ownership of BBEP in September 2010 when we sold approximately 1.4 million common units at a unit price of $16.22, net of fees paid.  We recognized a gain of $14.4 million as other income for the difference between our carrying value at the time of the sale of $5.82 per BBEP unit and the net sales proceeds.  In October 2010, we sold an additional 650,000 units at a unit price of $17.72 and recognized a gain of $7.7 million. 

     We account for our investment in BBEP units using the equity method, utilizing a one-quarter lag from BBEP’s publicly available information.  When we sell BBEP units, we do not utilize the subsequently available financial information to adjust the carrying value of the units sold or to amend the previously recognized gain or loss on sale.  Summarized estimated financial information for BBEP is as follows:

		For the Three Months Ended								For the Nine Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands)
Revenues (1)		$	134,216			$	(36,994	)		$	305,645			$	534,192
Operating expenses			73,621				67,352				216,170				307,391
Operating income (loss)			60,595				(104,346	)			89,475				226,801
Interest and other (2)			6,437				4,988				18,130				37,458
Income tax (benefit) expense			561				(809	)			(469	)			336
Net income			53,597				(108,525	)			71,814				189,007
Noncontrolling interests			28				(5	)			118				15
Net income attributable to BBEP		$	53,569			$	(108,520	)		$	71,696			$	188,992

		As of				As of
		June 30,				December 31,
		2010				2009
		(In thousands)
Current assets		$	147,678			$	142,441
Property, plant and equipment			1,725,827				1,741,089
Other assets			118,214				87,499
Current liabilities			68,477				91,890
Long-term debt			534,000				559,000
Other non-current liabilities			61,282				91,338
Total equity			1,327,960				1,228,801

     For the nine months ended September 30, 2010, we recognized income of $24.2 million of BBEP’s income for the nine months ended June 30, 2010.  For the comparable 2009 period, we recognized income of $77.4 million and impairment expense of $102.1 million. 

     Changes in the balance of our investment in BBEP for the nine months ended September 30, 2010 were as follows:

(In thousands, except unit data)
Balance at December 31, 2009		$	112,763
Equity income from BBEP			24,203
Distributions from BBEP			(14,785	)
Conveyance of 3,619,901 BBEP units			(18,981	)
Sale of 1,387,050 BBEP units			(8,075	)
Balance at September 30, 2010		$	95,125

     Note 8 contains additional information regarding the April 2010 settlement of our lawsuit against BBEP and other parties. 

5. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment, excluding the property, plant and equipment of our midstream operations held for sale, consisted of the following:

		September 30,				December 31,
		2010				2009
		(In thousands)
Oil and gas properties
Subject to depletion		$	4,496,290			$	3,947,676
Unevaluated costs			404,783				458,037
Accumulated depletion			(2,193,288	)			(2,067,469	)
Net oil and gas properties			2,707,785				2,338,244
Other plant and equipment
Pipelines and processing facilities			208,451				201,880
General properties			68,451				64,893
Accumulated depreciation			(70,999	)			(62,172	)
Net other property and equipment			205,903				204,601
Property, plant and equipment, net of accumulated depletion and depreciation		$	2,913,688			$	2,542,845

Ceiling Test Analysis

     Our U.S. and Canadian ceiling tests for each of the first three quarters of 2010 resulted in no impairment of our U.S. or Canadian oil and gas properties.  The ceiling limitations were determined using internally prepared proved reserve reports using the unweighted average of the preceding 12-month first-day-of-the-month prices for natural gas, NGL and oil. 

     In the first nine months of 2009, we recorded impairments of our U.S. and Canadian oil and gas properties that totaled $786.9 million and $109.6 million, respectively.  Lower period-end benchmark prices for natural gas, oil and NGL prices at March 31, 2009 and June 30, 2009 were the primary factor contributing to a reduction of the U.S. and Canadian ceiling limitations at March 31, 2009 and the Canadian ceiling limit at June 30, 2009. 

     Note 10 to our consolidated financial statements in our 2009 Annual Report on Form 10-K contains additional information regarding our property, plant and equipment and our 2009 full cost ceiling impairments. 

Lake Arlington Acquisition

     In May 2010, we completed the acquisition of an additional 25% working interest in our company-operated Lake Arlington Project, for which we conveyed $62.1 million in cash and 3,619,901 BBEP common units owned by us with a market value of $54.4 million on the date of closing.  We recognized a gain of $35.4 million as other income for the difference between our carrying value of $5.24 per BBEP unit and the fair value of $15.03 per BBEP unit on the date of the transaction. 

6. LONG-TERM DEBT

     Long-term debt consisted of the following:

		September 30,				December 31,
		2010				2009
		(In thousands)
Senior Secured Credit Facility		$	529,274			$	467,569
Senior notes due 2015, net of unamortized discount			470,641				469,964
Senior notes due 2016, net of unamortized discount			583,026				581,359
Senior notes due 2019, net of unamortized discount			293,374				293,004
Senior subordinated notes due 2016			350,000				350,000
Convertible debentures, net of unamortized discount			141,591				136,119
Total debt			2,367,906				2,298,015
Unamortized deferred gain - terminated interest rate swaps			28,799				-
Fair value of interest rate swaps			-				4,108
Long-term debt		$	2,396,705			$	2,302,123

Senior Secured Credit Facility

     The $1.0 billion borrowing base on our Senior Secured Credit Facility was re-affirmed in May 2010.  In October 2010, using proceeds from the Crestwood Transaction, we repaid all of our outstanding borrowings under the Senior Secured Credit Facility. 

Convertible Debentures

     The convertible debentures are contingently convertible into shares of Quicksilver common stock at a rate of 65.4418 shares for each $1,000 debenture, subject to adjustment.  In the event of conversion, we have the option to deliver either Quicksilver common stock, cash, or any combination thereof.  Should all debentures be converted to Quicksilver common stock, an additional 9,816,270 shares would become outstanding; however, as of October 1, 2010, the debentures were not convertible based on share prices for the quarter ended September 30, 2010.  Additionally, holders of the debentures can require us to repurchase all or a portion of their debentures for cash on November 1, 2011, 2014 or 2019 at a price equal to the principal amount plus accrued and unpaid interest.  We can require the holders of the debentures to redeem all or a portion of their debentures for cash at any time on or after November 8, 2011 and prior to maturity at a price equal to the principal amount plus accrued and unpaid interest. 

     At September 30, 2010 and December 31, 2009, the remaining unamortized discount on the debentures was $8.4 million and $13.9 million, respectively, resulting in a carrying value of $141.6 million and $136.1 million, respectively.  The remaining discount will be accreted to face value through October 2011.  For the nine months ended September 30, 2010 and 2009, interest expense on our convertible debentures, recognized at an effective interest rate of 6.75%, was $7.6 million and $7.2 million, respectively, including contractual interest of $2.1 million for each period. 

KGS Credit Facility

     As discussed in Note 2, the balance due by KGS under the KGS Credit Agreement is reported in liabilities of midstream operations held for sale.  Upon completion of the Crestwood Transaction, any borrowings outstanding under the KGS Credit Agreement, are excluded from our balance sheet entirely. 

Summary of All Outstanding Debt

     The following table summarizes significant aspects of our long-term debt:

Priority on Collateral and Structural Seniority (1)

Highest priority

Lowest priority

Equal priority

Senior Secured

2015

2016

2019

Senior

Convertible

Credit Facility

Senior Notes

Senior Notes

Senior Notes

Subordinated Notes

Debentures

Scheduled maturity date

February 9, 2012

August 1, 2015

January 1, 2016

August 15, 2019

April 1, 2016

November 1, 2024

Interest rate at September 30, 2010 (2)

3.812

%

8.25

%

11.75

%

9.125

%

7.125

%

1.875

%

Base interest rate options (3)

LIBOR, ABR or specified (4)

N/A

N/A

N/A

N/A

N/A

Financial covenants (5)

- Minimum current ratio of 1.0

N/A

N/A

N/A

N/A

N/A

- Minimum EBITDA to interest expense ratio of 2.5

Significant restrictive covenants (5)

- Incurrence of debt - Incurrence of liens - Payment of dividends - Equity purchases - Asset sales - Affiliate transactions - Limitations on derivatives

- Incurrence of debt - Incurrence of liens - Payment of dividends - Equity purchases - Asset sales - Affiliate transactions

- Incurrence of debt - Incurrence of liens - Payment of dividends - Equity purchases - Asset sales - Affiliate transactions

- Incurrence of debt - Incurrence of liens - Payment of dividends - Equity purchases - Asset sales - Affiliate transactions

- Incurrence of debt - Incurrence of liens - Payment of dividends - Equity purchases - Asset sales - Affiliate transactions

N/A

Estimated fair value (6)

$529.3 million

$498.8 million

$700.5 million

$327.8 million

$344.3 million

$159.1 million

     Note 13 to the consolidated financial statements in our 2009 Annual Report on Form 10-K contains a more complete description of our long-term debt. 

