ck0000068589-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

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

For the quarterly period ended September 30, 2018

or

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

For the transition period from              to

 

 

Commission File Number

Exact name of registrant as specified in its charter, address of

principal executive office and registrant’s telephone number

I.R.S. Employer

Identification Number

 

 

 

333-69210

QUESTAR GAS COMPANY

87-0155877

 

 

 

 

333 SOUTH STATE STREET

SALT LAKE CITY, UTAH 84145

(801) 324-5000

 

 

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.

 

Large accelerated filer

Accelerated filer

Emerging growth company

 

 

 

 

 

 

Non-accelerated filer

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

Page

Number

 

 

 

 

 

 

 

Glossary of Terms

 

3

 

 

 

 

 

 

 

PART I. Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

4

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

22

 

 

 

 

 

 

 

 

 

 

 

 

PART II. Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

23

 

 

 

 

 

Item 1A.

 

Risk Factors

 

23

 

 

 

 

 

Item 6.

 

Exhibits

 

24

 

 

 

 

 

 

2


 

GLOSSARY OF TERMS

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

 

Abbreviation or Acronym

 

Definition

 

 

 

2017 Tax Reform Act

 

An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (previously known as The Tax Cuts and Jobs Act) enacted on December 22, 2017

 

 

 

ARO

 

Asset retirement obligation

 

 

 

bcf

 

Billion cubic feet

 

 

 

CEO

 

Chief Executive Officer

 

 

 

CERCLA

 

Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as Superfund

 

 

 

CET

 

Conservation enabling tariff

 

 

 

CFO

 

Chief Financial Officer

 

 

 

DEQPS

 

Dominion Energy Questar Pipeline Services, Inc.

 

 

 

DES

 

Dominion Energy Services, Inc.

 

 

 

Dominion Energy

 

The legal entity, Dominion Energy, Inc., one or more of its consolidated subsidiaries (other than Dominion Energy Questar or Questar Gas) or operating segments, or the entirety of Dominion Energy, Inc. and its consolidated subsidiaries

 

 

 

Dominion Energy Gas

 

The legal entity, Dominion Energy Gas Holdings, LLC, one or more of its consolidated subsidiaries or operating segment, or the entirety of Dominion Energy Gas Holdings, LLC and its consolidated subsidiaries

 

 

 

Dominion Energy Questar

 

The legal entity, Dominion Energy Questar Corporation, one or more of its consolidated subsidiaries (other than Questar Gas) or operating segment, or the entirety of Dominion Energy Questar Corporation and its consolidated subsidiaries

 

 

 

Dominion Energy Questar Combination

 

Dominion Energy’s acquisition of Dominion Energy Questar completed on September 16, 2016 pursuant to the terms of the agreement and plan of merger entered on January 31, 2016

 

 

 

Dominion Energy Questar Pipeline

 

Dominion Energy Questar Pipeline, LLC, one or more of its consolidated subsidiaries, or the entirety of Dominion Energy Questar Pipeline, LLC and its consolidated subsidiaries

 

 

 

Dth

 

Dekatherm

 

 

 

EEP

 

Energy-efficiency program

 

 

 

EPA

 

U.S. Environmental Protection Agency

 

 

 

GAAP

 

U.S. generally accepted accounting principles

 

 

 

Gas Infrastructure

 

Gas Infrastructure Group operating segment

 

 

 

GHG

 

Greenhouse gas

 

 

 

Idaho Commission

 

Idaho Public Utilities Commission

 

 

 

IRCA

 

Intercompany revolving credit agreement

 

 

 

LNG

 

Liquefied natural gas

 

 

 

MD&A

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Questar Gas

 

The legal entity Questar Gas Company

 

 

 

SEC

 

Securities and Exchange Commission

 

 

 

Utah Commission

 

Public Service Commission of Utah

 

 

 

VIE

 

Variable interest entity

 

 

 

Virginia Power

 

The legal entity, Virginia Electric and Power Company, one or more of its consolidated subsidiaries or operating segments, or the entirety of Virginia Electric and Power Company and its consolidated subsidiaries

 

 

 

Wexpro

 

The legal entity, Wexpro Company, one or more of its consolidated subsidiaries, or the entirety of Wexpro Company and its consolidated subsidiaries

 

 

 

Wyoming Commission

 

Wyoming Public Service Commission

 

3


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QUESTAR GAS COMPANY

STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue(1)

$

84.1

 

 

$

90.9

 

 

$

628.2

 

 

$

627.5

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased gas(1)

 

35.9

 

 

 

42.3

 

 

 

361.5

 

 

 

359.1

 

Other operations and maintenance(1)

 

31.7

 

 

 

30.2

 

 

 

112.2

 

 

 

116.5

 

Depreciation and amortization

 

19.0

 

 

 

19.4

 

 

 

56.3

 

 

 

52.1

 

Other taxes

 

6.3

 

 

 

5.6

 

 

 

19.0

 

 

 

17.0

 

Total Operating Expenses

 

92.9

 

 

 

97.5

 

 

 

549.0

 

 

 

544.7

 

Income (loss) from operations

 

(8.8

)

 

 

(6.6

)

 

 

79.2

 

 

 

82.8

 

Other income

 

0.8

 

 

 

1.1

 

 

 

2.6

 

 

 

3.1

 

Interest and related charges(1)

 

8.9

 

 

 

8.5

 

 

 

27.0

 

 

 

25.5

 

Income (loss) from operations before income tax expense

 

(16.9

)

 

 

(14.0

)

 

 

54.8

 

 

 

60.4

 

Income tax expense (benefit)

 

(5.3

)

 

 

(5.5

)

 

 

10.1

 

 

 

22.9

 

Net Income (Loss)

$

(11.6

)

 

$

(8.5

)

 

$

44.7

 

 

$

37.5

 

(1)

See Note 13 for amounts attributable to related parties.

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

4


 

QUESTAR GAS COMPANY

BALANCE SHEETS

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017(1)

 

(millions)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1.7

 

 

$

6.7

 

Customer receivables (less allowance for doubtful accounts of $1.5 and $1.7)

 

 

34.9

 

 

 

171.7

 

Other receivables

 

 

1.4

 

 

 

2.1

 

Affiliated receivables

 

 

 

 

 

1.5

 

Inventories at lower of average cost or market:

 

 

 

 

 

 

 

 

Gas stored

 

 

62.1

 

 

 

52.9

 

Materials and supplies

 

 

22.7

 

 

 

25.2

 

Regulatory assets

 

 

10.6

 

 

 

16.6

 

Other(2)

 

 

11.5

 

 

 

5.3

 

Total current assets

 

 

144.9

 

 

 

282.0

 

Property, Plant and Equipment

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

3,205.5

 

 

 

3,041.7

 

Accumulated depreciation and amortization

 

 

(786.6

)

 

 

(745.8

)

Total property, plant and equipment, net

 

 

2,418.9

 

 

 

2,295.9

 

Deferred Charges and Other Assets

 

 

 

 

 

 

 

 

Pension and other postretirement benefit assets(2)

 

 

111.1

 

 

 

107.1

 

Other

 

 

19.9

 

 

 

12.8

 

Total deferred charges and other assets

 

 

131.0

 

 

 

119.9

 

Total assets

 

$

2,694.8

 

 

$

2,697.8

 

(1)

Questar Gas’ Balance Sheet at December 31, 2017 has been derived from the audited Balance Sheet at that date.

(2)

See Note 13 for amounts attributable to related parties.

