Item 1. Business

GENERAL

Questar Gas is a wholly-owned subsidiary of Dominion Energy Questar which, effective September 2016, is a wholly-owned subsidiary of Dominion Energy.

Questar Gas distributes natural gas as a public utility in Utah, southwestern Wyoming and a small portion of southeastern Idaho. As of December 31, 2017, Questar Gas serves approximately 1.0 million sales and transportation customers. Questar Gas is the only non-municipal gas-distribution utility in Utah, where over 97% of its customers are located. The Utah, Wyoming and Idaho Commissions have granted Questar Gas the necessary regulatory approvals to serve these areas. Questar Gas also has long-term franchises granted by communities and counties within its service area. In order to service these areas, Questar Gas owns and operates distribution systems and has approximately 29,600 miles of street mains, service lines and interconnecting pipelines. It has a major operations center in Salt Lake City, and has operations centers, field offices and service-center facilities in other parts of its service area.

Questar Gas’ growth is tied to the economic growth of Utah and southwestern Wyoming. It has a market share of over 90% of residential space and water heating in its service area. During 2017, Questar Gas added approximately 23,500 customers, a 2.3% increase over the prior year.

Questar Gas faces similar risks as other local distribution companies. These risks include revenue variations based on changes in demand, changes in natural gas prices, availability of natural gas supplies, declining residential usage per customer, aging of distribution facilities and adverse regulatory decisions.

Questar Gas’ sales to residential and commercial customers are seasonal, with a substantial portion of such sales made during the heating season. The typical residential customer in Utah (considered to be a customer using 80 dth per year) consumes more than 70% of their annual gas usage during the coldest six months of the year. Questar Gas, however, has a weather-normalization mechanism for its general-service customers. This billing mechanism adjusts the non-gas portion of a customer’s monthly bill as the actual Heating degree days in the billing cycle are warmer or colder than normal. This mechanism reduces volatility in any given customer’s monthly bill from year to year and reduces volatility in Questar Gas’ earnings.

Questar Gas’ gas-supply risk is partly mitigated by cost-of-service gas supplied by an affiliate, Wexpro. During 2017, Questar Gas satisfied the majority of its supply requirements with cost-of-service gas volumes. Wexpro designs its development program to meet up to 65% of Questar Gas’ weather-normalized gas-supply requirements. Wexpro produces gas, which is then gathered by Wexpro or third parties, transported by another affiliate, Dominion Energy Questar Pipeline, and delivered at cost of service to Questar Gas. Questar Gas also has a balanced and diversified portfolio of third-party gas-supply contracts for volumes produced in Wyoming, Colorado and Utah. In addition, Questar Gas has regulatory approval to pass through in its balancing account the economic results associated with commodity-price hedging activities if it were to utilize such hedges.

Questar Gas has designed its distribution system and annual gas-supply plan to handle peak design-day/hour demand, which is defined as the estimated volume of gas that firm customers could use when the weather is extremely cold. For the 2017-2018 heating season, Questar Gas had an estimated peak sales and firm transportation design-day demand of 1.8 million dth.

Questar Gas has long-term contracts with Dominion Energy Questar Pipeline for transportation and storage services. The storage contracts reserve capacity at Dominion Energy Questar Pipeline’s Clay Basin storage facility and three peak-day storage aquifers. Questar Gas also has transportation contracts to take deliveries at several locations on the Kern River Pipeline.

COMPETITION

Questar Gas currently does not face direct competition from other distributors of natural gas for residential and commercial customers in its service territory. Questar Gas provides transportation service to large commercial and industrial customers who buy gas directly from other suppliers. Questar Gas faces the risk that it could lose transportation customers to competitors who may be able to connect and transport natural gas to large industrial customers.

REGULATION

As a public utility, Questar Gas is subject to the jurisdictions of the Utah, Wyoming and Idaho Commissions. The Idaho Commission has contracted with the Utah Commission for rate oversight of Questar Gas operations in a small area of southeastern Idaho. Natural gas sales and transportation services are provided under rate schedules approved by the Utah and Wyoming Commissions. Both the Utah and Wyoming Commissions permit Questar Gas to recover gas costs through a balancing-account mechanism and to reflect natural gas price changes on a periodic basis, typically twice a year in the spring and the fall. Questar Gas recovers bad debt costs related to the gas-cost portion of rates in its Utah operations through a purchased-gas adjustment to rates.

Questar Gas is subject to the requirements of the PSIA and PSRCJCA. The PSIA is designed to examine and improve the state of pipeline safety regulations, gives enhanced safety authority to the PHMSA and is intended to improve pipeline transportation by strengthening enforcement capabilities. The PSRCJCA and the rules issued by the U.S. Department of Transportation require interstate pipelines and local distribution companies to implement a 10-year program of risk analysis, pipeline assessment and remedial repair for transportation pipelines located in high-consequence areas such as densely populated locations. The Utah Commission has allowed Questar Gas to recover $7.0 million per year for the operating costs of complying with these regulations. Costs incurred in excess of these amounts will be recovered through future rate changes.

Questar Gas has an infrastructure cost-tracking mechanism that allows it to place into rate base, and earn a return on, capital expenditures associated with a multi-year natural gas infrastructure-replacement program upon the completion of each project. A 2014 Utah general rate case reset the recovery of costs under the infrastructure-replacement program into general rates until Questar Gas invested $84 million in new pipelines. This dollar threshold was met in November 2014 and thereafter Questar Gas has been able to recover program capital expenditures through the infrastructure-replacement mechanism.

Questar Gas has a revenue decoupling mechanism called the CET, which allows it to collect its allowed revenue per customer and promote energy conservation. Under the CET, Questar Gas non-gas revenues are decoupled from the temperature-adjusted usage per customer. The tariff specifies an allowed monthly revenue per customer, with differences to be deferred and recovered from or refunded to customers through periodic rate adjustments. These adjustments are limited to 5% of Utah’s distribution non-gas revenues.

Under the EEP, Questar Gas encourages the conservation of natural gas through advertising, rebates for efficient homes and appliances, and home energy plans. The costs related to the EEP are deferred and recovered from customers through periodic rate adjustments.

See Note 10 to the Financial Statements for additional information.

EMPLOYEES

At December 31, 2017, Questar Gas had approximately 900 employees.

WHERE YOU CAN FIND MORE INFORMATION

The SEC maintains a website that contains annual, quarterly and current reports and other information that issuers and voluntary reporting companies, like Questar Gas, file electronically with the SEC. Questar Gas’ SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document it files at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

Questar Gas makes its SEC filings available, free of charge, including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, through Dominion Energy’s internet website, http://www.dominionenergy.com, as soon as reasonably practicable after filing or furnishing the material to the SEC. Information contained on Dominion Energy’s website is not incorporated by reference in this report.

Item 1A. Risk Factors

Questar Gas’ business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond its control. A number of these factors have been identified below. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see Forward-Looking Statements in Item 7. MD&A.

Questar Gas’ investment in infrastructure replacement may increase customer rates, which could cause customers to explore alternatives to natural gas. Questar Gas is investing significant capital to replace aging pipeline infrastructure. This significant investment is expected to continue over a number of years. Replacement of aging pipeline infrastructure will increase customer safety. However, Questar Gas’ return on this investment and depreciation costs may result in increased customer rates. Over time, this may impact customer decisions on the use of natural gas versus other energy sources, which could adversely affect Questar Gas’ results of operations, cash flows and financial condition.

Questar Gas’ operations are subject to operational hazards, equipment failures, supply chain disruptions and personnel issues, which could negatively affect Questar Gas. Operation of Questar Gas’ facilities involves risk, including the risk of potential break-down or failure of equipment or processes due to aging infrastructure, fuel supply, pipeline integrity or transportation disruptions, accidents, acts of terrorism or sabotage, construction delays or cost overruns, shortages of, or delays in, obtaining equipment, material and labor, operational restrictions resulting from environmental limitations and governmental interventions, and performance below expected levels. Questar Gas’ business is dependent upon sophisticated information technology systems and network infrastructure, the failure of which could prevent it from accomplishing critical business functions. Because Questar Gas’ pipelines and other facilities are interconnected with those of third parties, the operation of these facilities and pipelines could be adversely affected by unexpected or uncontrollable events occurring on the systems of such third parties.

In addition, there are many risks associated with Questar Gas’ operations and the transportation, storage and processing of natural gas, including fires, explosions, uncontrolled release of natural gas and other environmental hazards, the collision of third party equipment with pipelines and wildlife impacts. Such incidents could result in loss of human life or injuries among employees, customers or the public in general, environmental pollution, damage or destruction of facilities or business interruptions and associated public or employee safety impacts, loss of revenues, increased liabilities, heightened regulatory scrutiny and reputational risk. Further, the location of pipelines and other facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks.

Questar Gas is dependent on bank credit arrangements to successfully execute its operating strategies. Questar Gas relies on credit facilities with banks to meet short-term funding needs. Questar Gas is a co-borrower to two joint revolving credit facilities with Dominion Energy, Virginia Power and Dominion Energy Gas. Banks may be unable or unwilling to extend credit in the future. Questar Gas’ revolving credit facilities are subject to variable interest rates. From time to time, Questar Gas may use interest-rate derivatives to fix the rate on a portion of its variable-rate debt. A downgrade of credit ratings could increase the interest cost of debt and decrease future availability of capital from banks and other sources. While management believes it is important to maintain investment-grade credit ratings to conduct Questar Gas’ businesses, Questar Gas may not be able to keep investment-grade ratings.

Exposure to counterparty performance may adversely affect Questar Gas’ financial results of operations. Questar Gas is exposed to credit risks of its counterparties and the risk that one or more counterparties may fail or delay the performance of their contractual obligations, including but not limited to payment for services. For example, Questar Gas has credit exposure in outstanding accounts receivable from customers, which could become significant. Defaults or failure to perform by customers, suppliers or other third parties may adversely affect Questar Gas’ financial results, cash flows and liquidity.

Potential changes in accounting practices may adversely affect Questar Gas’ financial results. Questar Gas cannot predict the impact that future changes in accounting standards or practices may have on public companies in general, the energy industry or their operations specifically. New accounting standards could be issued that could change the way Questar Gas records revenues, expenses, assets and liabilities. These changes in accounting standards could adversely affect earnings or could increase liabilities.

Questar Gas’ business and operations depend upon the ability of Wexpro and its other suppliers to economically find and develop new resources and produce natural gas to satisfy Questar Gas’ supply requirements. During 2017, Questar Gas satisfied the majority of its supply requirements with cost-of-service gas volumes supplied by Wexpro, which designs its development program to meet 65% of Questar Gas’ weather-normalized gas supply requirements. Questar Gas also maintains a balanced and diversified portfolio of third-party gas-supply contracts. Productive natural gas reservoirs are generally characterized by declining production rates that vary depending on reservoir characteristics. Because of significant production decline rates in several of Questar Gas’s suppliers’ producing areas, Questar Gas’ suppliers may be required to make substantial capital expenditures to develop gas reserves to replace those depleted by production. As a result, the price of gas volumes acquired from third-party producers may increase.

Similarly, the volume of cost-of-service gas that Wexpro can provide may decline or the growth of Questar Gas’ demand for cost-of-service gas may outpace Wexpro’s production capability. In either case, if Questar Gas’ supply requirements exceed the volume of cost-of-service gas it can acquire from Wexpro, Questar Gas would be forced to seek gas at non-cost-of-service prices from third-party suppliers. Questar Gas’ suppliers may not be able to supply volumes of natural gas to Questar Gas sufficient

to satisfy Questar Gas’ needs at economically favorable prices or at all, which could negatively affect Questar Gas’ financial condition and impair its ability to operate its business.

Questar Gas faces the risk that future legislative initiatives in the states in which it operates could open its service territories to competition for retail and commercial natural gas customers and that it could lose transportation customers to competitors, each of which would adversely affect its financial results, cash flows and liquidity. Questar Gas currently does not face direct competition from other distributors of natural gas for residential and commercial customers in its service territory, because state regulations in Utah, Wyoming and Idaho do not allow customers to choose their natural gas provider. Questar Gas is the only non-municipal gas distribution utility in Utah, where over 97% of its customers are located. At this time, Utah, Wyoming and Idaho have not enacted legislation allowing customers to choose natural gas providers in Questar Gas’ service territories. However, if any of the states in which Questar Gas operates were to consider legislation regarding the competitive deregulation of natural gas sales, Questar Gas may be forced to compete for retail and commercial customers with other natural gas distributors.

