UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended September 30, 2018

or

For the transition period from              to

State or other jurisdiction of incorporation or organization of the registrant: Utah

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  ☐    No   ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒    No  ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).

Yes ☐    No  ☒

Questar Gas Company does not have any voting or non-voting common equity held by non-affiliates. As of October 12, 2018, Questar Gas Company had 9,189,626 shares of common stock outstanding. Dominion Energy Questar Corporation (a wholly-owned subsidiary of Dominion Energy, Inc.) holds all of the outstanding stock of Questar Gas Company.

QUESTAR GAS COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS FILING THIS FORM 10-Q UNDER THE REDUCED DISCLOSURE FORMAT.

Questar Gas Company

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GLOSSARY OF TERMS

The following abbreviations or acronyms used in this Form 10-Q are defined below:

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QUESTAR GAS COMPANY

STATEMENTS OF INCOME

(Unaudited)

The accompanying notes are an integral part of Questar Gas’ Financial Statements.

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QUESTAR GAS COMPANY

BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of Questar Gas’ Financial Statements.

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QUESTAR GAS COMPANY

BALANCE SHEETS—(Continued)

(Unaudited)

The accompanying notes are an integral part of Questar Gas’ Financial Statements.

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QUESTAR GAS COMPANY

STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of Questar Gas’ Financial Statements.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations

Questar Gas is a wholly-owned subsidiary of Dominion Energy Questar which 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 in Idaho.

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.

Note 2. Significant Accounting Policies

As permitted by the rules and regulations of the SEC, Questar Gas’ accompanying unaudited Financial Statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited financial statements prepared in accordance with GAAP. These unaudited Financial Statements should be read in conjunction with the Financial Statements and Notes in Questar Gas’ Annual Report on Form 10-K for the year ended December 31, 2017.

In the opinion of management, the accompanying unaudited Financial Statements contain all adjustments necessary to present fairly its financial position at September 30, 2018, its results of operations for the three and nine months ended September 30, 2018 and 2017 and its cash flows for the nine months ended September 30, 2018 and 2017. Such adjustments are normal and recurring in nature unless otherwise noted.

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.

The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Information for quarterly periods is affected by seasonal variations in sales, rate changes, purchased gas expenses and other factors.

Certain amounts in Questar Gas’ 2017 Financial Statements and Notes have been reclassified to conform to the 2018 presentation for comparative purposes. The reclassifications did not affect Questar Gas’ net income, total assets, liabilities, equity or cash flows.

The effect of the adoption of revised accounting guidance for revenue recognition from contracts with customers is described below. There have been no other significant changes from Note 2 to the Financial Statements in Questar Gas’ Annual Report on Form 10-K for the year ended December 31, 2017.

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 include 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, subsequent to the adoption of revised guidance for revenue recognition from contracts with customers, are as follows:

Revenue from Contracts with Customers

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Other Revenue

The primary types of sales and service activities reported as operating revenue for Questar Gas, prior to the adoption of revised guidance for revenue recognition from contracts with customers, were as follows:

Revenues from gas sales are recognized over time, as the customers of Questar Gas consume the gas as it is delivered. Transportation contracts are primarily stand-ready service contracts that include fixed reservation and variable usage fees. Fixed fees are recognized ratably over the life of the contract, which is less than 12 months, as the stand-ready performance obligation is satisfied, while variable usage fees are recognized when Questar Gas has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the performance obligation completed to date. As a local distribution company, substantially all of Questar Gas’ revenues are derived from performance obligations satisfied over time, rather than recognized at a single point in time, and are month-to-month contracts billed according to the terms of its tariff. Payment for most sales varies by contract type, but is typically due within a month of billing.

New Accounting Standards

Revenue Recognition

In May 2014, the Financial Accounting Standards Board issued revised accounting guidance for revenue recognition from contracts with customers. Questar Gas adopted this revised accounting guidance for interim and annual reporting periods beginning January 1, 2018 using the modified retrospective method. The adoption of the revised standard had no impact on the amount of revenue recognized.

Note 3. Operating Revenue

Questar Gas’ operating revenue, subsequent to the adoption of revised guidance for revenue recognition from contracts with customers, consists of the following:

Contract liabilities represent an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration, or the amount that is due, from the customer. At September 30, 2018 and December 31, 2017, Questar Gas’ contract liability balances were $17.8 million and $17.3 million, respectively. During the nine months ended September 30, 2018, Questar Gas recognized revenue of $17.3 million from the beginning contract liability balance as Questar Gas fulfilled its obligations to provide service to its customers.

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Questar Gas’ operating revenue, prior to the adoption of revised guidance for revenue recognition from contracts with customers, consisted of the following:

Note 4. Income Taxes

For continuing operations, the statutory U.S. federal income tax rate reconciles to Questar Gas’ effective income tax rate as follows:

The 2017 Tax Reform Act reduced the statutory federal income tax rate to 21% beginning in January 2018. Accordingly, current income taxes, and deferred income taxes that originate in 2018, are being recorded at the new 21% rate. Deferred taxes will reverse at the weighted average rate used to originate the deferred tax liability, which in some cases will be 35%. For the nine months ended September 30, 2018, Questar Gas has recorded an estimate of the portion of excess deferred income tax amortization expected to occur in 2018. The reversal of these excess deferred income taxes will impact the effective tax rate, and may ultimately impact rates charged to customers. As described in Note 8 to the Financial Statements, Questar Gas decreased revenue and increased regulatory liabilities to offset these deferred tax impacts in accordance with applicable regulatory commission orders or formula rate mechanisms.

Questar Gas continues to evaluate the changes in accelerated depreciation for tax purposes and state conformity to the provisions of the 2017 Tax Reform Act. As of September 30, 2018, Questar Gas has applied the provisions of recently proposed regulations addressing the availability of federal bonus depreciation for the period beginning after September 27, 2017 through December 31, 2017. The application of these proposed regulations had no impact on income tax expense as the changes in, and remeasurement of, deferred tax liabilities were recorded as increases to regulatory liabilities of $4.4 million. These amounts represent Questar Gas’ best estimate based on available information, and could be subject to change based on additional guidance in yet to be finalized regulations. See Note 4 to the Financial Statements in Questar Gas’ Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of the impacts of the 2017 Tax Reform Act.

Note 5. 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, 2017. See Note 6 in this report for further information about Questar Gas’ derivatives and hedge accounting activities.

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,

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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, 2018.  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.

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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, 2018 and 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 and other receivables, affiliated receivables, short-term debt, affiliated current borrowings, accounts payable and payables 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:

Note 6. Derivatives and Hedge Accounting Activities

Questar Gas’ accounting policies, objectives and strategies for using derivative instruments are discussed in Note 2 to the Financial Statements in the Questar Gas’ Annual Report on Form 10-K for the year ended December 31, 2017. See Note 5 in this report 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 September 30, 2018, 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 September 30, 2018. 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.

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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.

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Note 7. Regulatory Assets and Liabilities

Regulatory assets and liabilities include the following: