Document And Entity Information

6 Months Ended

Jun. 30, 2017

Jul. 25, 2017

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

Yes

Entity Filer Category

Large Accelerated Filer

Entity Common Stock, Shares Outstanding

52,269,117

Document Fiscal Year Focus

2017

Document Fiscal Period Focus

Q2

Document Type

10-Q

Amendment Flag

false

Document Period End Date

Jun. 30, 2017

STATEMENTS OF INCOME (USD $)

In Thousands, except Per Share data, unless otherwise specified

3 Months Ended

6 Months Ended

Jun. 30, 2017

Jun. 30, 2016

Jun. 30, 2017

Jun. 30, 2016

Gross Margin

Revenues

$ 279,689

$ 245,923

$ 830,097

$ 754,288

Cost of natural gas

82,572

56,457

345,726

292,186

Net margin

197,117

189,466

484,371

462,102

Operating expenses

Operations and maintenance

101,241

97,119

210,598

203,250

Depreciation and amortization

37,851

35,565

74,870

70,249

General taxes

13,973

13,161

29,719

28,908

Total operating expenses

153,065

145,845

315,187

302,407

Operating income

44,052

43,621

169,184

159,695

Other income

875

416

2,121

434

Other expense

(462)

(314)

(802)

(769)

Interest expense, net

(11,305)

(10,848)

(22,786)

(21,695)

Income before income taxes

33,160

32,875

147,717

137,665

Income taxes

(12,537)

(12,575)

(50,638)

(52,621)

Net income

$ 20,623

$ 20,300

$ 97,079

$ 85,044

Earnings per share

Basic

$ 0.39

$ 1.85

$ 1.62

Diluted

$ 0.39

$ 0.38

$ 1.83

$ 1.61

Average shares (thousands)

Basic

52,553

52,386

52,565

52,452

Diluted

52,969

52,836

53,012

52,972

Dividends declared per share of stock

$ 0.42

$ 0.35

$ 0.84

$ 0.70

STATEMENTS OF COMPREHENSIVE INCOME STATEMENTS OF COMPREHENSIVE INCOME Parenthetical (USD $)

In Thousands, unless otherwise specified

3 Months Ended

6 Months Ended

Jun. 30, 2017

Jun. 30, 2016

Jun. 30, 2017

Jun. 30, 2016

STATEMENTS OF COMPREHENSIVE INCOME Parenthetical [Abstract]

Pension and other postemployment benefit plans, tax

$ (81)

$ (73)

$ (161)

$ (145)

STATEMENTS OF COMPREHENSIVE INCOME STATEMENTS OF COMPREHENSIVE INCOME (USD $)

In Thousands, unless otherwise specified

3 Months Ended

6 Months Ended

Jun. 30, 2017

Jun. 30, 2016

Jun. 30, 2017

Jun. 30, 2016

Net income

$ 20,623

$ 20,300

$ 97,079

$ 85,044

Other comprehensive income (loss), net of tax

Change in pension and postemployment benefit plan liability, net of tax of $(81), $(73), $(161), and $(145), respectively respectively

129

115

258

231

Other comprehensive income (loss), net of tax

129

115

258

231

Comprehensive income

$ 20,752

$ 20,415

$ 97,337

$ 85,275

BALANCE SHEETS (USD $)

In Thousands, unless otherwise specified

Jun. 30, 2017

Dec. 31, 2016

Property, plant and equipment

$ 5,545,302

$ 5,404,168

Accumulated depreciation and amortization

1,710,509

1,672,548

Net property, plant and equipment

3,834,793

3,731,620

Current assets

Cash and cash equivalents

5,113

14,663

Accounts receivable, net

152,278

290,944

Materials and supplies

36,876

34,084

Natural gas in storage

114,996

125,432

Regulatory assets

82,302

83,146

Other current assets

20,014

20,654

Total current assets

411,579

568,923

Goodwill and other assets

Regulatory assets

421,094

440,522

Goodwill

157,953

Other assets

47,711

43,773

Total goodwill and other assets

626,758

642,248

Total assets

4,873,130

4,942,791

Equity and long-term debt

Common stock, $0.01 par value: authorized 250,000,000 shares; issued 52,598,005 shares and outstanding 52,267,296 shares at June 30, 2017; issued 52,598,005 and outstanding 52,283,260 at December 31, 2016

