Note 4. Fair Value Measurements

Questar Gas' fair value measurements are made in accordance with the policies discussed in Note 5 to the Financial Statements in Questar Gas' Annual Report on Form 10-K for the year ended December 31, 2016. See Note 5 in this report for further information about Questar Gas' derivatives and hedge accounting activities.

Questar Gas enters into certain physical forwards and options, 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. An option model is used to value Level 3 physical options. 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. The option model calculates mark-to-market valuations using variations of the Black-Scholes option model. The inputs into the models are the forward market prices, implied price volatilities, risk-free rate of return, the option expiration dates, the option strike prices, the original sales prices, and volumes. For Level 3 fair value measurements, forward market prices and implied price volatilities 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, 2017. The range and weighted average are presented in dollars for market price inputs and percentages for price volatility.

Fair Value

(millions)

Valuation Techniques

Unobservable Input

Range

Weighted

Average⁽¹⁾

Assets

Physical options:

Natural gas

0.3

Option model

Market price (per Dth)

⁽²

⁾

2.9 - 3.3

3.1

Price volatility

⁽³

⁾

29.1% - 41.1%

33.7

Total assets

0.3

Liabilities

Physical forwards:

Natural gas⁽⁴⁾

0.2

Discounted cash flow

Market price (per Dth)

⁽²

⁾

2.5 - 3.3

2.9

Total liabilities

0.2

(1)	Averages weighted by volume.

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

(3)	Represents volatilities unrepresented in published markets.

(4)	Includes basis.

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)
Price volatility	Buy	Increase (decrease)	Gain (loss)
Price volatility	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.

	Level 1		Level 2		Level 3		Total
(millions)
At September 30, 2017
Assets:
Derivatives:
Commodity	$	—	$	0.4	$	0.3	$	0.7
Total assets	$	—	$	0.4	$	0.3	$	0.7
Liabilities:
Derivatives:
Commodity	$	—	$	0.3	$	0.2	$	0.5
Total liabilities	$	—	$	0.3	$	0.2	$	0.5
At December 31, 2016
Assets:
Derivatives:
Commodity	$	—	$	0.1	$	—	$	0.1
Total assets	$	—	$	0.1	$	—	$	0.1
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.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
(millions)
Beginning balance	$	(0.2	)	$	—	$	—		$	—
Total realized and unrealized gains (losses):
Included in earnings⁽¹⁾		—			—		(0.1	)		—
Included in regulatory assets/liabilities		0.3			1.6		—			1.6
Settlements		—			—		0.1			—
Purchases		—			—		0.1			—
Ending balance	$	0.1		$	1.6	$	0.1		$	1.6

(1)	The gains and losses included in earnings were classified in cost of sales.

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, 2017.

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, customer receivables, receivable from affiliates, short-term debt, affiliated current borrowings, accounts payable and accounts payable to affiliates 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, 2017				December 31, 2016
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount		Estimated Fair Value⁽¹⁾
(millions)
Long-term debt, including securities due within one year⁽²⁾	$	631.1	$	692.0	$	630.8	$	672.6

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