Questar Gas currently does not face significant competition for transportation customers. However, the states in which Questar Gas operates do not limit the choice of provider for transportation customers in the same way they limit the choice of retail and commercial customers. As a result, Questar Gas faces the risk that it could lose transportation customers to competitors who may be able to connect and transport natural gas to large industrial customers. The loss of transportation or retail and commercial natural gas customers would adversely affect Questar Gas’ financial results, cash flows and liquidity.

Questar Gas is subject to complex federal, state and local environmental laws and regulations that could adversely affect its cost of doing business. Environmental laws and regulations are complex, and evolve over time. Some of the laws with which Questar Gas must comply include the National Environmental Policy Act, the Endangered Species Act, the Clean Air Act, the Clean Water Act, the National Historic Preservation Act, the Toxic Substance Control Act, the Resource Conservation and Recovery Act, CERCLA, the Emergency Planning and Community Right to Know Act, the Oil Pollution Act as well as similar state and local laws that can be stricter than federal laws.

Federal and state agencies frequently impose conditions on Questar Gas’ activities. These restrictions have become more stringent over time and can limit or prevent the construction of new transmission or distribution pipelines and related facilities. For example, Questar Gas is subject to regulation by the Department of Transportation under PHMSA, which has established requirements relating to the design, installation, testing, construction, operation, replacement and management of pipeline facilities. The most recent reauthorization of PHMSA included new provisions on historical records research, maximum allowed operating pressure validation, use of automated or remote-controlled valves on new or replaced lines, increased civil penalties, and evaluation of expanding integrity management beyond high-consequence areas. PHMSA has not yet issued new rulemaking on most of these items. Questar Gas expects that existing environmental laws and regulations may be revised and/or new laws may be adopted or become applicable to Questar Gas.

Compliance costs cannot be estimated with certainty due to the inability to predict the requirements and timing of implementation of any new environmental rules or regulations. Other factors which affect the ability to predict future environ-mental expenditures with certainty include the difficulty in estimating clean-up costs and quantifying liabilities under environmental laws that impose joint and several liability on all responsible parties. Such expenditures, if material, could make Questar Gas’ facilities uneconomical to operate, result in the impairment of assets, or otherwise adversely affect Questar Gas’ results of operations, financial performance or liquidity.

The 2017 Tax Reform Act could have a material impact on Questar Gas’ operations, cash flows, and financial results. Reductions in the estimated annual cost of service effect (commonly referred to as the gross-up factor) due to the reduction in the corporate income tax rates to 21% under the provisions of the 2017 Tax Reform Act could result in amounts currently collected from utility customers to be refundable to such customers, generally through reductions in rates. In addition, Questar Gas’ regulators may require the reduction in accumulated deferred income tax balances under the provisions of the 2017 Tax Reform Act to be shared with customers, generally through reductions in future rates. The 2017 Tax Reform Act includes provisions that stipulate how these excess deferred taxes may be passed back to customers for certain accelerated tax depreciation benefits. Potential refunds of other deferred taxes may be determined by Questar Gas’ state regulators.

State agencies regulate the distribution of natural gas. Questar Gas’ natural gas distribution business is regulated by the Utah, Wyoming and Idaho Commissions. These commissions set rates for distribution services and establish policies and procedures for services, accounting, purchases, sales and other activities. The Utah and Wyoming Commissions’ policies and decisions including an authorized return on equity and disallowed costs may adversely affect Questar Gas’ profitability. Authorized returns on equity have declined for Questar Gas and throughout the U.S. with the decline in interest rates, and may decline further for Questar Gas in future rate cases.

Questar Gas’ business operations involve risks due to exposure to revenue variations based on seasonal changes in demand. Questar Gas’ sales to residential and commercial customers are seasonal, with a substantial portion of such sales made during the heating season. The typical residential customer in Utah (considered to be a customer using 80 dth per day) consumes more than 70% of their annual gas usage during the coldest six months of the year. If Questar Gas is unable to effectively mitigate volatility in revenue due to seasonal changes in demand including if the Utah or Wyoming Commissions were to disallow the CET, this volatility could adversely affect Questar Gas’ results of operations, liquidity, cash flows and financial condition.

Failure to attract and retain key executive officers and an appropriately qualified workforce could have an adverse effect on Questar Gas’ operations. Questar Gas’ business strategy is dependent on its ability to recruit, retain and motivate employees. Questar Gas’ key executive officers are the CEO, CFO and those responsible for financial, operational, legal, regulatory and accounting functions. Competition for skilled management employees in these areas of Questar Gas’ business operation is high. With respect to Questar Gas’ technical employees, certain

events, such as an aging workforce, mismatch of skill set or complement to future needs, or unavailability of contract resources may lead to operating challenges and increased costs. The challenges include lack of resources, loss of knowledge base and the length of time required for skill development. In this case, costs, including costs for contractors to replace employees, productivity costs and safety costs, may rise. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to new employees, or future availability and cost of contract labor may adversely affect the ability to manage and operate Questar Gas’ business. If Questar Gas is unable to successfully attract and retain an appropriately qualified workforce, its financial position or results of operations could be negatively affected.

Hostile cyber intrusions could severely impair Questar Gas’ operations, lead to the disclosure of confidential information, damage the reputation of Questar Gas and otherwise have an adverse effect on Questar Gas’ business. Questar Gas owns assets deemed as critical infrastructure, the operation of which is dependent on information technology systems. Further, the computer systems that run Questar Gas’ facilities are not completely isolated from external networks. There appears to be an increasing level of activity, sophistication and maturity of threat actors, in particular nation state actors, that wish to disrupt the U.S. bulk power system and the U.S. gas transmission or distribution system. Such parties could view Questar Gas’ computer systems, software or networks as attractive targets for cyber attack. For example, malware has been designed to target software that runs the nation’s critical infrastructure such as power transmission grids and gas pipelines. In addition, Questar Gas’ business requires that it and its vendors collect and maintain sensitive customer data, as well as confidential employee and shareholder information, which is subject to electronic theft or loss.

A successful cyber attack on the systems that control Questar Gas’ gas transmission or distribution assets could severely disrupt business operations, preventing Questar Gas from serving customers or collecting revenues. The breach of certain business systems could affect Questar Gas’ ability to correctly record, process and report financial information. A major cyber incident could result in significant expenses to investigate and repair security breaches or system damage and could lead to litigation, fines, other remedial action, heightened regulatory scrutiny and damage to Questar Gas’ reputation. In addition, the misappropriation, corruption or loss of personally identifiable information and other confidential data could lead to significant breach notification expenses and mitigation expenses such as credit monitoring. For these reasons, a significant cyber incident could materially and adversely affect Questar Gas’ business, financial condition and results of operations.

War, acts and threats of terrorism, intentional acts and other significant events could adversely affect the Questar Gas’ operations. Questar Gas cannot predict the impact that any future terrorist attacks may have on the energy industry in general, or on Questar Gas’ business in particular. Any retaliatory military strikes or sustained military campaign may affect Questar Gas’ operations in unpredictable ways, such as changes in insurance markets and disruptions of fuel supplies and markets. In addition, Questar Gas’ infrastructure facilities could be direct targets of, or indirect casualties of, an act of terror. For example, a physical

attack on a critical substation in California resulted in serious impacts to the power grid. Furthermore, the physical compromise of Questar Gas’ facilities could adversely affect Questar Gas’ ability to manage these facilities effectively. Instability in financial markets as a result of terrorism, war, intentional acts, pandemic, credit crises, recession or other factors could result in a significant decline in the U.S. economy and increase the cost of insurance coverage. This could negatively impact Questar Gas’ results of operations and financial condition.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

At December 31, 2017, Questar Gas’ properties consisted of operations centers, field offices and service-center facilities as well as gas distribution systems throughout Utah, southwestern Wyoming and southeastern Idaho. These physical properties are described in Item 1. Business, which description is incorporated herein by reference.

Item 3. Legal Proceedings

From time to time, Questar Gas is alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by Questar Gas, or permits issued by various local, state and/or federal agencies for the construction or operation of facilities. Administrative proceedings may also be pending on these matters. In addition, in the ordinary course of business, Questar Gas is involved in various legal proceedings.

See Notes 10 and 17 to the Financial Statements, which information is incorporated herein by reference, for discussion of various environmental and other regulatory proceedings to which Questar Gas is a party.

Item 4. Mine Safety Disclosures

Not applicable.

MD&A discusses Questar Gas’ results of operations and general financial condition. MD&A should be read in conjunction with Item 1. Business and the Financial Statements in Item 8. Financial Statements and Supplementary Data. Questar Gas meets the conditions to file under the reduced disclosure format, and therefore has omitted certain sections of MD&A.

CONTENTS OF MD&A

MD&A consists of the following information:

FORWARD-LOOKING STATEMENTS

This report contains statements concerning Questar Gas’ expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by such words as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may,” “continue,” “target” or other similar words.

Questar Gas makes forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to differ materially from predicted results. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additionally, other factors may cause actual results to differ materially from those indicated in any forward-looking statement. These factors include but are not limited to:

Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A. Risk Factors.

Questar Gas’ forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. Questar Gas cautions the reader not to place undue reliance on its forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Questar Gas undertakes no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

RESULTS OF OPERATIONS

Presented below is a summary of Questar Gas’ results:

OVERVIEW

2017 vs. 2016

Net income increased 18%, primarily due to lower employee related costs, higher infrastructure-replacement cost recovery and customer growth, partially offset by higher depreciation and amortization.

ANALYSIS OF OPERATIONS

Presented below are selected amounts related to Questar Gas’ results of operations:

An analysis of Questar Gas’ results of operations follows:

2017 vs. 2016

Net revenue increased 3%, primarily reflecting an $8.1 million increase in infrastructure-replacement cost recovery, a $7.0 million increase from customer growth and a $2.7 million increase in revenues from affiliates, partially offset by a $3.0 million decrease in EEP cost recovery and a $1.4 million decrease in revenues from natural gas vehicle fuel sales.

Other operations and maintenance decreased 12%, primarily reflecting lower employee related costs ($14.8 million), EEP costs ($3.0 million) and merger and restructuring costs ($1.5 million).

Depreciation and amortization increased 15%, primarily due to infrastructure growth and replacement projects placed into service.

Interest expense increased 14%, primarily due to interest on debt issued in the fourth quarter of 2016 ($3.7 million) and increased short-term debt balances throughout the year ($2.2 million), partially offset by decreased affiliated borrowings ($1.1 million) and lower interest on the gas balancing account ($0.7 million)

Income tax expense increased 25%, primarily reflecting higher pre-tax income.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of the following information is to provide information about Questar Gas’ potential exposure to market risk. The term “market risk” refers to the risk of loss arising from adverse changes in commodity prices and interest rates. The reader’s attention is directed to Item 1A. Risk Factors for discussion of various risks and uncertainties that may impact Questar Gas.

Commodity Price Risk

Questar Gas, as a distributor of natural gas under the framework of the Utah, Wyoming and Idaho Commissions, is able to recover the cost of natural gas delivered to customers. Accordingly, Questar Gas believes that it is not subject to any material impacts of commodity price risk.

Interest Rate Risk

As part of the Dominion Energy Questar Combination, Questar Gas settled its borrowings under the variable rate IRCA with Dominion Energy Questar and began borrowing under the variable rate IRCA with Dominion Energy. At December 31, 2017 and 2016, Questar Gas had $75.0 million and $48.0 million, respectively, of borrowings under the IRCA. In December 2016, Questar Gas began accessing the commercial paper markets. At December 31, 2017 and 2016, Questar Gas had $165.0 million and $200.0 million, respectively, of outstanding commercial paper. A hypothetical 10% increase in market interest rates would not have resulted in a material change in earnings at December 31, 2017 or 2016.

NOTE 1. NATURE OF OPERATIONS

Questar Gas is a wholly-owned subsidiary of Dominion Energy Questar which, effective September 2016, is a wholly-owned subsidiary of Dominion Energy.

Questar Gas distributes natural gas as a public utility in Utah, southwestern Wyoming and a small portion of southeastern Idaho. The Utah, Wyoming and Idaho Commissions have granted Questar Gas the necessary regulatory approvals to serve these areas. Questar Gas also has long-term franchises granted by communities and counties within its service area.

Revenue generated by Questar Gas is based primarily on rates established by the Utah and Wyoming Commissions. The Idaho Commission has contracted with the Utah Commission for rate oversight of Questar Gas operations.

Wexpro, an affiliate, provides the majority of Questar Gas’ natural gas supply and Dominion Energy Questar Pipeline, an affiliate, provides the majority of Questar Gas’ transportation and storage services.

Questar Gas manages its daily operations through one primary operating segment. It also reports a Corporate and Other segment that primarily includes specific items attributable to its operating segment that are not included in profit measures evaluated by executive management in assessing the segment’s performance or in allocating resources.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

General

Questar Gas makes certain estimates and assumptions in preparing its Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses and cash flows for the periods presented. Actual results may differ from those estimates.

Questar Gas reports certain contracts and instruments at fair value. See Note 5 for further information on fair value measurements.

Certain amounts in the 2016 and 2015 Financial Statements and footnotes have been reclassified to conform to the 2017 presentation for comparative purposes. The reclassifications did not affect Questar Gas’ net income, total assets, liabilities, equity or cash flows.

Operating Revenue

Operating revenue is recorded on the basis of services rendered, commodities delivered or contracts settled and includes amounts yet to be billed to customers. Questar Gas collects sales taxes; however, these amounts are excluded from revenue. Questar Gas’ customer receivables at December 31, 2017 and 2016 included $91.4 million and $88.6 million, respectively, of accrued unbilled revenue based on estimated amounts of natural gas delivered but not yet billed to its customers.

The primary types of sales and service activities reported as operating revenue for Questar Gas are as follows:

Purchased Gas

Questar Gas obtains the majority of its gas supply from Wexpro’s cost-of-service production and pays Wexpro an operator service fee based on the terms of the Wexpro Agreement and the Wexpro II Agreement. Questar Gas also obtains transportation and storage services from Dominion Energy Questar Pipeline. See Note 19 for more information. During the second and third quarters of the year, a significant portion of the natural gas from Wexpro production is injected into underground storage. This gas is withdrawn from storage as needed during the heating season in the first and fourth quarters. Purchased gas is credited with the value of natural gas as it is injected into storage and debited as it is withdrawn from storage.

The details of Questar Gas’ purchased gas are as follows:

Purchased Gas-Deferred Costs

Where permitted by regulatory authorities, the differences between Questar Gas’ purchased gas expenses and the related levels of recovery for these expenses in current rates are deferred and matched against recoveries in future periods. The deferral of gas costs in excess of current period recovery is recognized as a regulatory asset, while rate recovery in excess of current period gas costs is recognized as a regulatory liability.

Virtually all of Questar Gas’ natural gas purchases are either subject to deferral accounting or are recovered from the customer in the same accounting period as the sale.

Income Taxes

Judgment and the use of estimates are required in developing the provision for income taxes and reporting of tax-related assets and liabilities. The interpretation of tax laws, including the provisions of the 2017 Tax Reform Act, involves uncertainty, since tax authorities may interpret the laws differently. In addition, the states in which we operate may or may not conform to some or all the provisions in the 2017 Tax Reform Act. Ultimate resolution or clarification of income tax matters may result in favorable or unfavorable impacts to net income and cash flows, and adjustments to tax-related assets and liabilities could be material.

A consolidated federal income tax return is filed for Dominion Energy and its subsidiaries, including Questar Gas for the full year 2017 and going forward. For 2016, a consolidated federal

income tax return was filed for Dominion Energy Questar, including Questar Gas, for the period January 1, 2016 through September 16, 2016. Questar Gas was part of the consolidated federal income tax return filed by Dominion Energy for the period September 17, 2016 through December 31, 2016. In addition, where applicable, combined income tax returns for Dominion Energy and its subsidiaries are filed in various states; otherwise, separate state income tax returns are filed.

Questar Gas participates in intercompany tax sharing agreements with Dominion Energy and its subsidiaries. Current income taxes are based on taxable income or loss and credits determined on a separate company basis.

Under the agreements, if a subsidiary incurs a tax loss or earns a credit, recognition of current income tax benefits is limited to refunds of prior year taxes obtained by the carryback of the net operating loss or credit or to the extent the tax loss or credit is absorbed by the taxable income of other Dominion Energy consolidated group members. Otherwise, the net operating loss or credit is carried forward and is recognized as a deferred tax asset until realized.

The 2017 Tax Reform Act includes a broad range of tax reform provisions affecting Dominion Energy and its subsidiary Questar Gas, including changes in corporate tax rates and business deductions. The 2017 Tax Reform Act reduces the corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. Deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when temporary differences are realized or settled. Thus, at the date of enactment, deferred taxes were remeasured based upon the new 21% tax rate. The total effect of tax rate changes on federal deferred tax balances is recorded as a component of the income tax provision related to continuing operations for the period in which the law is enacted, even if the assets and liabilities relate to other components of the financial statements. As a regulated utility, Questar Gas is required to adjust deferred income tax assets and liabilities for the change in income tax rates. However, as it is probable that the effect of the change in income tax rates will be recovered or refunded in future rates, Questar Gas recorded a regulatory asset or liability instead of an increase or decrease to deferred income tax expense.

Accounting for income taxes involves an asset and liability approach. Deferred income tax assets and liabilities are provided, representing future effects on income taxes for temporary differences between the bases of assets and liabilities for financial reporting and tax purposes. Accordingly, deferred taxes are recognized for the future consequences of different treatments used for the reporting of transactions in financial accounting and income tax returns. Questar Gas establishes a valuation allowance when it is more-likely-than-not that all, or a portion, of a deferred tax asset will not be realized. A regulatory asset is recognized if it is probable that future revenues will be provided for the payment of deferred tax liabilities.

Questar Gas recognizes positions taken, or expected to be taken, in income tax returns that are more-likely-than-not to be realized, assuming that the position will be examined by tax authorities with full knowledge of all relevant information.

If it is not more-likely-than-not that a tax position, or some portion thereof, will be sustained, the related tax benefits are not recognized in the financial statements. Unrecognized tax benefits

may result in an increase in income taxes payable, a reduction of income tax refunds receivable or changes in deferred taxes. Also, when uncertainty about the deductibility of an amount is limited to the timing of such deductibility, the increase in income taxes payable (or reduction in tax refunds receivable) is accompanied by a decrease in deferred tax liabilities. Except when such amounts are presented net with amounts receivable from or amounts prepaid to tax authorities, noncurrent income taxes payable related to unrecognized tax benefits are classified in other deferred credits and other liabilities in the Balance Sheets and current payables are included in accrued interest, payroll and taxes in the Balance Sheets.