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

5


 

QUESTAR GAS COMPANY

BALANCE SHEETS—(Continued)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017(1)

 

(millions)

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Securities due within one year

 

$

 

 

$

120.0

 

Short-term debt

 

 

110.0

 

 

 

165.0

 

Affiliated current borrowings

 

 

48.4

 

 

 

75.0

 

Accounts payable

 

 

24.0

 

 

 

53.8

 

Accrued interest, payroll and taxes

 

 

35.0

 

 

 

15.6

 

Payables to affiliates

 

 

34.8

 

 

 

68.3

 

Regulatory liabilities

 

 

40.9

 

 

 

9.9

 

Contract liabilities

 

 

17.8

 

 

 

17.3

 

Other

 

 

29.7

 

 

 

27.2

 

Total current liabilities

 

 

340.6

 

 

 

552.1

 

Long-Term Debt

 

 

745.2

 

 

 

595.9

 

Deferred Credits and Other Liabilities

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

275.3

 

 

 

276.1

 

Regulatory liabilities

 

 

453.3

 

 

 

441.0

 

Other(2)

 

 

110.7

 

 

 

107.6

 

Total deferred credits and other liabilities

 

 

839.3

 

 

 

824.7

 

Total liabilities

 

 

1,925.1

 

 

 

1,972.7

 

Commitments and Contingencies (see Note 11)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock - par value $2.50(3)

 

 

23.0

 

 

 

23.0

 

Additional paid-in capital

 

 

272.5

 

 

 

272.5

 

Retained earnings

 

 

474.2

 

 

 

429.6

 

Total common shareholder's equity

 

 

769.7

 

 

 

725.1

 

Total liabilities and shareholder's equity

 

$

2,694.8

 

 

$

2,697.8

 

(1)

Questar Gas’ Balance Sheet at December 31, 2017 has been derived from the audited Balance Sheet at that date.

(2)

See Note 13 for amounts attributable to related parties.

(3)

50.0 million shares authorized; 9.2 million shares outstanding at September 30, 2018 and December 31, 2017.

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

6


 

QUESTAR GAS COMPANY

STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30,

 

2018

 

 

2017

 

(millions)

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

44.7

 

 

$

37.5

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

56.3

 

 

 

52.1

 

Deferred income taxes

 

 

4.3

 

 

 

58.0

 

Other adjustments for non-cash items

 

 

0.5

 

 

 

0.7

 

Changes in operating assets and liabilities

 

 

117.9

 

 

 

11.9

 

Net cash provided by operating activities

 

 

223.7

 

 

 

160.2

 

Investing Activities

 

 

 

 

 

 

 

 

Property, plant and equipment purchased

 

 

(171.8

)

 

 

(135.2

)

Other

 

 

(3.9

)

 

 

(3.7

)

Net cash used in investing activities

 

 

(175.7

)

 

 

(138.9

)

Financing Activities

 

 

 

 

 

 

 

 

Issuance (repayment) of short-term debt, net

 

 

(55.0

)

 

 

25.0

 

Issuance of long-term debt

 

 

150.0

 

 

 

 

Repayment of long-term debt

 

 

(120.0

)

 

 

 

Repayment of affiliated current borrowings, net

 

 

(26.6

)

 

 

(48.0

)

Other

 

 

(1.4

)

 

 

 

Net cash used in financing activities

 

 

(53.0

)

 

 

(23.0

)

Decrease in cash and equivalents

 

 

(5.0

)

 

 

(1.7

)

Cash, restricted cash and equivalents at beginning of period(1)

 

 

6.7

 

 

 

7.6

 

Cash, restricted cash and equivalents at end of period(1)

 

$

1.7

 

 

$

5.9

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Significant noncash investing activities:

 

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

10.0

 

 

$

21.3

 

(1)

No amounts were held in restricted cash and equivalents in any of the periods presented.

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

7


 

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

 

Regulated gas sales consist of state-regulated delivery of natural gas to residential, commercial and industrial customers;

 

Regulated gas transportation sales consist of state-regulated transportation of natural gas for commercial and industrial customers to buy their own natural gas supply;

 

Other regulated revenue consists primarily of miscellaneous product sales, connection fees and forfeited discounts; and

8


 

 

Other nonregulated revenue consists primarily of sales of natural gas production at market-based rates and sales of oil and extracted products.

Other Revenue

 

Other revenue consists primarily of royalty revenues.

