Note 7 – Derivative Instruments and Hedging Activities

Questar and its subsidiaries may enter into derivative instruments to manage exposure to changes in current and future market interest rates. In order to mitigate its exposure to changes in the fair value of its fixed-rate corporate debt resulting from changes in benchmark interest rates, in the second quarter of 2011 Questar executed a fixed-to-floating interest rate swap transaction with a counterparty and converted $125.0 million of its 2.75% fixed rate long-term debt to floating rate debt. The 2.75% rate was swapped for a London Interbank Offered Rate (LIBOR)-based floating rate that is determined at the beginning of August and February each year until maturity of the notes in 2016. This swap is accounted for as a fair value hedge under the accounting standards for derivatives and hedging.

In the second and third quarters of 2011, Questar Pipeline entered into forward starting swaps totaling $150.0 million at a weighted average fixed interest rate of 3.91%. Under these swaps Questar Pipeline pays fixed and receives floating interest rates. These swaps effectively fix a portion of the cash flows related to interest payments on fixed-rate debt expected to be issued in the fourth quarter of 2011 at market interest rates prevailing at the time the swaps were executed. These swaps terminated on October 14, 2011, requiring a payment of $29.1 million from Questar Pipeline to the counter parties because the interest rate declined to 2.97%. Questar Pipeline entered into a new forward starting swap on October 14, 2011, of $150.0 million at a fixed interest rate of 3.00%, which terminates on December 20, 2011. These swaps qualify as cash-flow hedges under derivative and hedge accounting standards and amounts paid to or received from counterparties will be amortized over the life of the debt.

All derivative instruments are required to be recorded on the balance sheet as either assets or liabilities measured at their fair values. The designation of a derivative instrument as a hedge and its ability to meet hedge accounting criteria determines how the changes in fair value of the derivative instrument are reflected in the consolidated financial statements. A derivative instrument qualifies for fair value hedge accounting if, at inception and throughout its life, the derivative is expected to be highly effective in offsetting the changes in fair value of the hedged debt attributable to the hedged interest rate. Changes in the fair value of a derivative instrument qualifying and designated as a fair value hedge as well as the offsetting changes in the fair value of the hedged debt attributable to the hedged interest rate are recorded currently in the Consolidated Statements of Income. A derivative instrument qualifies for cash flow hedge accounting if, at inception and throughout its life, the derivative is expected to be highly effective in offsetting the changes in expected cash flows of the hedged interest payments. Changes in the fair value of a derivative instrument qualifying and designated as a cash flow hedge are initially recorded as a component of AOCI on the Condensed Consolidated Balance Sheets for the hedge's effective portion and subsequently reclassified to earnings when the Company begins recording interest expense for the hedged interest payments. Ineffective portions of a qualifying and designated cash flow hedge are recorded currently in earnings.

Questar is not a party to any derivative instruments that do not qualify for hedge accounting designation or that require collateral to be posted by either party prior to settlement. Questar routinely monitors and manages its positions with, and the credit quality of the counterparties to its derivative instruments, all of which are large financial institutions. All derivative instruments are recorded in the Condensed Consolidated Balance Sheets at their fair value on a gross basis. Asset and liability derivative positions with the same counterparty are not netted.

Interest rate swaps and forward-starting interest rate swaps are settled in cash on periodic payment dates with one party paying the other for the net difference between the fixed and floating interest rate for the payment period as specified in the swap agreement, multiplied by the notional amount. Forward-starting interest rate swaps used as cash flow hedges of forecasted fixed-rate debt issuances are terminated and settled in cash when the forecasted debt is issued or as swaps expire, with one party paying the other for the swap's net fair value at the time of settlement. Questar reports cash flows related to derivative instruments qualifying and designated as hedges in the Condensed Consolidated Statements of Cash Flows based upon the nature of the associated hedged items.

The following table presents the pre-tax effects of the derivative instrument designated as a fair value hedge (including the hedged item) on the Consolidated Statements of Income and the derivative instruments designated as cash flow hedges on AOCI:

	Financial Statement	3 Months Ended,	9 Months Ended,	12 Months Ended,
Instrument and Activity	Location of Gain (Loss)	Sept. 30, 2011

Fair Value Hedge
Questar Corporation
Interest rate derivative instrument
Realized and unrealized gain	Interest expense	$ 5.2	$ 9.1	$ 9.1
2.75% notes due 2016
Realized and unrealized loss	Interest expense	(5.2)	(9.1)	(9.1)

Cash Flow Hedges
Questar Pipeline
Interest rate derivative instruments
Deferrals of effective portions	AOCI	($37.0)	($36.2)	($36.2)

There was no ineffectiveness recognized on the fair value hedge and ineffectiveness recognized on the cash flow hedges was de minimis for the three-, nine- and 12-months ended September 30, 2011. Reclassifications to earnings of amounts reported in AOCI related to the effective portions of cash flow hedges will begin when Questar Pipeline begins recording interest expense on the hedged debt that is expected to be issued in the fourth quarter of 2011 and will continue through the maturity of the hedged debt. Based on September 30, 2011 interest rates, pre-tax net losses of $0.4 million are expected to be reclassified from AOCI to the Consolidated Statements of Income in the next 12 months. As of September 30, 2011, the maximum period over which the Company is hedging its exposure to variability in future cash flows of forecasted transactions is expected to end in the fourth quarter of 2011.

The following table discloses the Level 2 fair values of the asset and liability derivative instruments designated as hedges in the Condensed Consolidated Balance Sheets.

Instrument	Balance Sheet Location	Sept. 30, 2011
		(in millions)
Assets
Questar Corporation
Interest rate derivative instrument	Prepaid expenses and other	$ 0.5
Interest rate derivative instrument	Other noncurrent assets	7.7
Consolidated total - derivative assets		$ 8.2

Liabilities
Questar Pipeline
Interest rate derivative instruments	Accounts payable and accrued expenses	$ 36.2
Consolidated total - derivative liabilities		$ 36.2

The following table provides additional information about the Company's derivative instruments:

Instrument Type	Accounting Treatment	Maturity Date	Weighted-average Fixed Interest Rate1	Notional Amount
				(in millions)
Questar Corporation
Interest rate swap – pay floating, receive fixed	Fair Value Hedge	2016	2.75%	$ 125.0
Questar Pipeline
Forward starting interest rate swaps – pay fixed, receive floating	Cash Flow Hedge	2011	3.91%	$ 150.0

1	Floating rates are based on 3- and 6-month U.S. dollar LIBOR.