Questar Gas recognizes interest on underpayments and overpayments of income taxes in interest expense and other income, respectively. Penalties are also recognized in other income.

Questar Gas’ interest and penalties were immaterial in 2017, 2016 and 2015.

At December 31, 2017, Questar Gas’ Balance Sheet included $25.0 million of tax-related payables to affiliates, representing $22.0 million of current federal income taxes payable and $3.0 million of state income taxes payable.

At December 31, 2016, Questar Gas’ Balance Sheet included tax-related payables to affiliates of $3.1 million comprised of $1.4 million of federal income taxes payable and $1.7 million of state income taxes payable. These amounts were settled with Dominion Energy during 2017 as part of the final 2016 tax return settlement.

Investment tax credits are deferred and amortized over the service lives of the properties giving rise to the credits.

Cash and Cash Equivalents

Current banking arrangements generally do not require checks to be funded until they are presented for payment. At December 31, 2017 and 2016, accounts payable included $14.9 million and $7.7 million, respectively, of checks outstanding but not yet presented for payment. For purposes of the Statements of Cash Flows, cash and cash equivalents include cash on hand, cash in banks and temporary investments purchased with an original maturity of three months or less.

Derivative Instruments

Questar Gas uses derivative instruments such as physical forwards and options to manage the commodity risk of its business operations. All derivatives, except those for which an exception applies, are required to be reported in the Balance Sheets at fair value. Derivative contracts representing unrealized gain positions and purchased options are reported as derivative assets. Derivative contracts representing unrealized losses and options sold are reported as derivative liabilities. One of the exceptions to fair value accounting, normal purchases and normal sales, may be elected when the contract satisfies certain criteria, including a requirement that physical delivery of the underlying commodity is probable. Expenses and revenues resulting from deliveries under normal purchase contracts and normal sales contracts, respectively, are included in earnings at the time of contract performance.

Questar Gas does not offset amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against amounts recognized for derivative instruments executed with the same counterparty under the same master netting

arrangement. See Note 6 for further information about derivatives.

Changes in the fair value of derivative instruments result in the recognition of regulatory assets or regulatory liabilities. Realized gains or losses on the derivative instruments are generally recognized when the related transactions impact earnings.

Property, Plant and Equipment

Property, plant and equipment is recorded at lower of original cost or fair value, if impaired. Capitalized costs include labor, materials and other direct and indirect costs such as asset retirement costs, AFUDC and overhead costs. The cost of repairs and maintenance, including minor additions and replacements, is generally charged to expense as it is incurred.

In 2017, 2016 and 2015, Questar Gas capitalized AFUDC to property, plant and equipment of $0.5 million, $0.4 million and $0.1 million, respectively.

The undepreciated cost of property, less salvage value, is generally charged to accumulated depreciation at retirement. Cost of removal collections from utility customers not representing AROs are recorded as regulatory liabilities. For property subject to cost-of-service rate regulation that will be abandoned significantly before the end of its useful life, the net carrying value is reclassified from plant-in-service when it becomes probable it will be abandoned.

Depreciation of property, plant and equipment is computed on the straight-line method based on projected service lives. Questar Gas’ average composite depreciation rates on utility property, plant and equipment are as follows:

Long-Lived and Intangible Assets

Questar Gas performs an evaluation for impairment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets or intangible assets with finite lives may not be recoverable. A long-lived or intangible asset is written down to fair value if the sum of its expected future undiscounted cash flows is less than its carrying amount. Intangible assets with finite lives are amortized over their estimated useful lives.

Regulatory Assets and Liabilities

The accounting for Questar Gas’ operations differs from the accounting for nonregulated operations in that it is required to reflect the effect of rate regulation in its Financial Statements. For regulated businesses subject to state cost-of-service rate regulation, regulatory practices that assign costs to accounting periods may differ from accounting methods generally applied by nonregulated companies. When it is probable that regulators will permit the recovery of current costs through future rates charged to customers, these costs that otherwise would be expensed by nonregulated companies are deferred as regulatory assets. Likewise, regulatory liabilities are recognized when it is probable that regulators will require customer refunds through future rates or when revenue is collected from customers for expenditures that have yet to be incurred. Generally, regulatory assets and liabilities are amortized into income over the period authorized by the regulator.

Questar Gas evaluates whether or not recovery of its regulatory assets through future rates is probable and makes various assumptions in its analyses. The expectations of future recovery are generally based on orders issued by regulatory commissions, legislation or historical experience, as well as discussions with applicable regulatory authorities and legal counsel. If recovery of a regulatory asset is determined to be less than probable, it will be written off in the period such assessment is made.

Asset Retirement Obligations

Questar Gas recognizes AROs at fair value as incurred or when sufficient information becomes available to determine a reasonable estimate of the fair value of future retirement activities to be performed for which a legal obligation exists. These amounts are generally capitalized as costs of the related tangible long-lived assets. Since relevant market information is not available, fair value is estimated using discounted cash flow analyses. Quarterly, Questar Gas assesses its AROs to determine if circumstances indicate that estimates of the amounts or timing of future cash flows associated with retirement activities have changed. AROs are adjusted when significant changes in the amounts or timing of future cash flows are identified. Questar Gas reports accretion of AROs and depreciation on asset retirement costs associated with its natural gas pipeline assets as an adjustment to the related regulatory liabilities when revenue is recoverable from customers for AROs.

Debt Issuance Costs

Questar Gas defers and amortizes debt issuance costs and debt premiums or discounts over the expected lives of the respective debt issues, considering maturity dates and, if applicable, redemption rights held by others. Deferred debt issuance costs are recorded as a reduction in long-term debt in the Balance Sheets. Amortization of the issuance costs is reported as interest expense. Unamortized costs associated with redemptions of debt securities prior to stated maturity dates are generally recognized and recorded in interest expense immediately. As permitted by regulatory authorities, gains or losses resulting from the refinancing of debt allocable to utility operations subject to cost-based rate regulation are deferred and amortized over the lives of the new issuances.

Inventories

Materials and supplies inventories are valued primarily using the weighted-average cost method. Stored gas inventory for Questar Gas used in gas distribution operations is valued using the weighted-average cost method.

Goodwill

Questar Gas evaluates goodwill for impairment annually as of April 1 and whenever an event occurs or circumstances change in the interim that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.

New Accounting Standards

REVENUE RECOGNITION

In May 2014, the FASB issued revised accounting guidance for revenue recognition from contracts with customers. The core principle of this revised accounting guidance is that an entity should recognize revenue to depict the transfer of promised goods

or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update also require disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

For Questar Gas, the revised accounting guidance is effective for interim and annual periods beginning January 1, 2018. We have completed the evaluation of the impact of this guidance and expect no significant impact on our results of operations. Questar Gas will apply the standard using the modified retrospective method as opposed to the full retrospective method.

TAX REFORM

In December 2017, the staff of the SEC issued guidance which clarifies accounting for income taxes if information is not yet available or complete and provides for up to a one year measurement period in which to complete the required analyses and accounting. The guidance describes three scenarios associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply accounting for income taxes based on the provisions of the tax laws that were in effect immediately prior to the 2017 Tax Reform Act being enacted. In addition, the guidance provides clarification related to disclosures for entities which are utilizing the measurement period. Questar Gas has recorded its best estimate of the impacts of the 2017 Tax Reform Act as discussed in Note 4. The amounts are considered to be provisional and may result in adjustments to be recognized during the measurement period.

NOTE 3. OPERATING REVENUE

Questar Gas’ operating revenue consists of the following:

NOTE 4. INCOME TAXES

The 2017 Tax Reform Act includes a broad range of tax reform provisions affecting Questar Gas, as discussed in Note 2. The 2017 Act Reform Act reduces the corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. At the date of enactment, federal deferred tax assets and liabilities were remeasured based upon the enacted 21% tax rate expected to apply when temporary differences are to be realized and settled. The specific provisions related to regulated public utilities in the 2017 Tax Reform Act generally allows for the continued deductibility of interest expense, changes the tax depreciation of certain property acquired after September 27, 2017, and continues certain rate normalization requirements for accelerated depreciation benefits.

As indicated in Note 2, Questar Gas’ operations, including accounting for income taxes, are subject to regulatory treatment. Reductions in accumulated deferred income tax balances due to the reduction in the corporate income tax rates to 21% under the provisions of the 2017 Tax Reform Act may result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers, generally through reductions in future rates. The 2017 Tax Reform Act includes provisions that stipulate how these excess deferred taxes are to be passed back to customers for certain accelerated tax depreciation benefits. Potential refunds of other deferred taxes will be determined by Questar Gas’ state regulators. See Note 10 for more information.

Questar Gas has completed or has made a reasonable estimate for the measurement and accounting of certain effects of the 2017 Tax Reform Act which have been reflected in the December 31, 2017 financial statements. The changes in deferred taxes were recorded as either an increase to a regulatory liability or as an adjustment to Questar Gas’ deferred tax provision.

The items reflected as provisional amounts are related to accelerated depreciation for tax purposes of certain property acquired and placed into service after September 27, 2017 and the impact of accelerated depreciation on state income taxes to the extent there is uncertainty on conformity to the new federal tax system.

The determination of the impact of the income tax effects of the items reflected as provisional amounts represents a reasonable estimate, but will require additional analysis of historical records and further interpretation of the 2017 Tax Reform Act from yet to be issued U.S. Department of the Treasury regulations which will require more time, information and resources than currently available to Questar Gas.

Details of Questar Gas’ income tax expense and deferred income taxes are provided in the following tables. The components of income tax expense were as follows:

The accounting for the reduction in the corporate income tax rate increased deferred income tax expense by $3.0 million for the year ending December 31, 2017.

The difference between the statutory federal income tax rate and Questar Gas’ effective income tax rate is explained as follows:

In 2017, Questar Gas’ effective tax rates reflect the net detriment of remeasuring deferred taxes resulting from the lower corporate income tax rate promulgated by the 2017 Tax Reform Act.

Significant components of Questar Gas’ deferred income taxes were as follows:

The most significant impact reflected for the 2017 Tax Reform Act is the adjustment of the net accumulated deferred income tax liability for the reduction in the corporate income tax rate to 21%. In addition to amounts recognized in deferred income tax expense, the impacts of the 2017 Tax Reform Act decreased the accumulated deferred income tax liability by $184.2 million at December 31, 2017. The December 31, 2017 balance sheet reflects the impact of the 2017 Tax Reform Act on Questar Gas’ regulatory liabilities which increased regulatory liabilities by $244.9 million, and a related deferred tax asset of $60.7 million. This adjustment had no impact on our 2017 cash flows.

There were no unrecognized tax benefits at the beginning or end of the years ended December 31, 2017, 2016 or 2015. The 2017 federal income tax return has not been filed.

NOTE 5. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. However, the use of a mid-market pricing convention (the mid-point between bid and ask prices) is permitted. Fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. This includes not only the credit standing of counterparties involved and the impact of credit enhancements but also the impact of Questar Gas’ own nonperformance risk on its liabilities. Fair value measurements assume that the transaction occurs in the principal market for the asset or liability (the market with the most volume and activity for the asset or liability from the perspective of the reporting entity), or in the absence of a principal market, the most advantageous market for the asset or liability (the market in which the reporting entity would be able to maximize the amount received or minimize the amount paid). Questar Gas applies fair value measurements to commodity derivative instruments in accordance with the requirements described above. Questar Gas applies credit adjustments to its derivative fair values in accordance with the requirements described above.

Inputs and Assumptions

Questar Gas maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Fair value is based on actively-quoted market prices, if available. In the absence of actively-quoted market prices, price information is sought from external sources, including broker quotes and industry publications. When evaluating pricing information provided by brokers and other pricing services, Questar Gas considers whether the broker is willing and able to trade at the quoted price, if the broker quotes are based on an active market or an inactive market and the extent to which brokers are utilizing a particular model if pricing is not readily available. If pricing information from external sources is not available, or if Questar Gas believes that observable pricing is not indicative of fair value, judgment is required to develop the estimates of fair value. In those cases Questar Gas must estimate prices based on available historical and near-term future price information and certain statistical methods, including regression analysis, that reflect its market assumptions.