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:

 

Regulated gas sales consisted of delivery of natural gas to residential, commercial and industrial customers;

 

Gas transportation consisted of transportation of gas for commercial and industrial customers who buy their own gas supply; and

 

Other consisted of connection fees, royalties, miscellaneous product sales, etc.

 

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:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2018

 

(millions)

 

 

 

 

 

 

 

 

Regulated gas sales:

 

 

 

 

 

 

 

 

Residential

 

$

60.9

 

 

$

448.9

 

Commercial

 

 

8.7

 

 

 

127.8

 

Industrial

 

 

0.9

 

 

 

4.3

 

Regulated gas transportation

 

 

6.5

 

 

 

20.2

 

Other regulated revenue

 

 

1.9

 

 

 

6.6

 

Other nonregulated revenue(1)(2)

 

 

3.4

 

 

 

12.6

 

Total operating revenue from contracts with customers

 

 

82.3

 

 

 

620.4

 

Other revenue(1)

 

 

1.8

 

 

 

7.8

 

Total operating revenue

 

$

84.1

 

 

$

628.2

 

(1)

See Note 13 for amounts attributable to related parties.

(2)

The amounts above include sales of oil and extracted products of $2.0 million and $7.7 million for the three and nine months ended September 30, 2018, respectively, which are considered to be goods transferred at a point in time.

 

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.

9


 

 

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

September 30, 2017

 

(millions)

 

 

 

 

 

 

 

 

Residential and commercial gas sales

 

$

75.3

 

 

$

575.8

 

Industrial gas sales

 

 

2.6

 

 

 

8.9

 

Gas transportation

 

 

6.1

 

 

 

19.3

 

Other(1)

 

 

6.9

 

 

 

23.5

 

Total operating revenue

 

$

90.9

 

 

$

627.5

 

(1)

See Note 13 for amounts attributable to related parties.

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:

 

Nine Months Ended September 30,

 

2018

 

 

2017

 

U.S. statutory rate

 

 

21.0

%

 

 

35.0

%

Increases (reductions) resulting from:

 

 

 

 

 

 

 

 

State taxes, net of federal benefit

 

 

3.7

 

 

 

3.1

 

Reversal of excess deferred income taxes

 

 

(4.6

)

 

 

 

State legislative change

 

 

(1.0

)

 

 

 

Other, net

 

 

(0.6

)

 

 

(0.2

)

Effective tax rate

 

 

18.5

%

 

 

37.9

%

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,

10


 

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.

 

 

 

Fair Value

(millions)

 

 

Valuation Techniques

 

Unobservable Input

 

 

 

Range

 

Weighted

Average(1)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical forwards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas(2)

 

$

6.9

 

 

Discounted cash flow

 

Market price (per Dth)

 

(3

)

1.8 - 4.1

 

 

2.7

 

Total assets

 

$

6.9

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Averages weighted by volume.

(2)

Includes basis.

(3)

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

 

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

 

Significant Unobservable

Inputs

 

Position

 

Change to Input

 

Impact on Fair Value

Measurement

Market price

 

Buy

 

Increase (decrease)

 

Gain (loss)

Market price

 

Sell

 

Increase (decrease)

 

Loss (gain)

Recurring Fair Value Measurements

The following table presents Questar Gas’ assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions.

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

 

$

 

 

$

 

 

$

6.9

 

 

$

6.9

 

Total assets

 

$

 

 

$

 

 

$

6.9

 

 

$

6.9

 

At December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

 

$

 

 

$

 

 

$

2.4

 

 

$

2.4

 

Total assets

 

$

 

 

$

 

 

$

2.4

 

 

$

2.4

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3.9

 

 

$

(0.2

)

 

$

2.4

 

 

$

 

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings(1)

 

 

 

 

 

 

 

 

0.1

 

 

 

(0.1

)

Included in regulatory assets/liabilities

 

 

3.0

 

 

 

0.3

 

 

 

4.5

 

 

 

 

Settlements

 

 

 

 

 

 

 

 

(0.1

)

 

 

0.1

 

Purchases

 

 

 

 

 

 

 

 

 

 

 

0.1

 

Ending balance

 

$

6.9

 

 

$

0.1

 

 

$

6.9

 

 

$

0.1

 

(1)

The gains and losses included in earnings were classified in purchased gas.

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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:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Carrying

Amount

 

 

Estimated Fair

Value(1)

 

 

Carrying

Amount

 

 

Estimated Fair

Value(1)

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including securities due within one year(2)

 

$

745.2

 

 

$

781.0

 

 

$

715.9

 

 

$

783.2

 

(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.

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.

 

 

 

Current

 

 

Noncurrent

 

Natural Gas (bcf):

 

 

 

 

 

 

 

 

Basis

 

 

7.3

 

 

 

19.1

 

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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.

 

 

 

Fair Value -

Derivatives

not under

Hedge

Accounting

 

 

Total

Fair

Value

 

(millions)

 

 

 

 

 

 

 

 

At September 30, 2018

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Commodity

 

$

2.4

 

 

$

2.4

 

Total current derivative assets(1)

 

 

2.4

 

 

 

2.4

 

Noncurrent Assets

 

 

 

 

 

 

 

 

Commodity

 

 

4.5

 

 

 

4.5

 

Total noncurrent derivative assets(2)

 

 

4.5

 

 

 

4.5

 

Total derivative assets

 

$

6.9

 

 

$

6.9

 

At December 31, 2017

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Commodity

 

$

0.4

 

 

$

0.4

 

Total current derivative assets(1)

 

 

0.4

 

 

 

0.4

 

Noncurrent Assets

 

 

 

 

 

 

 

 

Commodity

 

 

2.0

 

 

 

2.0

 

Total noncurrent derivative assets(2)

 

 

2.0

 

 

 

2.0

 

Total derivative assets

 

$

2.4

 

 

$

2.4

 

(1)

Current derivative assets are presented in other current assets in Questar Gas’ Balance Sheets.

(2)

Noncurrent derivative assets are presented in other deferred charges and other assets in Questar Gas’ 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.

 

 

 

Amount of Gain (Loss) Recognized in Income on Derivatives (1)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

Derivatives not designated as hedging instruments

 

2018

 

 

2017

 

 

2018

 

 

2017

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Type and Location of Gains

   (Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity(2)

 

$

 

 

$

 

 

$

0.1

 

 

$

(0.5

)

Total

 

$

 

 

$

 

 

$

0.1

 

 

$

(0.5

)

(1)

Includes derivative activity amortized out of regulatory assets/liabilities. Amounts deferred into regulatory assets/liabilities have no associated effect in Questar Gas’ Statements of Income.

(2)

Amounts recorded in Questar Gas’ Statements of Income are classified in purchased gas.

13


 

Note 7. Regulatory Assets and Liabilities

Regulatory assets and liabilities include the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

(millions)

 

 

 

 

 

 

 

 

Regulatory assets:

 

 

 

 

 

 

 

 

Pipeline integrity costs(1)

 

$

2.0

 

 

$

2.0

 

EEP(2)

 

 

6.1

 

 

 

3.3

 

Deferred royalties(3)

 

 

1.8

 

 

 

 

Purchased gas adjustment(4)

 

 

 

 

 

10.7

 

Cost of reacquired debt(5)

 

 

0.5

 

 

 

 

Other

 

 

0.2

 

 

 

0.6

 

Regulatory assets-current

 

 

10.6

 

 

 

16.6

 

Deferred production imbalance(6)

 

 

4.7

 

 

 

 

Cost of reacquired debt(5)

 

 

1.9

 

 

 

2.7

 

Pipeline integrity costs(1)

 

 

0.6

 

 

 

0.6

 

Regulatory assets-noncurrent(7)

 

 

7.2

 

 

 

3.3

 

Total regulatory assets

 

$

17.8

 

 

$

19.9

 

Regulatory liabilities: