ONE GAS, INC., 10-K filed on 2/25/2014
Annual Report
Document And Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Feb. 21, 2014
Feb. 3, 2014
Document Information [Line Items]
 
 
 
Entity Registrant Name
ONE Gas, Inc.  
 
 
Entity Central Index Key
0001587732 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
No 1
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 1.7 2
Entity Common Stock, Shares Outstanding
 
51,941,236 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2013 
 
 
STATEMENTS OF INCOME (Predecessor [Member], USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Predecessor [Member]
 
 
 
Gross Margin
 
 
 
Revenues
$ 1,689,952 
$ 1,376,649 
$ 1,621,334 
Cost of natural gas, including affiliate
876,944 
620,260 
869,499 
Net margin
813,008 
756,389 
751,835 
Operating expenses
 
 
 
Operations and maintenance, including affiliate
393,072 
363,120 
373,511 
Depreciation and amortization, including affiliate
144,758 
130,150 
132,212 
General taxes
54,830 
47,405 
46,452 
Total operating expenses
592,660 
540,675 
552,175 
Operating income
220,348 
215,714 
199,660 
Other income, including affiliate
6,165 
3,664 
140 
Other expense, including affiliate
(3,680)
(2,225)
(2,919)
Interest expense, including affiliate
(61,366)
(60,793)
(54,119)
Income before income taxes
161,467 
156,360 
142,762 
Income taxes
(62,272)
(59,851)
(56,004)
Net income
$ 99,195 
$ 96,509 
$ 86,758 
BALANCE SHEETS (USD $)
Dec. 31, 2013
Dec. 31, 2012
Current assets
 
 
Cash
$ 1 
 
Goodwill and other assets
 
 
Total assets
 
Common Stock, Value, Issued
 
Equity and long-term debt
 
 
Owner's net investment
 
Predecessor [Member]
 
 
Property, plant and equipment
 
 
Property, plant and equipment
4,534,074,000 
4,269,377,000 
Accumulated depreciation and amortization
1,489,216,000 
1,442,423,000 
Net property, plant and equipment (Note 6)
3,044,858,000 
2,826,954,000 
Current assets
 
 
Cash
3,171,000 
4,040,000 
Accounts receivable, net
356,988,000 
260,306,000 
Natural gas in storage
166,128,000 
102,989,000 
Regulatory assets (Note 5)
21,657,000 
68,719,000 
Other current assets
54,240,000 
21,040,000 
Total current assets
602,184,000 
457,094,000 
Goodwill and other assets
 
 
Regulatory assets (Note 5)
23,822,000 
38,178,000 
Goodwill
157,953,000 
157,953,000 
Other assets
17,658,000 
11,153,000 
Total goodwill and other assets
199,433,000 
207,284,000 
Total assets
3,846,475,000 
3,491,332,000 
Equity and long-term debt
 
 
Owner's net investment
1,239,023,000 
1,154,797,000 
Long-term debt, excluding current maturities
1,318,000 
1,323,000 
Long-term line of credit with ONEOK
1,027,631,000 
1,027,631,000 
Total equity
2,267,972,000 
2,183,751,000 
Current liabilities
 
 
Current maturities of long-term debt
6,000 
206,000 
Short-term note payable to ONEOK
444,960,000 
294,109,000 
Affiliate payables
22,403,000 
21,087,000 
Accounts payable
169,500,000 
137,276,000 
Accrued taxes other than income
32,426,000 
29,977,000 
Customer deposits
57,360,000 
58,087,000 
Other current liabilities
42,422,000 
37,960,000 
Total current liabilities
769,077,000 
578,702,000 
Deferred credits and other liabilities [Abstract]
 
 
Deferred income taxes
743,452,000 
649,303,000 
Other deferred credits
65,974,000 
79,576,000 
Total deferred credits and other liabilities
809,426,000 
728,879,000 
Commitments and contingencies (Note 10)
   
   
Total liabilities and equity
$ 3,846,475,000 
$ 3,491,332,000 
BALANCE SHEETS BALANCE SHEETS Parenthetical (USD $)
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
Common Stock, Par or Stated Value Per Share
$ 0.01 
Common Stock, Shares Authorized
1,000 
Common Stock, Shares, Issued
100 
Common Stock, Shares, Outstanding
100 
STATEMENTS OF CASH FLOWS (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Financing activities
 
 
 
Cash and cash equivalents at end of period
$ 1 
 
 
Predecessor [Member]
 
 
 
Net income
99,195,000 
96,509,000 
86,758,000 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
144,758,000 
130,150,000 
132,212,000 
Deferred income taxes
62,205,000 
59,491,000 
87,184,000 
Provision for doubtful accounts
5,460,000 
2,528,000 
2,741,000 
Changes in assets and liabilities:
 
 
 
Accounts receivable
(102,142,000)
10,016,000 
(18,216,000)
Natural gas in storage
(63,139,000)
30,154,000 
2,025,000 
Asset removal costs
(46,567,000)
(47,658,000)
(35,438,000)
Affiliate payable
(8,140,000)
(7,229,000)
(683,000)
Accounts payable
37,241,000 
(3,950,000)
(11,300,000)
Accrued taxes other than income
2,449,000 
174,000 
1,399,000 
Customer deposits
(727,000)
(1,254,000)
(826,000)
Regulatory assets and liabilities
29,436,000 
(59,338,000)
(33,804,000)
Other assets and liabilities
(5,821,000)
(13,006,000)
(19,262,000)
Cash provided by operating activities
154,208,000 
196,587,000 
192,790,000 
Investing activities
 
 
 
Capital expenditures
(292,080,000)
(272,014,000)
(240,996,000)
Proceeds from sale of assets
1,327,000 
1,462,000 
195,000 
Cash used in investing activities
(290,753,000)
(270,552,000)
(240,801,000)
Financing activities
 
 
 
Increase in short-term notes payable to ONEOK, net
150,851,000 
58,692,000 
74,975,000 
Borrowings on long-term line of credit with ONEOK
115,235,000 
155,974,000 
Repayment of long-term debt
(206,000)
(330,000)
(305,000)
Distributions to ONEOK
(14,969,000)
(100,067,000)
(180,158,000)
Cash provided by financing activities
135,676,000 
73,530,000 
50,486,000 
Change in cash and cash equivalents
(869,000)
(435,000)
2,475,000 
Cash and cash equivalents at beginning of period
4,040,000 
4,475,000 
2,000,000 
Cash and cash equivalents at end of period
3,171,000 
4,040,000 
4,475,000 
Supplemental cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
61,366,000 
60,793,000 
54,119,000 
Cash paid to (received from) ONEOK for income taxes
$ 67,000 
$ 360,000 
$ 31,180,000 
STATEMENT OF CHANGES IN EQUITY (USD $)
3 Months Ended 12 Months Ended
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Owner's net investment
$ 1 
 
 
 
 
 
 
 
$ 1 
 
 
 
Predecessor [Member]
 
 
 
 
 
 
 
 
 
 
 
 
Distributions to ONEOK
 
 
 
 
 
 
 
 
(14,969,000)
(100,067,000)
(180,158,000)
 
Net income
30,318,000 
434,000 
14,951,000 
53,492,000 
38,642,000 
2,323,000 
3,497,000 
52,047,000 
99,195,000 
96,509,000 
86,758,000 
 
Owner's net investment
$ 1,239,023,000 
 
 
 
$ 1,154,797,000 
 
 
 
$ 1,239,023,000 
$ 1,154,797,000 
$ 1,158,355,000 
$ 1,251,755,000 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Notes)
1.
DESCRIPTION OF BUSINESS

We were formed on August 30, 2013, as a wholly owned subsidiary of ONEOK, to hold ONEOK’s natural gas distribution business and to have our shares distributed to ONEOK’s shareholders. We have not incurred any income, expenses or cash flows from our date of formation through December 31, 2013. After the Separation, ONEOK did not retain any ownership interest in our company. We are the largest natural gas distributor in Oklahoma and Kansas and the third largest natural gas distributor in Texas, providing service as a regulated public utility to wholesale and retail customers. Our largest distribution markets are Oklahoma City and Tulsa, Oklahoma; Kansas City, Wichita and Topeka, Kansas; and Austin and El Paso, Texas.
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations - ONE Gas, Inc. was a wholly owned subsidiary of ONEOK as of December 31, 2013. Operations of our company are located in the United States and we are comprised of ONEOK’s former natural gas distribution business. On January 8, 2014, ONEOK’s board of directors approved the distribution of all the shares of our common stock to holders of ONEOK common stock. On January 31, 2014, we became an independent, publicly traded company as a result of a distribution by ONEOK of our common stock to ONEOK’s shareholders. Our common stock began trading “regular-way” under the ticker symbol “OGS” on the NYSE on February 3, 2014.

We provide natural gas distribution services to more than 2 million customers through our divisions in Oklahoma, Kansas and Texas through Oklahoma Natural Gas, Kansas Gas Service and Texas Gas Service, respectively. We serve residential, commercial, industrial and transportation customers in all three states. In addition, these natural gas distribution companies serve wholesale and public authority customers.

Basis of Presentation - These financial statements have been derived from ONEOK’s financial statements, which include its natural gas distribution business as if ONE Gas Predecessor, for accounting purposes, had been a separate company for all periods presented. The assets and liabilities in the financial statements have been reflected on a historical basis. The financial statements also include expense allocations for certain corporate functions historically performed by ONEOK, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal and information technology. We believe our assumptions underlying the financial statements, including the assumptions regarding the allocation of general corporate expenses from ONEOK, are reasonable. However, the financial statements may not include all of the actual expenses that would have been incurred by us and may not reflect our results of operations, financial position and cash flows had we been a separate publicly traded company during the periods presented.

Because the operations of the distribution business within ONEOK were conducted through separate divisions, ONEOK’s net investment in us, excluding the long-term line of credit with ONEOK, is shown as owner’s net investment in lieu of stockholder’s equity in the financial statements. Transactions between ONEOK and us which were not part of the long-term line of credit or the short-term notes payable with ONEOK have been identified in the Statements of Changes in Owner’s Net Investment as distributions to ONEOK. Transactions with ONEOK’s other operating businesses, which generally settle monthly, are shown as accounts receivable-affiliate or accounts payable-affiliate. See Note 3 for additional information on our transactions with ONEOK and its affiliates.

The financial statements include the accounts of the natural gas distribution business as set forth in “Organization and Nature of Operations” and “Basis of Presentation” above. All significant balances and transactions between our divisions have been eliminated.

Use of Estimates - 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 amount 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. Items that may be estimated include, but are not limited to, the economic useful life of assets, fair value of assets and liabilities, provisions for doubtful accounts receivable, unbilled revenues for natural gas delivered but for which meters have not been read, natural gas purchased but for which no invoice has been received, provision for income taxes, including any deferred tax valuation allowances, the results of litigation and various other recorded or disclosed amounts.

We evaluate these estimates on an ongoing basis using historical experience and other methods we consider reasonable based on the particular circumstances. Nevertheless, actual results may differ significantly from the estimates. Any effects on our financial position or results of operations from revisions to these estimates are recorded in the period when the facts that give rise to the revision become known.

Fair Value Measurements - We define fair value as the price that would be received from the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date. We use the market and income approaches to determine the fair value of our assets and liabilities and consider the markets in which the transactions are executed. We measure the fair value of a group of financial assets and liabilities consistent with how a market participant would price the net risk exposure at the measurement date.

Fair Value Hierarchy - At each balance sheet date, we utilize a fair value hierarchy to classify fair value amounts recognized or disclosed in our financial statements based on the observability of inputs used to estimate such fair value. The levels of the hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Significant observable pricing inputs other than quoted prices included within Level 1 that are, either directly or indirectly, observable as of the reporting date. Essentially, this represents inputs that are derived principally from or corroborated by observable market data; and
Level 3 - May include one or more unobservable inputs that are significant in establishing a fair value estimate. These unobservable inputs are developed based on the best information available and may include our own internal data.

We recognize transfers into and out of the levels as of the end of each reporting period.

Determining the appropriate classification of our fair value measurements within the fair value hierarchy requires management’s judgment regarding the degree to which market data is observable or corroborated by observable market data. We categorize derivatives for which fair value is determined using multiple inputs within a single level, based on the lowest level input that is significant to the fair value measurement in its entirety. See Note 4 for additional disclosures of our fair value measurements.

Cash and Cash Equivalents - We participated in the ONEOK cash management program rather than maintaining significant cash equivalent balances. Amounts due to ONEOK resulting from the cash management program are recorded as a short-term note payable to ONEOK. See Note 3 for additional information on the cash management program.

Revenue Recognition - For regulated deliveries of natural gas, we read meters and bill customers on a monthly cycle. We recognize revenues upon the delivery of the natural gas commodity or services rendered to customers. Revenues are accrued for natural gas delivered and services rendered to customers, but not yet billed, based on estimates from the last meter reading date to month end (accrued unbilled revenue). The billing cycles for customers do not necessarily coincide with the accounting periods used for financial reporting purposes.

Accounts Receivable - Accounts receivable represent valid claims against nonaffiliated customers for natural gas sold or services rendered, net of allowances for doubtful accounts. We accrue unbilled revenues for natural gas that has been delivered but not yet billed at the end of an accounting period. Accrued unbilled revenue is based on a percentage estimate of amounts unbilled each month, which is dependent upon a number of factors, some of which require management’s judgment. These factors include customer consumption patterns and the impact of weather on usage. The amounts of accrued unbilled natural gas sales revenues at December 31, 2013 and 2012, were $143.7 million and $127.1 million, respectively.

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 an allowance 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 natural gas costs related to doubtful accounts through purchased-gas cost adjustment mechanisms. At December 31, 2013 and 2012, our allowance for doubtful accounts was $3.3 million and $2.7 million, respectively.

Inventories - Natural gas in storage is maintained on the basis of weighted-average cost. Natural gas inventories that are injected into storage are recorded in inventory based on actual purchase costs, including storage and transportation costs. Natural gas inventories that are withdrawn from storage are accounted for in our purchased-gas cost adjustment mechanisms at the weighted-average inventory cost.

Materials and supplies inventories, which are included in other current assets on our Balance Sheets, are stated at the lower of weighted-average cost or net realizable value. Our materials and supplies inventories totaled $16.6 million and $18.3 million at December 31, 2013 and 2012, respectively.

Derivatives and Risk Management Activities - We record all derivative instruments at fair value, with the exception of normal purchases and normal sales that are expected to result in physical delivery. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it, or if regulatory rulings require a different accounting treatment.

If certain conditions are met, we may elect to designate a derivative instrument as a hedge of exposure to changes in fair values or cash flows.

The table below summarizes the various ways in which we account for our derivative instruments and the impact on our financial statements:
 
 
Recognition and Measurement
Accounting Treatment
 
Balance Sheet
 
Income Statement
Normal purchases and
normal sales
-
Fair value not recorded
-
Change in fair value not recognized in earnings
Mark-to-market
-
Recorded at fair value
-
Change in fair value recognized in, and
recoverable through, the purchased-gas cost adjustment mechanisms

We have not elected to designate any of our derivative instruments as hedges. Gains or losses associated with the fair value of commodity derivative instruments entered into by us are included in, and recoverable through, the purchased-gas cost adjustment mechanisms.

See Note 4 for more discussion of our fair value measurements and hedging activities using derivatives.

Property, Plant and Equipment - Our properties are stated at cost, which includes direct construction costs such as direct labor, materials, burden and AFUDC. Generally, the cost of our property retired or sold, plus removal costs, less salvage, is charged to accumulated depreciation. Gains and losses from sales or retirement of an entire operating unit or system of our properties are recognized in income. Maintenance and repairs are charged directly to expense.

AFUDC represents the cost of borrowed funds used to finance construction activities. We capitalize interest costs during the construction or upgrade of qualifying assets. Capitalized interest is recorded as a reduction to interest expense.

Our properties are depreciated using the straight-line method over their estimated useful lives. Generally, we apply composite depreciation rates to functional groups of property having similar economic circumstances. We periodically conduct depreciation studies to assess the economic lives of our assets. These depreciation studies are completed as a part of our rate proceedings, and the changes in economic lives, if applicable, are implemented prospectively when the new rates are effective. Changes in the estimated economic lives of our property, plant and equipment could have a material effect on our financial position or results of operations.

Property, plant and equipment on our Balance Sheets includes construction work in process for capital projects that have not yet been placed in service and therefore are not being depreciated. Assets are transferred out of construction work in process when they are substantially complete and ready for their intended use.

See Note 6 for disclosures of our property, plant and equipment.

Impairment of Goodwill and Long-Lived Assets - We assess our goodwill for impairment at least annually as of July 1. Total goodwill was $158.0 million at December 31, 2013 and 2012, respectively. Our goodwill impairment analysis performed in 2013 and 2012, utilized a qualitative assessment and did not result in any impairment indicators. Subsequent to July 1, 2013, no event has occurred indicating that the implied fair value is less than the carrying value of our net assets. There also was no impairment charge resulting from our 2011 annual impairment test. A decline of 10 percent in our estimated fair value utilized in our 2011 test would not have resulted in an impairment indicator.

As part of our goodwill impairment test, we first assess qualitative factors (including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance) to determine whether it is more likely than not that our fair value is less than our carrying amount. If further testing is necessary, we perform a two-step impairment test for goodwill. In the first step, an initial assessment is made by comparing our fair value with our book value, including goodwill. If the fair value is less than the book value, an impairment is indicated, and we must perform a second test to measure the amount of the impairment. In the second test, we calculate the implied fair value of the goodwill by deducting the fair value of all tangible and intangible net assets from the fair value determined in step one of the assessment. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, we will record an impairment charge.

To estimate our fair value, we use two generally accepted valuation approaches, an income approach and a market approach, using assumptions consistent with a market participant’s perspective. Under the income approach, we use anticipated cash flows over a period of years plus a terminal value and discount these amounts to their present value using appropriate discount rates. Under the market approach, we apply acquisition multiples to forecasted cash flows. The acquisition multiples used are consistent with historical asset transactions. The forecasted cash flows are based on average forecasted cash flows over a period of years.

We assess our long-lived assets for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. An impairment is indicated if the carrying amount of a long-lived asset exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If an impairment is indicated, we record an impairment loss equal to the difference between the carrying value and the fair value of the long-lived asset. We determined that there were no asset impairments in 2013, 2012 or 2011.

Regulation - We are subject to the rate regulation and accounting requirements of the OCC, KCC, RRC and various municipalities in Texas. We follow the accounting and reporting guidance for regulated operations. During the rate-making process, regulatory authorities set the framework for what we can charge customers for our services and establish the manner that our costs are accounted for, including allowing us to defer recognition of certain costs and permitting recovery of the amounts through rates over time, as opposed to expensing such costs as incurred. Examples include interim capital investment mechanisms such as GSRS and GRIP; interim rate adjustment mechanisms such as PBRC and cost of service adjustments, weather normalization, unrecovered purchased-gas costs, pension and postemployment benefit costs and ad valorem taxes. This allows us to stabilize rates over time rather than passing such costs on to the customer for immediate recovery. Actions by regulatory authorities could have an effect on the amount recovered from rate payers. Any difference in the amount recoverable and the amount deferred is recorded as income or expense at the time of the regulatory action. A write-off of regulatory assets and costs not recovered may be required if all or a portion of the regulated operations have rates that are no longer:
established by independent, third-party regulators;
designed to recover the specific entity’s costs of providing regulated services; and
set at levels that will recover our costs when considering the demand and competition for our services.

See Note 5 for our regulatory asset and liability disclosures.

Pension and Postretirement Employee Benefits - Certain benefit costs associated with employees who directly supported our operations were determined based on a specific employee basis. We were also allocated benefit costs associated with employees of ONEOK that provide general corporate services. These amounts were charged to us by ONEOK as described in Note 3. See Note 8 for additional information regarding pension and postretirement employee benefit plans.

For the periods presented, we were not the plan sponsor for these benefit plans. Accordingly, our Balance Sheets do not reflect any assets or liabilities related to these benefit plans.

Income Taxes - Our operations were included in the consolidated federal and state income tax returns of ONEOK. Our income tax provision has been calculated on a separate return basis. Accordingly, we have recognized deferred tax assets and liabilities for the difference between the financial statement and income tax basis of assets and liabilities and carry-forward items, based on income tax laws and rates existing at the time the temporary differences are expected to reverse as if we were a corporation for federal and state income tax purposes. In addition, ONEOK manages its tax position based upon the tax attributes of the consolidated group. Certain attributes may not be available to us if we were operating as an independent company.

The effect on deferred taxes of a change in tax rates is deferred and amortized for operations regulated by the OCC, KCC, RRC and various municipalities in Texas, if, as a result of an action by a regulator, it is probable that the effect of the change in tax rates will be recovered from or returned to customers through future rates. We continue to amortize previously deferred investment tax credits for ratemaking purposes over the periods prescribed by the OCC, KCC, RRC and various municipalities in Texas.

A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, as well as the current and forecasted business economics of our industry. We had no valuation allowance at December 31, 2013 and 2012.

We utilize a more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that is taken or expected to be taken in a tax return. We reflect penalties and interest as part of income tax expense as they become applicable for tax provisions that do not meet the more-likely-than-not recognition threshold and measurement attribute. There were no material uncertain tax positions at December 31, 2013 and 2012.

See Note 9 for additional discussion of income taxes.

Asset Retirement Obligations - Asset retirement obligations represent legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. Certain long-lived assets that comprise our natural gas distribution systems, primarily our pipeline assets, are subject to agreements or regulations that give rise to an asset retirement obligation for removal or other disposition costs associated with retiring the assets in place upon the discontinued use of the natural gas distribution system. We recognize the fair value of a liability for an asset retirement obligation in the period when it is incurred if a reasonable estimate of the fair value can be made. We are not able to estimate reasonably the fair value of the asset retirement obligations for portions of our assets because the settlement dates are indeterminable given our expected continued use of the assets with proper maintenance. We expect our natural gas distribution systems will continue in operation as long as natural gas supply and demand for natural gas distribution service exists. Based on the widespread use of natural gas for heating and cooking activities by residential and commercial customers in our service areas, management expects supply and demand to exist for the foreseeable future.

In accordance with long-standing regulatory treatment, we collect through rates the estimated costs of removal on certain regulated properties through depreciation expense, with a corresponding credit to accumulated depreciation and amortization. These removal costs collected through our rates include costs attributable to legal and nonlegal removal obligations; however, the amounts collected that are in excess of these nonlegal asset-removal costs incurred are accounted for as a regulatory liability for financial reporting purposes. Historically, with the exception of the regulatory authority in Kansas, the regulatory authorities that have jurisdiction over our regulated operations have not required us to quantify or disclose this amount; rather, these costs are addressed prospectively in depreciation rates and are set in each general rate order. We have made an estimate of our regulatory liability using current rates since the last general rate order in each of our jurisdictions; however, for financial reporting purposes, significant uncertainty exists regarding the future disposition of this regulatory liability, pending, among other issues, clarification of regulatory intent. We continue to monitor the regulatory requirements, and the liability may be adjusted as more information is obtained. We record the estimated asset removal obligation in noncurrent liabilities in other deferred credits on our Balance Sheets. To the extent this estimated liability is adjusted, such amounts will be reclassified between accumulated depreciation and amortization and other deferred credits and therefore will not have an impact on earnings.

Contingencies - Our accounting for contingencies covers a variety of business activities, including contingencies for legal and environmental exposures. We accrue these contingencies when our assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered and an amount can be estimated reasonably. We expense legal fees as incurred and base our legal liability estimates on currently available facts and our estimates of the ultimate outcome or resolution. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than the completion of a remediation feasibility study. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Actual results may differ from our estimates resulting in an impact, positive or negative, on earnings. See Note 10 for additional discussion of contingencies.

Share-Based Payments - Certain employees providing direct service to us participated in ONEOK’s share-based awards plans. The plans provide for ONEOK common stock based awards to both employees and ONEOK’s nonmanagement directors. The plans permit the granting of various types of awards including, but not limited to, performance units and restricted stock units. Awards may be granted for no consideration other than prior and future services or based on certain financial performance targets.

ONEOK charges us for compensation expense related to stock-based compensation awards granted to our employees that directly support our operations. Share-based compensation is also a component of allocated amounts charged to us by ONEOK for general and administrative personnel providing services on our behalf.

Earnings per Common Share - Historical earnings per share are not presented because we did not have common stock that was part of our capital structure for the periods presented.

Segments - We operate in one business segment: regulated public utilities that deliver natural gas to residential, commercial, industrial and transportation customers. We define business segments as components of an organization for which discrete financial information is available and operating results are evaluated on a regular basis by the chief operating decision maker (CODM) in order to assess performance and allocate resources. Our CODM is our Chief Executive Officer (CEO). Characteristics of our organization which were relied upon in making this determination include the similar nature of services we provide, the functional alignment of our organizational structure, and the reports that are regularly reviewed by the CODM for the purpose of assessing performance and allocating resources. Our management is functionally aligned and centralized, with performance evaluated based upon results of the entire distribution business. Capital allocation decisions are driven by asset integrity management and operating efficiency, not geographic location.

We evaluate performance based principally on operating income. Affiliate sales are recorded on the same basis as sales to unaffiliated customers and are discussed in further detail in Note 3. Net margin is comprised of total revenues less cost of natural gas. Cost of natural gas includes commodity purchases, fuel, storage and transportation costs and does not include an allocation of general operating costs or depreciation and amortization.

In 2013, 2012 and 2011, we had no single external customer from which we received 10 percent or more of our gross revenues.
SUBSEQUENT EVENTS (Notes)
2.
SUBSEQUENT EVENTS

Distribution - On January 8, 2014, ONEOK’s board of directors approved the distribution of all the shares of our common stock to holders of ONEOK common stock.

In order to allow ONEOK to effect the separation, we requested, and the SEC declared effective, our registration statement on Form 10 on January 10, 2014. ONEOK transferred all of the assets and liabilities primarily related to its natural gas distribution business to us. Assets and liabilities included accounts receivable and payable, natural gas in storage, regulatory assets and liabilities, pipeline and other natural gas distribution facilities, customer deposits, employee-related assets and liabilities, including amounts attributable to pension and other postretirement benefits, tax-related assets and liabilities and other assets and liabilities primarily associated with providing natural gas distribution service in Oklahoma, Kansas and Texas. Cash and certain corporate assets, such as office space in the corporate headquarters and certain IT hardware and software, were not transferred to us; however, the Transition Services Agreement between ONEOK and us provides access to such corporate assets as necessary to operate our business for a period of time to enable us to obtain the applicable corporate assets.

Immediately prior to the contribution of the natural gas distribution business to us, ONEOK contributed to the capital of the natural gas distribution business all of the amounts outstanding on the natural gas distribution business’ short-term note payable to and long-term line of credit with ONEOK. We received approximately $1.19 billion of cash from a private placement of senior notes, then used a portion of those proceeds to fund a cash payment of approximately $1.13 billion to ONEOK. Effective January 31, 2014, the number of our authorized shares increased to 250 million shares of common stock and 50 million shares of preferred stock. On January 31, 2014, ONEOK distributed one share of our common stock for every four shares of ONEOK common stock held by ONEOK shareholders of record as of the close of business on January 21, 2014, the record date of the distribution. No preferred shares have been issued. At the close of business on January 31, 2014, ONE Gas, Inc. became an independent, publicly traded company as a result of the distribution. Our common stock began trading “regular-way” under the ticker symbol “OGS” on the NYSE on February 3, 2014.

Senior notes issuance - In January 2014, we completed a private placement of 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 notes due 2044. The net proceeds from the private placement were approximately $1.19 billion and were used to fund a one-time cash payment to ONEOK of approximately $1.13 billion as part of the separation. The remaining portion of the net proceeds was retained in order to provide sufficient financial flexibility and to support working capital requirements and capital expenditures.

The indenture governing our senior notes due 2019, 2024 and 2044 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.

We may redeem our senior notes due 2019, 2024, and 2044 at par, plus accrued and unpaid interest to the redemption date, starting one month, three months, and six months, respectively, before their maturity dates. Prior to these dates, we may redeem these notes, in whole or in part, at a redemption price equal to the principal amount, plus accrued and unpaid interest and a make-whole premium. The redemption price will never be less than 100 percent of the principal amount of the respective note plus accrued and unpaid interest to the redemption date. Our senior notes are senior unsecured obligations, ranking equally in right of payment with all of our existing and future unsecured senior indebtedness.

In connection with the issuance of our senior notes due 2019, 2024 and 2044, we entered into a registration rights agreement, pursuant to which we are obligated to use our commercially reasonable efforts to file with the SEC and cause to become effective a registration statement with respect to an offer to exchange each series of our senior notes due 2019, 2024 and 2044 for new notes, with terms substantially identical in all material respects to such series of our senior notes. Alternatively, if the exchange offers are not available, cannot be completed or some holders are not able to participate in the exchange offers for one or more series of notes, we will be required to use our commercially reasonable efforts to file a shelf registration statement to cover resales of our senior notes under the Securities Act. If we do not comply with these obligations, we will be required to pay additional interest on our senior notes due 2019, 2024 and 2044 under specified circumstances.

ONE Gas Credit Agreement - In December 2013, we entered into the ONE Gas Credit Agreement, which became effective upon our separation from ONEOK on January 31, 2014, and is scheduled to expire on January 31, 2019. The ONE Gas Credit Agreement contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining our 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.

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. Borrowings, if any, will accrue interest at LIBOR plus 79.5 basis points, and the annual facility fee is 8 basis points based on our current credit rating.

We may reduce the unutilized portion of the ONE Gas Credit Agreement in whole or in part without premium or penalty. The ONE Gas Credit Agreement contains customary events of default. Upon the occurrence of certain events of default, the obligations under the ONE Gas Credit Agreement may be accelerated and the commitments may be terminated.
2.
SUBSEQUENT EVENTS

Distribution - On January 8, 2014, ONEOK’s board of directors approved the distribution of all the shares of our common stock to holders of ONEOK common stock.

In order for ONEOK to effect the separation, we requested, and the SEC declared effective, our registration statement on Form 10 on January 10, 2014. ONEOK transferred all of the assets and liabilities primarily related to its natural gas distribution business to us. Assets and liabilities included accounts receivable and payable, natural gas in storage, regulatory assets and liabilities, pipeline and other natural gas distribution facilities, customer deposits, employee-related assets and liabilities, including amounts attributable to pension and other postretirement benefits, tax-related assets and liabilities and other assets and liabilities primarily associated with providing natural gas distribution service in Oklahoma, Kansas and Texas. Cash and certain corporate assets, such as office space in the corporate headquarters and certain IT hardware and software, were not transferred to us; however, the Transition Services Agreement between ONEOK and us provides access to such corporate assets as necessary to operate our business for a period of time to enable us to obtain the applicable corporate assets.

Immediately prior to the contribution of the natural gas distribution business to us, ONEOK contributed to the capital of the natural gas distribution business all of the amounts outstanding on the natural gas distribution business’ short-term note payable to and long-term line of credit with ONEOK. We received approximately $1.19 billion of cash from a private placement of senior notes, then used a portion of those proceeds to fund a cash payment of approximately $1.13 billion to ONEOK. On January 31, 2014, ONEOK distributed one share of our common stock for every four shares of ONEOK common stock held by ONEOK shareholders of record as of the close of business on January 21, 2014, the record date of the distribution. At the close of business on January 31, 2014, ONE Gas, Inc. became an independent, publicly traded company as a result of the distribution. Our common stock began trading “regular-way” under the ticker symbol “OGS” on the NYSE on February 3, 2014.

Senior notes issuance - In January 2014, we completed a private placement of 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 notes due 2044. The net proceeds from the private placement were approximately $1.19 billion and were used to fund a one-time cash payment to ONEOK of approximately $1.13 billion as part of the separation. The remaining portion of the net proceeds was retained in order to provide sufficient financial flexibility and to support working capital requirements and capital expenditures.

The indenture governing our senior notes due 2019, 2024 and 2044 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.

We may redeem our senior notes due 2019, 2024, and 2044 at par, plus accrued and unpaid interest to the redemption date, starting one month, three months, and six months, respectively, before their maturity dates. Prior to these dates, we may redeem these notes, in whole or in part, at a redemption price equal to the principal amount, plus accrued and unpaid interest and a make-whole premium. The redemption price will never be less than 100 percent of the principal amount of the respective note plus accrued and unpaid interest to the redemption date. Our senior notes are senior unsecured obligations, ranking equally in right of payment with all of our existing and future unsecured senior indebtedness.

In connection with the issuance of our senior notes due 2019, 2024 and 2044, we entered into a registration rights agreement, pursuant to which we are obligated to use our commercially reasonable efforts to file with the SEC and cause to become effective a registration statement with respect to an offer to exchange each series of our senior notes due 2019, 2024 and 2044 for new notes, with terms substantially identical in all material respects to such series of our senior note. Alternatively, if the exchange offers are not available or cannot be completed or some holders are not able to participate in the exchange offers for one or more series of notes, we will be required to use our commercially reasonable efforts to file a shelf registration statement to cover resales of our senior notes under the Securities Act. If we do not comply with these obligations, we will be required to pay additional interest on our senior notes due 2019, 2024 and 2044 under specified circumstances.

ONE Gas Credit Agreement - In December 2013, we entered into the ONE Gas Credit Agreement, which became effective upon our separation from ONEOK on January 31, 2014, and is scheduled to expire on January 31, 2019. The ONE Gas Credit Agreement contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining ONE Gas’ 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 ONE Gas, amounts outstanding under the ONE Gas Credit Agreement may become due and payable immediately.

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 by either 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.

We may reduce the unutilized portion of the ONE Gas Credit Agreement in whole or in part without premium or penalty. The ONE Gas Credit Agreement contains customary events of default. Upon the occurrence of certain events of default, the obligations under the ONE Gas Credit Agreement may be accelerated and the commitments may be terminated.
RELATED-PARTY TRANSACTIONS (Notes) (Predecessor [Member])
RELATED-PARTY TRANSACTIONS
3.
RELATED-PARTY TRANSACTIONS

Affiliate Transactions - We have certain transactions with ONEOK and its subsidiaries. We purchase a portion of our natural gas supply and natural gas transportation and storage services from ONEOK and its affiliates. These contracts are awarded through a competitive-bidding process, and the costs are recoverable through our purchased-gas cost mechanisms.

The Statements of Income include expense allocations for certain corporate functions historically performed by ONEOK and allocated to its natural gas distribution business, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, information technology and facilities maintenance. Where costs are incurred specifically on our behalf, the costs are billed directly to us by ONEOK. In other situations, the costs may be allocated to us through a variety of methods, depending upon the nature of the expenses. For example, a service that applies equally to all employees of ONEOK is allocated based upon the number of employees in each ONEOK affiliate. An expense benefiting the company but having no direct basis for allocation is allocated by the modified Distrigas method, a method using a combination of ratios that include gross plant and investment, operating income and payroll expense. It is not practicable to determine what these general overhead costs would be on a stand-alone basis. These allocations include the following costs:

Corporate Services - Represents costs for certain employees of ONEOK who provide general and administrative services on our behalf. These charges are either directly identifiable or allocated based upon usage factors for our operations. In addition, we receive other allocated costs for our share of general corporate expenses of ONEOK, which are determined based on our relative use of the service or, if there is no direct basis for allocation, are allocated by the modified Distrigas method. All of these costs are reflected in operations and maintenance and depreciation expense in the Statements of Income.

Benefit Plans and Incentives - Represents benefit costs and other incentives, including group health and welfare benefits, pension plans, postretirement benefit plans and employee stock-based compensation plans. Costs associated with incentive and stock-based compensation plans are determined on a specific identification basis for certain employees who directly support our operations. All other employee benefit costs historically have been allocated using a percentage factor derived from a ratio of benefit costs to salary costs for ONEOK’s employees. These expenses are included in operations and maintenance expenses in the Statements of Income.

Total compensation cost, which includes costs for both employees who directly supported our operations and allocations for corporate services, charged to us by ONEOK related to share-based payment plans was $15.5 million, $12.4 million and $22.6 million during 2013, 2012 and 2011, respectively. See Note 7 for additional information regarding share-based payments. Total cost charged to us by ONEOK related to pension and postretirement health and welfare plans was $52.1 million, $43.4 million and $40.3 million during 2013, 2012 and 2011, respectively, which is net of amounts deferred through regulatory mechanisms of $1.8 million, $4.1 million and $3.7 million during 2013, 2012 and 2011, respectively. See Note 8 for additional information regarding employee benefit plans.

Interest Expense - ONEOK utilized a centralized approach to cash management and the financing of its businesses. Cash receipts and cash expenditures for costs and expenses from our operations were transferred to or from ONEOK on a regular basis and recorded as increases or decreases in the balance due in short-term note payable to ONEOK under unsecured promissory notes we had in place with ONEOK. The amounts outstanding under the long-term line of credit with ONEOK and the short-term note payable to ONEOK accrued interest based on ONEOK’s weighted-average cost of short-term debt and such interest was added monthly to the note principal.

The following table shows ONEOK’s and its subsidiaries’ transactions with us included in the Statements of Income for the periods indicated:
 
 
Years Ended December 31,
 
 
2013
 
2012
 
2011
 
 
(Thousands of dollars)
Cost of natural gas
 
$
226,582

 
$
135,650

 
$
203,585

Operations and maintenance
 
 

 
 

 
 

Direct employee labor and benefit costs
 
177,526

 
165,798

 
178,151

Allocated employee labor and benefit costs
 
29,955

 
24,994

 
25,452

Charges for general and administrative services
 
36,078

 
24,059

 
28,266

Depreciation and amortization
 
6,940

 
6,033

 
6,444

Other (income)/expense, net
 
(5,073
)
 
(2,668
)
 
1,419

Interest expense
 
60,930

 
60,305

 
53,357

Total
 
$
532,938

 
$
414,171

 
$
496,674



Employee labor and benefit costs capitalized totaled $49.3 million, $46.1 million and $43.0 million for 2013, 2012 and 2011, respectively. In addition, we recorded regulated utility revenue from ONEOK and its subsidiaries. These amounts were immaterial for all periods presented.

Cash Management - ONEOK uses a centralized cash management program that concentrates the cash assets of its operating divisions and subsidiaries in joint accounts for the purpose of providing financial flexibility and lowering the cost of borrowing, transaction costs and bank fees. The centralized cash management program provides that funds in excess of the daily needs of the operating divisions and subsidiaries are concentrated, consolidated or otherwise made available for use by other wholly owned entities of ONEOK. Under this cash management program, depending on whether a participating division or subsidiary has short-term cash requirements or cash surpluses, ONEOK provides cash to its respective divisions or subsidiaries or the divisions or subsidiaries provide cash to ONEOK. The amounts receivable, or due, under this program are due on demand. Activities under this program are reflected in the Balance Sheets as short-term note payable to ONEOK.

Principal under this note payable bears interest based on ONEOK’s weighted-average cost of short-term debt, plus a utilization fee of 50 basis points, calculated monthly. The weighted-average interest rates for this note payable were 0.92 percent, 0.96 percent and 0.82 percent for 2013, 2012 and 2011, respectively. Changes in this note payable represented any funding required from ONEOK for working capital or capital expenditures and after giving effect to the transfers to ONEOK from our cash flows from operations.

Affiliate receivables were not material as of December 31, 2013 and 2012, and are included in accounts receivable on our Balance Sheets.

Long-Term Line of Credit with ONEOK - Prior to the separation, we had a $1.1 billion long-term line of credit with ONEOK. The weighted-average interest rate on the amounts outstanding for the year was 5.79 percent, 6.43 percent and 6.87 percent in 2013, 2012 and 2011, respectively. The interest rate on the revolver is reset each year based on ONEOK’s outstanding debt plus an adjustment of 50 basis points for ONEOK’s cost to administer the program. The amount utilized on the long-term line of credit was adjusted annually with an offset to owner’s net investment to adjust our debt-to-capital ratio to a level consistent with ONEOK’s debt-to-capital ratio.

Immediately prior to the contribution of the natural gas distribution business to us, ONEOK contributed to the capital of the natural gas distribution business all amounts outstanding under the note payable and long-term line of credit.

Agreements with ONEOK after the Separation - We entered into the Separation and Distribution Agreement and several other agreements with ONEOK to effect the separation and provide a framework for our relationships with ONEOK after the distribution. These agreements govern the relationship between ONEOK and us subsequent to the completion of the distribution, and provide for the allocation among ONEOK and us of the assets, liabilities and obligations (including employee benefits and tax-related assets and liabilities) relating to the natural gas distribution business attributable to periods prior to, at and after the distribution. In addition to the Separation and Distribution Agreement (which contains many of the key provisions related to our separation from ONEOK and the distribution of our shares of common stock to ONEOK shareholders), these agreements include:

Transition Services Agreement;
Tax Matters Agreement; and
Employee Matters Agreement.
DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Notes) (Predecessor [Member])
Fair Value Disclosures
4.
DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Derivative Instruments - We held purchased natural gas call options with fair values of $8.7 million and $1.8 million at December 31, 2013 and 2012, respectively. The premiums paid are recorded in current regulatory assets as these contracts are included in, and recoverable through, the purchased-gas cost adjustment mechanisms. We recorded losses of $4.5 million, $5.9 million and $14.5 million for the years ended December 31, 2013, 2012 and 2011, respectively, which are deferred as part of our unrecovered purchased-gas costs in current regulatory assets or other current liabilities in our Balance Sheets. Our natural gas call options are classified as Level 1 as fair value amounts are based on unadjusted quoted prices in active markets including NYMEX-settled prices. There were no transfers between levels for the years ended December 31, 2013, 2012 and 2011.

All of our natural gas derivative financial contracts are with our affiliate ONEOK Energy Services Company, a subsidiary of ONEOK. ONEOK Energy Services Company entered into similar natural gas derivative financial contracts with third parties at our direction and on our behalf. ONEOK announced an accelerated wind down of ONEOK Energy Services Company operations that is expected to be substantially completed by April 2014. We expect to enter into natural gas derivative financial contracts with third parties in the future.

Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable and accounts payable is equal to book value, due to the short-term nature of these items. Our cash and cash equivalents are comprised of bank and money market accounts and are classified as Level 1.

Debt payable to ONEOK includes short-term notes payable and a long-term line of credit as discussed in Note 3. The short-term notes payable to ONEOK are due upon demand and, therefore, the carrying amounts approximate fair value and are classified as Level 1. The estimated fair value of our long-term line of credit with ONEOK was $1.2 billion and $1.3 billion at December 31, 2013 and 2012, respectively. The book value of our long-term line of credit with ONEOK was $1.0 billion at December 31, 2013 and 2012, respectively. The long-term line of credit was valued using the income approach by discounting the future payments. Significant inputs include the discount rate which we estimated using a rate at which we could have borrowed at each measurement date. All inputs to this calculation are Level 3.
REGULATORY ASSETS AND LIABILITIES (Notes) (Predecessor [Member])
Schedule of Regulatory Assets and Liabilities
5.
REGULATORY ASSETS AND LIABILITIES

The table below presents a summary of regulatory assets, net of amortization, and liabilities for the periods indicated:
 
 
 
 
December 31, 2013
 
 
Remaining Recovery Period
 
Current
 
Noncurrent
 
Total
 
 
 
 
(Thousands of dollars)
Under-recovered purchased-gas costs
 
1 year
 
$
12,393

 
$

 
$
12,393

Reacquired debt costs
 
14 years
 
812

 
10,541

 
11,353

Pension and postretirement benefit costs
 
5 to 20 years
 
298

 
9,556

 
9,854

Weather normalization
 
1 year
 
3,730

 

 
3,730

Recoupable take-or-pay
 
1 year
 
586

 

 
586

Transition costs
 
23 years
 
19

 
433

 
452

Other
 
1 to 25 years
 
3,819

 
3,292

 
7,111

Total regulatory assets, net of amortization
 
 
 
21,657

 
23,822

 
45,479

Accumulated removal costs (a)
 
up to 50 years
 

 
(21,375
)
 
(21,375
)
Over-recovered purchased-gas costs (b)
 
1 year
 
(17,796
)
 

 
(17,796
)
Total regulatory liabilities
 
 
 
(17,796
)
 
(21,375
)
 
(39,171
)
Net regulatory assets and liabilities
 
 
 
$
3,861

 
$
2,447

 
$
6,308

(a) Included in other deferred credits in our Balance Sheets.
(b) Included in other current liabilities in our Balance Sheets.
 
 
 
 
December 31, 2012
 
 
Remaining Recovery Period
 
Current
 
Noncurrent
 
Total
 
 
 
 
(Thousands of dollars)
Under-recovered purchased-gas costs
 
1 year
 
$
29,170

 
$

 
$
29,170

Reacquired debt costs
 
15 years
 
811

 
11,353

 
12,164

Pension and postretirement benefit costs
 
5 to 20 years
 
992

 
11,354

 
12,346

Weather normalization
 
1 year
 
18,978

 

 
18,978

Recoupable take-or-pay
 
2 years
 
6,911

 
622

 
7,533

Transition costs
 
25 years
 
442

 
10,610

 
11,052

Ad valorem tax
 
1 year
 
7,038

 

 
7,038

Other
 
1 to 26 years
 
4,377

 
4,239

 
8,616

Total regulatory assets, net of amortization
 
 
 
68,719

 
38,178

 
106,897

Accumulated removal costs (a)
 
up to 50 years
 

 
(29,526
)
 
(29,526
)
Over-recovered purchased-gas costs (b)
 
1 year
 
(9,584
)
 

 
(9,584
)
Total regulatory liabilities
 
 
 
(9,584
)
 
(29,526
)
 
(39,110
)
Net regulatory assets and liabilities
 
 
 
$
59,135

 
$
8,652

 
$
67,787

(a) Included in other deferred credits in our Balance Sheets.
(b) Included in other current liabilities in our Balance Sheets.

Regulatory assets on our Balance Sheets, as authorized by the various regulatory commissions, are probable of recovery. Base rates are designed to provide a recovery of cost during the period rates are in effect but do not generally provide for a return on investment for amounts we have deferred as regulatory assets. All of our regulatory assets recoverable through base rates are subject to review by the respective regulatory commissions during future rate proceedings. We are not aware of any evidence that these costs will not be recoverable through either rate riders or base rates, and we believe that we will be able to recover such costs, consistent with our historical recoveries.

The OCC has authorized Oklahoma Natural Gas’ recovery of the recoupable take-or-pay settlement, and pension and postretirement benefit costs over a 10 to 20 year period. The KCC has authorized Kansas Gas Service’s recovery of pension and postretirement benefit costs over a period of 5 years.

Unrecovered purchased-gas costs represents the costs that have been over- or under-recovered from customers through the purchased-gas cost adjustment mechanisms and includes natural gas utilized in our operations.

We amortize reacquired debt costs in accordance with the accounting guidelines prescribed by the OCC and KCC.

In December 2013, the KCC approved a settlement agreement between ONEOK, the staff of the KCC, and the Citizens’ Utility Ratepayer Board that authorized the transfer of ONEOK’s Kansas Gas Service natural gas distribution assets to us. As a result, Kansas Gas Service expensed certain transition costs associated with ONEOK’s acquisition of Kansas Gas Service in 1997 that previously had been recorded as a regulatory asset and amortized and recovered in rates over a 40-year period. As such, we recorded a noncash charge to income of approximately $10.2 million before taxes during 2013 in depreciation and amortization.

Weather normalization represents revenue over- or under-recovered through the weather normalization adjustment rider in Kansas. This amount is deferred as a regulatory asset for a 12-month period. Kansas Gas Service then applies an adjustment to the customers’ bills for 12 months to refund the over-collected revenue or bill the under-collected revenue.

Ad valorem tax represents an increase in Kansas Gas Service’s taxes above the amount approved in a rate case. Kansas law permits a utility to file a tariff to recover additional ad valorem tax expense incurred above the amount currently recovered in the cost of service rate. This excess amount is recoverable through a surcharge and can be recovered, provided the utility reports the change in rates to the KCC, on an annual basis.

Recovery through rates resulted in amortization of regulatory assets of approximately $32.0 million, including $10.2 million related to certain transition costs as described above, for the year ended December 31, 2013. Recovery through rates resulted in amortization of regulatory assets of approximately $18.3 million and $26.0 million for the years ended December 31, 2012 and 2011, respectively.

We collect through our rates the estimated costs of removal on certain regulated properties through depreciation expense, with a corresponding credit to accumulated depreciation and amortization. These removal costs are nonlegal obligations; however, the amounts collected that are in excess of these nonlegal asset-removal costs incurred are accounted for as a regulatory liability. We have made an estimate of our regulatory liability using current rates since the last general rate order in each of our jurisdictions. We record the estimated nonlegal asset removal obligation in noncurrent liabilities in other deferred credits on our Balance Sheets.
PROPERTY, PLANT AND EQUIPMENT (Notes) (Predecessor [Member])
PROPERTY, PLANT AND EQUIPMENT
6.
PROPERTY, PLANT AND EQUIPMENT

The following table sets forth our property, plant and equipment by property type, for the periods indicated:
 
 
December 31,
 
December 31,
 
 
2013
 
2012
 
 
(Thousands of dollars)
Natural gas distribution pipelines and related equipment
 
$
3,703,593

 
$
3,512,660

Natural gas transmission pipelines and related equipment
 
430,042

 
402,030

General plant and other
 
326,004

 
304,346

Construction work in process
 
74,435

 
50,341

Property, plant and equipment
 
4,534,074

 
4,269,377

Accumulated depreciation and amortization
 
(1,489,216
)
 
(1,442,423
)
Net property, plant and equipment
 
$
3,044,858

 
$
2,826,954



The average depreciation rates for our property are set forth in the following table for the periods indicated:
Years Ended December 31,
2013
 
2012
 
2011
2.0% - 3.0%
 
2.0% - 3.0%
 
2.0% - 2.9%


We recorded capitalized interest of $1.3 million, $1.3 million and $1.7 million for the years ended December 31, 2013, 2012 and 2011, respectively. We incurred liabilities for construction work in process that had not been paid at December 31, 2013, 2012 and 2011 of $10.5 million, $12.0 million and $3.7 million, respectively. Such amounts are not included in capital expenditures on the Statements of Cash Flows.
SHARE-BASED PAYMENTS (Notes) (Predecessor [Member])
Disclosure of Compensation Related Costs, Share-based Payments
7.
SHARE-BASED PAYMENTS

Prior to the separation, certain employees who directly supported our operations participated in the ECP and the LTI Plan, which provide for the granting of stock-based compensation. We were charged by ONEOK for share-based compensation expense related to employees that directly supported our operations. ONEOK also charged us for the allocated costs of certain employees of ONEOK (including stock-based compensation) who provided general and administrative services on our behalf. Information included in this note is limited to share-based compensation associated with employees that directly supported our operations in 2013, 2012 and 2011. See Note 3 for total costs charged to us by ONEOK.

Compensation cost charged to us for employees who directly supported our operations for ONEOK’s share-based payment plans was $9.7 million, $4.8 million and $10.9 million for 2013, 2012 and 2011, respectively, which is net of $6.1 million, $3.0 million and $7.1 million of tax benefits, respectively. Compensation costs capitalized for employees who directly supported our operations associated with ONEOK’s share-based payment plans were not material for 2013 and 2012 and totaled $2.2 million in 2011.

Restricted Stock Units - ONEOK has granted restricted stock units to key employees that vest over a three-year period and entitle the grantee to receive shares of its common stock. Restricted stock unit awards are measured at fair value as if they were vested and issued on the grant date, reduced by expected dividend payments and adjusted for estimated forfeitures. No dividends were paid prior to vesting on the restricted stock units granted prior to 2013. Beginning in 2013, restricted stock unit awards granted accrue dividend equivalents in the form of additional restricted stock units prior to vesting. Compensation expense is recognized on a straight-line basis over the vesting period of the award. For all awards outstanding, a forfeiture rate of 3 percent based on historical forfeitures under ONEOK’s share-based payment plans is used.

Performance Unit Awards - ONEOK grants performance unit awards to key employees. The shares of its common stock underlying the performance units vest at the expiration of a three-year period if certain performance criteria are met by ONEOK as determined by the Executive Compensation Committee of the ONEOK Board of Directors. Upon vesting, a holder of performance units is entitled to receive a number of shares of common stock equal to a percentage (0 percent to 200 percent) of the performance units granted, based on ONEOK’s total shareholder return over the vesting period, compared with the total shareholder return of a peer group of other energy companies over the same period. Compensation expense is recognized on a straight-line basis over the period of the award.

If paid, the outstanding performance unit awards entitle the grantee to receive the grant in shares of ONEOK common stock. The outstanding performance unit awards are equity awards with a market-based condition, which results in the compensation cost for these awards being recognized over the requisite service period, provided that the requisite service period is fulfilled, regardless of when, if ever, the market condition is satisfied. The fair value of these performance units was estimated on the grant date based on a Monte Carlo model. For all awards outstanding, a forfeiture rate of 3 percent based on historical forfeitures under ONEOK’s share-based payment plans was used. No dividends were paid prior to vesting on performance stock units granted prior to 2013. Beginning in 2013, performance stock unit awards granted will accrue dividend equivalents in the form of additional performance units prior to vesting. The compensation expense on these awards will only be adjusted for changes in forfeitures.

We established the ONE Gas, Inc. Equity Compensation Plan, effective upon the separation. All 2011 awards were vested and paid out prior to the separation.

Restricted Stock Unit Activity

As of December 31, 2013, there was $1.6 million of total unrecognized compensation cost related to the nonvested restricted stock unit awards of employees who directly supported our operations, which is expected to be recognized over a weighted-average period of 1.6 years. The following tables set forth activity and various statistics for the ONEOK restricted stock unit awards:
 
 
Number of
Shares
 
Weighted-
Average Price
Nonvested December 31, 2012
 
205,300

 
$
26.89

Granted
 
27,930

 
$
47.36

Released to participants
 
(84,114
)
 
$
19.69

Forfeited
 
(11,446
)
 
$
37.42

Nonvested December 31, 2013
 
137,670

 
$
34.57

 
 
2013
 
2012
 
2011
Weighted-average grant date fair value (per share)
 
$
47.36

 
$
36.60

 
$
28.50

Fair value of shares granted (thousands of dollars)
 
$
1,323

 
$
2,046

 
$
2,310



Performance Unit Activity

As of December 31, 2013, there was $3.4 million of total unrecognized compensation cost related to the nonvested performance unit awards of employees who directly supported our operations, which is expected to be recognized over a weighted-average period of 1.6 years. The following tables set forth activity and various statistics related to the ONEOK performance unit awards and the assumptions used in the valuations of the 2013, 2012 and 2011 grants at the grant date:
 
 
Number of
Units
 
Weighted-
Average Price
Nonvested December 31, 2012
 
363,874

 
$
32.90

Granted
 
58,355

 
$
51.89

Released to participants
 
(130,975
)
 
$
24.05

Forfeited
 
(26,717
)
 
$
43.07

Nonvested December 31, 2013
 
264,537

 
$
40.45

 
 
2013
 
2012
 
2011
Volatility (a)
 
22.27%
 
27.00%
 
39.91%
Dividend yield
 
3.04%
 
2.86%
 
3.30%
Risk-free interest rate
 
0.42%
 
0.38%
 
1.33%
(a) - Volatility based on historical volatility over three years using daily stock price observations.
 
 
2013
 
2012
 
2011
Weighted-average grant date fair value (per share)
 
$
52.30

 
$
42.39

 
$
34.68

Fair value of shares granted (thousands of dollars)
 
$
2,926

 
$
4,286

 
$
5,026



Employee Stock Purchase Plan

Prior to the separation, certain employees who directly supported our operations participated in the ONEOK, Inc. Employee Stock Purchase Plan (the ESPP). Subject to certain exclusions, all full-time ONEOK employees are eligible to participate in the ESPP. Employees can choose to have up to 10 percent of their annual base pay withheld to purchase ONEOK’s common stock, subject to terms and limitations of the plan. The purchase price of the stock is 85 percent of the lower of the average market price of ONEOK’s common stock on the grant date or exercise date. Compensation cost, before taxes, charged to us for employees who directly supported our operations reflects $2.7 million, $0.8 million and $3.2 million for 2013, 2012 and 2011, respectively, for the ESPP.

Employee Stock Award Program

Prior to the separation, certain employees who directly supported our operations participated in ONEOK’s Employee Stock Award Program. Under the program, each time the per-share closing price of ONEOK common stock on the NYSE closed for the first time at or above each $1.00 increment above its previous historical high closing price, ONEOK issued, for no monetary consideration, one share of its common stock to all eligible employees. Compensation cost, before taxes, charged to us for employees who directly supported our operations reflects $4.2 million, $1.2 million and $9.8 million for 2013, 2012 and 2011, respectively, related to the Employee Stock Award Plan.

Impact of Separation on Stock Compensation Plans

In connection with the separation from ONEOK on January 31, 2014, we entered into an Employee Matters Agreement with ONEOK which provides that our employees may no longer participate in stock compensation plans sponsored or maintained by ONEOK. Pursuant to the Employee Matters Agreement, we made certain adjustments to the number of the share-based compensation awards recorded, with the intention of preserving the intrinsic value of the awards immediately prior to the separation.

Restricted Stock Units - ONEOK restricted stock units were converted to those of the entity where the employee holding them is working immediately post-separation. Therefore, ONEOK restricted stock units held by our employees were surrendered as a result of the separation, and new restricted-unit awards were granted concurrently by us with an equivalent intrinsic value as compared with the intrinsic value of the ONEOK awards immediately prior to the separation.

Performance Unit Awards - ONEOK performance unit awards held by our employees were surrendered as a result of the separation, and new performance unit awards were granted concurrently by us with an equivalent intrinsic value as compared with the intrinsic value of the ONEOK awards immediately prior to the separation.

Employee Stock Purchase Plan - For our employees, enrollment in the plan was terminated upon the separation. Our employees will receive shares of ONEOK at the end of the offering period based upon the contributions made while employed at ONEOK.

Deferred Awards - Deferred shares associated with vested restricted stock units or performance awards held by current or former employees were adjusted to provide holders one deferred share of our stock for every four deferred shares of ONEOK stock.
EMPLOYEE BENEFIT PLANS (Notes) (Predecessor [Member])
EMPLOYEE BENEFIT PLANS
8.
EMPLOYEE BENEFIT PLANS

Certain ONEOK employees participate in defined benefit pension plans and postretirement health and welfare plans (Shared Plans) sponsored by ONEOK, including employees who directly support our operations. We historically have accounted for such Shared Plans as multiemployer benefit plans. Accordingly, we did not record an asset or liability to recognize the funded status of the Shared Plans. We recognized a liability only for any required contributions to the Shared Plans that were accrued and unpaid at the balance sheet date. The related pension and postretirement expenses were allocated to us based on plan participants who directly supported our operations. These pension and postretirement benefit costs included amounts associated with vested participants who are no longer employees. As described in Note 3, ONEOK also charged us for the allocated cost of certain employees of ONEOK who provided general and administrative services on our behalf. ONEOK included an allocation of the benefit costs associated with these ONEOK employees based upon its allocation methodology, not necessarily specific to the employees providing general and administrative services on our behalf. As a result, the information described below is limited to amounts associated with the employees who directly supported our operations.

Shared Retirement and Postretirement Benefit Plans

Shared Retirement Plans - ONEOK historically has maintained a defined benefit pension plan covering nonbargaining-unit employees hired before January 1, 2005, and certain bargaining-unit employees hired before December 15, 2011. Nonbargaining unit employees hired after December 31, 2004; employees represented by Local No. 304 of the International Brotherhood of Electrical Workers (IBEW) hired on or after July 1, 2010; employees represented by the United Steelworkers hired on or after December 15, 2011; and employees who accepted a one-time opportunity to opt out of ONEOK’s pension plan were covered by a profit-sharing plan. Certain employees of the Texas Gas Services division of ONEOK were entitled to benefits under a frozen cash-balance pension plan. In addition, ONEOK has a supplemental executive retirement plan for the benefit of certain officers. No new participants in the supplemental executive retirement plan have been approved since 2005, and it was formally closed to new participants as of January 1, 2014. ONEOK funds its pension costs at a level needed to maintain or exceed the minimum funding levels required by the Employee Retirement Income Security Act of 1974, as amended, and the Pension Protection Act of 2006. Pension expense charged to us for employees directly supporting our operations by ONEOK for 2013, 2012 and 2011 totaled $35.0 million, $22.8 million and $18.9 million, respectively.

Shared Postretirement Benefit Plans - ONEOK sponsors health and welfare plans that provide postretirement medical and life insurance benefits to certain employees who retire with at least five years of service. The postretirement medical plan is contributory based on hire date, age and years of service, with retiree contributions adjusted periodically, and contains other cost-sharing features such as deductibles and coinsurance. Other postretirement benefit expense charged to us for employees directly supporting our operations by ONEOK for 2013, 2012 and 2011 totaled $12.3 million, $16.6 million and $17.2 million, respectively.

Actuarial Assumptions - The following table sets forth the weighted-average assumptions used by ONEOK to determine the periodic benefit costs for the periods indicated:
 
 
Years Ended December 31,
 
 
2013
 
2012
 
2011
Discount rate - pension plans
 
4.25%
 
5.00%
 
5.50%
Discount rate - postretirement plans
 
4.00%
 
5.00%
 
5.50%
Expected long-term return on plan assets
 
8.25%
 
8.25%
 
8.25%
Compensation increase rate
 
3.45% - 3.50%
 
3.20% - 3.80%
 
3.30% - 3.90%


Regulatory Treatment - The OCC, KCC and regulatory authorities in Texas have approved the recovery of pension costs and postretirement benefits costs through rates for Oklahoma Natural Gas, Kansas Gas Service and Texas Gas Service, respectively. The costs recovered through rates are based on current funding requirements and the net periodic benefit cost for pension and postretirement costs. Differences, if any, between the expense and the amount recovered through rates would be reflected in earnings, net of authorized deferrals.

We historically have recovered pension and postretirement benefit costs through rates. We believe it is probable that regulators will continue to include the net periodic pension and postretirement benefit costs in our cost of service.

Other Employee Benefit Plans

401(k) Plan - ONEOK has a 401(k) Plan covering all full-time employees, and employee contributions are discretionary. ONEOK matches 100 percent of each participant’s eligible contribution up to 6 percent of each participant’s eligible compensation, subject to certain limits. Compensation expense charged to us for employees who directly supported our operations by ONEOK totaled $8.3 million, $8.4 million and $8.5 million in 2013, 2012 and 2011, respectively for ONEOK’s matching contributions to this plan.

Profit-Sharing Plan - ONEOK historically has maintained a profit-sharing plan for all nonbargaining unit employees hired after December 31, 2004, and employees covered by the IBEW collective bargaining agreement hired after June 30, 2010. Nonbargaining unit employees who were employed prior to January 1, 2005, and employees covered by the IBEW collective bargaining agreement employed prior to July 1, 2010, were given a one-time opportunity to make an irrevocable election to participate in the profit-sharing plan and not accrue any additional benefits under ONEOK’s defined benefit pension plan after December 31, 2004, and June 30, 2010, respectively. Employees covered by the United Steelworker collective bargaining agreement employed prior to December 16, 2011, were given a one-time opportunity to make an irrevocable election to participate in the profit-sharing plan. ONEOK historically has made a contribution to the profit-sharing plan each quarter equal to 1 percent of each participant’s eligible compensation during the quarter. Additional discretionary employer contributions may be made at the end of each year. Employee contributions are not allowed under the plan. Compensation expense associated with ONEOK’s contributions made to the plan for employees who directly supported our operations were $1.6 million, $2.1 million and $2.1 million in 2013, 2012 and 2011, respectively.

Employee Deferred Compensation Plan - The ONEOK, Inc. 2005 Nonqualified Deferred Compensation Plan provides select employees, as approved by ONEOK’s Board of Directors, with the option to defer portions of their compensation and provides nonqualified deferred compensation benefits that are not available due to limitations on employer and employee contributions to qualified defined contribution plans under the federal tax laws. Contributions made to the plan for employees who directly supported our operations were not material in 2013, 2012 and 2011.

ONE Gas Employee Benefit Plans - In connection with the separation from ONEOK, we entered into an Employee Matters Agreement with ONEOK, which provides that our employees no longer participate in benefit plans sponsored or maintained by ONEOK as of the separation date. Effective January 1, 2014, the ONEOK defined benefit pension plans and postretirement benefit plans transferred assets and obligations related to those employees transferring to ONE Gas to the new ONE Gas plans. As a result, we recorded sponsored pension and postretirement plan obligations of approximately $1.1 billion, and sponsored pension and postretirement plan assets of approximately $1.0 billion. Additionally, as a result of the transfer of unrecognized losses from ONEOK, our regulatory assets and deferred income taxes increased $86 million and $331 million, respectively.
INCOME TAXES (Notes) (Predecessor [Member])
INCOME TAXES
9.
INCOME TAXES

The following table sets forth our provision for income taxes for the periods indicated:
 
Years Ended December 31,
 
2013
 
2012
 
2011
 
(Thousands of dollars)
Current income tax provision (benefit)
 
 
 
 
 
Federal
$

 
$

 
$
(27,093
)
State
67

 
360

 
(4,087
)
Total current income tax provision (benefit)
67

 
360

 
(31,180
)
Deferred income tax provision
 
 
 
 
 
Federal
53,562

 
51,481

 
75,304

State
8,643

 
8,010

 
11,880

Total deferred income tax provision
62,205

 
59,491

 
87,184

Total provision for income taxes
$
62,272

 
$
59,851

 
$
56,004



The following table is a reconciliation of our income tax provision for the periods indicated:
 
Years Ended December 31,
 
2013
 
2012
 
2011
 
(Thousands of dollars)
Income before income taxes
$
161,467

 
$
156,360

 
$
142,762

Federal statutory income tax rate
35
%
 
35
%
 
35
%
Provision for federal income taxes
56,513

 
54,726

 
49,967

State income taxes, net of federal tax benefit
5,661

 
5,423

 
4,278

Other, net
98

 
(298
)
 
1,759

Income tax provision
$
62,272

 
$
59,851

 
$
56,004



The following table sets forth the tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities for the periods indicated:
 
December 31,
 
December 31,
 
2013
 
2012
 
(Thousands of dollars)
Deferred tax assets
 
 
 
Net operating loss
$
40,125

 
$
51,623

Other
8,249

 
1,521

Total deferred tax assets
48,374

 
53,144

Deferred tax liabilities
 
 
 
Excess of tax over book depreciation
750,305

 
690,776

Purchased-gas cost adjustment
4,695

 
6,513

Other regulatory assets and liabilities, net
2,563

 
8,684

Total deferred tax liabilities
757,563

 
705,973

Net deferred tax liabilities
$
709,189

 
$
652,829



We had no income taxes payable or receivable at December 31, 2013 and 2012. We do not make cash payments directly to taxing jurisdictions; rather, our share of ONEOK’s tax payments or refunds received are reflected as changes in short-term notes payable to ONEOK.

The net operating losses begin expiring in 2031. The company, or its affiliates, expects to utilize all of the net operating losses prior to their expiration dates.
COMMITMENTS AND CONTINGENCIES (Notes) (Predecessor [Member])
COMMITMENTS AND CONTINGENCIES
10.
COMMITMENTS AND CONTINGENCIES

Commitments - Operating leases represent future minimum lease payments under noncancelable leases covering office space, equipment and vehicles. Rental expense was $4.8 million in both 2013 and 2012, and $4.6 million in 2011. The following table sets forth our operating lease payments for the periods indicated:
Operating Leases
(Millions of dollars)
2014
 
$
2.7

2015
 
2.4

2016
 
2.2

2017
 
2.0

2018
 
1.9

Thereafter
 
3.3

Total
 
$
14.5



Environmental Matters - We are subject to multiple historical, wildlife preservation and environmental laws and/or regulations, that 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. 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.

Of the 12 sites, we have begun soil remediation on 11 sites. Regulatory closure has been achieved at three locations, and we have completed or are near completion of soil remediation at eight 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 2013, 2012 and 2011. We do not expect to incur material expenditures for these matters in the future.

The EPA’s rule on air-quality standards, RICE NESHAP, initially included a compliance date in 2013. Subsequent industry appeals and settlements with the EPA have extended timelines for compliance associated with the final RICE NESHAP rule. While the rule could require capital expenditures for the purchase and installation of new emissions-control equipment, we do not expect these expenditures will have a material impact on our results of operations, financial position or cash flows.

Pipeline Safety - We are subject to PHMSA regulations, including integrity-management regulations. The Pipeline Safety Improvement Act requires pipeline companies operating high-pressure 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 law increased maximum penalties for violating federal pipeline safety regulations and directs the DOT and 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 on 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.

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.
QUARTERLY FINANCIAL DATA (UNAUDITED) (Notes) (Predecessor [Member])
QUARTERLY FINANCIAL DATA (UNAUDITED)
11.    QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Year Ended December 31, 2013
 
 
 
 
 
 
(Thousands of dollars)
Revenues
 
$
635,933

 
$
311,608

 
$
219,725

 
$
522,686

Net margin
 
$
251,674

 
$
178,447

 
$
159,233

 
$
223,654

Operating income
 
$
101,838

 
$
39,307

 
$
14,189

 
$
65,014

Net income
 
$
53,492

 
$
14,951

 
$
434

 
$
30,318

 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Year Ended December 31, 2012
 
 
 
 
 
 
(Thousands of dollars)
Revenues
 
$
517,765

 
$
221,182

 
$
204,932

 
$
432,770

Net margin
 
$
237,348

 
$
157,488

 
$
150,987

 
$
210,566

Operating income
 
$
98,338

 
$
22,063

 
$
17,107

 
$
78,206

Net income
 
$
52,047

 
$
3,497

 
$
2,323

 
$
38,642

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) (Predecessor [Member])
12 Months Ended
Dec. 31, 2013
Predecessor [Member]
 
Significant Accounting Policies [Line Items]
 
Use of Estimates
Fair Value Measurement
Cash and Cash Equivalents
Revenue Recognition
Trade and Other Accounts Receivable
Inventory
Derivatives and Risk Management
Property, Plant and Equipment
Impairment of Goodwill and Long-Lived Assets, including Intangible Assets
Regulation
Regulation - We are subject to the rate regulation and accounting requirements of the OCC, KCC, RRC and various municipalities in Texas. We follow the accounting and reporting guidance for regulated operations. During the rate-making process, regulatory authorities set the framework for what we can charge customers for our services and establish the manner that our costs are accounted for, including allowing us to defer recognition of certain costs and permitting recovery of the amounts through rates over time, as opposed to expensing such costs as incurred. Examples include interim capital investment mechanisms such as GSRS and GRIP; interim rate adjustment mechanisms such as PBRC and cost of service adjustments, weather normalization, unrecovered purchased-gas costs, pension and postemployment benefit costs and ad valorem taxes. This allows us to stabilize rates over time rather than passing such costs on to the customer for immediate recovery. Actions by regulatory authorities could have an effect on the amount recovered from rate payers. Any difference in the amount recoverable and the amount deferred is recorded as income or expense at the time of the regulatory action. A write-off of regulatory assets and costs not recovered may be required if all or a portion of the regulated operations have rates that are no longer:•established by independent, third-party regulators;•designed to recover the specific entity’s costs of providing regulated services; and•set at levels that will recover our costs when considering the demand and competition for our services.See Note 5 for our regulatory asset and liability disclosures. 
Pension and Other Postretirement Plans
Income Taxes
Asset Retirement Obligations
Contingencies
Share-based Compensation, Option and Incentive Plans
Earnings Per Share
Segment Reporting
Use of Estimates - 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 amount 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. Items that may be estimated include, but are not limited to, the economic useful life of assets, fair value of assets and liabilities, provisions for doubtful accounts receivable, unbilled revenues for natural gas delivered but for which meters have not been read, natural gas purchased but for which no invoice has been received, provision for income taxes, including any deferred tax valuation allowances, the results of litigation and various other recorded or disclosed amounts.

We evaluate these estimates on an ongoing basis using historical experience and other methods we consider reasonable based on the particular circumstances. Nevertheless, actual results may differ significantly from the estimates. Any effects on our financial position or results of operations from revisions to these estimates are recorded in the period when the facts that give rise to the revision become known.
Fair Value Measurements - We define fair value as the price that would be received from the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date. We use the market and income approaches to determine the fair value of our assets and liabilities and consider the markets in which the transactions are executed. We measure the fair value of a group of financial assets and liabilities consistent with how a market participant would price the net risk exposure at the measurement date.

Fair Value Hierarchy - At each balance sheet date, we utilize a fair value hierarchy to classify fair value amounts recognized or disclosed in our financial statements based on the observability of inputs used to estimate such fair value. The levels of the hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Significant observable pricing inputs other than quoted prices included within Level 1 that are, either directly or indirectly, observable as of the reporting date. Essentially, this represents inputs that are derived principally from or corroborated by observable market data; and
Level 3 - May include one or more unobservable inputs that are significant in establishing a fair value estimate. These unobservable inputs are developed based on the best information available and may include our own internal data.

We recognize transfers into and out of the levels as of the end of each reporting period.

Determining the appropriate classification of our fair value measurements within the fair value hierarchy requires management’s judgment regarding the degree to which market data is observable or corroborated by observable market data. We categorize derivatives for which fair value is determined using multiple inputs within a single level, based on the lowest level input that is significant to the fair value measurement in its entirety. See Note 4 for additional disclosures of our fair value measurements.
Cash and Cash Equivalents - We participated in the ONEOK cash management program rather than maintaining significant cash equivalent balances. Amounts due to ONEOK resulting from the cash management program are recorded as a short-term note payable to ONEOK. See Note 3 for additional information on the cash management program.
Revenue Recognition - For regulated deliveries of natural gas, we read meters and bill customers on a monthly cycle. We recognize revenues upon the delivery of the natural gas commodity or services rendered to customers. Revenues are accrued for natural gas delivered and services rendered to customers, but not yet billed, based on estimates from the last meter reading date to month end (accrued unbilled revenue). The billing cycles for customers do not necessarily coincide with the accounting periods used for financial reporting purposes.
Accounts Receivable - Accounts receivable represent valid claims against nonaffiliated customers for natural gas sold or services rendered, net of allowances for doubtful accounts. We accrue unbilled revenues for natural gas that has been delivered but not yet billed at the end of an accounting period. Accrued unbilled revenue is based on a percentage estimate of amounts unbilled each month, which is dependent upon a number of factors, some of which require management’s judgment. These factors include customer consumption patterns and the impact of weather on usage. The amounts of accrued unbilled natural gas sales revenues at December 31, 2013 and 2012, were $143.7 million and $127.1 million, respectively.

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 an allowance 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 natural gas costs related to doubtful accounts through purchased-gas cost adjustment mechanisms. At December 31, 2013 and 2012, our allowance for doubtful accounts was $3.3 million and $2.7 million, respectively.
Inventories - Natural gas in storage is maintained on the basis of weighted-average cost. Natural gas inventories that are injected into storage are recorded in inventory based on actual purchase costs, including storage and transportation costs. Natural gas inventories that are withdrawn from storage are accounted for in our purchased-gas cost adjustment mechanisms at the weighted-average inventory cost.

Materials and supplies inventories, which are included in other current assets on our Balance Sheets, are stated at the lower of weighted-average cost or net realizable value. Our materials and supplies inventories totaled $16.6 million and $18.3 million at December 31, 2013 and 2012, respectively.
Derivatives and Risk Management Activities - We record all derivative instruments at fair value, with the exception of normal purchases and normal sales that are expected to result in physical delivery. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it, or if regulatory rulings require a different accounting treatment.

If certain conditions are met, we may elect to designate a derivative instrument as a hedge of exposure to changes in fair values or cash flows.

The table below summarizes the various ways in which we account for our derivative instruments and the impact on our financial statements:
 
 
Recognition and Measurement
Accounting Treatment
 
Balance Sheet
 
Income Statement
Normal purchases and
normal sales
-
Fair value not recorded
-
Change in fair value not recognized in earnings
Mark-to-market
-
Recorded at fair value
-
Change in fair value recognized in, and
recoverable through, the purchased-gas cost adjustment mechanisms

We have not elected to designate any of our derivative instruments as hedges. Gains or losses associated with the fair value of commodity derivative instruments entered into by us are included in, and recoverable through, the purchased-gas cost adjustment mechanisms.

See Note 4 for more discussion of our fair value measurements and hedging activities using derivatives.
Property, Plant and Equipment - Our properties are stated at cost, which includes direct construction costs such as direct labor, materials, burden and AFUDC. Generally, the cost of our property retired or sold, plus removal costs, less salvage, is charged to accumulated depreciation. Gains and losses from sales or retirement of an entire operating unit or system of our properties are recognized in income. Maintenance and repairs are charged directly to expense.

AFUDC represents the cost of borrowed funds used to finance construction activities. We capitalize interest costs during the construction or upgrade of qualifying assets. Capitalized interest is recorded as a reduction to interest expense.

Our properties are depreciated using the straight-line method over their estimated useful lives. Generally, we apply composite depreciation rates to functional groups of property having similar economic circumstances. We periodically conduct depreciation studies to assess the economic lives of our assets. These depreciation studies are completed as a part of our rate proceedings, and the changes in economic lives, if applicable, are implemented prospectively when the new rates are effective. Changes in the estimated economic lives of our property, plant and equipment could have a material effect on our financial position or results of operations.

Property, plant and equipment on our Balance Sheets includes construction work in process for capital projects that have not yet been placed in service and therefore are not being depreciated. Assets are transferred out of construction work in process when they are substantially complete and ready for their intended use.

See Note 6 for disclosures of our property, plant and equipment.

Impairment of Goodwill and Long-Lived Assets - We assess our goodwill for impairment at least annually as of July 1. Total goodwill was $158.0 million at December 31, 2013 and 2012, respectively. Our goodwill impairment analysis performed in 2013 and 2012, utilized a qualitative assessment and did not result in any impairment indicators. Subsequent to July 1, 2013, no event has occurred indicating that the implied fair value is less than the carrying value of our net assets. There also was no impairment charge resulting from our 2011 annual impairment test. A decline of 10 percent in our estimated fair value utilized in our 2011 test would not have resulted in an impairment indicator.

As part of our goodwill impairment test, we first assess qualitative factors (including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance) to determine whether it is more likely than not that our fair value is less than our carrying amount. If further testing is necessary, we perform a two-step impairment test for goodwill. In the first step, an initial assessment is made by comparing our fair value with our book value, including goodwill. If the fair value is less than the book value, an impairment is indicated, and we must perform a second test to measure the amount of the impairment. In the second test, we calculate the implied fair value of the goodwill by deducting the fair value of all tangible and intangible net assets from the fair value determined in step one of the assessment. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, we will record an impairment charge.

To estimate our fair value, we use two generally accepted valuation approaches, an income approach and a market approach, using assumptions consistent with a market participant’s perspective. Under the income approach, we use anticipated cash flows over a period of years plus a terminal value and discount these amounts to their present value using appropriate discount rates. Under the market approach, we apply acquisition multiples to forecasted cash flows. The acquisition multiples used are consistent with historical asset transactions. The forecasted cash flows are based on average forecasted cash flows over a period of years.

We assess our long-lived assets for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. An impairment is indicated if the carrying amount of a long-lived asset exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If an impairment is indicated, we record an impairment loss equal to the difference between the carrying value and the fair value of the long-lived asset. We determined that there were no asset impairments in 2013, 2012 or 2011.
Pension and Postretirement Employee Benefits - Certain benefit costs associated with employees who directly supported our operations were determined based on a specific employee basis. We were also allocated benefit costs associated with employees of ONEOK that provide general corporate services. These amounts were charged to us by ONEOK as described in Note 3. See Note 8 for additional information regarding pension and postretirement employee benefit plans.

For the periods presented, we were not the plan sponsor for these benefit plans. Accordingly, our Balance Sheets do not reflect any assets or liabilities related to these benefit plans.
Income Taxes - Our operations were included in the consolidated federal and state income tax returns of ONEOK. Our income tax provision has been calculated on a separate return basis. Accordingly, we have recognized deferred tax assets and liabilities for the difference between the financial statement and income tax basis of assets and liabilities and carry-forward items, based on income tax laws and rates existing at the time the temporary differences are expected to reverse as if we were a corporation for federal and state income tax purposes. In addition, ONEOK manages its tax position based upon the tax attributes of the consolidated group. Certain attributes may not be available to us if we were operating as an independent company.

The effect on deferred taxes of a change in tax rates is deferred and amortized for operations regulated by the OCC, KCC, RRC and various municipalities in Texas, if, as a result of an action by a regulator, it is probable that the effect of the change in tax rates will be recovered from or returned to customers through future rates. We continue to amortize previously deferred investment tax credits for ratemaking purposes over the periods prescribed by the OCC, KCC, RRC and various municipalities in Texas.

A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, as well as the current and forecasted business economics of our industry. We had no valuation allowance at December 31, 2013 and 2012.

We utilize a more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that is taken or expected to be taken in a tax return. We reflect penalties and interest as part of income tax expense as they become applicable for tax provisions that do not meet the more-likely-than-not recognition threshold and measurement attribute. There were no material uncertain tax positions at December 31, 2013 and 2012.

See Note 9 for additional discussion of income taxes.
Asset Retirement Obligations - Asset retirement obligations represent legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. Certain long-lived assets that comprise our natural gas distribution systems, primarily our pipeline assets, are subject to agreements or regulations that give rise to an asset retirement obligation for removal or other disposition costs associated with retiring the assets in place upon the discontinued use of the natural gas distribution system. We recognize the fair value of a liability for an asset retirement obligation in the period when it is incurred if a reasonable estimate of the fair value can be made. We are not able to estimate reasonably the fair value of the asset retirement obligations for portions of our assets because the settlement dates are indeterminable given our expected continued use of the assets with proper maintenance. We expect our natural gas distribution systems will continue in operation as long as natural gas supply and demand for natural gas distribution service exists. Based on the widespread use of natural gas for heating and cooking activities by residential and commercial customers in our service areas, management expects supply and demand to exist for the foreseeable future.

In accordance with long-standing regulatory treatment, we collect through rates the estimated costs of removal on certain regulated properties through depreciation expense, with a corresponding credit to accumulated depreciation and amortization. These removal costs collected through our rates include costs attributable to legal and nonlegal removal obligations; however, the amounts collected that are in excess of these nonlegal asset-removal costs incurred are accounted for as a regulatory liability for financial reporting purposes. Historically, with the exception of the regulatory authority in Kansas, the regulatory authorities that have jurisdiction over our regulated operations have not required us to quantify or disclose this amount; rather, these costs are addressed prospectively in depreciation rates and are set in each general rate order. We have made an estimate of our regulatory liability using current rates since the last general rate order in each of our jurisdictions; however, for financial reporting purposes, significant uncertainty exists regarding the future disposition of this regulatory liability, pending, among other issues, clarification of regulatory intent. We continue to monitor the regulatory requirements, and the liability may be adjusted as more information is obtained. We record the estimated asset removal obligation in noncurrent liabilities in other deferred credits on our Balance Sheets. To the extent this estimated liability is adjusted, such amounts will be reclassified between accumulated depreciation and amortization and other deferred credits and therefore will not have an impact on earnings.
Contingencies - Our accounting for contingencies covers a variety of business activities, including contingencies for legal and environmental exposures. We accrue these contingencies when our assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered and an amount can be estimated reasonably. We expense legal fees as incurred and base our legal liability estimates on currently available facts and our estimates of the ultimate outcome or resolution. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than the completion of a remediation feasibility study. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Actual results may differ from our estimates resulting in an impact, positive or negative, on earnings. See Note 10 for additional discussion of contingencies.
Share-Based Payments - Certain employees providing direct service to us participated in ONEOK’s share-based awards plans. The plans provide for ONEOK common stock based awards to both employees and ONEOK’s nonmanagement directors. The plans permit the granting of various types of awards including, but not limited to, performance units and restricted stock units. Awards may be granted for no consideration other than prior and future services or based on certain financial performance targets.

ONEOK charges us for compensation expense related to stock-based compensation awards granted to our employees that directly support our operations. Share-based compensation is also a component of allocated amounts charged to us by ONEOK for general and administrative personnel providing services on our behalf.
Earnings per Common Share - Historical earnings per share are not presented because we did not have common stock that was part of our capital structure for the periods presented.
Segments - We operate in one business segment: regulated public utilities that deliver natural gas to residential, commercial, industrial and transportation customers. We define business segments as components of an organization for which discrete financial information is available and operating results are evaluated on a regular basis by the chief operating decision maker (CODM) in order to assess performance and allocate resources. Our CODM is our Chief Executive Officer (CEO). Characteristics of our organization which were relied upon in making this determination include the similar nature of services we provide, the functional alignment of our organizational structure, and the reports that are regularly reviewed by the CODM for the purpose of assessing performance and allocating resources. Our management is functionally aligned and centralized, with performance evaluated based upon results of the entire distribution business. Capital allocation decisions are driven by asset integrity management and operating efficiency, not geographic location.

We evaluate performance based principally on operating income. Affiliate sales are recorded on the same basis as sales to unaffiliated customers and are discussed in further detail in Note 3. Net margin is comprised of total revenues less cost of natural gas. Cost of natural gas includes commodity purchases, fuel, storage and transportation costs and does not include an allocation of general operating costs or depreciation and amortization.

In 2013, 2012 and 2011, we had no single external customer from which we received 10 percent or more of our gross revenues.
RELATED-PARTY TRANSACTIONS (Tables) (Predecessor [Member], ONEOK, Inc. [Member])
Schedule of Related Party Transactions
The following table shows ONEOK’s and its subsidiaries’ transactions with us included in the Statements of Income for the periods indicated:
 
 
Years Ended December 31,
 
 
2013
 
2012
 
2011
 
 
(Thousands of dollars)
Cost of natural gas
 
$
226,582

 
$
135,650

 
$
203,585

Operations and maintenance
 
 

 
 

 
 

Direct employee labor and benefit costs
 
177,526

 
165,798

 
178,151

Allocated employee labor and benefit costs
 
29,955

 
24,994

 
25,452

Charges for general and administrative services
 
36,078

 
24,059

 
28,266

Depreciation and amortization
 
6,940

 
6,033

 
6,444

Other (income)/expense, net
 
(5,073
)
 
(2,668
)
 
1,419

Interest expense
 
60,930

 
60,305

 
53,357

Total
 
$
532,938

 
$
414,171

 
$
496,674

REGULATORY ASSETS AND LIABILITIES (Tables) (Predecessor [Member])
SCHEDULE OF REGULATED ASSETS AND LIABILITIES
The table below presents a summary of regulatory assets, net of amortization, and liabilities for the periods indicated:
 
 
 
 
December 31, 2013
 
 
Remaining Recovery Period
 
Current
 
Noncurrent
 
Total
 
 
 
 
(Thousands of dollars)
Under-recovered purchased-gas costs
 
1 year
 
$
12,393

 
$

 
$
12,393

Reacquired debt costs
 
14 years
 
812

 
10,541

 
11,353

Pension and postretirement benefit costs
 
5 to 20 years
 
298

 
9,556

 
9,854

Weather normalization
 
1 year
 
3,730

 

 
3,730

Recoupable take-or-pay
 
1 year
 
586

 

 
586

Transition costs
 
23 years
 
19

 
433

 
452

Other
 
1 to 25 years
 
3,819

 
3,292

 
7,111

Total regulatory assets, net of amortization
 
 
 
21,657

 
23,822

 
45,479

Accumulated removal costs (a)
 
up to 50 years
 

 
(21,375
)
 
(21,375
)
Over-recovered purchased-gas costs (b)
 
1 year
 
(17,796
)
 

 
(17,796
)
Total regulatory liabilities
 
 
 
(17,796
)
 
(21,375
)
 
(39,171
)
Net regulatory assets and liabilities
 
 
 
$
3,861

 
$
2,447

 
$
6,308

(a) Included in other deferred credits in our Balance Sheets.
(b) Included in other current liabilities in our Balance Sheets.
 
 
 
 
December 31, 2012
 
 
Remaining Recovery Period
 
Current
 
Noncurrent
 
Total
 
 
 
 
(Thousands of dollars)
Under-recovered purchased-gas costs
 
1 year
 
$
29,170

 
$

 
$
29,170

Reacquired debt costs
 
15 years
 
811

 
11,353

 
12,164

Pension and postretirement benefit costs
 
5 to 20 years
 
992

 
11,354

 
12,346

Weather normalization
 
1 year
 
18,978

 

 
18,978

Recoupable take-or-pay
 
2 years
 
6,911

 
622

 
7,533

Transition costs
 
25 years
 
442

 
10,610

 
11,052

Ad valorem tax
 
1 year
 
7,038

 

 
7,038

Other
 
1 to 26 years
 
4,377

 
4,239

 
8,616

Total regulatory assets, net of amortization
 
 
 
68,719

 
38,178

 
106,897

Accumulated removal costs (a)
 
up to 50 years
 

 
(29,526
)
 
(29,526
)
Over-recovered purchased-gas costs (b)
 
1 year
 
(9,584
)
 

 
(9,584
)
Total regulatory liabilities
 
 
 
(9,584
)
 
(29,526
)
 
(39,110
)
Net regulatory assets and liabilities
 
 
 
$
59,135

 
$
8,652

 
$
67,787

(a) Included in other deferred credits in our Balance Sheets.
(b) Included in other current liabilities in our Balance Sheets.
PROPERTY, PLANT AND EQUIPMENT (Tables) (Predecessor [Member], Regulated [Member])
The following table sets forth our property, plant and equipment by property type, for the periods indicated:
 
 
December 31,
 
December 31,
 
 
2013
 
2012
 
 
(Thousands of dollars)
Natural gas distribution pipelines and related equipment
 
$
3,703,593

 
$
3,512,660

Natural gas transmission pipelines and related equipment
 
430,042

 
402,030

General plant and other
 
326,004

 
304,346

Construction work in process
 
74,435

 
50,341

Property, plant and equipment
 
4,534,074

 
4,269,377

Accumulated depreciation and amortization
 
(1,489,216
)
 
(1,442,423
)
Net property, plant and equipment
 
$
3,044,858

 
$
2,826,954

The average depreciation rates for our property are set forth in the following table for the periods indicated:
Years Ended December 31,
2013
 
2012
 
2011
2.0% - 3.0%
 
2.0% - 3.0%
 
2.0% - 2.9%
SHARE-BASED PAYMENTS (Tables) (Predecessor [Member])
The following tables set forth activity and various statistics for the ONEOK restricted stock unit awards:
 
 
Number of
Shares
 
Weighted-
Average Price
Nonvested December 31, 2012
 
205,300

 
$
26.89

Granted
 
27,930

 
$
47.36

Released to participants
 
(84,114
)
 
$
19.69

Forfeited
 
(11,446
)
 
$
37.42

Nonvested December 31, 2013
 
137,670

 
$
34.57

 
 
2013
 
2012
 
2011
Weighted-average grant date fair value (per share)
 
$
47.36

 
$
36.60

 
$
28.50

Fair value of shares granted (thousands of dollars)
 
$
1,323

 
$
2,046

 
$
2,310

The following tables set forth activity and various statistics related to the ONEOK performance unit awards and the assumptions used in the valuations of the 2013, 2012 and 2011 grants at the grant date:
 
 
Number of
Units
 
Weighted-
Average Price
Nonvested December 31, 2012
 
363,874

 
$
32.90

Granted
 
58,355

 
$
51.89

Released to participants
 
(130,975
)
 
$
24.05

Forfeited
 
(26,717
)
 
$
43.07

Nonvested December 31, 2013
 
264,537

 
$
40.45

 
 
2013
 
2012
 
2011
Volatility (a)
 
22.27%
 
27.00%
 
39.91%
Dividend yield
 
3.04%
 
2.86%
 
3.30%
Risk-free interest rate
 
0.42%
 
0.38%
 
1.33%
(a) - Volatility based on historical volatility over three years using daily stock price observations.
 
 
2013
 
2012
 
2011
Weighted-average grant date fair value (per share)
 
$
52.30

 
$
42.39

 
$
34.68

Fair value of shares granted (thousands of dollars)
 
$
2,926

 
$
4,286

 
$
5,026

EMPLOYEE BENEFIT PLANS (Tables) (Predecessor [Member])
Weighted-average assumptions used to determine net periodic benefit costs
Actuarial Assumptions - The following table sets forth the weighted-average assumptions used by ONEOK to determine the periodic benefit costs for the periods indicated:
 
 
Years Ended December 31,
 
 
2013
 
2012
 
2011
Discount rate - pension plans
 
4.25%
 
5.00%
 
5.50%
Discount rate - postretirement plans
 
4.00%
 
5.00%
 
5.50%
Expected long-term return on plan assets
 
8.25%
 
8.25%
 
8.25%
Compensation increase rate
 
3.45% - 3.50%
 
3.20% - 3.80%
 
3.30% - 3.90%
INCOME TAXES (Tables) (Predecessor [Member])
The following table sets forth our provision for income taxes for the periods indicated:
 
Years Ended December 31,
 
2013
 
2012
 
2011
 
(Thousands of dollars)
Current income tax provision (benefit)
 
 
 
 
 
Federal
$

 
$

 
$
(27,093
)
State
67

 
360

 
(4,087
)
Total current income tax provision (benefit)
67

 
360

 
(31,180
)
Deferred income tax provision
 
 
 
 
 
Federal
53,562

 
51,481

 
75,304

State
8,643

 
8,010

 
11,880

Total deferred income tax provision
62,205

 
59,491

 
87,184

Total provision for income taxes
$
62,272

 
$
59,851

 
$
56,004

The following table is a reconciliation of our income tax provision for the periods indicated:
 
Years Ended December 31,
 
2013
 
2012
 
2011
 
(Thousands of dollars)
Income before income taxes
$
161,467

 
$
156,360

 
$
142,762

Federal statutory income tax rate
35
%
 
35
%
 
35
%
Provision for federal income taxes
56,513

 
54,726

 
49,967

State income taxes, net of federal tax benefit
5,661

 
5,423

 
4,278

Other, net
98

 
(298
)
 
1,759

Income tax provision
$
62,272

 
$
59,851

 
$
56,004

The following table sets forth the tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities for the periods indicated:
 
December 31,
 
December 31,
 
2013
 
2012
 
(Thousands of dollars)
Deferred tax assets
 
 
 
Net operating loss
$
40,125

 
$
51,623

Other
8,249

 
1,521

Total deferred tax assets
48,374

 
53,144

Deferred tax liabilities
 
 
 
Excess of tax over book depreciation
750,305

 
690,776

Purchased-gas cost adjustment
4,695

 
6,513

Other regulatory assets and liabilities, net
2,563

 
8,684

Total deferred tax liabilities
757,563

 
705,973

Net deferred tax liabilities
$
709,189

 
$
652,829

COMMITMENTS AND CONTINGENCIES (Tables) (Predecessor [Member])
Future Minimum Rental Payments for Operating Lease and Firm Transportation and Storage Contracts
The following table sets forth our operating lease payments for the periods indicated:
Operating Leases
(Millions of dollars)
2014
 
$
2.7

2015
 
2.4

2016
 
2.2

2017
 
2.0

2018
 
1.9

Thereafter
 
3.3

Total
 
$
14.5

QUARTERLY FINANCIAL DATA (UNAUDITED) (Tables) (Predecessor [Member])
Quarterly Financial Data
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Year Ended December 31, 2013
 
 
 
 
 
 
(Thousands of dollars)
Revenues
 
$
635,933

 
$
311,608

 
$
219,725

 
$
522,686

Net margin
 
$
251,674

 
$
178,447

 
$
159,233

 
$
223,654

Operating income
 
$
101,838

 
$
39,307