526

Paid-in Capital

1,734,083

1,749,574

Retained earnings

224,570

161,021

Accumulated other comprehensive income (loss)

(4,457)

(4,715)

Treasury stock, at cost: 330,709 shares at June 30, 2017 and 314,745 shares at December 31, 2016

21,426

18,126

Total equity

1,933,296

1,888,280

Long-term debt, excluding current maturities and net issuance costs of $8,445 and $8,851, respectively

1,192,848

1,192,446

Total equity and long-term debt

3,126,144

3,080,726

Current liabilities

Notes payable

79,000

145,000

Accounts payable

60,458

131,988

Accrued interest

18,958

18,854

Accrued taxes other than income

33,562

42,571

Accrued liabilities

16,202

22,931

Customer deposits

60,523

61,209

Other current liabilities

23,982

21,380

Total current liabilities

292,685

443,933

Deferred credits and other liabilities [Abstract]

Deferred income taxes

1,077,992

1,038,568

Employee benefit obligations

296,881

303,507

Other deferred credits

79,428

76,057

Total deferred credits and other liabilities

1,454,301

1,418,132

Commitments and contingencies

Total liabilities and equity

$ 4,873,130

$ 4,942,791

BALANCE SHEETS BALANCE SHEETS Parenthetical (USD $)

In Thousands, except Share data, unless otherwise specified

Jun. 30, 2017

Dec. 31, 2016

Common stock, par value per share

$ 0.01

Common stock, shares authorized

250,000,000

Common stock, shares issued

52,598,005

Common stock, shares outstanding

52,267,296

52,283,260

Treasury stock, shares

330,709

314,745

Debt issuance costs

$ 8,445

$ 8,851

STATEMENTS OF CASH FLOWS (USD $)

In Thousands, unless otherwise specified

6 Months Ended

Jun. 30, 2017

Jun. 30, 2016

Document Fiscal Year Focus

2017

Operating activities

Net income

$ 97,079

$ 85,044

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

Depreciation and amortization

74,870

70,249

Deferred income taxes

50,308

36,031

Share-based compensation expense

4,951

7,451

Provision for doubtful accounts

3,501

2,757

Changes in assets and liabilities:

Accounts receivable

135,165

98,321

Materials and supplies

(2,792)

707

Natural gas in storage

10,436

38,412

Asset removal costs

(22,837)

(27,672)

Accounts payable

(68,992)

(42,897)

Accrued interest

104

53

Accrued taxes other than income

(9,009)

(5,573)

Accrued liabilities

(6,729)

(16,156)

Customer deposits

(686)

1,113

Regulatory assets and liabilities

19,782

(2,966)

Other assets and liabilities

(5,880)

31,341

Cash provided by operating activities

279,271

276,215

Investing activities

Capital expenditures

(154,666)

(144,760)

Other

477

492

Cash used in investing activities

(154,189)

(144,268)

Financing activities

Repayments of notes payable, net

(66,000)

(12,500)

Repurchase of common stock

(17,512)

(24,066)

Proceeds from Issuance of Common Stock

2,208

1,983

Dividends paid

(44,042)

(36,638)

Tax withholdings related to net share settlements of stock compensation

(9,286)

(8,902)

Cash used in financing activities

(134,632)

(80,123)

Change in cash and cash equivalents

(9,550)

51,824

Cash and cash equivalents at beginning of period

14,663

2,433

Cash and cash equivalents at end of period

$ 5,113

$ 54,257

STATEMENT OF CHANGES IN EQUITY (USD $)

In Thousands, except Share data

Total

Common Stock [Member]

Paid-in Capital [Member]

Retained Earnings [Member]

Treasury Stock [Member]

Accumulated Other Comprehensive Income (Loss) [Member]

Equity, beginning balance at Dec. 31, 2016

$ 1,888,280

$ 526

$ 1,749,574

$ 161,021

$ (18,126)

$ (4,715)

Shares issued, beginning balance at Dec. 31, 2016

52,598,005

Cumulative effect of accounting change

10,982

0

10,982

0

Net income

97,079

0

97,079

0

Other comprehensive income

258

0

258

Repurchase of common stock

(17,500)

0

(17,512)

0

Common stock issued, shares

0

Common stock issued, value

(1,749)

0

(15,961)

0

14,212

0

Common stock dividends - $0.84 per share

(44,042)

0

470

(44,512)

0

Equity, ending balance at Jun. 30, 2017

$ 1,933,296

$ 526

$ 1,734,083

$ 224,570

$ (21,426)

$ (4,457)

Shares issued, ending balance at Jun. 30, 2017

52,598,005

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Notes)

SIGNIFICANT ACCOUNTING POLICIES


1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the SEC. These statements also have been prepared in accordance with GAAP and reflect all adjustments that, in our opinion, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The 2016 year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. These unaudited financial statements should be read in conjunction with the audited financial statements and footnotes in our Annual Report. Due to the seasonal nature of our business, the results of operations for the three and six months ended June 30, 2017, are not necessarily indicative of the results that may be expected for a 12-month period.

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, we also provide natural gas distribution services to wholesale and public authority customers.

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, provision for doubtful accounts, 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.

Segments - We operate in one reportable and operating business segment: regulated public utilities that deliver natural gas to residential, commercial, industrial, wholesale, public authority and transportation customers. The accounting policies for our segment are the same as described in Note 1 of our Notes to the Financial Statements in our Annual Report. We evaluate our financial performance principally on operating income. For the three and six months ended June 30, 2017, and 2016, we had no single external customer from which we received 10 percent or more of our gross revenues.

Recently Issued Accounting Standards Update - In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires (1) separation of net periodic service costs for pension and other postemployment benefits into service cost and other components, (2) presentation of the service cost component in the same line as other compensation costs rendered by pertinent employees during the period, and (3) reporting the other components of net periodic benefit costs separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. However, all of our cost components remain eligible for capitalization under the accounting requirements for rate regulated entities.

We are required to adopt this guidance for our interim and annual reports for periods beginning after December 15, 2017. When adopted, the presentation changes required for net periodic benefit costs will not impact previously reported net income; however, the reclassification of the other components of benefits costs will result in an increase in operating income and an increase in other expenses for 2016 and 2017. We continue to evaluate the impact of this guidance including the impact on our capitalization policies considering our regulated operations.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 of the goodwill test, where the measurement of a goodwill impairment loss was determined by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Upon adoption, a goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This new guidance is required for our interim and annual reports for periods beginning after December 15, 2019, and early adoption is permitted. We do not expect this guidance to have a material impact on our financial statements and will adjust our goodwill testing procedures accordingly upon adoption.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which includes various new aspects to simplify how share-based payments are accounted for and presented in the financial statements. The new standard modifies several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows. We adopted this new guidance in the first quarter 2017, and in accordance with the transition requirements, we recorded $5.2 million of excess tax benefit in income tax expense and have transitioned all provisions of this new guidance prospectively, other than our presentation of our withholding shares for tax-withholding purposes, which we accounted for retrospectively in the financing activities section of the statement of cash flows. We recorded a noncash cumulative-effect increase of $11.0 million to retained earnings, with an offset to a deferred tax asset, as of the beginning of the reporting period in 2017, for excess tax benefits earned prior to January 1, 2017, that had not been recognized. We continue our use of the estimation method to account for share unit awards forfeitures rather than actual forfeitures. The retrospective impact of our withholding shares for tax-withholding purposes to our Statement of Cash Flows for the six months ended June 30, 2016, was a $8.9 million increase to net cash provided by operating activities and a $8.9 million decrease to net cash used in financing activities.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which prescribes recognizing lease assets and liabilities on the balance sheet and includes disclosure of key information about leasing arrangements. A modified retrospective transition approach is required for leases existing at the time of adoption. We are evaluating our population of leases, analyzing lease agreements, and holding meetings with cross-functional teams to determine the potential impact of this accounting standard on our financial position and results of operations and the transition approach we will utilize. This new guidance is required for our interim and annual reports for periods beginning after December 15, 2018, and early adoption is permitted.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which clarifies and converges the revenue recognition principles under GAAP and International Financial Reporting Standards. In July 2015, FASB delayed the effective date for one year. We have substantially completed evaluating all of our sources of revenue to determine the potential effect on our financial position, results of operations, cash flows and the related accounting policies and business processes. We are evaluating this information to determine what information will be disclosed in our financial statements and footnotes. In addition to updating our revenue recognition disclosures, additional disclosures may include disaggregation of revenues by types of service, source of revenue or customer class, performance obligations and other types of revenues.

