
2.	SEPARATION & RELATED-PARTY TRANSACTIONS

Distribution - On January 8, 2014, ONEOK’s board of directors approved the distribution 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, which were later exchanged for registered 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 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. 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.

Reorganization Adjustments - In accordance with the terms of the Separation and Distribution Agreement, ONEOK contributed the assets and liabilities of its natural gas distribution business to us. The noncash contributions below represent ONEOK assets and liabilities attributable to pension and other postretirement employee benefits, general corporate assets and liabilities and related deferred taxes not included previously in the ONE Gas Predecessor balance sheet, but the costs for which were included in ONE Gas Predecessor’s results of operations. The table below also includes the contribution of the short-term note payable to and long-term line of credit with ONEOK previously included in ONE Gas Predecessor balance sheets. The assets and liabilities below were recorded at historical cost as the reorganization was among entities under common control. Net transfers from ONEOK included:



(Thousands of dollars)
Property, plant and equipment, net	$	21,459
Regulatory assets, pension and other postretirement benefits	331,148
Other assets	80,700
Long-term line of credit with ONEOK	1,027,631
Short-term note payable to ONEOK	397,857
Pension and other postretirement benefits - liabilities	(123,800		)
Other liabilities	(34,404		)
Deferred taxes	(86,112		)
Accumulated other comprehensive loss	(3,393		)
Net contribution of assets (liabilities)	$	1,611,086
Less: Cash paid to ONEOK	1,130,000
Net transfers from ONEOK	$	481,086

Affiliate Transactions - Prior to our separation, we had certain transactions with ONEOK and its subsidiaries. We purchased a portion of our natural gas supply and natural gas transportation and storage services from ONEOK and its affiliates. These contracts were awarded through a competitive-bidding process, and the costs were recoverable through our purchased-gas cost adjustment mechanisms.

Prior to our separation, the Statements of Income included 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 were incurred specifically on our behalf, the costs were billed directly to us by ONEOK. In other situations, the costs were allocated to us through a variety of methods, depending upon the nature of the expenses. For example, a service that applied equally to all employees of ONEOK was allocated based upon the number of employees in each ONEOK affiliate. An expense benefiting us but having no direct basis for allocation was 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 included the following costs:

Corporate Services - These represent costs for certain employees of ONEOK who provided general and administrative services on our behalf. These charges were either directly identifiable or allocated based upon usage factors for our operations. In addition, we received other allocated costs for our share of general corporate expenses of ONEOK, which were determined based on our relative use of the service or, if there was no direct basis for allocation, were 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 - These represent benefit costs and other incentives, including group health and welfare benefits, pension plans, other postretirement benefit plans and employee stock-based compensation plans. Costs associated with incentive and stock-based compensation plans were determined on a specific identification basis for certain employees who directly supported our operations. All other employee benefit costs historically were 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 included 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 and $12.4 million during 2013 and 2012, respectively. Compensation costs charged to us by ONEOK in 2014 were not material. See Note 11 for additional information regarding share-based payments. Total cost charged to us by ONEOK related to pension and other postretirement health and welfare plans was $52.1 million and $43.4 million during 2013 and 2012, respectively, which is net of amounts deferred through regulatory mechanisms of $1.8 million and $4.1 million during 2013 and 2012, respectively. Cost related to pension and other postretirement health and welfare plans which was charged to us by ONEOK in 2014 was not material. See Note 12 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 an unsecured promissory note 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 long-term and short-term debt, respectively.

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
	(Thousands of dollars)
Cost of natural gas	$	226,582		$	135,650
Operations and maintenance
Direct employee labor and benefit costs	177,526			165,798
Allocated employee labor and benefit costs	29,955			24,994
Charges for general and administrative services	36,078			24,059
Depreciation and amortization	6,940			6,033
Other (income)/expense, net	(5,073		)	(2,668		)
Interest expense	60,930			60,305
Total	$	532,938		$	414,171

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

Following the separation, we and ONEOK are still providing services to each other under the Transition Services Agreement, but these services are now considered third-party transactions. The remaining related party transactions prior to the separation were not material in 2014.

Cash Management - Prior to the separation, we participated in ONEOK’s centralized cash management program that concentrated 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 provided that funds in excess of the daily needs of the operating divisions and subsidiaries were 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 had short-term cash requirements or cash surpluses, ONEOK provided cash to its respective divisions or subsidiaries or the divisions or subsidiaries provided cash to ONEOK. The amounts receivable, or due, under this program were due on demand. Activities under this program were 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 and 0.96 percent for 2013 and 2012, 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.

We had no affiliate receivables as of December 31, 2014. Affiliate receivables were not material as of December 31, 2013, 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 and 6.43 percent in 2013 and 2012, respectively. The interest rate on the revolver was 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.