7. ASSET RETIREMENT OBLIGATIONS

     The following table provides information about our estimated asset retirement obligation activity for the nine months ended September 30, 2010 excluding such obligations of our midstream operations held for sale:

(In thousands)
Beginning asset retirement obligations		$	48,581
Incremental liability incurred			1,549
Accretion expense			1,893
Asset retirement costs incurred			(677	)
Gain on settlement of liability			436
Currency translation adjustment			762
Ending asset retirement obligations			52,544
Less current portion			(109	)
Long-term asset retirement obligations		$	52,435

8. COMMITMENTS AND CONTINGENCIES

     In the litigation filed by us against Eagle Drilling LLC (“Eagle”), which includes counter claims filed by Eagle against us and disclosed in our 2009 Annual Report on Form 10-K, on October 19, 2010, the U.S. District Court granted our motion for summary judgment directed to Eagle’s breach of contract claims, although other claims remain outstanding.

     In April 2010, we finalized a global settlement agreement with BBEP and all other parties to our lawsuit whereby we received $18.0 million in cash, which we recognized as other income in the second quarter of 2010.  Pursuant to the agreement, we also retained full voting rights for our units held in BBEP subject to the provisions of a limited standstill agreement and have named two directors to the board of directors of BBEP’s general partner.

     In April 2010, Quicksilver entered into a lease of office space for a term of 12 years that commenced August 2010.  Aggregate rentals over the life of the lease will total $34.8 million.

     As of September 2010, we had surety bonds outstanding of $39.2 million.  Our outstanding letters of credit at September 30, 2010 totaled $46.0 million, which includes $28.9 million issued in support of surety bonds.

     Note 3 contains information regarding the Gas Purchase Commitment.

     There have been no other significant changes to our commitments and contingencies as reported in Note 16 to the consolidated financial statements in our 2009 Annual Report on Form 10-K.

9. STOCK-BASED COMPENSATION

     Note 19 to the consolidated financial statements in our 2009 Annual Report on Form 10-K contains additional information about our equity-based compensation plans.

Quicksilver Stock Options

     Options to purchase shares of common stock were granted in 2010 with an estimated fair value of $8.9 million.  We recognized expense of $5.2 million for all unvested stock options in the first nine months of 2010.

     We estimated the fair value of stock options granted in 2010 on the dates of grant using the Black-Scholes option-pricing model with the following assumptions:

		Stock
		Options
		Issued
Weighted average grant date fair value			$15.88
Weighted average grant date		Jan 4, 2010
Weighted average risk-free interest rate			3.00	%
Expected life (in years)			6.0
Weighted average volatility			66.76	%
Expected dividends			—

     The following table summarizes stock option activity during the nine months ended September 30, 2010:

						Wtd Avg				Wtd Avg
						Exercise				Remaining				Aggregate
		Shares				Price				Contractual Life				Intrinsic Value
										(In years)				(In thousands)
Outstanding at December 31, 2009			3,014,441			$	8.97
Granted			901,887				15.88
Exercised			(270,250	)			5.93
Cancelled			(94,312	)			9.09
Outstanding at September 30, 2010			3,551,766			$	10.96				8.6			$	14,790
Exercisable at September 30, 2010			1,041,859			$	11.83				7.5			$	4,937
Vested at September 30, 2010 or expected to vest in the future			3,356,417			$	11.03

     Cash received from the exercise of stock options was $1.4 million for the nine months ended September 30, 2010 and the total fair value of those options exercised was $2.2 million.

Quicksilver Restricted Stock and Restricted Stock Units

     The following table summarizes information regarding our restricted stock and RSU activity:

		Payable in stock								Payable in cash
						Wtd Avg								Wtd Avg
						Grant Date								Grant Date
		Shares				Fair Value				Stock Units				Fair Value
Outstanding at December 31, 2009			2,722,875			$	10.33				328,695			$	6.22
Granted			892,069				15.58				205,244				15.24
Vested			(1,097,937	)			12.27				(109,602	)			6.22
Cancelled			(85,300	)			11.47				(63,187	)			10.21
Outstanding at September 30, 2010			2,431,707			$	11.34				361,150			$	10.65