We continue to monitor accounting task forces and the FASB for additional implementation guidance related to: (1) the accounting for funds received from third parties to partially or fully reimburse the cost of construction of an asset; (2) the evaluation of collectability from customers if a utility has regulatory mechanisms to help assure recovery of uncollected accounts from ratepayers; and (3) the accounting for alternative revenue programs, such as weather normalization, that may impact the final conclusions of our evaluation. Until these items are resolved, we cannot complete our evaluation of the potential effect the new guidance will have on our financial position, results of operations, cash flows or business processes.

We will adopt this new guidance for our interim and annual reports beginning with the first quarter 2018.

REGULATORY ASSETS AND LIABILITIES (Notes)

Schedule of Regulatory Assets and Liabilities


2.	REGULATORY ASSETS AND LIABILITIES

The tables below present a summary of regulatory assets, net of amortization, and liabilities for the periods indicated:



	June 30, 2017
	Current			Noncurrent		Total
	(Thousands of dollars)
Under-recovered purchased-gas costs	$	26,500		$	—	$	26,500
Pension and postemployment benefit costs	31,498			408,593		440,091
Weather normalization	20,311			—		20,311
Reacquired debt costs	812			7,703		8,515
Other	3,181			4,798		7,979
Total regulatory assets, net of amortization	82,302			421,094		503,396
Over-recovered purchased-gas costs	(14,049		)	—		(14,049		)
Ad valorem tax	(606		)	—		(606		)
Total regulatory liabilities (a)	(14,655		)	—		(14,655		)
Net regulatory assets (liabilities)	$	67,647		$	421,094	$	488,741

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



	December 31, 2016
	Current			Noncurrent		Total
	(Thousands of dollars)
Under-recovered purchased-gas costs	$	29,901		$	—	$	29,901
Pension and postemployment benefit costs	31,498			427,448		458,946
Weather normalization	17,661			—		17,661
Reacquired debt costs	812			8,108		8,920
Other	3,274			4,966		8,240
Total regulatory assets, net of amortization	83,146			440,522		523,668
Over-recovered purchased-gas costs	(10,154		)	—		(10,154		)
Ad valorem tax	(1,768		)	—		(1,768		)
Total regulatory liabilities (a)	(11,922		)	—		(11,922		)
Net regulatory assets (liabilities)	$	71,224		$	440,522	$	511,746

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

Regulatory assets on our Balance Sheets, as authorized by various regulatory authorities, are probable of recovery. Base rates are designed to provide a recovery of costs 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 are subject to review by the respective regulatory authorities during future regulatory proceedings. We are not aware of any evidence that these costs will not be recoverable through either riders or base rates, and we believe that we will be able to recover such costs, consistent with our historical recoveries.

CREDIT FACILITIES (Notes)

Short-term Debt [Text Block]


3.	CREDIT FACILITY AND SHORT-TERM NOTES PAYABLE

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. At June 30, 2017, our debt-to-capital ratio was 40 percent and we were in compliance with all covenants under the ONE Gas Credit Agreement.

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

The ONE Gas Credit Agreement is available to repay the commercial paper notes, if necessary. Amounts outstanding under the commercial paper program reduce the borrowing capacity under the ONE Gas Credit Agreement. At June 30, 2017, we had $79.0 million in short-term borrowings, $1.8 million in letters of credit issued under the ONE Gas Credit Agreement and $619.2 million of remaining credit available under the ONE Gas Credit Agreement.

LONG-TERM DEBT (Notes)

Long-term Debt [Text Block]


4.	LONG-TERM DEBT

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

EQUITY (Notes)

Stockholders' Equity Note Disclosure [Text Block]


5.	EQUITY

Treasury Shares - For the six months ended June 30, 2017, we repurchased approximately 256 thousand shares of our common stock for approximately $17.5 million.

Dividends Declared - In July 2017, we declared a dividend of $0.42 per share ($1.68 per share on an annualized basis) for shareholders of record as of August 14, 2017, payable September 1, 2017.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Notes)

Comprehensive Income (Loss) Note [Text Block]


6.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table sets forth the effect of reclassifications from accumulated other comprehensive income (loss) in our Statements of Income for the periods indicated:



	Three Months Ended						Six Months Ended
Details about Accumulated Other Comprehensive	June 30,						June 30,						Affected Line Item in the
Income (Loss) Components	2017			2016			2017			2016			Statements of Income
	(Thousands of dollars)
Pension and other postemployment benefit plan obligations (a)
Amortization of net loss	$	10,648		$	10,036		$	21,296		$	20,073
Amortization of unrecognized prior service cost	(1,149		)	(908		)	(2,298		)	(1,816		)
	9,499			9,128			18,998			18,257
Regulatory adjustments (b)	(9,289		)	(8,940		)	(18,579		)	(17,881		)
	210			188			419			376			Income before income taxes
	(81		)	(73		)	(161		)	(145		)	Income tax expense
Total reclassifications for the period	$	129		$	115		$	258		$	231		Net income

(a) These components of accumulated other comprehensive income (loss) are included in the computation of net periodic benefit cost. See Note 8 for additional detail of our net periodic benefit cost.

(b) Regulatory adjustments represent pension and other postemployment benefit costs expected to be recovered through rates and are deferred as part of our regulatory assets. See Note 2 for additional disclosures of regulatory assets and liabilities.

EARNINGS PER SHARE (Notes)

Earnings Per Share [Text Block]


7.	EARNINGS PER SHARE

Basic EPS is based on net income and is calculated based upon the daily weighted-average number of common shares outstanding during the periods presented. Also, this calculation includes fully vested stock awards that have not yet been issued as common stock. Diluted EPS includes basic EPS, plus unvested stock awards granted under our compensation plans, but only to the extent these instruments dilute earnings per share.

The following tables set forth the computation of basic and diluted EPS from continuing operations for the periods indicated:



	Three Months Ended June 30, 2017
	Income		Shares	Per Share Amount
	(Thousands, except per share amounts)
Basic EPS Calculation
Net income available for common stock	$	20,623	52,553	$	0.39
Diluted EPS Calculation
Effect of dilutive securities	—		416
Net income available for common stock and common stock equivalents	$	20,623	52,969	$	0.39



	Three Months Ended June 30, 2016
	Income		Shares	Per Share Amount
	(Thousands, except per share amounts)
Basic EPS Calculation
Net income available for common stock	$	20,300	52,386	$	0.39
Diluted EPS Calculation
Effect of dilutive securities	—		450
Net income available for common stock and common stock equivalents	$	20,300	52,836	$	0.38



	Six Months Ended June 30, 2017
	Income		Shares	Per Share Amount
	(Thousands, except per share amounts)
Basic EPS Calculation
Net income available for common stock	$	97,079	52,565	$	1.85
Diluted EPS Calculation
Effect of dilutive securities	—		447
Net income available for common stock and common stock equivalents	$	97,079	53,012	$	1.83



	Six Months Ended June 30, 2016
	Income		Shares	Per Share Amount
	(Thousands, except per share amounts)
Basic EPS Calculation
Net income available for common stock	$	85,044	52,452	$	1.62
Diluted EPS Calculation
Effect of dilutive securities	—		520
Net income available for common stock and common stock equivalents	$	85,044	52,972	$	1.61

EMPLOYEE BENEFIT PLANS (Notes)

EMPLOYEE BENEFIT PLANS


8.	EMPLOYEE BENEFIT PLANS

The following tables set forth the components of net periodic benefit cost for our pension and other postemployment benefit plans for the periods indicated:



	Pension Benefits
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
	(Thousands of dollars)
Components of net periodic benefit cost
Service cost	$	3,044		$	3,014		$	6,088		$	6,028
Interest cost	10,113			11,388			20,226			22,775
Expected return on assets	(14,624		)	(15,296		)	(29,248		)	(30,592		)
Amortization of net loss	9,027			8,885			18,054			17,771
Net periodic benefit cost	$	7,560		$	7,991		$	15,120		$	15,982



	Other Postemployment Benefits
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
	(Thousands of dollars)
Components of net periodic benefit cost
Service cost	$	627		$	638		$	1,254		$	1,276
Interest cost	2,472			2,627			4,944			5,254
Expected return on assets	(3,147		)	(3,071		)	(6,294		)	(6,142		)
Amortization of unrecognized prior service cost	(1,149		)	(908		)	(2,298		)	(1,816		)
Amortization of net loss	1,621			1,151			3,242			2,302
Net periodic benefit cost	$	424		$	437		$	848		$	874

We recover qualified pension benefit plan and other postemployment benefit plan costs through rates charged to our customers. Certain utility commissions require that the recovery of these costs be based on specific guidelines. The difference between these regulatory-based amounts and the periodic benefit cost calculated pursuant to GAAP is deferred as a regulatory asset or liability and amortized to expense over periods in which this difference will be recovered in rates, as authorized by the applicable utility commission. Regulatory deferrals related to net periodic benefit cost were not material for the three and six months ended June 30, 2017.

COMMITMENTS AND CONTINGENCIES (Notes)

COMMITMENTS AND CONTINGENCIES


9.	COMMITMENTS AND CONTINGENCIES

Environmental Matters - We are subject to multiple historical, wildlife preservation and environmental laws and/or regulations, which affect many aspects of our present and future operations. Regulated activities include, but are not limited to, those involving air emissions, storm water and wastewater discharges, handling and disposal of solid and hazardous wastes, wetland preservation, hazardous materials transportation, and pipeline and facility construction. These laws and regulations require us to obtain and/or comply with a wide variety of environmental clearances, registrations, licenses, permits and other approvals. Failure to comply with these laws, regulations, licenses and permits may expose us to fines, penalties and/or interruptions in our operations that could be material to our results of operations. In addition, emission controls and/or other regulatory or permitting mandates under the Clean Air Act and other similar federal and state laws could require unexpected capital expenditures. 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 and results of operations. Our expenditures for environmental investigation, and remediation compliance to-date have not been significant in relation to our financial position, results of operations or cash flows, and our expenditures related to environmental matters had no material effects on earnings or cash flows during the three and six months ended June 30, 2017 and 2016.

We own or retain legal responsibility for the environmental conditions at 12 former manufactured gas sites in Kansas. These sites contain contaminants generally associated with manufactured gas sites and 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 require us to investigate these sites and set remediation activities based upon the results of the investigations and risk analysis. Remediation typically involves the management of contaminated soils and may involve removal of structures and monitoring and/or remediation of groundwater.

We have completed or addressed removal of the source of soil contamination at 11 of the 12 sites, and continue to monitor groundwater at eight of the 12 sites according to plans approved by the KDHE. Regulatory closure has been achieved at three of the 12 sites, but these sites remain subject to potential future requirements that may result in additional costs. During 2016, we completed a site assessment at the twelfth site where no active soil remediation has occurred. We have submitted a work plan to the KDHE for approval to address a source of contamination and associated contaminated soil on a portion of this site. We are also conducting a study of the feasibility of various options to address the remainder of the site. Costs associated with the remediation at this site are not expected to be material to our results of operations or financial position.

With regard to one of our former manufactured gas sites, periodic monitoring and a 2016 interim site investigation indicated elevated levels of contaminants generally associated with manufactured gas sites. Additional testing and work plan development is underway in 2017 to determine a remediation work plan to present to the KDHE for approval, which could impact our estimates of the cost of remediation at this site. In the fourth quarter of 2016, we estimated the potential costs associated with additional investigation and remediation to be in the range of $4.0 million to $7.0 million. A single reliable estimate of the remediation costs is not feasible due to the amount of uncertainty in the ultimate remediation approach that will be utilized. Accordingly, we recorded a reserve of $4.0 million for this site in the fourth quarter of 2016.

Our expenditures for environmental evaluation, mitigation, remediation and compliance to date have not been significant in relation to our financial position, results of operations or cash flows, and our expenditures related to environmental matters had no material effects on earnings or cash flows during the three and six months ended June 30, 2017 and 2016. A number of environmental issues may exist with respect to manufactured gas sites that are unknown to us. Accordingly, future costs are dependent on the final determination and regulatory approval of any remedial actions, the complexity of the site, level of remediation required, changing technology and governmental regulations, and to the extent not recovered by insurance or recoverable in rates from our customers, could be material to our financial condition, results of operations or cash flows.

With the trend toward stricter standards, greater regulation and more extensive permit requirements for the types of assets operated by us that are subject to environmental regulation, our environmental expenditures could increase in the future, and such expenditures may not be fully recovered by insurance or recoverable in rates from our customers, and those costs may adversely affect our financial condition, results of operations and cash flows. We do not expect expenditures for these matters to have a material adverse effect on our financial condition, results of operations or cash flows.

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


•	an evaluation of whether natural gas pipeline integrity-management requirements should be expanded beyond current high-consequence areas;


•	a verification of records for pipelines in class 3 and 4 locations and high-consequence areas to confirm maximum allowable operating pressures; and


•	a requirement to test previously untested pipelines operating above 30 percent yield strength in high-consequence areas.

In April 2016, PHMSA published a NPRM, the Safety of Gas Transmission & Gathering Lines Rule, in the Federal Register to revise pipeline safety regulations applicable to the safety of onshore natural gas transmission and gathering pipelines. Proposals include changes to pipeline integrity management requirements and other safety-related requirements. The NPRM comment period ended July 7, 2016, and comments are under review by PHMSA. As part of the comment review process, PHMSA is being advised by the Technical Pipeline Safety Standards Committee, informally known by PHMSA as the Gas Pipeline Advisory Committee (“GPAC”), a statutorily mandated advisory committee that advises PHMSA on proposed safety policies for natural gas pipelines. The GPAC reviews PHMSA's proposed regulatory initiatives to assure the technical feasibility, reasonableness, cost-effectiveness and practicality of each proposal. The potential capital and operating expenditures associated with compliance with the proposed rule are currently being evaluated and could be significant depending on the final regulations.

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.

DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Notes)

Fair Value Disclosures


10.	DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Accounting Treatment - 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 to mitigate the risk 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	-	Recorded at historical cost	-	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. Premiums paid and any cash settlements received associated with the commodity derivative instruments entered into by us are included in, and recoverable through, the purchased-gas cost adjustment mechanisms.

Determining Fair Value - 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.

Derivative Instruments - At June 30, 2017, we held purchased natural gas call options for the heating season ending March 31, 2018, with total notional amounts of 14.6 Bcf, for which we paid premiums of $5.6 million, and had a fair value of $4.0 million. At December 31, 2016, we held purchased natural gas call options for the heating season ended March 31, 2017, with total notional amounts of 14.3 Bcf, for which we paid premiums of $5.4 million, and had a fair value of $6.5 million. The premiums paid and any cash settlements received are recorded as part of our unrecovered purchased-gas costs in current regulatory assets as these contracts are included in, and recoverable through, the purchased-gas cost adjustment mechanisms. Additionally, changes in fair value associated with these contracts are deferred as part of our unrecovered purchased-gas costs 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 three and six months ended June 30, 2017 and 2016.

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.

Short-term notes payable and commercial paper are due upon demand and, therefore, the carrying amounts approximate fair value and are classified as Level 1. The book value of our long-term debt, including current maturities, was $1.2 billion at both June 30, 2017 and December 31, 2016. The estimated fair value of our long-term debt, including current maturities, was $1.3 billion and $1.2 billion at June 30, 2017 and December 31, 2016, respectively. The estimated fair value of our Senior Notes at June 30, 2017 and December 31, 2016, was determined using quoted market prices, and are classified as Level 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

Use of Estimates

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, provision for doubtful accounts, 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.

Segments

Segments - We operate in one reportable and operating business segment: regulated public utilities that deliver natural gas to residential, commercial, industrial, wholesale, public authority and transportation customers. The accounting policies for our segment are the same as described in Note 1 of our Notes to the Financial Statements in our Annual Report. We evaluate our financial performance principally on operating income. For the three and six months ended June 30, 2017, and 2016, we had no single external customer from which we received 10 percent or more of our gross revenues.

Recently Issued Accounting Standards Update