Fair Value Measurements

Questar Gas' fair value measurements are made in accordance with the policies discussed in Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. See Note 8 in this report for further information about Questar Gas' derivatives and hedge accounting activities.

Questar Gas' commodity derivative valuations are prepared by Dominion's Enterprise Risk Management (ERM) department. The ERM department creates mark-to-market valuations for Questar Gas’ derivative transactions using computer-based statistical models. The inputs that go into the market valuations are transactional information stored in the systems of record and market pricing information that resides in data warehouse databases. The majority of forward prices are automatically uploaded into the data warehouse databases from various third-party sources. Inputs obtained from third-party sources are evaluated for reliability considering the reputation, independence, market presence, and methodology used by the third-party. If forward prices are not available from third-party sources, then the ERM department models the forward prices based on other available market data. A team consisting of risk management and risk quantitative analysts meets and assesses the validity of market prices and mark-to-market valuations. Changes in mark-to-market valuations from period to period are examined and qualified against historical expectations. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

For options where observable pricing information is not available from external sources, Questar Gas generally uses a modified Black-Scholes Model or other option model.

The inputs and assumptions used in measuring fair value for commodity derivative contracts include the following:


•	Forward commodity prices


•	Transaction prices


•	Price correlation


•	Volumes


•	Commodity location


•	Interest rates


•	Credit quality of counterparties and Questar Gas


•	Credit enhancements


•	Time value

For derivative contracts, Questar Gas recognizes transfers among Level 1, Level 2 and Level 3 based on fair values as of the first day of the month in which the transfer occurs. Transfers out of Level 3 represent assets and liabilities that were previously classified as Level 3 for which the inputs became observable for classification in either Level 1 or Level 2. Because the activity and liquidity of commodity markets vary substantially between regions and time periods, the availability of observable inputs for substantially the full term and value of Questar Gas' over-the-counter derivative contracts is subject to change.

Level 3 Valuations

Fair value measurements are categorized as Level 3 when price or other inputs that are considered to be unobservable are significant to their valuations. Long-dated commodity derivatives are generally based on unobservable inputs due to the length of time to settlement and the absence of market activity and are therefore categorized as Level 3.

Questar Gas enters into certain physical forwards, which are considered Level 3 as they have one or more inputs that are not observable and are significant to the valuation. The discounted cash flow method is used to value Level 3 physical forward contracts. The discounted cash flow model for forwards calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return, and credit spreads. For Level 3 fair value measurements, forward market prices are considered unobservable. The unobservable inputs are developed and substantiated using historical information, available market data, third-party data, and statistical analysis. Periodically, inputs to valuation models are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third-party pricing sources.

The following table presents Questar Gas' quantitative information about Level 3 fair value measurements at September 30, 2016. The range and weighted average are presented in dollars for market price inputs.



	Fair Value (millions)		Valuation Techniques	Unobservable Input	Range	Weighted Average⁽¹⁾
Assets
Physical and financial forwards and futures:
Natural gas	$	1.6	Discounted cash flow	Market price (per Dth)⁽²⁾	2.6 - 3.6	3.1
Total assets	$	1.6

⁽¹⁾ Averages weighted by volume.

⁽²⁾ Represents market prices beyond defined terms for Levels 1 and 2.

Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows:



Significant Unobservable Inputs	Position	Change to Input	Impact on Fair Value Measurement
Market price	Buy	Increase (decrease)	Gain (loss)
Market price	Sell	Increase (decrease)	Loss (gain)

Recurring Fair Value Measurements

The following table presents Questar Gas’ assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions. Questar Gas did not have any such items at December 31, 2015.



	September 30, 2016
	Level 1		Level 2		Level 3		Total
	(millions)
Assets
Derivatives:
Commodity	$	—	$	—	$	1.6	$	1.6
Total assets	$	—	$	—	$	1.6	$	1.6
Liabilities
Derivatives:
Commodity	$	—	$	0.1	$	—	$	0.1
Total liabilities	$	—	$	0.1	$	—	$	0.1

The following table presents the net change in Questar Gas' assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category:



	3 Months Ended September 30,				9 Months Ended September 30,
	2016		2015		2016		2015
	(millions)
Beginning balance	$	—	$	—	$	—	$	—
Total realized and unrealized gains (losses):
Included in regulatory assets/liabilities	1.6		—		1.6		—
Ending balance	$	1.6	$	—	$	1.6	$	—

There were no unrealized gains or losses included in earnings in the Level 3 fair value category relating to assets/liabilities still held at the reporting date for the three and nine months ended September 30, 2016 and 2015.

Fair Value of Financial Instruments

Substantially all of Questar Gas' financial instruments are recorded at fair value, with the exception of the instruments described below, which are reported at historical cost. Estimated fair values have been determined using available market information and valuation methodologies considered appropriate by management. The carrying amount of cash and cash equivalents, accounts receivables, unbilled gas receivables, receivables from affiliates, payables to affiliates, notes payable to Dominion Questar, and accounts payable are representative of fair value because of the short-term nature of these instruments. For Questar Gas' financial instruments that are not recorded at fair value, the carrying amounts and estimated fair values are as follows:



	September 30, 2016				December 31, 2015
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount		Estimated Fair Value⁽²⁾
	(millions)
Long-term debt⁽³⁾	$	531.4	$	607.2	$	531.2	$	568.4

⁽¹⁾ Fair value is estimated using market prices, where available, and interest rates currently available for issuance of debt with similar terms

and remaining maturities. The fair value measurements are classified as Level 2.

⁽²⁾ Fair value is estimated using the discounted present value of cash flows using Questar Gas’ current credit risk-adjusted borrowing rates.

The fair value measurements are classified as Level 2.

⁽³⁾ Carrying amount includes amounts which represent the unamortized debt issuance costs, discount and/or premium.