Questar Gas’ commodity derivative valuations are prepared by Dominion Energy’s Enterprise Risk Management department which 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 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 Dominion Energy’s Enterprise Risk Management department models the forward prices based on other available market data. A team consisting of risk management and risk

quantitative analysts meets to assess the validity of market prices and mark-to-market valuations. During this meeting, the 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 and contracts with option-like characteristics 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:

Levels

Questar Gas also utilizes the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. In these cases, the lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

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, certain 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 December 31, 2017. The range and weighted average are presented in dollars for market price inputs.

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

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:

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. Questar Gas did not have any such items at December 31, 2015.

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 years ended December 31, 2017 and 2016.

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 and other receivables, affiliated receivables, short-term debt, affiliated current borrowings, payables to affiliates 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:

NOTE 6. DERIVATIVES AND HEDGE ACCOUNTING ACTIVITIES

Questar Gas uses derivative instruments to manage exposure to supply and price risk. As discussed in Note 2, changes in the fair value of derivatives are deferred as regulatory assets or regulatory liabilities until the related transactions impact earnings. See Note 5 for further information about fair value measurements and associated valuation methods for derivatives.

Derivative assets and liabilities are presented gross on Questar Gas’ Balance Sheets. Questar Gas’ derivative contracts include over-the-counter transactions, which are bilateral contracts that are transacted directly with a counterparty. At December 31, 2017, substantially all of Questar Gas’ derivative assets and liabilities were not subject to a master netting or similar arrangement.

Volumes

The following table presents the volume of Questar Gas’ derivative activity at December 31, 2017. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions, except in the case of offsetting transactions, for which they represent the absolute value of the net volume of their long and short positions.

Fair Value and Gains and Losses on Derivative Instruments

The following table presents the fair values of Questar Gas’ derivatives and where they are presented in its Balance Sheets.

The following table presents the gains and losses on Questar Gas’ derivatives, as well as where the associated activity is presented in its Statements of Income.

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

Major classes of property, plant and equipment and their respective balances for Questar Gas are as follows:

NOTE 8. GOODWILL

The changes in Questar Gas’ carrying amount and segment allocation of goodwill are presented below:

NOTE 9. REGULATORY ASSETS AND LIABILITIES

Regulatory assets and liabilities include the following:

At December 31, 2017, none of Questar Gas’ regulatory assets were earning a return.

NOTE 10. REGULATORY MATTERS

As a public utility, Questar Gas is subject to the jurisdiction of the Utah Commission and the Wyoming Commission. Natural gas sales and transportation services are provided under rate schedules approved by the two regulatory commissions.

Questar Gas has an infrastructure cost-tracking mechanism that allows it to place into rate base, and earn a return on, capital expenditures associated with a multi-year natural gas infrastructure-replacement program upon the completion of each project. A 2014 Utah general rate case reset the recovery of costs under the infrastructure-replacement program into general rates until Questar Gas invested $84 million in new pipelines. This dollar threshold was met in November 2014, and thereafter Questar Gas has been able to recover program capital expenditures through the infrastructure-replacement mechanism. Questar Gas spent approximately $69 million in 2017 under this program.

As part of the Dominion Energy Questar Combination, Questar Gas agreed with the Utah Commission to not file a new general rate case to adjust its base distribution non-gas rates prior to July 1, 2019 unless otherwise ordered by the Utah Commission. In addition, Questar Gas agreed with the Wyoming Commission to not file a general rate case application with a requested rate effective date earlier than January 1, 2020.

In September 2017, Questar Gas submitted a filing with the Utah Commission for a $5.9 million non-gas increase reflecting forecasted increases in infrastructure replacement costs. The Utah Commission approved the filing in September 2017 with rates effective October 2017.

In October 2017, Questar Gas submitted filings with both the Utah and Wyoming Commissions for a combined $25.8 million gas cost increase reflecting forecasted increases in commodity and transportation costs. The Utah and Wyoming Commissions both approved the filings in October 2017 with rates effective November 2017.

In November 2017, Questar Gas submitted a filing with the Utah Commission for a $0.7 million non-gas decrease due to interruption penalties that were paid by transportation customers. The Utah Commission approved the filing in November.

Subsequent to the enactment of the 2017 Tax Reform Act, Questar Gas’ state regulators issued orders requesting that public utilities evaluate the total tax impact on Questar Gas’ cost of service and accrue a regulatory liability attributable to the benefits of the reduction in the corporate income tax rate. Certain of the orders requested that Questar Gas submit a response to the Utah and Wyoming Commissions detailing the total tax impact on the utility’s cost of service. In January 2018, Questar Gas submitted a response to the Utah Commission detailing that the 2017 Tax Reform Act would reduce Questar Gas’ revenue requirement for

base rates by $14.5 million. Also, in January 2018, Questar Gas submitted a filing with the Utah Commission for a $2.5 million non-gas revenue requirement decrease due to impacts of the 2017 Tax Reform Act. These filings are pending. Questar Gas will begin to reserve the impacts of the cost of service reduction as a regulatory liability beginning in 2018 until the rates are reset. The 2017 Tax Reform Act is expected to reduce customer rates due to lower income tax expense recoveries and the settlement of income taxes refundable through future rates. The ultimate resolution of the amount and timing of these rate reductions with Questar Gas’ regulators could be material to Questar Gas’ operating cash flows.

Questar Gas has recorded a reasonable estimate of net income taxes refundable through future rates in the jurisdictions in which it operates. Through actions by the Utah, Wyoming or Idaho Commissions the estimates may be subject to changes that could have a material impact on Questar Gas’ results of operations, financial condition and/or cash flows.

NOTE 11. ASSET RETIREMENT OBLIGATIONS

AROs represent obligations that result from laws, statutes, contracts and regulations related to the eventual retirement of certain of Questar Gas’ long-lived assets. Revisions to estimates result from material changes in the expected timing or amount of cash flows associated with AROs. As a result of a change in the estimated timing of cash flows for the interim retirement of natural gas pipeline components, Questar Gas recorded an increase of $75.1 million to AROs in the third quarter of 2016. The current portion of the ARO balance is $1.6 million and is included in other current liabilities in the Balance Sheets. The changes to AROs during 2016 and 2017 were as follows: