# ONE Gas, Inc.: Form 10-Q for the period ended Jun 30, 2015

- Company: [ONE Gas, Inc.](/companies/ogs.md) (CIK 1587732)
- Form: 10-Q
- Filed: 2015-07-30
- Accepted by EDGAR: Jul 30, 2015, 14:44 ET
- Period: 2015-06-30
- Accession: 0001587732-15-000051
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1587732/000158773215000051/onegas10-qx6302015.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1587732/000158773215000051/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Gross profit | 3 months, 2015-04-01 to 2015-06-30 | $176.8m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2015-01-01 to 2015-06-30 | $439.8m | us-gaap:GrossProfit |
| Operating income | 3 months, 2015-04-01 to 2015-06-30 | $31.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2015-01-01 to 2015-06-30 | $140.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2015-04-01 to 2015-06-30 | $11.2m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2015-01-01 to 2015-06-30 | $22.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-04-01 to 2015-06-30 | $7.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2015-01-01 to 2015-06-30 | $45.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-04-01 to 2015-06-30 | $12.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2015-01-01 to 2015-06-30 | $72.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.23 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2015-01-01 to 2015-06-30 | $1.36 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.23 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2015-01-01 to 2015-06-30 | $1.37 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-04-01 to 2015-06-30 | 53,438,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2015-01-01 to 2015-06-30 | 53,437,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2015-01-01 to 2015-06-30 | $342.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2015-01-01 to 2015-06-30 | $125.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2015-01-01 to 2015-06-30 | $31.5m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2015-01-01 to 2015-06-30 | $24.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-06-30 | $135.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-06-30 | $477.5m | us-gaap:AssetsCurrent |
| Total assets | at 2015-06-30 | $4.53bn | us-gaap:Assets |
| Current liabilities | at 2015-06-30 | $246.9m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2015-06-30 | $1.20bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2015-06-30 | $7.0k | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2015-06-30 | $0 | us-gaap:CommercialPaper |
| Shareholders' equity | at 2015-06-30 | $1.82bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,145 characters.

The following discussion and analysis should be read in conjunction with our unaudited financial statements and the Notes to Financial Statements in this Quarterly Report, as well as our Annual Report. Due to the seasonal nature of our business, the results of operations for the three and six months ended June 30, 2015, are not necessarily indicative of the results that may be expected for a 12-month period.

### RECENT DEVELOPMENTS

**Dividend -** In June 2015, we paid dividends on our common stock to shareholders of record at the close of business on May 15, 2015, equal to $0.30 per share ($1.20 per share on an annualized basis). In July 2015, a dividend of $0.30 per share ($1.20 per share on an annualized basis) was declared for shareholders of record on August 14, 2015, payable September 1, 2015.

**Regulatory Activities -** Oklahoma - In July 2015, Oklahoma Natural Gas filed a request with the OCC for an increase in base rates, reflecting system investments and operating costs necessary to maintain the safety and reliability of its natural gas distribution system. Oklahoma Natural Gas’ request, if approved, represents an increase of $50.4 million in base rates and is based on a 10.5 percent return on equity, unchanged from the previous general rate case filed in 2009. This filing also requests the continuation, with certain modifications, of the Performance Based Rate Change plan that was established in 2009. Additionally, the common equity ratio requested is 60.5 percent based on ONE Gas’ actual equity ratio as of March 31, 2015, with debt costs of 3.95 percent. The filing represents a rate base of approximately $1.2 billion. In accordance with Oklahoma law, the OCC has 180 days to consider Oklahoma Natural Gas’ proposed rate changes.

In March 2015, Oklahoma Natural Gas filed its energy-efficiency program true-up application for its 2014 program year, requesting a utility incentive of $1.2 million. The Public Utility Division of the OCC recommended approval of the filing; however, this recommendation remains subject to a hearing on the merits and approval by the OCC.

In December 2014, the Public Utility Division of the OCC filed an application to close the remaining take-or-pay items associated with Oklahoma Natural Gas’ rider. The OCC’s final audit of the take-or-pay rider and related items included a review of the over-recovery of $1.1 million and adopted Oklahoma Natural Gas’ recommendation to refund this over-recovery to customers through its Purchased Gas Adjustment Clause (PGA) mechanism. The pass-through of the over-recovery through the PGA has no impact on operating income.

Kansas - In March 2015, the KCC issued an order opening an investigation regarding accelerated replacement of obsolete pipeline materials. This order was issued after several open meetings were hosted by the KCC in the fourth quarter of 2014, discussing the status of natural gas infrastructure replacement in Kansas. In June 2015, the KCC issued an order agreeing with Kansas Gas Service and other LDCs, as well as the KCC Staff, that the KCC has jurisdiction to approve alternative pipeline replacement programs with alternative rate mechanisms. In July 2015, the Citizen’s Utility Ratepayer Board submitted a petition for reconsideration of the KCC’s order.

Texas - In March 2014, Texas Gas Service and the City of El Paso agreed to enter into an annual rate review mechanism called the El Paso Annual Rate Review (EPARR). The EPARR provides for a streamlined review of Texas Gas Service’s revenue requirement on an annual basis, and is in lieu of a filing under the GRIP statute. Texas Gas Service continued to file under the GRIP statute for other incorporated cities in the El Paso service area until early 2015, when the other incorporated cities in the El Paso service area adopted the EPARR mechanism. GRIP is a capital-recovery mechanism that allows for a rate adjustment providing recovery of and a return on incremental capital investments made between rate cases.

In March 2015, Texas Gas Service filed under the EPARR, requesting an increase in revenues of $9.4 million in the City of El Paso and surrounding incorporated cities. The filing included a request to include a payroll adjustment which would increase revenues by an additional $1.8 million, for a total increase in revenues of $11.2 million. In April 2015, Texas Gas Service filed with the RRC under the GRIP statute, requesting an increase of $0.4 million in revenues for the unincorporated areas of the El Paso service area. The RRC approved the filing in July 2015.

Texas Gas Service received approval for rate relief under the GRIP statute with the City of Austin, Texas, and surrounding communities in May 2015, for approximately $3.7 million. The new rates became effective in June 2015.

In the normal course of business, we have received approval for increases totaling $3.0 million in 2015 for rate relief under the GRIP and cost-of-service adjustments in other Texas jurisdictions to address investments in rate base and changes in cost of service.

### FINANCIAL RESULTS AND OPERATING INFORMATION

**Selected Financial Results -** The following table sets forth certain selected financial results for our operations for the periods indicated:

*(Millions of dollars, except percentages)*

| Financial Results | Three Months Ended June 30, 2015 | 2014 | Six Months Ended June 30, 2015 | 2014 | Three Months 2015 vs. 2014 Increase (Decrease) |  | Six Months 2015 vs. 2014 Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Natural gas sales | **$229.0** | $265.1 | **$865.8** | $989.8 | **$(36.1)** | **(14)%** | **$(124.0)** | **(13)%** |
| Transportation revenues | **20.6** | 22.2 | **52.0** | 54.7 | **(1.6)** | **(7)%** | **(2.7)** | **(5)%** |
| Cost of natural gas | **79.9** | 120.4 | **493.5** | 626.7 | **(40.5)** | **(34)%** | **(133.2)** | **(21)%** |
| Net margin, excluding other revenues | **169.7** | 166.9 | **424.3** | 417.8 | **2.8** | **2%** | **6.5** | **2%** |
| Other revenues | **7.1** | 9.6 | **15.5** | 18.5 | **(2.5)** | **(26)%** | **(3.0)** | **(16)%** |
| Net margin | **176.8** | 176.5 | **439.8** | 436.3 | **0.3** | **—%** | **3.5** | **1%** |
| Operating costs | **112.5** | 118.4 | **234.9** | 237.3 | **(5.9)** | **(5)%** | **(2.4)** | **(1)%** |
| Depreciation and amortization | **33.0** | 31.3 | **64.6** | 62.8 | **1.7** | **5%** | **1.8** | **3%** |
| Operating income | **$31.3** | $26.8 | **$140.3** | $136.2 | **$4.5** | **17%** | **$4.1** | **3%** |
| Capital expenditures | **$70.5** | $82.9 | **$125.4** | $148.6 | **$(12.4)** | **(15)%** | **$(23.2)** | **(16)%** |

The following table sets forth our net margin, excluding other revenues, by type of customer, for the periods indicated:

*(Millions of dollars, except percentages)*

| Net Margin, Excluding Other Revenues Natural gas sales | Three Months Ended June 30, 2015 | 2014 | Six Months Ended June 30, 2015 | 2014 | Three Months 2015 vs. 2014 Increase (Decrease) |  | Six Months 2015 vs. 2014 Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | **$122.8** | $118.7 | **$306.9** | $298.3 | **$4.1** | **3%** | **$8.6** | **3%** |
| Commercial and industrial | **25.1** | 24.8 | **62.1** | 61.8 | **0.3** | **1%** | **0.3** | **—%** |
| Wholesale and public authority | **1.2** | 1.2 | **3.3** | 3.0 | **—** | **—%** | **0.3** | **10%** |
| Net margin on natural gas sales | **149.1** | 144.7 | **372.3** | 363.1 | **4.4** | **3%** | **9.2** | **3%** |
| Transportation revenues | **20.6** | 22.2 | **52.0** | 54.7 | **(1.6)** | **(7)%** | **(2.7)** | **(5)%** |
| Net margin, excluding other revenues | **$169.7** | $166.9 | **$424.3** | $417.8 | **$2.8** | **2%** | **$6.5** | **2%** |

Our net margin on natural gas sales is comprised of two components, fixed and variable margin. Fixed margin reflects the portion of our net margin attributable to the monthly fixed customer charge component of our rates, which does not fluctuate based on customer usage in each period. Variable margin reflects the portion of our net margin that fluctuates with the volumes delivered and billed. We believe that the combination of the significant residential component of our customer base, the fixed charge component of our sales margin and our regulatory rate mechanisms that we have in place result in a stable cash flow profile. The following table sets forth our net margin on natural gas sales by revenue type for the periods indicated:

*(Millions of dollars, except percentages)*

| Net Margin on Natural Gas Sales Net margin on natural gas sales | Three Months Ended June 30, 2015 | 2014 | Six Months Ended June 30, 2015 | 2014 | Three Months 2015 vs. 2014 Increase (Decrease) |  | Six Months 2015 vs. 2014 Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Fixed margin | **$129.5** | $122.3 | **$259.8** | $243.9 | **$7.2** | **6%** | **$15.9** | **7%** |
| Variable margin | **19.6** | 22.4 | **112.5** | 119.2 | **(2.8)** | **(13)%** | **(6.7)** | **(6)%** |
| Net margin on natural gas sales | **$149.1** | $144.7 | **$372.3** | $363.1 | **$4.4** | **3%** | **$9.2** | **3%** |

Net margin increased $0.3 million for the three months ended June 30, 2015, compared with the same period last year, due primarily to the following:

- an increase of $6.1 million from new rates primarily in Oklahoma and Texas; and
- an increase of $1.3 million in residential sales due primarily to customer growth in Oklahoma; offset partially by
- a decrease of $2.7 million due to lower sales volumes, net of weather normalization, primarily from warmer weather in the second quarter 2015 compared with second quarter 2014;
- a decrease of $2.2 million due to lower line extension revenue, from commercial and industrial customers, and other revenues; and
- a decrease of $1.6 million due primarily to lower transportation volumes from weather-sensitive customers in Kansas.

Net margin increased $3.5 million for the six months ended June 30, 2015, compared with the same period last year, due primarily to the following:

- an increase of $14.9 million from new rates primarily in Oklahoma and Texas; and
- an increase of $2.6 million in residential sales due primarily to customer growth in Oklahoma; offset partially by
- a decrease of $5.0 million due to lower sales volumes, net of weather normalization, primarily from warmer weather for the six months ended June 30, 2015, compared with the same period last year;
- a decrease of $3.1 million due to lower line extension revenue, from commercial and industrial customers, and other revenues;
- a decrease of $2.9 million in rider and surcharge recoveries due to a lower ad valorem surcharge in Kansas and the expiration of the rider associated with the recovery of take-or-pay settlements in Oklahoma, both of which are offset by lower regulatory amortization in depreciation and amortization expense; and
- a decrease of $2.6 million due primarily to lower transportation volumes from weather-sensitive customers in Kansas.

Operating costs decreased $5.9 million for the three months ended June 30, 2015, compared with the same period last year, due primarily to the following:

- a decrease of $4.3 million in outside service costs, which includes $2.7 million of lower costs associated with contractor pipeline maintenance activities and $1.3 million of costs associated with our separation from ONEOK in the prior year;
- a decrease of $1.6 million in bad debt expense due primarily to warmer weather in Kansas;
- a decrease of $1.2 million in legal costs;
- a decrease of $1.2 million in ad valorem taxes; offset partially by
- an increase of $0.9 million in employee-related costs; and
- an increase of $0.9 million in information technology expenses.

Operating costs decreased $2.4 million for the six months ended June 30, 2015, compared with the same period last year, due primarily to the following:

- a decrease of $5.1 million in outside service costs, which includes $2.4 million of lower costs associated with contractor pipeline maintenance activities and $2.6 million of costs associated with our separation from ONEOK in the prior year;
- a decrease of $3.0 million in legal and workers’ compensation expense;
- a decrease of $1.6 million in bad debt expense due primarily to warmer weather in Kansas;
- a decrease of $1.4 million in ad valorem taxes; partially offset by
- an increase of $4.9 million in employee-related costs due primarily to increases of $1.9 million in benefit costs and $2.4 million in higher labor costs; and
- an increase of $2.9 million in information technology expenses.

Depreciation and amortization expense increased $1.7 million for the three months ended June 30, 2015, compared with the same period last year, due to an increase in depreciation of $2.3 million from our capital expenditures being placed in service, offset partially by a decrease in the amortization associated with the ad valorem surcharge rider in Kansas. Depreciation and amortization expense increased $1.8 million for the six months ended June 30, 2015, compared with the same period last year, due to an increase in depreciation of $5.1 million from our capital expenditures being placed in service, offset partially by a decrease in the amortization of the ad valorem surcharge rider in Kansas and take-or-pay rider in Oklahoma of $2.6 million.

Capital Expenditures - Our capital expenditures program includes expenditures for pipeline integrity, extending service to new areas, modifications to customer service lines, increasing system capabilities, pipeline replacements and information technology assets. It is our practice to maintain and upgrade our infrastructure, facilities and systems to ensure safe, reliable and efficient operations.

Capital expenditures decreased $12.4 million for the three months ended June 30, 2015, and decreased $23.2 million for the six months ended June 30, 2015, compared with the same periods last year, due primarily to information technology hardware and software assets acquired due to our separation from ONEOK in the prior year.

**Selected Operating Information -** The following tables set forth certain selected operating information for the periods indicated:

*(in thousands)*

| Average Number of Customers | Three Months Ended June 30, 2015 OK | KS | TX | Total | 2014 OK | KS | TX | Total | Variances 2015 vs. 2014 Increase (Decrease) OK | KS | TX | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | **784** | **581** | **608** | **1,973** | 778 | 579 | 602 | 1,959 | **6** | **2** | **6** | **14** |
| Commercial and industrial | **73** | **50** | **34** | **157** | 72 | 50 | 34 | 156 | **1** | **—** | **—** | **1** |
| Wholesale and public authority | **—** | **—** | **3** | **3** | — | — | 3 | 3 | **—** | **—** | **—** | **—** |
| Transportation | **6** | **6** | **1** | **13** | 5 | 6 | 1 | 12 | **1** | **—** | **—** | **1** |
| Total customers | **863** | **637** | **646** | **2,146** | 855 | 635 | 640 | 2,130 | **8** | **2** | **6** | **16** |

*(in thousands)*

| Average Number of Customers | Six Months Ended June 30, 2015 OK | KS | TX | Total | 2014 OK | KS | TX | Total | Variances 2015 vs. 2014 Increase (Decrease) OK | KS | TX | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | **786** | **584** | **607** | **1,977** | 780 | 584 | 602 | 1,966 | **6** | **—** | **5** | **11** |
| Commercial and industrial | **73** | **50** | **35** | **158** | 73 | 51 | 35 | 159 | **—** | **(1)** | **—** | **(1)** |
| Wholesale and public authority | **—** | **—** | **3** | **3** | — | — | 3 | 3 | **—** | **—** | **—** | **—** |
| Transportation | **6** | **6** | **1** | **13** | 5 | 6 | 1 | 12 | **1** | **—** | **—** | **1** |
| Total customers | **865** | **640** | **646** | **2,151** | 858 | 641 | 641 | 2,140 | **7** | **(1)** | **5** | **11** |

| Volumes (MMcf) Natural gas sales | Three Months Ended June 30, 2015 | 2014 | Six Months Ended June 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Residential | **11,399** | 13,551 | **71,511** | 76,965 |
| Commercial and industrial | **4,640** | 4,724 | **21,784** | 23,043 |
| Wholesale and public authority | **363** | 422 | **1,472** | 1,231 |
| Total volumes sold | **16,402** | 18,697 | **94,767** | 101,239 |
| Transportation | **46,783** | 48,372 | **107,555** | 115,349 |
| Total volumes delivered | **63,185** | 67,069 | **202,322** | 216,588 |

Total volumes delivered decreased for the three and six months ended June 30, 2015, compared with the same periods last year, due primarily to warmer temperatures in 2015. The impact on residential and commercial margins was mitigated significantly by weather-normalization mechanisms.

Wholesale sales represent contracted natural gas volumes that exceed the needs of our residential, commercial and industrial customer base and are available for sale to other parties. The impact to net margin from changes in volumes associated with these customers is minimal.

| Heating Degree Days | Three Months Ended June 30, 2015 Actual | Normal | 2014 Actual | Normal | 2015 vs 2014 Actual Variance | 2015 Actual as a percent of Normal | 2014 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Oklahoma | **156** | **195** | 228 | 195 | **(32)%** | **80%** | 117% |
| Kansas | **300** | **411** | 409 | 411 | **(27)%** | **73%** | 100% |
| Texas | **31** | **51** | 63 | 58 | **(51)%** | **61%** | 109% |

| Heating Degree Days | Six Months Ended June 30, 2015 Actual | Normal | 2014 Actual | Normal | 2015 vs 2014 Actual Variance | 2015 Actual as a percent of Normal | 2014 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Oklahoma | **2,067** | **1,998** | 2,370 | 1,998 | **(13)%** | **103%** | 119% |
| Kansas | **2,815** | **2,913** | 3,288 | 2,913 | **(14)%** | **97%** | 113% |
| Texas | **1,125** | **1,033** | 1,041 | 1,037 | **8%** | **109%** | 100% |

Normal HDDs are established through rate proceedings in each of our rate jurisdictions for use primarily in weather normalization billing calculations. See further discussion on weather normalization in our Regulatory Overview section in Part 1, Item 1,”Business,” of our Annual Report. Normal HDDs disclosed above are based on:

- 10-year weighted average HDDs as of December 31, 2008, for years 1999-2008, as calculated using 11 weather stations across Oklahoma and weighted on average customer count for Oklahoma;
- 30-year average for years 1981-2010 published by the National Oceanic and Atmospheric Administration, as calculated using 13 weather stations across Kansas and weighted on HDDs by weather station and customers for Kansas; and
- a rolling 10-year average of actual natural gas distribution sales volumes by service area for Texas.

Actual HDDs are based on the quarter-to-date and year-to-date, weighted average of:

- 11 weather stations and customers by month for Oklahoma;
- 13 weather stations and customers by month for Kansas; and
- 9 weather stations and natural gas distribution sales volumes by service area for Texas.

### CONTINGENCIES

**Legal Proceedings -** We are a party to various litigation matters and claims that have arisen in the normal course of our operations. While the results of litigation and claims cannot be predicted with certainty, we believe the reasonably possible losses from such matters, individually and in the aggregate, are not material. Additionally, we believe the probable final outcome of such matters will not have a material adverse effect on our results of operations, financial position or cash flows.

### LIQUIDITY AND CAPITAL RESOURCES

**General -** We have relied primarily on operating cash flow, commercial paper and the ONE Gas Credit Agreement for our liquidity and capital resource requirements. We fund operating expenses, working capital requirements, including purchases of natural gas, and capital expenditures primarily with cash from operations, commercial paper and bank credit facilities.

We believe that the combination of the significant residential component of our customer base, the fixed-charge component of our natural gas sales net margin and our regulatory rate mechanisms that we have in place result in a stable cash flow profile. Because the energy consumption of residential customers is less volatile compared with commercial and industrial customers, our business historically has generated stable and predictable net margin and cash flows. Additionally, we have several regulatory rate mechanisms in place to reduce the lag in earning a return on our capital expenditures. We anticipate that our cash flow generated from operations and our expected short- and long-term financing arrangements will enable us to maintain our current and planned level of operations and provide us flexibility to finance our infrastructure investments.

Our ability to access capital markets for debt and equity financing under reasonable terms depends on market conditions and our financial condition and credit ratings. We believe that stronger credit ratings will provide a significant advantage to our business. By maintaining a conservative financial profile and stable revenue base, we believe that we will be able to maintain an investment-grade credit rating, which we believe will provide us access to diverse sources of capital at favorable rates in order to finance our infrastructure investments. Credit rating agencies perform independent analyses when assigning credit ratings.

**Short-term Financing -** The ONE Gas Credit Agreement contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining a debt-to-capital ratio of no more than 70 percent at the end of any calendar quarter. The ONE Gas Credit Agreement also contains customary affirmative and negative covenants, including covenants relating to liens, indebtedness of subsidiaries, investments, changes in the nature of business, fundamental changes, transactions with affiliates, burdensome agreements, and use of proceeds. In the event of a breach of certain covenants by us, amounts outstanding under the ONE Gas Credit Agreement may become due and payable immediately. At June 30, 2015, our debt-to-capital ratio was 40 percent, and we were in compliance with all covenants under the ONE Gas Credit Agreement.

The ONE Gas Credit Agreement includes a $50 million sublimit for the issuance of standby letters of credit and also features an option to request an increase in the size of the facility to an aggregate of $1.2 billion from $700 million, upon satisfaction of customary conditions, including receipt of commitments from new lenders or increased commitments from existing lenders. Borrowings made under the facility are available for general corporate purposes. The ONE Gas Credit Agreement contains provisions for an applicable margin rate and an annual facility fee, both of which adjust with changes in our credit rating. Based on our current credit ratings, borrowings, if any, will accrue interest at LIBOR plus 79.5 basis points, and the annual facility fee is 8 basis points. The total amount of short-term borrowings authorized by ONE Gas’ Board of Directors is $1.2 billion.

We have a commercial paper program under which we may issue unsecured commercial paper up to a maximum amount of $700 million to fund short-term borrowing needs. The maturities of the commercial paper notes may vary but may not exceed 270 days from the date of issue. The commercial paper notes are generally sold at par less a discount representing an interest factor.

The ONE Gas Credit Agreement is available to repay the commercial paper notes, if necessary. Amounts outstanding under the commercial paper program reduce the borrowing capacity under the ONE Gas Credit Agreement. At June 30, 2015, we had no short-term borrowings and $1.0 million in letters of credit issued under the ONE Gas Credit Agreement. At June 30, 2015, we had approximately $135.9 million of cash and cash equivalents and $699.0 million of remaining credit available under the ONE Gas Credit Agreement.

**Long-Term Debt -** We have senior notes, consisting of $300 million of 2.07 percent senior notes due 2019, $300 million of 3.61 percent senior notes due 2024 and $600 million of 4.658 percent senior notes due 2044 (collectively, our “Senior Notes”). The indenture governing our Senior Notes includes an event of default upon the acceleration of other indebtedness of $100 million or more. Such events of default would entitle the trustee or the holders of 25 percent in aggregate principal amount of the outstanding Senior Notes to declare those Senior Notes immediately due and payable in full.

**Treasury Shares** - In the second quarter of 2015, we repurchased approximately 564 thousand treasury shares of our common stock for approximately $24.1 million, of which $4.4 million was funded by our dividend reinvestment and employee stock purchase plans. Our repurchase of treasury shares was authorized by our Board of Directors in February 2015.

**Credit Ratings -** Our credit ratings as of June 30, 2015, were:

| Rating Agency | Rating | Outlook |
| --- | --- | --- |
| Moody’s | A2 | Stable |
| S&P | A- | Stable |

Our commercial paper is currently rated Prime-1 by Moody’s and A-2 by S&P. We intend to maintain strong credit metrics while we pursue a balanced approach to capital investment and a return of capital to shareholders via a dividend that we believe will be competitive with our peer group.

**Capitalization structure -** As of June 30, 2015, our total capitalization structure is 40 percent debt to 60 percent equity.

**Pension and Other Postretirement Benefit Plans -** Information about our pension and other postretirement benefits plans, including anticipated contributions, is included under Note 12 of the ONE Gas Notes to Financial Statements in our Annual Report. See Note 8 of the Notes to Financial Statements in this Quarterly Report for additional information.

### CASH FLOW ANALYSIS

We use the indirect method to prepare our Statements of Cash Flows. Under this method, we reconcile net income to cash flows provided by operating activities by adjusting net income for those items that impact net income but may not result in actual cash receipts or payments and changes in our assets and liabilities not classified as investing or financing activities during the period. Items that impact net income but may not result in actual cash receipts or payments include, but are not limited to, depreciation and amortization, deferred income taxes, share-based compensation expense and provision for doubtful accounts.

The following table sets forth the changes in cash flows by operating, investing and financing activities for the periods indicated:

| Total cash provided by (used in): | Six Months Ended June 30, 2015 (Millions of dollars) | 2014 | Variances 2015 vs. 2014 Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Operating activities | **$342.6** | $261.7 | **$80.9** |
| Investing activities | **(125.4)** | (148.6) | **23.2** |
| Financing activities | **(93.2)** | 45.1 | **(138.3)** |
| Change in cash and cash equivalents | **124.0** | 158.2 | **(34.2)** |
| Cash and cash equivalents at beginning of period | **11.9** | 3.1 | **8.8** |
| Cash and cash equivalents at end of period | **$135.9** | $161.3 | **$(25.4)** |

**Operating Cash Flows -** Operating cash flows are affected by earnings from our business activities. Changes in natural gas prices and demand for our services or natural gas, whether because of general economic or weather conditions, changes in supply or increased competition from other service providers, could affect our earnings and operating cash flows. Typically, our cash flows from operations are greater in the first half of the year compared with the second half of the year.

Cash flows from operating activities, before changes in operating assets and liabilities, increased for the six months ended June 30, 2015, compared with the same period in 2014. The increase was due primarily to changes in net margin and operating expenses discussed in Financial Results and Operating Information.

The net increase in cash flows from operating assets and liabilities was due primarily to the collection of trade and income tax receivables, changes in natural gas in storage, payment of trade payables and the recovery of natural gas purchase costs through our purchased-gas cost mechanisms. The timing of cash collections from customers and payments to vendors and suppliers varies from period to period in the normal course of business and directly impacts our cash flows from operations.

**Investing Cash Flows -** Cash used in investing activities decreased for the six months ended June 30, 2015, compared with the prior period due primarily to capital expenditures for information technology assets associated with our separation from ONEOK.

**Financing Cash Flows -** The changes in cash flows from financing activities are primarily the result of our $1.19 billion debt issuance and $1.13 billion cash payment to ONEOK for the six months ended June 30, 2014, in connection with our separation from ONEOK, compared with repayments of commercial paper, dividends paid to shareholders and repurchases of common stock for the six months ended June 30, 2015.

### ENVIRONMENTAL, SAFETY AND REGULATORY MATTERS

**Environmental Matters -** We are subject to multiple historical, wildlife preservation and environmental laws and/or regulations, which affect many aspects of our present and future operations. Regulated activities include, but are not limited to, those involving air emissions, storm water and wastewater discharges, handling and disposal of solid and hazardous wastes, wetland preservation, hazardous materials transportation, and pipeline and facility construction. These laws and regulations require us to obtain and/or comply with a wide variety of environmental clearances, registrations, licenses, permits and other approvals. Failure to comply with these laws, regulations, licenses and permits may expose us to fines, penalties and/or interruptions in our operations that could be material to our results of operations. In addition, emission controls and/or other regulatory or permitting mandates under the Clean Air Act and other similar federal and state laws could require unexpected capital expenditures at our facilities. We cannot assure that existing environmental statutes and regulations will not be revised or that new regulations will not be adopted or become applicable to us. Revised or additional statutes or regulations that result in increased compliance costs or additional operating restrictions could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We own or retain legal responsibility for the environmental conditions at 12 former manufactured natural gas sites in Kansas. These sites contain potentially harmful materials that are subject to control or remediation under various environmental laws and regulations. A consent agreement with the KDHE governs all work at these sites. The terms of the consent agreement allow us to investigate these sites and set remediation activities based upon the results of the investigations and risk analysis. Remediation involves typically the management of contaminated soils and may involve removal of structures and monitoring and/or remediation of groundwater.

We have completed or addressed removal of the source of soil contamination at 11 of the 12 sites according to plans approved by the KDHE. Regulatory closure has been achieved at three of the sites. We have begun site assessment at the remaining site where no active remediation has occurred.

Our expenditures for environmental evaluation, mitigation, remediation and compliance to date have not been significant in relation to our financial position, results of operations or cash flows, and our expenditures related to environmental matters had no material effects on earnings or cash flows during the six months ended June 30, 2015 and 2014. We do not expect to incur material expenditures for these matters in the future.

**Pipeline Safety -** We are subject to PHMSA regulations, including integrity-management regulations. PHMSA regulations require pipeline companies operating high-pressure transmission pipelines to perform integrity assessments on pipeline segments that pass through densely populated areas or near specifically designated high-consequence areas. In January 2012, the Pipeline Safety, Regulatory Certainty and Job Creation Act was signed into law. The new law increased maximum penalties for violating federal pipeline safety regulations and directs the DOT and the Secretary of Transportation to conduct further review or studies on issues that may or may not be material to us. These issues include, but are not limited to, the following:

- an evaluation of whether natural gas pipeline integrity-management requirements should be expanded beyond current high-consequence areas;
- a verification of records for pipelines in class 3 and 4 locations and high-consequence areas to confirm maximum allowable operating pressures; and
- a requirement to test previously untested pipelines operating above 30 percent yield strength in high-consequence areas.

The potential capital and operating expenditures related to this legislation, the associated regulations or other new pipeline safety regulations are unknown.

**Air and Water Emissions -** The Clean Air Act, the Clean Water Act, analogous state laws and/or regulations promulgated thereunder, impose restrictions and controls regarding the discharge of pollutants into the air and water in the United States. Under the Clean Air Act, a federally enforceable operating permit is required for sources of significant air emissions. We may be required to incur certain capital expenditures for air-pollution-control equipment in connection with obtaining or maintaining permits and approvals for sources of air emissions. We do not expect that these expenditures will have a material impact on our respective results of operations, financial position or cash flows. The Clean Water Act imposes substantial potential liability for the removal of pollutants discharged to waters of the United States and remediation of waters affected by such discharge.

Federal, state and regional initiatives to measure and regulate greenhouse gas emissions are underway. We monitor relevant federal and state legislation to assess the potential impact on our operations. The EPA’s Mandatory Greenhouse Gas Reporting Rule requires annual greenhouse gas emissions reporting as carbon dioxide equivalents from affected facilities and for the natural gas delivered by us to our natural gas distribution customers who are not otherwise required to report their own emissions. The additional cost to gather and report this emission data did not have, and we do not expect it to have, a material impact on our results of operations, financial position or cash flows. In addition, Congress has considered, and may consider in the future, legislation to reduce greenhouse gas emissions, including carbon dioxide and methane. Likewise, the EPA may institute additional regulatory rulemaking associated with greenhouse gas emissions. At this time, no rule or legislation has been enacted that assesses any costs, fees or expenses on any of these emissions.

**CERCLA -** The federal CERCLA, also commonly known as Superfund, imposes strict, joint and several liability, without regard to fault or the legality of the original act, on certain classes of “persons” (defined under CERCLA) that caused and/or contributed to the release of a hazardous substance into the environment. These persons include but are not limited to the owner or operator of a facility where the release occurred and/or companies that disposed or arranged for the disposal of the hazardous substances found at the facility. Under CERCLA, these persons may be liable for the costs of cleaning up the hazardous substances released into the environment, damages to natural resources and the costs of certain health studies. We do not expect that our responsibilities under CERCLA will have a material impact on our respective results of operations, financial position or cash flows.

**Pipeline Security -** The United States Department of Homeland Security’s Transportation Security Administration issued updated pipeline security guidelines in April 2012. Our pipeline facilities have been reviewed according to the current guidelines and no material changes have been required to date.

**Environmental Footprint -** Our environmental and climate change strategy focuses on taking steps to minimize the impact of our operations on the environment. These strategies include: (1) developing and maintaining an accurate greenhouse gas emissions inventory according to current rules issued by the EPA; (2) improving the efficiency of our various pipelines; (3) following developing technologies for emission control; and (4) utilizing practices to reduce the loss of methane from our facilities.

We participate in the EPA’s Natural Gas STAR Program to voluntarily reduce methane emissions. We continue to focus on maintaining low rates of lost-and-unaccounted-for natural gas through expanded implementation of best practices to limit the release of natural gas during pipeline and facility maintenance and operations.

**Regulatory** - Several regulatory initiatives impacted the earnings and future earnings potential of our business. See discussion of our regulatory initiatives in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

### IMPACT OF NEW ACCOUNTING STANDARDS

Information about the impact of new accounting standards, if any, is included in Note 1 of the Notes to Financial Statements in this Quarterly Report.

### ESTIMATES AND CRITICAL ACCOUNTING POLICIES

The preparation of our financial statements and related disclosures in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions that cannot be known with certainty that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ from our estimates.

Information about our estimates and critical accounting policies is included under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Estimates and Critical Accounting Policies,” in our Annual Report.

### FORWARD-LOOKING STATEMENTS

Some of the statements contained and incorporated in this Quarterly Report are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements relate to our anticipated financial performance, liquidity, management’s plans and objectives for our future operations, our business prospects, the outcome of regulatory and legal proceedings, market conditions and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of

1995\. The following discussion is intended to identify important factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Forward-looking statements include the items identified in the preceding paragraph, the information concerning possible or assumed future results of our operations and other statements contained or incorporated in this Quarterly Report identified by words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “goal,” “forecast,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled,” and other words and terms of similar meaning.

One should not place undue reliance on forward-looking statements, which are applicable only as of the date of this Quarterly Report. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Those factors may affect our operations, markets, products, services and prices. In addition to any assumptions and other factors referred to specifically in connection with the forward-looking statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statement include, among others, the following:

- our ability to recover operating costs and amounts equivalent to income taxes, costs of property, plant and equipment and regulatory assets in our regulated rates;
- our ability to manage our operations and maintenance costs;
- changes in regulation, including the application of market rates by state and local agencies;
- the economic climate and, particularly, its effect on the natural gas requirements of our residential and

commercial industrial customers;

- competition from alternative forms of energy, including, but not limited to, solar power, wind power, geothermal energy and biofuels;
- variations in weather, including seasonal effects on demand, the occurrence of storms and disasters, and climate change;
- indebtedness could make us more vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds and/or place us at competitive disadvantage compared with competitors;
- our ability to secure reliable, competitively priced and flexible natural gas supply;
- the mechanical integrity of facilities operated;
- operational hazards and unforeseen operational interruptions;
- adverse labor relations;
- the effectiveness of our strategies to reduce earnings lag, margin protection strategies and risk mitigation strategies;
- our ability to generate sufficient cash flows to meet all our cash needs;
- changes in the financial markets during the periods covered by the forward-looking statements, particularly those affecting the availability of capital and our ability to refinance existing debt and fund investments and acquisitions;
- actions of rating agencies, including the ratings of debt, general corporate ratings and changes in the rating agencies’ ratings criteria;
- changes in inflation and interest rates;
- our ability to purchase and sell assets at attractive prices and on other attractive terms;
- our ability to recover the costs of natural gas purchased for our customers;
- impact of potential impairment charges;
- volatility and changes in markets for natural gas;
- possible loss of LDC franchises or other adverse effects caused by the actions of municipalities;
- payment and performance by counterparties and customers as contracted and when due;
- changes in regulation of natural gas distribution services, particularly those in Oklahoma, Kansas and Texas;
- changes in law resulting from new federal or state energy legislation;
- changes in environmental, safety, tax and other laws to which we and our subsidiaries are subject;
- advances in technology;
- population growth rates and changes in the demographic patterns of the markets we serve;
- acts of nature and the potential effects of threatened or actual terrorism, including cyber attacks, and war;
- the sufficiency of insurance coverage to cover losses;
- the effects of our strategies to reduce tax payments;
- the effects of litigation and regulatory investigations, proceedings, including our rate cases, or inquiries;
- changes in accounting standards and corporate governance;
- our ability to attract and retain talented management and directors;
- the results of financing efforts, including our ability to obtain financing on favorable terms, which can be affected by various factors, including our credit ratings and general economic conditions;
- declines in the market prices of debt and equity securities and resulting funding requirements for our defined benefit pension plans;
- the ability to successfully complete merger, acquisition or divestiture plans, regulatory or other limitations imposed as a result of a merger, acquisition or divestiture, and the success of the business following a merger, acquisition or divestiture;
- the final resolutions or outcomes with respect to our contingent and other corporate liabilities related to the natural gas distribution business and any related actions for indemnification made pursuant to the Separation and Distribution Agreement with ONEOK;
- our ability to operate effectively as a separate, publicly traded company; and
- the costs associated with increased regulation and enhanced disclosure and corporate governance requirements pursuant to the Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors could also have material adverse effects on our future results. These and other risks are described in greater detail in Item 1A, Risk Factors, in our Annual Report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Other than as required under securities laws, we undertake no obligation to update publicly any forward-looking statement whether as a result of new information, subsequent events or change in circumstances, expectations or otherwise.

## Market risk

As filed, 2,065 characters.

Our quantitative and qualitative disclosures about market risk are consistent with those discussed in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report.

### Commodity Price Risk

Our commodity price risk, driven primarily by fluctuations in the price of natural gas, is mitigated by our purchased-gas cost adjustment mechanisms. Additionally, we inject natural gas into storage during the summer months and withdraw the natural gas during the winter heating season. Pursuant to programs that are approved by the state commissions, we use derivative instruments to mitigate the volatility of natural gas prices for anticipated natural gas purchases during the winter heating months. Premiums paid and any cash settlements received associated with these derivative instruments are included in, and recoverable through our purchased-gas cost adjustment mechanisms.

### Interest-Rate Risk

We would be exposed to interest-rate risk with any new debt financing. We are able to manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and, at times, interest-rate swaps. Fixed-rate swaps may be used to reduce our risk of increased interest costs during periods of rising interest rates. Floating-rate swaps may be used to convert the fixed rates of long-term borrowings into short-term variable rates.

### Counterparty Credit Risk

We assess the creditworthiness of our customers. Those customers who do not meet minimum standards are required to provide security, including deposits and other forms of collateral, when appropriate. With more than 2 million customers across three states, we are not exposed materially to a concentration of credit risk. We maintain a provision for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends, consideration of the current credit environment and other information. In most jurisdictions, we are able to recover the natural gas cost component of our uncollectible accounts through our purchased-gas cost mechanisms.

## Controls and procedures

As filed, 719 characters.

**Quarterly Evaluation of Disclosure Controls and Procedures** - Our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report based on the evaluation of the controls and procedures required by Rules 13(a)-15(b) of the Exchange Act.

**Changes in Internal Control Over Financial Reporting** - There have been no changes in our internal control over financial reporting during the second quarter ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 736 characters.

Our investors should consider the risks set forth in Part I, Item 1A, Risk Factors, of our Annual Report that could affect us and our business. Although we have tried to discuss key factors, our investors need to be aware that other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our financial performance. Investors should carefully consider the discussion of risks and the other information included or incorporated by reference in this Quarterly Report, including “Forward-Looking Statements,” which are included in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Filed Jul 30, 2015.
Source: SEC EDGAR, the filing index for accession 0001587732-15-000051. Last ingested by Listed: Nov 3, 2026, 18:56 ET. No prices; not investment advice.