Filed Pursuant to Rule 424(b)(1)
Registration Statement Nos. 333-267322 and 333-267322-01

PROSPECTUS

$336,000,000 Series 2022-A Senior Secured Securitized Utility Tariff Bonds

Kansas Gas Service, a division of ONE Gas, Inc.

Sponsor, Depositor and Initial Servicer

Central Index Key Number: 0001587732

Kansas Gas Service Securitization I, L.L.C.

Issuing Entity

Central Index Key Number: 0001944984

 

 

Tranche

Expected weighted average life (years)

Principal amount offered

Scheduled final payment date

Final maturity date

Interest rate

Initial price to public

Underwriting discounts and commissions

Proceeds to issuing entity (before expenses)

CUSIP

ISIN

A

5.50

$

336,000,000

8/1/2032

8/1/2034

5.486%

99.97947%

0.400%

$

334,587,019

484915AA1

US484915AA16

The total initial price to the public is $335,931,019. The total amount of the underwriting discounts and commissions is $1,344,000. The total amount of proceeds to the issuing entity before deduction of expenses (estimated to be $4,500,000) is $334,587,019. The distribution frequency is semi-annually. The first scheduled payment date is August 1, 2023.

Investing in the Series 2022-A Senior Secured Securitized Utility Tariff Bonds involves risks. Please read “Risk Factors” beginning on page 18 to read about factors you should consider before buying the securitized utility tariff bonds.

Kansas Gas Service, a division of ONE Gas, Inc. (“KGS”), as “depositor”, is offering up to $336,000,000 aggregate principal amount of Series 2022-A Senior Secured Securitized Utility Tariff Bonds (the “securitized utility tariff bonds”) to be issued by Kansas Gas Service Securitization I, L.L.C., a Delaware limited liability company (the “issuing entity” or “us”) and wholly owned subsidiary of KGS. KGS is the “seller,” the “initial servicer” and the “sponsor” with regard to the securitized utility tariff bonds. The securitized utility tariff bonds are senior secured obligations of the issuing entity and will be secured by the securitized utility tariff property (the “securitized utility tariff property”) consisting of the right to impose and collect securitized utility tariff charges (the “securitized utility tariff charge”) paid by all existing and future retail customers located within KGS’s service area. Securitized utility tariff charges are required to be adjusted at least semi-annually, and more frequently as necessary, to correct any under-collection or over-collection of securitized utility tariff charges during the preceding 6 months and to ensure the projected recovery of amounts sufficient to provide all payments of debt service and other required amounts and charges in connection with the securitized utility tariff bonds. The primary forms of credit enhancement for the securitized utility tariff bonds will be provided by such statutory true-up mechanism, as well as by general, excess funds and capital subaccounts held under the indenture governing the securitized utility tariff bonds.

Each securitized utility tariff bond will be entitled to interest on February 1 and August 1 of each year, beginning on August 1, 2023. The first scheduled payment date is August 1, 2023. Interest will accrue from the date of issuance and must be paid by the purchaser of the securitized utility tariff bonds if the securitized utility tariff bonds are delivered after that date. On each payment date, scheduled principal payments shall be paid sequentially in accordance with the expected sinking fund schedule in this prospectus, but only to the extent funds are available in the collection account after payment of certain fees and expenses and after payment of interest.

The securitized utility tariff bonds represent obligations only of the issuing entity, Kansas Gas Service Securitization I, L.L.C., and are secured only by the assets of the issuing entity, consisting principally of the securitized utility tariff property and related assets to support its obligations under the securitized utility tariff bonds. Please read “Description of the Securitized Utility Tariff Bonds—The Security for the Securitized Utility Tariff Bonds,” and “Description of the Securitized Utility Tariff Property” in this prospectus. The securitized utility tariff property includes the right to impose, bill, charge, collect and receive securitized utility tariff charges from KGS’s retail customers in amounts sufficient to make payments on the securitized utility tariff bonds, as described further in this prospectus. KGS and its affiliates, other than the issuing entity, are not liable for any payments on the securitized utility tariff bonds. The securitized utility tariff bonds are not a debt or obligation of the State of Kansas or any of its political subdivisions, agencies or instrumentalities and are not a charge on its or any of its political subdivisions, agencies or instrumentalities’ full faith and credit or taxing power.

All matters relating to the structuring and pricing of the securitized utility tariff bonds have been considered by KGS and the State Corporation Commission of the State of Kansas, acting through its designated representatives.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the securitized utility tariff bonds through the book-entry facilities of The Depository Trust Company for the accounts of its participants including Clearstream Banking, S.A. and Euroclear Banks SA/NV, as operator of the Euroclear System against payment on or about November 18, 2022. There currently is no secondary market for the securitized utility tariff bonds, and we cannot assure you that one will develop.

 

J.P. Morgan

RBC Capital Markets

 

Structuring agent and joint bookrunner

Joint bookrunner

 

BofA Securities Co-Manager		Wells Fargo Securities Co-Manager

The date of this prospectus is November 9, 2022.

TABLE OF CONTENTS

 

		Page
ABOUT THIS PROSPECTUS			iv
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION			vi
PROSPECTUS SUMMARY OF TERMS			1
RISK FACTORS			18
RISKS ASSOCIATED WITH POTENTIAL JUDICIAL, LEGISLATIVE OR REGULATORY ACTIONS			18
SERVICING RISKS			22
WEATHER-RELATED DAMAGE AND OTHER NATURAL DISASTER RISKS			24
RISKS TO NATURAL GAS INDUSTRY			25
RISKS ASSOCIATED WITH THE UNUSUAL NATURE OF THE SECURITIZED UTILITY TARIFF PROPERTY			26
RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS OF THE SELLER OR THE SERVICER			27
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIZED UTILITY TARIFF BONDS			30
REVIEW OF SECURITIZED UTILITY TARIFF PROPERTY			36
DESCRIPTION OF THE SECURITIZED UTILITY TARIFF PROPERTY			40
Creation of Securitized Utility Tariff Property; Financing Order			40
Tariff; Securitized Utility Tariff Charges			40
Securitized Utility Tariff Charge Customer Classes			41
Billing and Collection Terms and Conditions			42
THE SECURITIZATION ACT			43
Overview			43
KGS May Securitize Qualified Extraordinary Costs and Related Upfront and Ongoing Financing Costs			43
Constitutional Matters			45
The Kansas Commission May Adjust Securitized Utility Tariff Charges			47
Securitized Utility Tariff Charges are Nonbypassable			47
The Securitization Act Protects Securitized Utility Tariff Bondholders’ Security Interest on Securitized Utility Tariff Property			47
The Securitization Act Characterizes the Transfer of Securitized Utility Tariff Property as a True Sale			48
KGS’S FINANCING ORDER			49
THE DEPOSITOR, SELLER, INITIAL SERVICER AND SPONSOR			54
About KGS			54
KGS’s Customer Base and Natural Gas Consumption			55
Credit Policy			56
Billing Process			56
Collection, Termination of Service and Write-off Policy			56
Alternatives to Gas as An Energy Source for KGS Customers			57
Additional Natural Gas Utility Considerations			57
Weather Rules			57
Forecasting Natural Gas Customers			58

 

i

		Page
Annual Forecast Variance			58
Write-off and Delinquency Experience			58
Delinquencies			60
KANSAS GAS SERVICE SECURITIZATION I, L.L.C., THE ISSUING ENTITY			61
General			61
Restricted Purposes			62
Our Relationship with KGS			62
Managers and Officers			62
Manager Fees and Limitation on Liabilities			63
We are a Separate and Distinct Legal Entity from KGS			64
Administration Agreement			64
THE SECURITIZED UTILITY TARIFF CHARGES			65
Initial Securitized Utility Tariff Charges			65
DESCRIPTION OF THE SECURITIZED UTILITY TARIFF BONDS			66
General			66
Payments of Interest and Principal on the Securitized Utility Tariff Bonds			66
Redemption of the Securitized Utility Tariff Bonds			71
Securitized Utility Tariff Bonds Will Be Issued in Book-Entry Form			71
Definitive Certificated Securitized Utility Tariff Bonds			75
Registration and Transfer of the Securitized Utility Tariff Bonds			76
The Security for the Securitized Utility Tariff Bonds			76
The Collection Account for the Securitized Utility Tariff Bonds			77
How Funds in the Collection Account Will Be Allocated			80
How Funds in the Subaccounts Will Be Used upon Repayment of the Securitized Utility Tariff Bonds			81
Reports to Holders of the Securitized Utility Tariff Bonds			82
Website			82
We and the Trustee May Modify the Indenture			82
What Constitutes an Event of Default on the Securitized Utility Tariff Bonds			86
Our Covenants			89
Access to the List of Securitized Utility Tariff Bondholders			92
We Must File an Annual Compliance Statement			92
The Trustee Must Provide an Annual Report to All Securitized Utility Tariff Bondholders			92
What Will Trigger Satisfaction and Discharge of the Indenture			92
Our Legal Defeasance and Covenant Defeasance Options			93
No Recourse to Others			94
Governing Law			95
THE TRUSTEE			96
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE SECURITIZED UTILITY TARIFF BONDS			99
Weighted Average Life Sensitivity			99

 

ii

		Page
ESTIMATED ANNUAL FEES AND EXPENSES			101
THE SALE AGREEMENT			102
KGS’s Sale and Assignment of the Securitized Utility Tariff Property			102
Conditions to the Sale of the Securitized Utility Tariff Property			103
KGS’s Representations and Warranties			103
KGS’s Covenants			108
KGS’s Obligation to Indemnify Us and the Trustee and to Take Legal Action			111
Successors to KGS			112
Amendment			112
THE SERVICING AGREEMENT			113
Servicing Procedures			113
Securitized Utility Tariff Charge Adjustment Process			114
Servicer Compensation			116
KGS’s Representations and Warranties as Servicer			116
The Servicer Will Indemnify Us, Other Entities and the Kansas Commission in Limited Circumstances			118
Limitation on Liability of Servicer and Others			118
The Servicer Will Provide Statements to Us, the Kansas Commission and the Trustee			118
The Servicer Will Provide Assessments Concerning Compliance with the Servicing Agreement			119
Matters Regarding KGS as the Servicer			120
Events Constituting a Default by the Servicer			121
The Trustee’s Rights if the Servicer Defaults			121
Waiver of Past Defaults			122
The Replacement of KGS as Servicer with a Successor Servicer			122
The Obligations of a Successor Servicer			122
Amendment			123
HOW A BANKRUPTCY MAY AFFECT YOUR INVESTMENT			124
USE OF PROCEEDS			128
PLAN OF DISTRIBUTION			129
The Underwriters’ Sales Price for the Securitized Utility Tariff Bonds			129
No Assurance as to Resale Price or Resale Liquidity for the Securitized Utility Tariff Bonds			129
Various Types of Underwriter Transactions that May Affect the Price of the Securitized Utility Tariff Bonds			129
AFFILIATIONS AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			131
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES			132
General			132
Income Tax Status of the Securitized Utility Tariff Bonds and Us as Issuing Entity			133
Tax Consequences to U.S. Holders			133
Tax Consequences to Non-U.S. Holders			134

 

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		Page
MATERIAL KANSAS INCOME TAX CONSEQUENCES			137
ERISA CONSIDERATIONS			138
General			138
Regulation of Assets Included in a Plan			139
Prohibited Transaction Exemptions			139
Consultation with Counsel			140
LEGAL PROCEEDINGS			141
RATINGS FOR THE SECURITIZED UTILITY TARIFF BONDS			142
WHERE YOU CAN FIND MORE INFORMATION			143
INCORPORATION BY REFERENCE			144
INVESTMENT COMPANY ACT OF 1940 AND VOLCKER RULE MATTERS			145
RISK RETENTION			146
LEGAL MATTERS			147
OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS			148
NOTICE TO RESIDENTS OF THE EUROPEAN ECONOMIC AREA			148
NOTICE TO RESIDENTS OF UNITED KINGDOM			149
NOTICE TO RESIDENTS OF CANADA			150
NOTICE TO PROSPECTIVE INVESTORS IN SWITZERLAND			151
NOTICE TO PROSPECTIVE INVESTORS IN HONG KONG			152
NOTICE TO PROSPECTIVE INVESTORS IN JAPAN			153
NOTICE TO PROSPECTIVE INVESTORS IN TAIWAN			154
GLOSSARY OF DEFINED TERMS			155

ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement filed with the Securities and Exchange Commission or SEC. This prospectus provides information about us, the securitized utility tariff bonds and Kansas Gas Service, a division of ONE Gas, Inc., as depositor, sponsor and initial servicer. This prospectus describes the terms of the securitized utility tariff bonds offered hereby. You should carefully review this prospectus, any free writing prospectus the issuing entity files with the SEC, and the information, if any, contained in the documents referenced in this prospectus under the heading “Where You Can Find More Information.”

References in this prospectus to the terms “we,” “us,” “our” or “the issuing entity” mean Kansas Gas Service Securitization I, L.L.C. References to “KGS,” “the sponsor,” “the initial servicer,” “the depositor” or “the seller” mean Kansas Gas Service, a division of ONE Gas, Inc. References to “ONE Gas” means ONE Gas, Inc., an Oklahoma corporation. KGS is a division of ONE Gas. References to “the securitized utility tariff bonds” or “the bonds” mean our Series 2022-A Senior Secured Securitized Utility Tariff Bonds offered pursuant to this prospectus. References to “the servicer” refer to KGS and any successor servicer under the servicing agreement referred to in this prospectus. References to the “Securitization Act” mean the Utility Financing and Securitization Act, established by the Kansas Legislature, which provides for the securitization of “qualified extraordinary costs” (such as fuel costs incurred during extreme weather events) by issuing “securitized utility tariff bonds.” The Securitization Act is codified at K.S.A. § 66-1,240 – 66-1,253. Unless the context otherwise requires, the term “retail customer” means an end-use customer who purchases natural gas for consumption from KGS. We also refer to the State Corporation Commission of the State of Kansas as “the Kansas commission.” You can find a glossary of some of the other defined terms we use in this prospectus on page 155 of this prospectus.

 

iv

We have included cross-references to sections in this prospectus where you can find further related discussions. You can also find references to key topics in the table of contents.

You should rely only on the information contained in this prospectus. Neither we nor any underwriter, agent, dealer, salesperson, the Kansas commission or KGS has authorized anyone else to provide you with any different information. Neither we nor any underwriter, agent, dealer, salesperson, the Kansas commission or KGS take any responsibility for, nor provide any assurance as to the reliability of, any different information that others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. We are not offering to sell the securitized utility tariff bonds in any jurisdiction where the offer or sale is not permitted. The information in this prospectus is current only as of the date of this prospectus.

We expect to deliver the securitized utility tariff bonds against payment for the securitized utility tariff bonds on or about the date specified in the last paragraph of the cover page of this prospectus, which will be the sixth business day following the date of pricing of the securitized utility tariff bonds. Since trades in the secondary market generally settle in two business days, purchasers who wish to trade securitized utility tariff bonds on the date of pricing or the succeeding three business days will be required, by virtue of the fact that the securitized utility tariff bonds initially will settle in T + 6, to specify alternative settlement arrangements to prevent a failed settlement.

 

v

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements included in this prospectus are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements relate to our ability to pay principal and interest on the securitized utility tariff bonds when scheduled to be paid, the ability of our servicer to collect securitized utility tariff charges, the value of the securitized utility tariff property, the outcome of regulatory, administrative and legal proceedings, market conditions and other matters. The following discussion is intended to identify important factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Forward-looking statements include the items identified in the preceding paragraph, the information concerning possible or assumed future remittances of securitized utility tariff charges and other statements contained in this prospectus identified by words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “goal,” “forecast,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled,” “likely,” and other words and terms of similar meaning.

One should not place undue reliance on forward-looking statements, which are applicable only as of the date of this prospectus. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Those factors may affect the value of the securitized utility tariff bonds. In addition to any assumptions and other factors referred to specifically in connection with the forward-looking statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statement include, but are not limited to, those set forth below:

 

•

the length and severity of a pandemic or other health crisis, such as the outbreak of the Coronavirus Disease 2019 (“COVID-19”) or variants thereof, including the impact to us and KGS’s operations, customers, contractors, vendors and employees, and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it,

 

•

competition from alternative forms of energy, including, but not limited to, electricity, solar power, wind power, geothermal energy and biofuels,

 

•

broader use of alternative energy sources by KGS’s retail customers,

 

•

possible loss of local distribution company franchises or other adverse effects caused by the actions of municipalities,

 

•

advances in technology, including technologies that increase efficiency or that improve electricity’s competitive position relative to natural gas,

 

•

the ability of KGS’s retail customers to continue paying their utility bills,

 

•

economic conditions in KGS’s service area, including the economy’s effects on its retail customers,

 

•

terrorist attacks, cyberattacks, or other malicious acts that may damage or disrupt operating or information technology systems,

 

•

acts of nature and the potential effects of threatened or actual terrorism and war,

 

•

the accuracy of the servicer’s estimates of growth in KGS’s retail customer base, and

 

•

the accuracy of the servicer’s forecast of retail customers and/or the payment of securitized utility tariff charges.

 

vi

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

 

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Summary of risk factors

Set forth below is a summary of the material risk factors which you should consider before deciding whether to invest in the securitized utility tariff bonds. These risks can affect the timing or ultimate payment of the securitized utility tariff bonds and the value of your investment in the securitized utility tariff bonds.

 

•

You may experience material payment delays or incur a loss on your investment in the securitized utility tariff bonds because the source of funds for payment is limited.

Risks associated with potential judicial, legislative or regulatory actions

 

•

We and KGS are not obligated to indemnify you for changes in law.

 

•

Future judicial action could reduce the value of your investment in the securitized utility tariff bonds.

 

•

Future state action could reduce the value of your investment in the securitized utility tariff bonds.

 

•

The Kansas commission might attempt to take actions that could reduce the value of your investment in the securitized utility tariff bonds.

 

•

The servicer may not fulfill its obligations to act on behalf of the securitized utility tariff bondholders to protect bondholders from actions by the Kansas commission or the State of Kansas, or the servicer may be unsuccessful in any such attempt.

 

•

Deregulation or restructuring of the natural gas utility market in Kansas might reduce collections of securitized utility tariff charges and the value of your investment in the securitized utility tariff bonds.

 

•

A municipal entity may seek to acquire portions of KGS’s gas system and avoid payment of the securitized utility tariff charges.

Servicing risks

 

•

Your investment in the securitized utility tariff bonds depends on KGS or its successor or assignee, acting as servicer of the securitized utility tariff property.

 

•

Inaccurate customer count forecasting or unanticipated delinquencies or write-offs might reduce scheduled payments on the securitized utility tariff bonds.

 

•

If we have to replace KGS as the servicer, we may experience difficulties finding and using a replacement servicer.

 

•

Changes to billing and collection practices might reduce the value of your investment in the securitized utility tariff bonds.

 

•

Limits on rights to terminate service might make it more difficult to collect the securitized utility tariff charges.

Weather-related damage and other natural disaster risks

 

•

Storm-related damage or damage from other natural disasters to KGS’s system could impair payments on the securitized utility tariff bonds.

 

16

Risks to natural gas industry

 

•

Natural gas is subject to competition from alternative energy sources and future technological change might make alternative energy sources more attractive.

 

•

Increases in natural gas prices could prompt customers to switch to alternative energy sources and negatively impact the collection of securitized utility tariff charges.

 

•

Political, institutional and societal sentiment toward climate change and related policies could prompt customers to switch to alternative energy sources and negatively impact the collection of securitized utility tariff charges.

Risks associated with the unusual nature of the securitized utility tariff property

 

•

Future adjustments to the securitized utility tariff charges by retail customer class might result in insufficient collection.

 

•

Foreclosure of the trustee’s lien on the securitized utility tariff property might not be practical, and acceleration of the securitized utility tariff bonds before maturity might have little practical effect.

Risks associated with potential bankruptcy proceedings of the seller or the servicer

 

•

The servicer will commingle the securitized utility tariff charges with other revenues it collects, which might obstruct access to the securitized utility tariff charges in case of the servicer’s bankruptcy and reduce the value of your investment in the securitized utility tariff bonds.

 

•

The bankruptcy of ONE Gas might result in losses or delays in payments on the securitized utility tariff bonds.

 

•

The sale of the securitized utility tariff property might be construed as a financing and not a sale in a case of ONE Gas’s bankruptcy which might delay or limit payments on the securitized utility tariff bonds.

 

•

If the servicer enters bankruptcy proceedings, the remittance of certain securitized utility tariff charges by the servicer prior to the date of bankruptcy might constitute preferences, which means these funds might be unavailable to pay amounts owed on the securitized utility tariff bonds.

 

•

Claims against KGS might be limited in the event of a bankruptcy of ONE Gas.

 

•

The bankruptcy of ONE Gas might limit the remedies available to the trustee.

Other risks associated with an investment in the securitized utility tariff bonds

 

•

KGS’s indemnification obligations under the sale agreement and the servicing agreement are limited and might not be sufficient to protect your investment in the securitized utility tariff bonds.

 

•

Credit ratings do not indicate the expected rate of payment of principal on the securitized utility tariff bonds.

 

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A reduction of ONE Gas’s credit ratings might affect the market value of the securitized utility tariff bonds.

 

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The absence of a secondary market for the securitized utility tariff bonds might limit your ability to resell the securitized utility tariff bonds.

 

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You might receive principal payments for the securitized utility tariff bonds later than you expect.

 

17

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KGS may cause the issuance, by another subsidiary or affiliated entity, of additional securitized utility tariff bonds secured by additional securitized utility tariff property that includes a nonbypassable charge on retail customers.

 

•

KGS’s operations are subject to risks beyond its control, including cyber-security intrusions, terrorist attacks or other catastrophic events, which could limit KGS’s operations and ability to service the securitized utility tariff property.

 

•

If the investment of collected securitized utility tariff charges and other funds held by the trustee in the collection account results in investment losses or the investments become illiquid, you may receive payment of principal and interest on the securitized utility tariff bonds later than you expect.

 

•

Regulatory provisions affecting certain investors could adversely affect the liquidity and the regulatory treatment of investments in the securitized utility tariff bonds.

RISK FACTORS

Please carefully consider all the information we have included or incorporated by reference in this prospectus, including the risks described below and in “Cautionary Statement Regarding Forward-Looking Information,” before deciding whether to invest in the securitized utility tariff bonds.

You may experience material payment delays or incur a loss on your investment in the securitized utility tariff bonds because the source of funds for payment is limited.

The only source of funds for payment of the securitized utility tariff bonds will be our assets, which consist of:

 

•

the securitized utility tariff property securing the securitized utility tariff bonds, including the right to impose, bill, charge, collect and receive securitized utility tariff charges;

 

•

the funds on deposit in the accounts held by the trustee; and

 

•

our rights under various contracts we describe in this prospectus.

The securitized utility tariff bonds are not a charge on the full faith and credit or taxing power of the State of Kansas or any governmental agency or instrumentality, nor will the securitized utility tariff bonds be insured or guaranteed by KGS, including in its capacity as the sponsor, depositor, seller or initial servicer, or any of their respective affiliates (other than us), the trustee or any other person or entity. The securitized utility tariff bonds will be nonrecourse obligations, secured only by the collateral. Delays in payment on the securitized utility tariff bonds might result in a reduction in the market value of the securitized utility tariff bonds and, therefore, the value of your investment in the securitized utility tariff bonds. Thus, you must rely for payment of the securitized utility tariff bonds solely upon the collections of the securitized utility tariff charges, and funds on deposit in the accounts held by the trustee. Our organizational documents restrict our right to acquire other assets unrelated to the transactions described in this prospectus. Please read “Kansas Gas Service Securitization I, L.L.C., The Issuing Entity” in this prospectus.

RISKS ASSOCIATED WITH POTENTIAL JUDICIAL, LEGISLATIVE OR REGULATORY ACTIONS

We and KGS are not obligated to indemnify you for changes in law.

Neither we nor KGS, nor any affiliate, successor or assignee, will indemnify you for any changes in the law, including any federal preemption or repeal or amendment of the Securitization Act, that might affect the value of the securitized utility tariff bonds. KGS will agree in the sale agreement to institute any legal or

 

18

administrative action or proceeding as may be reasonably necessary to block or overturn any attempts to cause a repeal, modification or amendment of the Securitization Act that would be materially adverse to us, the trustee or the securitized utility tariff bondholders. However, we cannot assure you that KGS would be able to take this action or that any such action would be successful. Although KGS or any successor assignee might be required to indemnify us if legal action based on the law in effect at the time of the issuance of the securitized utility tariff bonds invalidates the securitized utility tariff property, such indemnification obligations do not apply for any changes in law after the date the securitized utility tariff bonds are issued, whether such changes in law are effected by means of any legislative enactment, any constitutional amendment or any final and non-appealable judicial decision. Please read “The Sale Agreement—KGS’s Covenants” in this prospectus.

Future judicial action could reduce the value of your investment in the securitized utility tariff bonds.

The securitized utility tariff property is the creation of the Securitization Act and the financing order that has been issued by the Kansas commission to KGS pursuant to the Securitization Act. The Securitization Act was enacted in April 2021. There is uncertainty associated with investing in bonds payable from an asset that depends for its existence on legislation because there is limited judicial or regulatory experience implementing and interpreting the legislation. The Securitization Act or any financing order or any provisions thereof might be directly contested in courts or otherwise become the subject of litigation. Because the securitized utility tariff property is a creation of the Securitization Act and the financing order, any judicial determination affecting the validity of or interpreting the Securitization Act or the financing order, the securitized utility tariff property or our ability to make payments on the securitized utility tariff bonds might have an adverse effect on the value of the securitized utility tariff bonds or cause a delay in the recovery of your investment. As of the date of this prospectus, no such litigation has arisen; however, we cannot assure you that a lawsuit challenging the validity of the Securitization Act or any financing order will not be filed in the future or that, if filed, such lawsuit will not be successful. If an invalidation of any relevant underlying legislative provision or any financing order provision were to result from such litigation, you might lose some or all of your investment or might experience delays in recovering your investment. Please read “The Securitization Act—Constitutional Matters” in this prospectus.

Other states have passed laws with financing provisions similar to some provisions of the Securitization Act, and some of these laws have been challenged by judicial actions or utility commission proceedings. To date, none of these challenges has succeeded, but future judicial challenges might be made. An unfavorable decision regarding another state’s law would not automatically invalidate the Securitization Act or the financing order, but it might provoke a challenge to the Securitization Act or the financing order, establish a legal precedent for a successful challenge to the Securitization Act or the financing order or heighten awareness of the political and other risks of the securitized utility tariff bonds, and in that way may limit the liquidity and value of the securitized utility tariff bonds. Therefore, legal activity in other states may indirectly affect the value of your investment in the securitized utility tariff bonds.

Future state action could reduce the value of your investment in the securitized utility tariff bonds.

Despite the State’s pledge and the Kansas commission’s pledge in the Securitization Act and the financing order, respectively, not to take or permit certain actions that would impair the value of the securitized utility tariff property or the securitized utility tariff charges, the Kansas legislature might attempt to repeal or amend the Securitization Act in a manner that limits or alters the securitized utility tariff property so as to reduce its value. For a description of the State’s pledge, please read “The Securitization Act—KGS May Securitize Qualified

 

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Extraordinary Costs and Related Upfront and Ongoing Financing Costs” in this prospectus. As of the date of this prospectus, we are not aware of any pending legislation in the Kansas legislature that would affect any provisions of the Securitization Act.

It might be possible for the Kansas legislature to repeal or amend the Securitization Act notwithstanding the State’s pledge if the legislature acts in order to serve a significant and legitimate public purpose, such as protecting the public health and safety, or responding to a national or regional catastrophe or emergency affecting KGS’s service area, or if such action or inaction otherwise is in the valid exercise of the State’s police power. Similarly, it might be possible for the Kansas commission to repeal or amend the financing order notwithstanding the Kansas commission’s pledge if it acts in order to serve a significant and legitimate public purpose. Any such action, as well as the costly and time-consuming litigation that likely would ensue, might adversely affect the price and liquidity, the dates of payment of interest and principal and the weighted average lives of the securitized utility tariff bonds. Moreover, the outcome of any litigation cannot be predicted. Accordingly, you might incur a loss on or delay in recovery of your investment in the securitized utility tariff bonds.

Except as described in “The Sale Agreement—KGS’s Obligation to Indemnify Us and the Trustee and to Take Legal Action” in this prospectus, neither we, KGS, nor any of its successors, assignees or affiliates will indemnify you for any change in law, including any amendment or repeal of the Securitization Act, that might affect the value of the securitized utility tariff bonds.

If an action of the Kansas legislature or the Kansas commission adversely affecting the securitized utility tariff property or the ability to collect securitized utility tariff charges were considered a “taking” under the United States or Kansas Constitutions, the State of Kansas might be obligated to pay compensation in an amount equal to the estimated value of the securitized utility tariff property at the time of the taking. However, even in that event, there is no assurance that any amount provided as compensation would be sufficient for you to recover fully your investment in the securitized utility tariff bonds or to offset interest lost pending such recovery.

Nothing in the State’s or Kansas commission’s pledge precludes any limitation or alteration of the Securitization Act or the financing order if full compensation is made by law for the full protection of the securitized utility tariff charges collected pursuant to the financing order and of the securitized utility tariff bondholders. It is unclear what “full compensation” and “full protection” would be afforded to the securitized utility tariff bondholders by the State of Kansas or the Kansas commission if such limitation or alteration were attempted.

Unlike the citizens of some other states, the citizens of the State of Kansas currently do not have the constitutional right to adopt or revise state laws by initiative or referendum. Thus, absent an amendment to the Kansas Constitution, the Securitization Act cannot be amended or repealed by direct action of the electorate of the State of Kansas.

The enforcement of any rights against the State of Kansas or the Kansas commission under their respective pledges may be subject to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against state and local governmental entities in Kansas. These limitations might include, for example, the necessity to exhaust administrative remedies prior to bringing suit in a court, or limitations on type and locations of courts in which the State of Kansas or the Kansas commission may be sued, or limitations on awards or collection of damages.

The Kansas commission might attempt to take actions that could reduce the value of your investment in the securitized utility tariff bonds.

The Securitization Act provides that for a financing order issued to create securitized utility tariff property, the financing order must provide that the financing order is irrevocable and that the Kansas commission may not

 

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directly or indirectly, by any subsequent action, amend, modify or terminate a financing order or reduce, impair, postpone, terminate or otherwise adjust the securitized utility tariff charges authorized under a financing order, except for the true-up adjustments to the securitized utility tariff charges. In addition, the Kansas commission had pledged in the financing order that it will not amend, modify, or rescind the financing order by any subsequent action or reduce, impair, postpone, terminate, or otherwise adjust the securitized utility tariff charges. However, the Kansas commission retains the power to adopt, revise or rescind rules or regulations affecting KGS or a successor utility. The Kansas commission also retains the power to interpret the financing order granted to KGS, and in that capacity might be called upon to rule on the meanings of provisions of the financing order that might need further elaboration. Any new or amended regulations or orders from the Kansas commission might adversely affect the ability of the servicer to disconnect customers for nonpayment, assess late fees, impose deposit requirements or collect the securitized utility tariff charges in full and on a timely basis, which may negatively impact the rating of the securitized utility tariff bonds or their price and, accordingly, the amortization of the securitized utility tariff bonds and their weighted average lives.

The servicer is required to file with the Kansas commission, on our behalf, certain periodic true-up adjustments of the securitized utility tariff charges. The Kansas commission has 30 days after the date of a true-up adjustment filing to confirm the mathematical accuracy of the servicer’s adjustment and to confirm that there are no clerical errors. Any true-up adjustment filed with the Kansas commission will take effect on its proposed effective date, which shall not be less than 30 days after filing. Please read “KGS’s Financing Order—True-Ups” and “—Adjustments to Allocation of Securitized Utility Tariff Charges” in this prospectus. True-up adjustment procedures may be challenged in the future. Challenges to or delays in the true-up process might adversely affect the market perception and valuation of the securitized utility tariff bonds. Also, any litigation might materially delay securitized utility tariff charge collections due to delayed implementation of true-up adjustments and might result in missing payments or payment delays and lengthened weighted average life of the securitized utility tariff bonds.

Deregulation or restructuring in the natural gas utility market in Kansas may result in increased competition and material delays or reductions in collecting securitized utility tariff charges that could materially adversely affect investments in the securitized utility tariff bonds.

Future deregulation of the natural gas utility market in Kansas could change how natural gas services are provided to customers and allow new competitive market entrants to provide retail natural gas service, provide metering services, provide billing services or collect payments (including the securitized utility tariff charges) from customers. We cannot predict if or when it will be subject to changes in legislation or regulation, nor can it predict the impact of these changes. Poor performance, inaction, failure to abide by contractual obligations, commingling of funds, lack of creditworthiness, insolvency or other unforeseen problems with respect to any service provider could result in material delays or reductions in calculating and collecting securitized utility tariff charges and therefore material delays or reductions of payments of principal and interest on the securitized utility tariff bonds and could materially reduce the value of your investment in the securitized utility tariff bonds.

The servicer may not fulfill its obligations to act on behalf of the securitized utility tariff bondholders to protect bondholders from actions by the Kansas commission or the State of Kansas, or the servicer may be unsuccessful in any such attempt.

The servicer will agree in the servicing agreement to take any action or proceeding reasonably necessary to compel performance by the Kansas commission and the State of Kansas of any of their obligations or duties under the securitization provisions of the Securitization Act or the financing order, including any actions

 

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reasonably necessary to block or overturn any attempts to cause a repeal, or modification of, or supplement to the securitization provisions of the Securitization Act or the financing order or the rights of bondholders in the securitized utility tariff property by executive action, legislative enactment, constitutional amendment or other means that would be adverse to the bondholders. The servicer, however, may not be able to take those actions for a number of reasons, including due to legal or regulatory restrictions, financial constraints and practical difficulties in successfully challenging any such legislative enactment or constitutional amendment. Additionally, any action the servicer is able to take may not be successful. Any such failure to perform its obligations or to successfully compel performance by the Kansas commission or the State of Kansas could negatively affect bondholders’ rights and result in a loss of their investment in the securitized utility tariff bonds.

A municipal entity may seek to acquire portions of KGS’s gas distribution facilities and avoid payment of the securitized utility tariff charges.

Kansas law authorizes municipalities to seek to acquire portions of a utility’s gas distribution facilities through voluntary transactions or the power of expropriation for use as part of municipally owned utility systems. There can be no assurance that one or more municipalities will not seek to acquire some or all of KGS’s gas distribution facilities while the securitized utility tariff bonds remain outstanding. The Securitization Act specifies that securitized utility tariff charges approved by a financing order shall be collected by a utility as well as its “successors or assignees.” In the servicing agreement, KGS has covenanted to assert in an appropriate forum that any municipality that acquires any portion of KGS’s gas distribution facilities by expropriation, including upon the expiration of any franchise agreement, must be treated as a successor to KGS under the Securitization Act and the financing order. However, the involved municipality might assert that it should not be treated as a successor to KGS for these purposes and that its distribution customers are not responsible for payment of securitized utility tariff charges. In any case, we cannot assure you that the securitized utility tariff charges will be collected from customers of municipally owned utilities who were formerly retail customers of KGS and that such an occurrence might not affect the timing or receipt of payments with respect to the securitized utility tariff bonds.

SERVICING RISKS

Your investment in the securitized utility tariff bonds depends on KGS or its successor or assignee, acting as servicer of the securitized utility tariff property.

KGS, as initial servicer, will be responsible for, among other things, calculating, billing and collecting the securitized utility tariff charges from its retail customers, submitting requests to the Kansas commission to adjust these charges, monitoring the collateral for the securitized utility tariff bonds and taking certain actions in the event of non-payment by a retail customer. The trustee’s receipt of collections in respect of the securitized utility tariff charges, which will be used to make payments on the securitized utility tariff bonds, will depend in part on the skill and diligence of the servicer in performing these functions. The systems that the servicer has in place for securitized utility tariff charge billings and collections, together with the regulations of the Kansas commission governing utilities such as KGS might, in particular circumstances, cause the servicer to experience difficulty in performing these functions in a timely and completely accurate manner. If the servicer fails to make securitized utility tariff charge collections for any reason, then the servicer’s payments to the trustee in respect of the securitized utility tariff charges might be delayed or reduced. In that event, our payments on the securitized utility tariff bonds might be delayed or reduced.

 

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Inaccurate customer count forecasting or unanticipated delinquencies or write-offs might reduce scheduled payments on the securitized utility tariff bonds.

The securitized utility tariff charges are generally assessed based on forecasted customer counts for each retail customer class. The amount and the rate of securitized utility tariff charge collections will depend on the actual number of retail customers and the amount of securitized utility tariff charge collections and write-offs for each retail customer class. The securitized utility tariff charges are calculated by the servicer according to the methodology approved in the financing order, which includes the allocation of cost responsibility among retail customer classes. If the servicer inaccurately forecasts customer counts (including forecasts within each retail customer class) or underestimates customer delinquency or write-off data when setting or adjusting the securitized utility tariff charges, there could be a shortfall or material delay in securitized utility tariff charge collections, which might result in missed or delayed payments of principal and interest and lengthened weighted average lives of the securitized utility tariff bonds. Please read “KGS’s Financing Order—True-Ups” and “—Adjustments to Allocation of Securitized Utility Tariff Charges” in this prospectus.

The servicer’s use of inaccurate delinquency or write-off rates might also result from, among other things, unexpected deterioration of the economy or the occurrence of a natural disaster or extreme weather, an act of terrorism, cyberattack or other catastrophic event or the unanticipated declaration of a moratorium on terminating natural gas service to retail customers in the event of such occurrences, any of which would cause greater delinquencies or write-offs than expected or force KGS to grant additional payment relief to more retail customers, or any other change in law that makes it more difficult for KGS to terminate service to nonpaying retail customers or that requires KGS to apply more lenient credit standards in accepting retail customers. For example, under its emergency powers, the State legislature or the Kansas commission could impose a moratorium on the payment of consumer bills.

If we have to replace KGS as the servicer, we may experience difficulties finding and using a replacement servicer.

If KGS ceases to service the securitized utility tariff property, it might be difficult to find a successor servicer. Under the financing order, the annual servicing fee payable to a successor servicer is capped and the payment of compensation in excess of the cap is dependent upon Kansas commission approval. Also, any successor servicer might have less experience and ability than KGS and might experience difficulties in collecting securitized utility tariff charges and determining appropriate adjustments to the securitized utility tariff charges and billing and/or payment arrangements may change, resulting in delays or disruptions in collections. A successor servicer might charge fees that, while permitted under the financing order, are substantially higher than the fees paid to KGS as the initial servicer. Although a true-up adjustment may be required to allow for the increase in fees, there could be a gap between the incurrence of those fees and the implementation of the true-up adjustment to adjust for the increase that might adversely affect distributions from the collection account. In the event of the commencement of a case by or against the servicer under the Bankruptcy Code or similar laws, we and the trustee might be prevented from effecting a transfer of servicing due to operation of the Bankruptcy Code. Any of these factors and others might delay the timing of payments and may reduce the value of your investment. Please read “The Servicing Agreement” in this prospectus.

Changes to billing and collection practices might reduce the value of your investment in the securitized utility tariff bonds.

The financing order specifies the methodology for determining the amount of the securitized utility tariff charges we may impose. The servicer may not change this methodology without approval from the Kansas commission. However, the servicer may set its own billing and collection arrangements with its customers,

 

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provided that these arrangements comply with the Kansas commission’s customer safeguards. For example, to recover part of an outstanding bill, the servicer may agree to extend a customer’s payment schedule or to write-off the remaining unpaid portion of the bill, including the securitized utility tariff charges. Also, the servicer may change billing and collection practices, which might adversely impact the timing and amount of retail customer payments and might reduce securitized utility tariff charge collections, thereby limiting our ability to make scheduled payments on the securitized utility tariff bonds. Separately, the Kansas commission might require changes to these practices. Any changes in billing and collection practices regulations might make it more difficult for the servicer to collect the securitized utility tariff charges and adversely affect the value of your investment in the securitized utility tariff bonds. Please read “The Depositor, Seller, Initial Servicer and Sponsor—Forecasting Natural Gas Customers,” “—Billing Process” and “—Collection, Termination of Service and Write-Off Policy” in this prospectus.

Consumer protection measures may limit the ability of KGS to collect all charges owed by consumers, including the securitized utility tariff charges. In addition, the State legislature or the Kansas commission may take actions in response to pandemics, natural disasters, adverse weather events or any other situation which may adversely affect the timing of securitized utility tariff charge collections. Any such action could result in a shortfall or material delay in securitized utility tariff charge collections, which in turn might result in missed or delayed payments of principal and interest, lengthened weighted average life of the securitized utility tariff bonds and downgrade of the credit ratings on the securitized utility tariff bonds.

In addition, COVID-19 or any future pandemic may impact the ability of KGS to maintain operations at the same level as it was able prior to the pandemic. For instance, a large portion of KGS’s workforce, including employees of their contractors, may be unable to perform their job functions effectively due to illness, family illness, quarantine requirements, social distancing, telework requirements and other impacts of the COVID-19 or any future pandemic. Such potential impacts may limit the ability of KGS to service the securitized utility tariff charges.

Limits on rights to terminate service might make it more difficult to collect the securitized utility tariff charges.

If KGS, as the servicer, is billing retail customers for securitized utility tariff charges, it may terminate service to the retail customer for non-payment of securitized utility tariff charges pursuant to the applicable rules of the Kansas commission. Nonetheless, the rules and regulations of the Kansas commission, which may change from time to time, regulate and control the right to disconnect service. For example, gas utilities generally may not terminate service to a customer (i) on a holiday or weekend day or (ii) during certain extreme weather conditions. To the extent these retail customers do not pay for their gas service, KGS will not be able to collect securitized utility tariff charges from these retail customers.

In addition, KGS may be limited in the future in its ability to terminate service or collect securitized utility tariff charges. The Kansas commission, in response to a federal mandate or otherwise, could impose restrictions on the rates KGS charges to provide its services, including the inability to implement approved rates, or delay actions with respect to KGS’s base rate case and filings.

WEATHER-RELATED DAMAGE AND OTHER NATURAL DISASTER RISKS

Storm-related damage or damage from other natural disasters to KGS’s operations could impair payment on the securitized utility tariff bonds.

KGS’s operations were impacted by Winter Storm Uri and might be impacted by tornadoes, thunderstorms, ice storms, windstorms, flooding, earthquakes, prolonged droughts and the occurrence of wildfires, among other events. There could be longer-lasting weather-related adverse effects on residential and commercial

 

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development and economic activity in KGS’s service area, which could reduce the retail customer count and cause the securitized utility tariff charges to be greater than expected as a percentage of base rates of remaining retail customers. Legislative action adverse to the securitized utility tariff bondholders might be taken in response, and such legislation, if challenged as violative of the State pledge, might be defended on the basis of public necessity.

RISKS TO NATURAL GAS INDUSTRY

Natural gas is subject to competition from alternative energy sources and technological change might make alternative energy sources more attractive in the future.

The use of natural gas as an energy source is subject to competition from other energy sources including distributed electricity, private generation, solar energy producers, propane dealers, other renewable energy providers and from other sources of energy for power generation, such as coal or nuclear energy. The most significant product competition occurs between natural gas and electricity in the residential and small commercial markets. Natural gas competes with electricity for water and space heating, cooking, clothes drying and other general energy needs. Although currently natural gas is relatively more efficient than electricity and cheaper than electricity on a per unit basis, and switching energy sources entails significant upfront costs, changes in the competitive position of natural gas relative to electricity and other energy products have the potential to cause a decline in the number of KGS’s retail customers. A decline in KGS’s retail customers receiving natural gas by means of KGS’s distribution facilities would cause the securitized utility tariff charges to the remaining retail customers to increase, and thereby increase the risk of nonpayment by retail customers.

Technological developments and/or tax or other economic incentives might result in the introduction of economically attractive, more efficient, more environmentally-friendly and/or more cost-effective alternatives to purchasing natural gas through KGS’s distribution facilities for increasing numbers of retail customers. This might reduce the number of retail customers receiving natural gas by means of KGS’s distribution facilities, thereby causing securitized utility tariff charges to the remaining retail customers to increase. This, in turn, could adversely impact the billing and collection of securitized utility tariff charges, thereby increasing the risk of nonpayment by retail customers.

Increases in notional natural gas prices could prompt KGS retail customers to switch to alternative sources to meet all their energy requirements, which could adversely affect the billing and collection of securitized utility tariff charges.

KGS’s retail customers are subject to risks associated with changes in the notional price of natural gas. Increases in natural gas prices, possibly together with decreases in the relative costs of electricity, propane or other alternative sources of energy, might prompt KGS’s retail customers to switch to such alternative sources to meet their energy requirements and disconnect from KGS’s gas distribution system. This could reduce KGS’s retail customer count, resulting in higher securitized utility tariff charges for KGS’s remaining retail customers. This, in turn, could adversely impact the billing and collection of securitized utility tariff charges, thereby increasing the risk of nonpayment by retail customers.

Political, institutional, and societal sentiment toward climate change and climate change-related policies such as “carbon neutral” could prompt KGS retail customers to switch to alternative sources to meet all their energy requirements, which could adversely affect the billing and collection of securitized utility tariff charges.

International, federal, regional and/or state legislative and/or regulatory initiatives may attempt to regulate greenhouse gas emissions, including carbon dioxide and methane, as a response to the threat of climate

 

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change. The regulation of methane from oil and gas facilities, including systems to transport and distribute natural gas, has been subject to uncertainty in recent years; in September 2020, the Trump Administration revised prior regulations, rescinding certain methane standards and removing the transmission and storage segments from the source category for certain regulations. However, on January 20, 2021, President Biden signed an executive order calling for the suspension, revision, or rescission of the September 2020 rule and the establishment of new standards applicable to existing oil and gas operations, including the transmission and storage segments, in keeping with President Biden’s announcement that climate change will be a focus of his administration. Laws or regulations related to climate change could impose costs tied to carbon emissions, operational requirements or restrictions, or additional charges to fund energy efficiency activities. They could also provide a cost advantage to alternative energy sources, impose costs or restrictions on end users of natural gas, or result in other costs or requirements, such as costs associated with the adoption of new infrastructure and technology to respond to new mandates.

Relatedly, an increased political and societal focus on climate change could also adversely impact the reputation of fossil fuel products or services. The occurrence of the foregoing events could put upward pressure on the cost of natural gas relative to other energy sources, reduce the demand for natural gas or cause fuel switching to other energy sources, and impact the competitive position of natural gas and the ability to serve new or existing retail customers. In addition, changes in societal sentiment towards natural gas as an energy source may influence some energy consumers to switch from natural gas to other energy sources. Any or all of these items might prompt KGS’s retail customers to switch to alternative sources to meet their energy requirements and disconnect from KGS’s gas distribution system. This could reduce KGS’s retail customer count, resulting in higher securitized utility tariff charges for KGS’s remaining retail customers. This, in turn, could adversely impact the billing and collection of securitized utility tariff charges, thereby increasing the risk of nonpayment by retail customers.

RISKS ASSOCIATED WITH THE UNUSUAL NATURE OF THE SECURITIZED UTILITY TARIFF PROPERTY

Future adjustments to securitized utility tariff charges by retail customer class might result in insufficient collection.

The retail customers who pay the securitized utility tariff charges are divided into customer classes. Securitized utility tariff charges will be allocated among retail customer classes and assessed in accordance with the customer billing mechanism specified in the financing order. The true-up adjustment methodology approved in the financing order is cross collateralized across retail customer classes and requires that any delinquencies or under-collections in one retail customer class will be taken into account in the application of the true-up mechanism to adjust the securitized utility tariff charges for all retail customers, not just the class of retail customers from which the delinquency or under-collection arose. Nonetheless, if enough retail customers in a class fail to pay securitized utility tariff charges or cease to be retail customers, the servicer might have to substantially increase the securitized utility tariff charges for the remaining retail customers in that retail customer class and for other retail customer classes as well. These increases could lead to further unanticipated failures by the remaining retail customers to pay securitized utility tariff charges, thereby increasing the risk of a shortfall in funds to pay interest and principal on the securitized utility tariff bonds.

Foreclosure of the trustee’s lien on the securitized utility tariff property might not be practical, and acceleration of the securitized utility tariff bonds before maturity might have little practical effect.

Under the Securitization Act and the indenture, the trustee or the securitized utility tariff bondholders have the right to foreclose or otherwise enforce the lien on the securitized utility tariff property securing the securitized

 

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utility tariff bonds. However, in the event of foreclosure, there is likely to be a limited market, if any, for the securitized utility tariff property. Therefore, foreclosure might not be a realistic or practical remedy. Moreover, although principal of the securitized utility tariff bonds will be due and payable upon acceleration of the securitized utility tariff bonds before maturity, securitized utility tariff charges likely would not be accelerated and the nature of our business will result in the principal of the securitized utility tariff bonds being paid as funds become available.

RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS OF THE SELLER OR THE SERVICER

For a detailed discussion of the following bankruptcy risks, please read “How a Bankruptcy May Affect Your Investment” in this prospectus.

The servicer will commingle the securitized utility tariff charges with other revenues it collects, which might obstruct access to the securitized utility tariff charges in case of the servicer’s bankruptcy and reduce the value of your investment in the securitized utility tariff bonds.

The servicer will remit collected securitized utility tariff charges (the “daily remittance”) to the trustee for deposit to the general subaccount of the collection account as soon as reasonably practicable, but in no event later than two servicer business days following such date. The servicer will not segregate the securitized utility tariff charges from the other funds it collects from customers or its general funds. The securitized utility tariff charges will be segregated only when the servicer pays them to the trustee.

Despite this requirement, the servicer might fail to remit the full amount of the securitized utility tariff charges to the trustee or might fail to do so on a timely basis. This failure, whether voluntary or involuntary, might materially reduce the amount of securitized utility tariff charge collections available to make payments on the securitized utility tariff bonds.

The Securitization Act provides that the priority of a security interest perfected in securitized utility tariff property is not impaired by the commingling of the funds arising from securitized utility tariff charges with any other funds of the servicer. In a bankruptcy of the servicer, however, a bankruptcy court might rule that federal bankruptcy law does not recognize our right to collections of the securitized utility tariff charges that are commingled with other funds of the servicer as of the date of bankruptcy. If so, the collections of the securitized utility tariff charges held by the servicer as of the date of bankruptcy would not be available to pay amounts owed on the securitized utility tariff bonds. In this case, we would have only a general unsecured claim against the servicer for those amounts. This decision could cause material delays in payments of principal or interest, or losses, on the securitized utility tariff bonds and could materially reduce the value of your investment in the securitized utility tariff bonds. Please read “How a Bankruptcy May Affect Your Investment” in this prospectus.

The bankruptcy of ONE Gas might result in losses or delays in payments on the securitized utility tariff bonds.

The Securitization Act and the financing order provide that as a matter of Kansas state law:

 

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the rights and interests of a selling utility under a financing order, including the right to impose, bill, charge, collect and receive securitized utility tariff charges, are contract rights of the seller,

 

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the seller may make a present transfer of its rights under a financing order, including the right to impose, bill, charge, collect and receive future securitized utility tariff charges that retail customers do not yet owe,

 

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the securitized utility tariff property constitutes a present contract right, even though the imposition and collection of securitized utility tariff charges depend on further acts that have not yet occurred, and

 

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a transfer of the securitized utility tariff property from the seller, or its affiliate, to us, under an agreement that expressly states the transfer is a sale or other absolute transfer, is a true sale of the securitized utility tariff property and not a pledge of the securitized utility tariff property to secure a financing by the seller.

Please read “The Securitization Act” in this prospectus. These provisions are important to maintaining payments on the securitized utility tariff bonds in accordance with their terms during any bankruptcy of ONE Gas. In addition, the transaction has been structured with the objective of keeping us legally separate from ONE Gas and its affiliates in the event of a bankruptcy of ONE Gas or any such affiliates.

A bankruptcy court generally follows state property law on issues such as those addressed by the state law provisions described above. However, a bankruptcy court does not follow state law if it determines that the state law is contrary to a paramount federal bankruptcy policy or interest. If a bankruptcy court in a ONE Gas bankruptcy refused to enforce one or more of the state property law provisions described above, the effect of this decision on you as a beneficial owner of the securitized utility tariff bonds might be similar to the treatment you would receive in a ONE Gas bankruptcy if the securitized utility tariff bonds had been issued directly by KGS (a division of ONE Gas). A decision by the bankruptcy court that, despite our separateness from KGS, our assets and liabilities and those of KGS should be substantively consolidated would have a similar effect on you as a bondholder.

We have taken steps together with KGS, as the seller, to reduce the risk that in the event the seller or an affiliate of the seller were to become the debtor in a bankruptcy case, a court would order that our assets and liabilities be substantively consolidated with those of ONE Gas or an affiliate. Nonetheless, these steps might not be completely effective, and thus if ONE Gas or an affiliate were to become a debtor in a bankruptcy case, a court might order that our assets and liabilities be substantively consolidated with those of ONE Gas or such affiliate. This might cause material delays in payment of, or losses on, the securitized utility tariff bonds and might materially reduce the value of your investment in the securitized utility tariff bonds. For example:

 

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without permission from the bankruptcy court, the trustee might be prevented from taking actions against KGS or recovering or using funds on your behalf or replacing KGS as the servicer;

 

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the bankruptcy court might order the trustee to exchange the securitized utility tariff property for other property of lower value;

 

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tax or other government liens on KGS’s property might have priority over the trustee’s lien and might be paid from collected securitized utility tariff charges before payments on the securitized utility tariff bonds;

 

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the trustee’s lien might not be properly perfected in the collected securitized utility tariff charges prior to or as of the date of ONE Gas’s bankruptcy, with the result that the securitized utility tariff bonds would represent only general unsecured claims against ONE Gas;

 

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the bankruptcy court might rule that neither our property interest nor the trustee’s lien extends to securitized utility tariff charges in respect of natural gas consumed after the commencement of ONE Gas’s bankruptcy case, with the result that the securitized utility tariff bonds would represent only general unsecured claims against ONE Gas;

 

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we and KGS might be relieved of any obligation to make any payments on the securitized utility tariff bonds during the pendency of the bankruptcy case and might be relieved of any obligation to pay interest accruing after the commencement of the bankruptcy case;

 

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KGS might be able to alter the terms of the securitized utility tariff bonds as part of ONE Gas’s plan of reorganization;

 

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the bankruptcy court might rule that the securitized utility tariff charges should be used to pay, or that we should be charged for, a portion of the cost of providing natural gas service;

 

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the bankruptcy court might rule that the remedy provisions of the sale agreement are unenforceable, leaving us with an unsecured claim for actual damages against KGS that may be difficult to prove or, if proven, to collect in full;

 

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if the servicer defaults or enters bankruptcy proceedings, it might be difficult to find a successor servicer and payments on the securitized utility tariff bonds might be suspended;

 

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the mere fact of a servicer or seller bankruptcy proceeding might have an adverse effect on the resale market for the securitized utility tariff bonds and on the value of the securitized utility tariff bonds; or

 

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the servicer will commingle the securitized utility tariff charges with other revenues it collects, which might obstruct access to the securitized utility tariff charges in case of the bankruptcy of the servicer and reduce the value of your investment in the securitized utility tariff bonds.

Please read “How a Bankruptcy May Affect Your Investment.”

The sale of the securitized utility tariff property might be construed as a financing and not a sale in a case of ONE Gas’s bankruptcy which might delay or limit payments on the securitized utility tariff bonds.

The Securitization Act provides that the characterization of a transfer of securitized utility tariff property as a sale or other absolute transfer will not be affected or impaired by treatment of the transfer as a financing for federal or state tax purposes or financial reporting purposes. We, KGS and ONE Gas will treat the transaction as a sale under applicable law, although for financial reporting and federal and state tax purposes the transaction is intended to be treated as a financing. In the event of a bankruptcy of ONE Gas, a party in interest in the bankruptcy might assert that the sale of the securitized utility tariff property to us was a financing transaction and not a “sale or other absolute transfer” and that the treatment of the transaction for financial reporting and tax purposes as a financing and not a sale lends weight to that position. If a court were to characterize the transaction as a financing, we expect that we would, on behalf of ourselves and the trustee, be treated as a secured creditor of ONE Gas in the bankruptcy proceedings, although a court might determine that we only have an unsecured claim against ONE Gas. See “—The servicer will commingle the securitized utility tariff charges with other revenues it collects, which might obstruct access to the securitized utility tariff charges in case of the servicer’s bankruptcy and reduce the value of your investment in the securitized utility tariff bonds” above. Even if we had a security interest in the securitized utility tariff property, we might not have access to the related securitized utility tariff charge collections during the bankruptcy and would be subject to the risks of a secured creditor in a bankruptcy case, including the possible bankruptcy risks described in the immediately preceding risk factor. As a result, repayment of the securitized utility tariff bonds might be significantly delayed and a plan of reorganization in the bankruptcy might permanently modify the amount and timing of payments to us of the securitized utility tariff charge collections and therefore the amount and timing of funds available to us to pay securitized utility tariff bondholders.

If the servicer enters bankruptcy proceedings, the remittance of certain securitized utility tariff charges by the servicer prior to the date of bankruptcy might constitute preferences, which means these funds might be unavailable to pay amounts owed on the securitized utility tariff bonds.

In the event of a bankruptcy of the servicer, a party in interest might take the position that the remittance of funds prior to bankruptcy of the servicer, pursuant to the servicing agreement, constitutes a preference under

 

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bankruptcy law if the remittance of those funds was deemed to be paid on account of a preexisting debt. If a court were to hold that the remittance of funds constitutes a preference, any such remittance within 90 days of the filing of the bankruptcy petition could be avoidable, and the funds could be required to be returned to the bankruptcy estate of the servicer. To the extent that securitized utility tariff charges have been commingled with the general funds of the servicer, the risk that a court would hold that a remittance of funds was a preference would increase. Also, if we are considered to be an “insider” of the servicer, any such remittance made within one year of the filing of the bankruptcy petition could be avoidable as well if the court were to hold that such remittance constitutes a preference. In either case, we or the trustee would merely be an unsecured creditor of the servicer. If any funds were required to be returned to the bankruptcy estate of the servicer, we would expect that the amount of any future securitized utility tariff charges would be increased through the true-up mechanism to recover such amount, though this would not eliminate the risk of payment delays or losses on your investment in the securitized utility tariff bonds.

Claims against KGS might be limited in the event of a bankruptcy of the seller.

If the seller were to become a debtor in a bankruptcy case, claims, including indemnity claims, by us against the seller under the sale agreement and the other documents executed in connection with the sale agreement could be unsecured claims and would be disposed of in the bankruptcy case. In addition, the bankruptcy court might estimate any contingent claims that we have against the seller and, if it determines that the contingency giving rise to these claims is unlikely to occur, estimate the claims at a lower amount. A party in interest in the bankruptcy of ONE Gas might challenge the enforceability of the indemnity provisions in the sale agreement. If a court were to hold that the indemnity provisions were unenforceable, we would be left with a claim for actual damages against the seller based on breach of contract principles, which would be subject to estimation and/or calculation by the court. We cannot give any assurance as to the result if any of the above-described actions or claims were made. Furthermore, we cannot give any assurance as to what percentage of their claims, if any, unsecured creditors would receive in any bankruptcy proceeding involving ONE Gas.

The bankruptcy of ONE Gas might limit the remedies available to the trustee.

Upon an event of default for the securitized utility tariff bonds under the indenture, the Securitization Act permits the trustee to enforce the security interest in the securitized utility tariff property in accordance with the terms of the indenture. In this capacity, the trustee is permitted to request the Kansas commission or a court of appropriate jurisdiction for an order of sequestration and payment to all securitized utility tariff bondholders of all revenues arising with respect to the related securitized utility tariff property. There can be no assurance, however, that the Kansas commission or such court would issue this order after a ONE Gas bankruptcy in light of the automatic stay provisions of Section 362 of the United States Bankruptcy Code. In that event, the trustee would be required to seek an order from the bankruptcy court lifting the automatic stay to permit this action by the Kansas court, and an order requiring an accounting and segregation of the revenues arising from the securitized utility tariff property. There can be no assurance that a court would grant either order.

OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIZED UTILITY TARIFF BONDS

KGS’s indemnification obligations under the sale agreement and the servicing agreement are limited and might not be sufficient to protect your investment in the securitized utility tariff bonds.

KGS is obligated under the sale agreement to indemnify us and the trustee, for itself and on behalf of the securitized utility tariff bondholders, only in specified circumstances and will not be obligated to repurchase

 

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any securitized utility tariff property in the event of a breach of any of its representations, warranties or covenants regarding the securitized utility tariff property. Similarly, KGS is obligated under the servicing agreement to indemnify us and the trustee, for itself and on behalf of the securitized utility tariff bondholders only in specified circumstances. Please read “The Sale Agreement” and “The Servicing Agreement” in this prospectus.

Neither the trustee nor the securitized utility tariff bondholders will have the right to accelerate payments on the securitized utility tariff bonds as a result of a breach under the sale agreement or servicing agreement, absent an event of default under the indenture governing the securitized utility tariff bonds as described in “Description of the Securitized Utility Tariff Bonds—What Constitutes an Event of Default on the Securitized Utility Tariff Bonds.” Furthermore, KGS might not have sufficient funds available to satisfy its indemnification obligations under these agreements, and the amount of any indemnification paid by KGS might not be sufficient for you to recover all of your investment in the securitized utility tariff bonds. In addition, if KGS becomes obligated to indemnify securitized utility tariff bondholders, the ratings on the securitized utility tariff bonds will likely be downgraded as a result of the circumstances causing the breach and the fact that securitized utility tariff bondholders will be unsecured creditors of KGS with respect to any of these indemnification amounts. KGS will not indemnify any person for any loss, damages, liability, obligation, claim, action, suit or payment resulting solely from a downgrade in the ratings on the securitized utility tariff bonds, or for any consequential damages, including any loss of market value of the securitized utility tariff bonds resulting from a default or a downgrade of the ratings of the securitized utility tariff bonds. Please read “The Sale Agreement—KGS’s Representations and Warranties” and “—KGS’s Obligation to Indemnify Us and the Trustee and to Take Legal Action” in this prospectus.

Credit ratings do not indicate the expected rate of payment of principal on the securitized utility tariff bonds.

We expect that the securitized utility tariff bonds will receive credit ratings from two nationally recognized statistical rating organizations (“NRSRO”). A rating is not a recommendation to buy, sell or hold the securitized utility tariff bonds.

The ratings merely analyze the probability that we will repay the total principal amount of the securitized utility tariff bonds at the final maturity date (which is later than the scheduled final payment date) and will make timely interest payments. The ratings are not an indication that the rating agencies believe that principal payments are likely to be paid on time according to the expected sinking fund schedule.

Under Rule 17g-5 of the Exchange Act, NRSROs providing KGS, as the sponsor, with the requisite certification will have access to all information posted on a website by KGS for the purpose of determining the initial rating and monitoring the rating after the closing date in respect of the securitized utility tariff bonds. As a result, an NRSRO other than an NRSRO hired by KGS (the “hired NRSRO”) may issue ratings on the securitized utility tariff bonds (“Unsolicited Ratings”), which may be lower, and could be significantly lower, than the ratings assigned by the hired NRSROs. The Unsolicited Ratings may be issued prior to, or after, the issuance date of the securitized utility tariff bonds. Issuance of any Unsolicited Rating will not affect the issuance of the securitized utility tariff bonds. Issuance of an Unsolicited Rating lower than the ratings assigned by the hired NRSRO on the securitized utility tariff bonds might adversely affect the value of the securitized utility tariff bonds and, for regulated entities, could affect the status of the securitized utility tariff bonds as a legal investment or the capital treatment of the securitized utility tariff bonds. Investors in the securitized utility tariff bonds should consult with their legal counsel regarding the effect of the issuance of a rating by a non-hired NRSRO that is lower than the rating of a hired NRSRO. None of KGS, us, the underwriters or any of their affiliates will have any obligation to inform you of any Unsolicited Ratings assigned after the date of this prospectus. In addition, if we

 

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or KGS fail to make available to a non-hired NRSRO any information provided to any hired rating agency for the purpose of assigning or monitoring the ratings on the securitized utility tariff bonds, a hired NRSRO could withdraw its ratings on the securitized utility tariff bonds, which could adversely affect the market value of the securitized utility tariff bonds and/or limit your ability to resell the securitized utility tariff bonds.

ONE Gas’s credit ratings might affect the market value of the securitized utility tariff bonds.

Although neither ONE Gas nor KGS is an obligor on the securitized utility tariff bonds, a downgrading of the credit ratings on the debt of ONE Gas might have an adverse effect on the market value of the securitized utility tariff bonds. Credit ratings may change at any time. A NRSRO has the authority to revise or withdraw its rating based solely upon its own judgment.

The absence of a secondary market for the securitized utility tariff bonds might limit your ability to resell the securitized utility tariff bonds.

The underwriters for the securitized utility tariff bonds might assist in resales of the securitized utility tariff bonds, but they are not required to do so. A secondary market for the securitized utility tariff bonds might not develop. If a secondary market does develop, it might not continue or it might not be sufficiently liquid to allow you to resell any of the securitized utility tariff bonds. We do not anticipate that the securitized utility tariff bonds will be listed on any securities exchange. Please read “Plan of Distribution” in this prospectus.

You might receive principal payments for the securitized utility tariff bonds later than you expect.

The amount and the rate of collection of the securitized utility tariff charges for the securitized utility tariff bonds, together with the related securitized utility tariff charge adjustments, will generally determine whether there is a delay in the scheduled repayments for the securitized utility tariff bond principal. If the servicer collects the securitized utility tariff charges at a slower rate than expected, it might have to request adjustments of the securitized utility tariff charges. If those adjustments are not timely and accurate, you might experience a delay in payments of principal and interest and a decrease in the value of your investment in the securitized utility tariff bonds. Please read “Description of the Securitized Utility Tariff Bonds” in this prospectus.

KGS may cause the issuance, by another subsidiary or affiliated entity, of additional securitized utility tariff bonds secured by additional securitized utility tariff property that includes a nonbypassable charge on retail customers.

Any new issuance of securitized utility tariff bonds by another subsidiary or affiliated entity of KGS may include terms and provisions that would be unique to that particular issuance. In the event a retail customer does not pay in full all amounts owed under any bill, including securitized utility tariff charges, KGS, as servicer, is required to allocate any resulting shortfalls in securitized utility tariff charges ratably based on the amounts of securitized utility tariff charges owed in respect of the securitized utility tariff bonds, and amounts owed in respect of other securitized utility tariff bonds. However, if a dispute arises with respect to the allocation of such securitized utility tariff charges or other delays occur on account of the administrative burdens of making such allocation, we cannot assure you that any issuance of other securitized utility tariff bonds by another subsidiary or affiliated entity of KGS would not cause reductions or delays in payment of principal and interest on the securitized utility tariff bonds.

 

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KGS’s operations are subject to risks beyond its control, including cyber-security intrusions, terrorist attacks or other catastrophic events, which could limit KGS’s operations and ability to service the securitized utility tariff property.

KGS operates in an industry that requires the use of sophisticated information technology systems and network infrastructure, which control an interconnected system of distribution and transmission systems shared with third parties. Due to increased technology advances, KGS and its affiliates have become more reliant on technology to effectively operate its business, including to help run their financial and operations organizations in part to integrate data and reporting activities across KGS and its affiliates. A successful physical or cyber-security intrusion may occur despite KGS’s security measures or those of its affiliates or the third parties it works with. Despite the implementation of security measures, all assets and systems are potentially vulnerable to disability, failures, or unauthorized access due to physical or cyber-security intrusions caused by human error, bugs, terrorist attacks, or other malicious acts. If KGS’s or its affiliates assets or systems (including those it shares with third parties or otherwise uses) were to fail, be physically damaged, or be breached, and were not recovered in a timely manner, KGS may be unable to perform critical business functions, including the distribution of natural gas and the metering and billing of retail customers, all of which could materially affect KGS’s ability to bill and collect securitized utility tariff charges or otherwise service the securitized utility tariff property.

If the investment of collected securitized utility tariff charges and other funds held by the trustee in the collection account results in investment losses or the investments become illiquid, you may receive payment of principal and interest on the securitized utility tariff bonds later than you expect.

Funds held by the trustee in the collection account will be invested in eligible investments at the written direction of the servicer. Eligible investments include commercial paper, money market funds and repurchase obligations with respect to United States treasuries, among other items. Although the eligible investments as defined in the indenture governing the securitized utility tariff bonds have traditionally been viewed as highly liquid with a low probability of loss, illiquidity and losses have been experienced by investors in certain eligible investments as a result of disruptions in the financial markets in recent years. If investment losses or illiquidity is experienced, you might experience a delay in payments of principal and interest on the securitized utility tariff bonds and a decrease in the value of your investment in the securitized utility tariff bonds.

Regulatory provisions affecting certain investors could adversely affect the liquidity and the regulatory treatment of investments in the securitized utility tariff bonds.

European Union (“EU”) legislation comprising Regulation (EU) 2017/2402 (as amended, the “EU Securitization Regulation”) and certain related regulatory technical standards, implementing technical standards and official guidance (together, the “European Securitization Rules”) imposes certain restrictions and obligations with regard to securitizations (as such term is defined for purposes of the EU Securitization Regulation). The European Securitization Rules are in force throughout the EU (and are expected also to be implemented in the non-EU member states of the European Economic Area).

Pursuant to the European Securitization Rules, EU Institutional Investors investing in a securitisation (as so defined) must, amongst other things, verify that (a) certain credit-granting requirements are satisfied, (b) the originator, sponsor or original lender retains on an ongoing basis a material net economic interest which, in any event, shall not be less than 5%, determined in accordance with Article 6 of the EU Securitization Regulation, and discloses that risk retention, (c) the originator, sponsor or relevant securitization special purpose entity has, where applicable, made available information as required by Article 7 of the EU Securitization Regulation

 

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and (d) they have carried out a due-diligence assessment that enables the EU Institutional Investors to assess the risks involved, considering at least (i) the risk characteristics of the securitisation position and the underlying exposures and (ii) all the structural features of the securitization that can materially impact the performance of the securitisation position. EU Institutional Investors include: (a) insurance undertakings and reinsurance undertakings as defined in Directive 2009/138/EC, as amended; (b) institutions for occupational retirement provision falling within the scope of Directive (EU) 2016/2341 (subject to certain exceptions), and certain investment managers and authorized entities appointed by such institutions; (c) alternative investment fund managers as defined in Directive 2011/61/EU which manage and/or market alternative investment funds in the EU; (d) certain internally managed investment companies authorized in accordance with Directive 2009/65/EC, and managing companies as defined in that Directive; (e) credit institutions as defined in Regulation (EU) No 575/2013 (CRR) (and certain consolidated affiliates thereof); and (f) investment firms as defined in CRR (and certain consolidated affiliates thereof).

With respect to the United Kingdom (UK), relevant UK-established or UK-regulated persons (as described below) are subject to the restrictions and obligations of the EU Securitization Regulation as it forms part of UK domestic law by operation of the European Union (Withdrawal) Act 2018 (as amended, the “EUWA”), and as amended by the Securitisation (Amendment) (EU Exit) Regulations 2019, and as further amended from time to time, the UK Securitization Regulation. The UK Securitization Regulation, together with (a) all applicable binding technical standards made under the UK Securitization Regulation, (b) any EU regulatory technical standards or implementing technical standards relating to the EU Securitization Regulation (including such regulatory technical standards or implementing technical standards that are applicable pursuant to any transitional provisions of the EU Securitization Regulation) forming part of UK domestic law by operation of the EUWA, (c) all relevant guidance, policy statements or directions relating to the application of the UK Securitization Regulation (or any binding technical standards) published by the Financial Conduct Authority (the “FCA”) and/or the Prudential Regulation Authority (the “PRA”) (or their successors), (d) any guidelines relating to the application of the EU Securitization Regulation that are applicable in the UK, (e) any other transitional, saving or other provision relevant to the UK Securitization Regulation by virtue of the operation of the EUWA and (f) any other applicable laws, acts, statutory instruments, rules, guidance or policy statements published or enacted relating to the UK Securitization Regulation, in each case, as may be further amended, supplemented or replaced, from time to time, are referred to in this prospectus as the UK Securitization Rules.

Article 5 of the UK Securitization Regulation places certain conditions on investments in a “securitisation” (as defined in the UK Securitization Regulation) by a UK Institutional Investor. UK Institutional Investors include: (a) an insurance undertaking as defined in section 417(1) of the Financial Services And Markets Act 2000 (as amended, the “FSMA”); (b) a reinsurance undertaking as defined in section 417(1) of the FSMA; (c) an occupational pension scheme as defined in section 1(1) of the Pension Schemes Act 1993 that has its main administration in the UK, or a fund manager of such a scheme appointed under section 34(2) of the Pensions Act 1995 that, in respect of activity undertaken pursuant to that appointment, is authorized for the purposes of section 31 of the FSMA; (d) an alternative investment fund manager as defined in regulation 4(1) of the Alternative Investment Fund Managers Regulation 2013 that markets or manages alternative investments funds (as defined in regulation 3 of the Alternative Investment Fund Managers Regulation 2013) in the UK; (e) a management company as defined in section 237(2) of the FSMA; (f) an undertaking for collective investment in transferable securities as defined by section 236A of the FSMA, which is an authorized open ended investment company as defined in section 237(3) of the FSMA; and (g) a CRR firm as defined in Regulation (EU) No 575/2013, as it forms part of UK domestic law by virtue of the EUWA (and certain consolidated affiliates thereof).

Prior to investing in (or otherwise holding an exposure to) a “securitisation position” (as defined in the UK Securitization Regulation), a UK Institutional Investor, other than the originator, sponsor or original lender

 

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(each as defined in the UK Securitization Regulation), must, among other things: (a) verify that, where the originator or original lender is established in a third country (i.e. not within the UK), the originator or original lender grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes to ensure that credit granting is based on a thorough assessment of the obligor’s creditworthiness; (b) verify that, if established in the third country (i.e. not within the UK), the originator, sponsor or original lender retains on an ongoing basis a material net economic interest that, in any event, shall not be less than 5%, determined in accordance with Article 6 of the UK Securitization Regulation, and discloses the risk retention to the affected investors; (c) verify that, where established in a third country (i.e. not within the UK), the originator, sponsor or relevant securitization special purpose entity, where applicable, made available information that is substantially the same as that which it would have made available under Article 7 of the UK Securitization Regulation (which sets out certain transparency requirements) if it had been established in the UK and has done so with such frequency and modalities as are substantially the same as those with which it would have made information available if it had been established in the UK; and (d) carry out a due-diligence assessment that enables the UK Institutional Investors to assess the risks involved, considering at least (i) the risk characteristics of the securitisation position and the underlying exposures and (ii) all the structural features of the securitization that can materially impact the performance of the securitisation position.

We and KGS do not believe that the securitized utility tariff bonds fall within the definition of a “securitization” for purposes of the EU Securitization Regulation or the UK Securitization Regulation as there is no tranching of credit risk associated with exposures under the transactions described in this prospectus. Therefore, we and KGS believe such transactions are not subject to the European Securitization Rules or the UK Securitization Rules. As such, neither we nor KGS, nor any other party to the transactions described in this prospectus, intend, or are required under the transaction documents, to retain a material net economic interest in respect of such transactions, or to take, or to refrain from taking, any other action, in a manner prescribed or contemplated by the European Securitization Rules or the UK Securitization Rules. In particular, no such Person undertakes to take, or to refrain from taking, any action for purposes of compliance by any investor (or any other Person) with any requirement of the European Securitization Rules or the UK Securitization Rules to which such investor (or other Person) may be subject at any time.

However, if a competent authority were to take a contrary view and determine that the transactions described in this prospectus do constitute a securitization for purposes of the EU Securitization Regulation or the UK Securitization Regulation, then any failure by an EU Institutional Investor or a UK Institutional Investor (as applicable) to comply with any applicable European Securitization Rules or UK Securitization Rules (as applicable) with respect to an investment in the securitized utility tariff bonds may result in the imposition of a penalty regulatory capital charge on that investment or of other regulatory sanctions and remedial measures.

Consequently, the securitized utility tariff bonds may not be a suitable investment for EU Institutional Investors or UK Institutional Investors. As a result, the price and liquidity of the securitized utility tariff bonds in the secondary market may be adversely affected.

Prospective investors are responsible for analyzing their own legal and regulatory position and are advised to consult with their own advisors and any relevant regulator or other authority regarding the scope, applicability and compliance requirements of the European Securitization Rules and the UK Securitization Rules, and the suitability of the securitized utility tariff bonds for investment. Neither we nor KGS, nor any other party to the transactions described in this prospectus, make any representation as to any such matter, or have any liability to any investor (or any other Person) for any non-compliance by any such Person with the European Securitization Rules, the UK Securitization Rules or any other applicable legal, regulatory or other requirements.

 

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REVIEW OF SECURITIZED UTILITY TARIFF PROPERTY

Pursuant to the rules of the SEC, KGS, as sponsor, has performed, as described below, a review of the securitized utility tariff property underlying the securitized utility tariff bonds. As required by these rules, the review was designed and effected to provide reasonable assurance that disclosure regarding the securitized utility tariff property is accurate in all material respects. KGS did not engage a third party in conducting its review.

The securitized utility tariff bonds will be secured under the indenture by the indenture’s trust estate. The principal asset of the indenture’s trust estate is the securitized utility tariff property. The securitized utility tariff property is a present contract right authorized and created pursuant to the securitization provisions of the Securitization Act and an irrevocable financing order. The securitized utility tariff property includes the irrevocable right to impose, bill, charge, collect and receive nonbypassable securitized utility tariff charges in amounts sufficient to timely pay scheduled principal and interest and ongoing financing costs in connection with the securitized utility tariff bonds. The securitized utility tariff charges are nonbypassable charges that will be paid by all existing and future retail customers receiving natural gas service from KGS or its successors or assignees under the rate schedules or special contracts approved by the Kansas commission, even if a retail customer elects to purchase natural gas from an alternative natural gas supplier following a fundamental change in regulation of public utilities in Kansas; provided, however, if a customer disconnects from KGS’s gas distribution system and switches to alternative sources of energy that meet all of its energy needs, such customer will no longer be a retail customer and will not be subject to paying securitized utility tariff charges. During the twelve months ended December 31, 2021, approximately 78.7% of KGS’s total gas deliveries were to residential retail customers and approximately 21.3% were to non-residential retail customers.

The securitized utility tariff property is not a static pool of receivables or assets. Securitized utility tariff charges authorized in the financing order are irrevocable and not subject to reduction, impairment, or adjustment by further action of the Kansas commission except that securitized utility tariff charges are subject to semi-annual and other interim true-up adjustments to correct any over-collections or under-collections of securitized utility tariff charges during the previous 6 months and to ensure the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the securitized utility tariff bonds. All revenues and collections resulting from securitized utility tariff charges provided for in the financing order are part of the securitized utility tariff property. The securitized utility tariff charges will be calculated on a fixed monthly charge per retail customer. The securitized utility tariff property is described in more detail under “Description of the Securitized Utility Tariff Property” in this prospectus.

In the financing order, the Kansas commission, among other things:

 

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orders that KGS, as servicer, shall impose and collect from all KGS retail customers the securitized utility tariff charges that are nonbypassable in an amount calculated as provided in the financing order,

 

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orders that upon the transfer of the securitized utility tariff property to us by KGS, we shall be the owner of the rights to the securitized utility tariff property and that KGS as servicer is merely the collection agent for us, and

 

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pledges that it will act under the financing order as expressly authorized by the securitization provisions of the Securitization Act to ensure the projected recovery of securitized utility tariff charge revenues are sufficient to provide timely payment of the scheduled principal of and interest on the securitized utility tariff bonds.

Please read “The Securitization Act” and “KGS’s Financing Order” in this prospectus for more information.

 

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The characteristics of securitized utility tariff property are unlike the characteristics of assets underlying mortgage and other commercial asset securitizations because securitized utility tariff property is a creature of statute and state regulatory commission proceedings. Because the nature and characteristics of the securitized utility tariff property and many elements of the securitized utility tariff bond securitization are set forth and constrained by the securitization provisions of the Securitization Act, KGS, as sponsor, does not select the assets to be securitized in ways common to many securitizations. Moreover, the securitized utility tariff bonds do not contain origination or underwriting elements similar to typical mortgage or other loan transactions involved in other forms of asset-backed securities. The securitization provisions of the Securitization Act and the Kansas commission require the imposition on, and collection of securitized utility tariff charges from, existing and future retail customers receiving natural gas service from KGS or it successors or assignees under Kansas commission-approved rate schedules or under special contracts, even if a retail customer elects to purchase natural gas from an alternative natural gas supplier following a fundamental change in regulation of public utilities in Kansas subject to certain exceptions discussed elsewhere in this prospectus. Since the securitized utility tariff charges are assessed against all retail customers and the true-up adjustment mechanism adjusts for the impact of retail customer defaults, the collectability of the securitized utility tariff charges is not ultimately dependent upon the credit quality of particular KGS retail customers, as would be the case in the absence of the true-up adjustment mechanism.

The review by KGS of the securitized utility tariff property underlying the securitized utility tariff bonds has involved a number of discrete steps and elements as described in more detail below. First, KGS has analyzed and applied the securitization provisions of the Securitization Act’s requirements for securitization of qualified extraordinary costs in seeking approval of the Kansas commission for the issuance of the financing order and in its application for a financing order with respect to the characteristics of the securitized utility tariff property to be created pursuant to the financing order. KGS worked with its counsel and its structuring agent in preparing the application for a financing order and with the Kansas commission on the terms of the financing order. Moreover, KGS worked with its counsel, its structuring agent and counsel to the underwriters in preparing the legal agreements that provide for the terms of the securitized utility tariff bonds and the security for the securitized utility tariff bonds. KGS has analyzed economic issues and practical issues for the scheduled payment of the securitized utility tariff bonds in terms of impacts of economic factors, potentials for disruptions due to weather or catastrophic events and its own forecasts for retail customer growth as well as the historic accuracy of its prior forecasts.

In light of the unique nature of the securitized utility tariff property, KGS has taken (or prior to the offering of the securitized utility tariff bonds, will take) the following actions in connection with its review of the securitized utility tariff property and the preparation of the disclosure for inclusion in this prospectus describing the securitized utility tariff property, the securitized utility tariff bonds and the proposed securitization:

 

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reviewed the securitization provisions of the Securitization Act, the rules and regulations of the Kansas commission as they relate to the securitized utility tariff property in connection with the preparation and filing of the application with the Kansas commission for the approval of the financing order in order to confirm that the application and proposed financing order satisfied applicable statutory and regulatory requirements;

 

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actively participated in the proceeding before the Kansas commission relating to the approval of the requested financing order;

 

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compared the financing order, as issued by the Kansas commission, to the securitization provisions of the Securitization Act and the rules and regulations of the Kansas commission as they relate to the securitized utility tariff property to confirm that the financing order met such requirements;

 

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compared the proposed terms of the securitized utility tariff bonds to the applicable requirements in the securitization provisions of the Securitization Act, the financing order and the regulations of the Kansas commission to confirm that they met such requirements;

 

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prepared and reviewed the agreements to be entered into in connection with the issuance of the securitized utility tariff bonds and compared such agreements to the applicable requirements in the securitization provisions of the Securitization Act, the financing order and the regulations of the Kansas commission to confirm that they met such requirements;

 

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reviewed the disclosure in this prospectus regarding the securitization provisions of the Securitization Act, the financing order and the agreements to be entered into in connection with the issuance of the securitized utility tariff bonds, and compared such descriptions to the relevant securitization provisions of the Securitization Act, the financing order and such agreements to confirm the accuracy of such descriptions;

 

•

consulted with legal counsel to assess if there is a basis upon which the securitized utility tariff bondholders (or the trustee acting on their behalf) could successfully challenge the constitutionality of any legislative action by the State of Kansas (including the Kansas commission) that could repeal or amend the securitization provisions of the Securitization Act that could substantially impair the value of the securitized utility tariff property, or substantially reduce, alter or impair the securitized utility tariff charges;

 

•

reviewed the process and procedures in place for it, as servicer, to perform its obligations under the servicing agreement, including without limitation, billing and collecting the securitized utility tariff charges to be provided for under the securitized utility tariff property, forecasting securitized utility tariff charge revenues, preparing and filing applications for true-up adjustments to the securitized utility tariff charges and enforcing credit standards;

 

•

reviewed the methodology and procedure of the true-up mechanism for adjusting securitized utility tariff charge levels to meet the scheduled payments on the securitized utility tariff bonds; and

 

•

with the assistance of its structuring agent and the underwriters, prepared financial models in order to set the initial securitized utility tariff charges to be provided for under the securitized utility tariff property at a level sufficient to pay on a timely basis scheduled principal and interest on the securitized utility tariff bonds.

In connection with the preparation of such models, KGS:

 

•

reviewed (i) the historical natural gas usage and retail customer growth within KGS’s retail customer base and (ii) forecasts of expected sales and retail customer growth; and

 

•

analyzed the sensitivity of the weighted average life of the securitized utility tariff bonds in relation to variances in actual retail customer count from forecasted levels and in relation to the true-up mechanism in order to assess the probability that the weighted average life of the securitized utility tariff bonds may be extended as a result of such variances, and in the context of the operation of the true-up mechanism for adjustment of securitized utility tariff charges to address under- or over-collections in light of scheduled payments on the securitized utility tariff bonds.

As a result of this review, KGS has concluded that:

 

•

the securitized utility tariff property, the financing order and the agreements to be entered into in connection with the issuance of the securitized utility tariff bonds meet in all material respects the applicable statutory and regulatory requirements;

 

•

the disclosure in this prospectus regarding the securitization provisions of the Securitization Act, the financing order and the agreements to be entered into in connection with the issuance of the securitized utility tariff bonds is as of its date, accurate in all material respects;

 

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•

the servicer has adequate processes and procedures in place to perform its obligations under the servicing agreement;

 

•

securitized utility tariff charge revenues, as adjusted from time to time as provided in the securitization provisions of the Securitization Act and the financing order, are expected to be sufficient to pay on a timely basis scheduled principal and interest on the securitized utility tariff bonds; and

 

•

the design and scope of KGS’s review of the securitized utility tariff property as described above is effective to provide reasonable assurance that the disclosure regarding the securitized utility tariff property in this prospectus is accurate in all material respects.

 

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DESCRIPTION OF THE SECURITIZED UTILITY TARIFF PROPERTY

Creation of Securitized Utility Tariff Property; Financing Order

The Securitization Act defines securitized utility tariff property as, “All rights and interests of a public utility, its successor or assignee under a financing order, including the right to impose, bill, charge, collect and receive securitized utility tariff charges authorized under the financing order and to obtain periodic adjustments to such charges authorized under this section and as provided in the financing order; and all revenues, collections, claims, rights to payments, payments, money or proceeds arising from the rights and interests specified in the financing order, regardless of whether such revenues, collections, claims, rights to payment, payments, money or proceeds are imposed, billed, received, collected or maintained together with or commingled with other revenues, collections, rights to payment, payments, money or proceeds.” The securitized utility tariff bonds will be secured by the securitized utility tariff property, as well as the other collateral described under “Description of the Securitized Utility Tariff Bonds—The Security for the Securitized Utility Tariff Bonds.”

In addition to the right to impose, bill, charge, collect and receive securitized utility tariff charges, the financing order:

 

•

Authorizes the transfer of the securitized utility tariff property to us and the issuance of securitized utility tariff bonds;

 

•

Establishes procedures for periodic true-up adjustments to securitized utility tariff charges in the event of over-collection or under-collection; and

 

•

Provides and pledges that after the earlier of the transfer of the securitized utility tariff property to an assignee or the issuance of securitized utility tariff bonds authorized by the financing order, the financing order is irrevocable and may not be amended, modified, or terminated by any subsequent action of the Kansas commission (except for the true-up mechanism adopted by the Kansas commission or in connection with a refinancing, retiring or refunding of securitized utility tariff bonds).

A form of issuance advice letter and a form of tariff (called the “Winter Event Securitized Cost Recovery Rider” or “WESCR”) are attached to the financing order. We will complete and file both documents with the Kansas commission immediately after the pricing of the securitized utility tariff bonds. The issuance advice letter confirms to the Kansas commission the interest rate and expected sinking fund schedule for the securitized utility tariff bonds and sets forth the actual dollar amount of the initial securitized utility tariff charges as described below under “KGS’s Financing Order—Issuance Advice Letter.” The Kansas commission’s review of the issuance advice letter will be limited to determining that the final structuring, terms and pricing of the securitized utility tariff bonds are consistent with the criteria established in the financing order and that the mathematical calculations are accurate.

Tariff; Securitized Utility Tariff Charges

The tariff establishes the initial securitized utility tariff charges. It also implements the procedures for periodic adjustments to the securitized utility tariff charges, the payment of securitized utility tariff charges and the semi-annual procedures allowing KGS as servicer to reconcile the amount of securitized utility tariff charge remittances with the periodic payment requirement.

The securitized utility tariff charges will be payable by all existing or future retail customers receiving natural gas service from KGS or its successors or assignees under Kansas commission-approved rate schedules or under special contracts, even if a retail customer elects to purchase natural gas from an alternative natural gas supplier following a fundamental change in regulation of public utilities in Kansas.

 

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If a customer disconnects from KGS’s gas distribution system and switches to alternative sources of energy that meet all of its energy needs, such customer will no longer be a retail customer and will not be subject to paying securitized utility tariff charges. KGS’s customers that are in KGS’s “Sales for Resale” customer class are not retail customers and will not be subject to paying securitized utility tariff charges. In addition, retail customers who become transportation customers when securitized utility tariff charges are being recovered are required to pay a settlement fee prior to becoming a transportation customer. The settlement fee owed by the customer will be based on the estimated present value of the expected charges the customer would have paid as a retail customer over the remaining period in which the securitized utility tariff charge is being recovered. The settlement fee will be credited to KGS’s other retail customers once per year. As of December 31, 2021, KGS had approximately 641,000 retail customers and approximately 6,000 customers, including “Sales for Resale” customers and transportation customers, that will not be subject to paying securitized utility tariff charges.

For purposes of billing securitized utility tariff charges, each retail customer will be designated as a customer belonging to one of the securitized utility tariff charge customer classes set forth below. Under the terms of the financing order, KGS will allocate the securitized utility tariff charges among the securitized utility tariff charge customer classes based on the percentage of the total estimated February 2021 sales volumes, as follows:

Securitized Utility Tariff Charge Customer Classes*

 

Retail Customer Class		Estimate of February 2021 Usage (Mcf)				Allocation Percentage
Residential			7,812,228				78.953%
General Service—Small			870,171				8.794%
General Service—Large			1,037,545				10.486%
General Service—Transport Eligible			170,496				1.723%
Small Generator Service			3,224				0.033%
Irrigation Sales			1,122				0.011%
KGS Supply			0				0.000%
TOTAL			9,894,787				100.000%

 

*

Columns may not add due to rounding.

The nonbypassable charge applicable to each securitized utility tariff charge customer class for any period will be determined based on the allocation percentage of such class, the amount necessary to make payments on the securitized utility tariff bonds for the related period, and as set forth in the Winter Event Securitized Cost Recovery Rider, contained in the form of tariff, attached to the financing order as Appendix B. Securitized utility tariff charges will be calculated on a fixed monthly charge per retail customer, which will be adjusted semi-annually pursuant to the true-up adjustment methodology approved in the financing order. The per retail customer charge will initially be calculated using the retail customer count reported in the most recent KGS Annual Report filed with the Kansas commission and will be updated semi-annually. The true-up adjustment methodology approved in the financing order is cross collateralized across retail customer classes and requires that any delinquencies or under-collections in one retail customer class will be taken into account in the application of the true-up mechanism to adjust the securitized utility tariff charges for all retail customers, not just the class of retail customers from which the delinquency or under-collection arose.

The securitized utility tariff charges will be reflected as a separate line item on retail customers’ bills and identified as “Winter Event Securitized Cost.” These securitized utility tariff charges will be adjusted semi-annually, or more frequently under certain circumstances, by the servicer in accordance with its filings with the Kansas commission.

KGS estimates that on an annualized basis the initial securitized utility tariff charges would represent approximately 5.0% of the total bill received by an average residential customer based on rates as of August 2022.

 

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Billing and Collection Terms and Conditions

Generally, bills are rendered monthly to all customers and are payable within 18 business days from mailing for residential customers and within 12 business days of mailing for nonresidential customers. Billing will begin with the first cycle of the month following the issuance of the securitized utility tariff bonds. Customers are billed in established cycles, with the total number of days between meter readings generally ranging from 26 to 36 days. KGS has some residential and general service customers that require manual billing due to more complex billing arrangements that are dictated by contractual terms. These customers were formerly served by another gas utility (Southern Star Central or “SSC”) and are billed the rate that SSC charged. SSC covers the difference between that rate and what such customers would have been charged under KGS tariffs.

KGS, as the initial servicer of the securitized utility tariff bonds will bill and collect the securitized utility tariff charges as described in the servicing agreement, and remit those amounts to the trustee on our behalf. We are a Delaware limited liability company subsidiary special purpose entity created by KGS to facilitate the securitization. The servicer will perform these functions for us in accordance with the servicing agreement by and between KGS, as the initial servicer, and us. If the servicer defaults on its obligations under the servicing agreement, the trustee may appoint a successor servicer, subject to the terms and conditions of the servicing agreement.

The securitized utility tariff bonds will be issued pursuant to an indenture and series supplement administered by the trustee. The indenture will include provisions for a collection account and subaccounts for the collection and administration of the securitized utility tariff charges and payment or funding of the principal and interest on the securitized utility tariff bonds and other costs. We will establish a collection account as a trust account to be held by the trustee as collateral for the payment of the scheduled principal, interest, and other costs approved in the financing order. The collection account will include the general subaccount, the capital subaccount, and the excess funds subaccount, and may include other subaccounts. The servicer will remit securitized utility tariff charges to the trustee, which will deposit such remittances into a general subaccount. Upon issuance of the securitized utility tariff bonds, KGS will make a capital contribution to us and we will deposit such contribution into a capital subaccount. The capital subaccount will serve as collateral to for timely payments of principal and interest on the securitized utility tariff bonds. An excess funds subaccount will hold any securitized utility tariff charge remittances and investment earnings on the collection account (other than earnings attributable to the capital subaccount and released under the terms of the Indenture) in excess of the amounts needed to pay principal and interest on the securitized utility tariff bonds and to pay ongoing costs related to the securitized utility tariff bonds (including replenishing the capital subaccount). Any balance in or allocated to the excess funds subaccount on a true-up adjustment date will be subtracted from the payments to be made on the next payment date for purposes of the true-up adjustment. The servicer is required to make semi-annual adjustments to the securitized utility tariff charges to correct any under-collection or over-collection of securitized utility tariff charges during the preceding six months and ensure the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the securitized utility tariff bonds. If remitted securitized utility tariff charges are insufficient to make payments of principal and interest on the securitized utility tariff bonds and other components of the periodic payment requirement, then the excess funds subaccount, and the capital subaccount will be drawn down, in that order, to make those payments. The servicer may perform periodic true-ups as necessary to ensure that the amount collected from securitized utility tariff charges is sufficient to service the securitized utility tariff bonds. There shall be quarterly true-up adjustments for the securitized utility tariff bonds remaining outstanding during the year immediately preceding the scheduled final payment date for the securitized utility tariff bonds.

The obligation to pay securitized utility tariff charges is not subject to any right of set-off, counterclaim or surcharge in connection with the bankruptcy or insolvency of ONE Gas or any other entity. Securitized utility tariff charges are “nonbypassable” in accordance with the provisions set forth in the Securitization Act and the financing order.

 

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THE SECURITIZATION ACT

Overview

In April 2021, the Kansas Legislature established the Securitization Act (a Kansas senate substitute for House Bill 2072 (Volume 40 - Issue 16 - April 22, 2021), as codified at K.S.A. §§ 66-1,240 - 66-1,253), providing for a financing mechanism through which certain utilities can use securitization financing to recover qualified extraordinary costs (as defined in the Securitization Act) resulting from Winter Storm Uri, by issuing securitized utility tariff bonds. Securitized utility tariff bonds must be approved in a financing order issued by the Kansas commission. A Kansas utility subject to the jurisdiction of the Kansas commission must apply to the Kansas commission in order to obtain a financing order under the Securitization Act to authorize the issuance of securitized utility tariff bonds.

In February 2021, Kansas experienced sub-zero temperatures brought by Winter Storm Uri, which led to a significant increase in demand for electricity and natural gas. On February 14, 2021, a State of Disaster Emergency was issued by Kansas Governor Kelly due to expected prolonged low temperatures and the strain on natural gas and utility providers; at the time, wholesale natural gas prices were reflecting increases from 10 to 100 times their normal rates. On February 15, 2021, the Kansas commission issued an Emergency Order in Docket No. 21-GIMX-303-MIS (Docket 21-303), directing jurisdictional natural gas utilities to take all reasonably feasible, lawful, and appropriate actions to ensure adequate transportation of natural gas to interconnected, non-jurisdictional Kansas utilities. Jurisdictional natural gas utilities were ordered to do everything necessary to ensure that natural gas service continued to be provided to their customers in Kansas. The Kansas commission authorized every jurisdictional natural gas distribution utility to defer extraordinary costs incurred during the Winter Event to a regulatory asset account. By June 30, 2021, KGS had incurred and deferred approximately $390 million of qualified extraordinary costs related to the winter storm event. On March 31, 2022, KGS applied for a financing order under the Securitization Act, which was issued by the Kansas commission on August 18, 2022.

Under the Securitization Act and the financing order, KGS’s retail customers will pay securitized utility tariff charges, which are nonbypassable charges included in their monthly charges. Securitized utility tariff charges will fund payments of principal and interest on the securitized utility tariff bonds, together with related financing costs. Securitized utility tariff charges will be collected by KGS, as initial servicer, or its successor, as provided for in the financing order. Securitized utility tariff charges are required to be adjusted at least semi-annually, and more frequently as necessary, to ensure the projected recovery of amounts sufficient to provide timely payment of the scheduled principal, interest and other required amounts in connection with the securitized utility tariff bonds during the preceding six-month period.

KGS May Securitize Qualified Extraordinary Costs and Related Upfront and Ongoing Financing Costs

KGS May Issue Securitized Utility Tariff Bonds to Recover KGS’s Qualified Extraordinary Costs.

Under the Securitization Act, the Kansas commission may issue financing orders approving the issuance of securitized utility tariff bonds to recover certain costs of a gas utility, including qualified extraordinary costs and related upfront and ongoing financing costs. A utility, its successors or a third-party assignee of a utility may issue securitized utility tariff bonds. The Securitization Act requires the proceeds of the securitized utility tariff bonds to be used for the purposes of recovering or financing qualified extraordinary costs and related upfront and ongoing costs, as determined by the Kansas commission. Securitized utility tariff bonds are secured by and payable from securitized utility tariff property, which includes the right to impose, bill, charge, collect

 

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and receive securitized utility tariff charges, to obtain periodic adjustments to such charges as provided in the financing order and all revenues, collections, claims, rights to payments, payments, money or proceeds arising from the foregoing rights and interests. Under the financing order, the securitized utility tariff bonds may have a legal maximum maturity of 32 years from the issuance date of the bonds.

Securitized utility tariff charges and related financing costs will be allocated to KGS retail customer classes based on the class percentage of the total estimated February 2021 sales volumes after removing 0.067% of the qualified extraordinary costs to be securitized to account for the “Sales for Resale” customer class, which constitute wholesale transactions (not retail service). Securitized utility tariff charges can be imposed only when and to the extent that securitized utility tariff bonds are issued.

The Securitization Act contains a number of provisions designed to facilitate the securitization of qualified extraordinary costs and related upfront and ongoing financing costs.

Creation of Securitized Utility Tariff Property.

The Securitization Act and financing order provide for the creation and establishment of the securitized utility tariff property, which is a present contract right in favor of KGS, its transferees and other financing parties, to impose, bill, charge, collect and receive securitized utility tariff charges from KGS’s existing and future retail customers, as well as to obtain periodic adjustments to such charges as provided in the financing order.

A Financing Order is Irrevocable.

A financing order, once effective, together with the securitized utility tariff charges authorized in such financing order, is irrevocable and not subject to amendment or modification by the Kansas commission, except for adjustments pursuant to the Securitization Act in order to correct over-collections or under-collections and to ensure the projected recovery of amounts sufficient to provide timely payment of debt service and all other upfront and ongoing financing costs in connection with the related securitized utility tariff bonds. Although a financing order is irrevocable, the Securitization Act allows for KGS (or any assignee) to apply for one or more new financing orders to provide for retiring and refunding securitized utility tariff bonds upon a showing that statutory criteria are met.

State and Commission Pledges.

The State of Kansas and its agencies, including the Kansas commission, have pledged and agreed with bondholders that, pursuant to the Securitization Act, the state and its agencies will not: (a) alter the statute that authorizes the Kansas commission to create an irrevocable contract right or chose in action by the issuance of a financing order, to create securitized utility tariff property and to make the securitized utility tariff charges imposed by a financing order irrevocable, binding or nonbypassable charges for all existing and future retail customers within the service area of the public utility; (b) take any action that would impair the value of securitized utility tariff property or the security for the securitized utility tariff bonds, or revises the Securitized Utility Tariff Costs (as defined in the Securitization Act) for which recovery is authorized; (c) impair the rights and remedies of the securitized utility tariff bondholders, assignees and other financing parties in any way; or (d) except for changes made pursuant to the true-up adjustment mechanism expressly allowed by law, reduce, alter, or impair the securitized utility tariff charges to be imposed, billed, charged, collected, and remitted for the benefit of the securitized utility tariff bondholders, any assignee, and any other financing parties, until any and all principal, interest, premium, financing costs and other fees, expenses or charges incurred and any contracts to be performed in connection with the related securitized utility tariff bonds have been paid and performed in full.

 

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The Kansas commission has jurisdiction over KGS and its application for a financing order to recover qualified extraordinary costs and related financing costs pursuant to K.S.A. § 66-1,241(b).

Constitutional Matters

To date, no federal or Kansas cases addressing the repeal or amendment of the Securitization Act or securitization provisions analogous to those contained in the Securitization Act have been decided. There have been cases in which courts have applied the Contract Clause of the United States Constitution to strike down legislation regarding similar matters, such as legislation reducing or eliminating taxes, public charges or other sources of revenues servicing other types of bonds issued by public instrumentalities or private issuers, or otherwise substantially impairing or eliminating the security for bonds or other indebtedness. Based upon this case law, Baker Botts L.L.P., as counsel to KGS and us, expects to deliver an opinion, prior to the closing of the offering of the securitized utility tariff bonds described in this prospectus, to the effect that the State pledge described above unambiguously indicates the State’s intent to be bound with the securitized utility tariff bondholders and, subject to all of the qualifications, limitations and assumptions set forth in its opinion, supports the conclusion that the State pledge constitutes a binding contractual relationship between the State and the securitized utility tariff bondholders for purposes of the Federal Contract Clause. Subject to all of the qualifications, limitations and assumptions set forth in such opinion, including that any impairment of the contract be “substantial,” the opinion of Baker Botts L.L.P. is expected to state that a reviewing court of competent jurisdiction would hold that the State of Kansas could not constitutionally repeal or amend the Securitization Act or take any other action contravening the State pledge and creating an impairment (without, as the Securitization Act requires, providing full compensation by law for the full protection of the securitized utility tariff charges to be collected pursuant to the financing order and full protection of the securitized utility tariff bondholders), unless such court would determine that such impairment clearly is a reasonable and necessary exercise of the State of Kansas’ sovereign powers based upon reasonable conditions and of a character reasonable and appropriate to the emergency or other significant and legitimate public purpose justifying such action.

Baker Botts L.L.P., subject to all of the qualifications, limitations and assumptions (including the assumption that any impairment would be “substantial”) set forth in their opinion, is also expected to state in their opinion that a Kansas state court reviewing an appeal of Kansas commission action of a legislative character would conclude that the Kansas commission pledge (i) creates a binding contractual obligation of the State of Kansas for purposes of the Federal Contract Clause, and (ii) provides a basis upon which the securitized utility tariff bondholders could challenge successfully on appeal any such action by the Kansas commission of a legislative character, including the rescission or amendment of the financing order, that such court determines violates the Kansas commission pledge in a manner that substantially reduces, limits or impairs the value of the securitized utility tariff property including the securitized utility tariff charges, prior to the time that the securitized utility tariff bondholders are fully paid and discharged, unless there is a judicial finding that the Kansas commission action clearly is exercised for a public end and is reasonably necessary to the accomplishment of that public end so as not to be arbitrary, capricious or an abuse of authority.

In addition, any action of the Kansas legislature adversely affecting the securitized utility tariff property or the ability to collect securitized utility tariff charges may be considered a “taking” under the United States or Kansas Constitutions. Baker Botts L.L.P. has advised us that it is not aware of any federal, and Husch Blackwell LLP has advised us that it is not aware of any Kansas, court cases addressing the applicability of the Takings Clause of the United States or Kansas Constitution respectively in a situation analogous to that which would be involved in an amendment or repeal of the Securitization Act. It is possible that a court would decline even to apply a Takings Clause analysis to a claim based on an amendment or repeal of the Securitization Act, since, for example, a court might determine that a Contract Clause analysis rather than a Takings Clause analysis should

 

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be applied. Assuming a Takings Clause analysis were applied under the United States Constitution or the Kansas Constitution, Baker Botts L.L.P. and Husch Blackwell LLP respectively expect to render an opinion, prior to the closing of the offering of the securitized utility tariff bonds described in this prospectus, to the effect that, under the existing case law of the respective courts each opinion is covering, a reviewing court of competent jurisdiction would hold (or with respect to the opinion of Husch Blackwell LLP, more likely than not, would hold), subject to all of the qualifications, limitations and assumptions set forth in each respective opinion, if it concludes that the securitized utility tariff property is protected by the Takings Clause of the United States Constitution (or the Takings Clause of the Kansas Constitution with respect to the opinion of Husch Blackwell LLP), that the State would be required to pay just compensation to the securitized utility tariff bondholders, as determined by such court, if the Kansas legislature repealed or amended the Securitization Act or took any other action contravening the State pledge, if the court determines doing so constituted a permanent appropriation of a substantial property interest of the securitized utility tariff bondholders in the securitized utility tariff property and deprived the securitized utility tariff bondholders of their reasonable expectations arising from their investments in the securitized utility tariff bonds. In examining whether action of the Kansas legislature amounts to a regulatory taking, both federal and state courts will consider the character of the governmental action, the economic impact of the governmental action on the securitized utility tariff bondholders, and the extent to which the governmental action interferes with distinct investment-backed expectations. There is no assurance, however, that, even if a court were to award just compensation, it would be sufficient for you to recover fully your investment in the securitized utility tariff bonds.

In connection with the foregoing, Baker Botts L.L.P. has advised us that issues relating to the Contract and Takings Clause of the United States Constitution, and Husch Blackwell LLP has advised us that issues relating to the Takings Clause of the Kansas Constitution, are essentially decided on a case-by-case basis and that the courts’ determinations, in most cases, appear to be strongly influenced by the facts and circumstances of the particular case, and has further advised us that there are no reported controlling judicial precedents that are directly on point. The opinions described above will be subject to the qualifications included in them. The degree of impairment necessary to meet the standards for relief under a Takings Clause analysis or Contract Clause analysis could be substantially in excess of what a securitized utility tariff bondholder would consider material.

In addition, Baker Botts L.L.P. expects to render an opinion, prior to the closing of the offering of the securitized utility tariff bonds described in this prospectus, to the effect that under existing case law, a reviewing court of competent jurisdiction would hold that the Securitization Act is constitutional in all material respects under the United States Constitution and, subject to all of the qualifications, limitations and assumptions set forth in its opinion, that the State pledge does not constitute an impermissible attempt to “contract away” the police power of the State of Kansas, and will not be disregarded under the reserved powers doctrine, and Husch Blackwell LLP expects to render an opinion, prior to the closing of the offering of the securitized utility tariff bonds described in this prospectus, to the effect that under existing case law, a reviewing court of competent jurisdiction would hold that the Securitization Act is constitutional in all material respects under the Kansas Constitution.

We and KGS will file a copy of each of the Baker Botts L.L.P. and Husch Blackwell LLP opinions as exhibits to an amendment to the registration statement of which this prospectus is a part, or to one of our periodic filings with the SEC.

For a discussion of risks associated with potential judicial, legislation or regulatory actions, please read “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions.”

 

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The Kansas Commission May Adjust Securitized Utility Tariff Charges

The Securitization Act authorizes the Kansas commission to provide, and the Kansas commission has provided, in the financing order, that securitized utility tariff charges be adjusted at least semi-annually. These true-up adjustments are designed to:

 

•

Correct any over-collections or under-collections during the preceding six months, and

 

•

Ensure the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the securitized utility tariff bonds.

Securitized Utility Tariff Charges are Nonbypassable

The Securitization Act provides that the securitized utility tariff charges are nonbypassable subject to the terms of the financing order. Under the financing order, “nonbypassable” means KGS is required to collect and must remit, consistent with the financing order, the nonbypassable securitized utility tariff charges that are applied to all existing and future retail customers within the KGS’s service area, as such service area exists on the date of the financing order, and as such service area may be expanded or acquired as provided for in the financing order. If a customer disconnects from KGS’s gas distribution system and switches to alternative sources of energy that meet all of its energy needs, such customer will no longer be a retail customer and will not be subject to paying securitized utility tariff charges. Retail customers who become transportation customers when securitized utility tariff charges are being recovered are required to pay a settlement fee prior to becoming a transportation customer. The settlement fee owed by the customer is to be based on the estimated present value of the expected charges the customer would have paid as a retail customer over the remaining period in which the securitized utility tariff charge is being recovered. The settlement fee will be credited to KGS’s other retail customers once per year.

The Securitization Act Protects Securitized Utility Tariff Bondholders’ Security Interest on Securitized Utility Tariff Property

The Securitization Act provides that a valid and enforceable security interest in securitized utility tariff property will attach only after the issuance of a financing order, the execution and delivery of a security agreement in connection with the issuance of the securitized utility tariff bonds and the receipt of value for the securitized utility tariff bonds. The security interest attaches automatically at the time when all of the foregoing conditions have been met.

Upon perfection by filing a financing statement, under K.S.A. § 66-1,245(d), the security interest will be a perfected security interest in the securitized utility tariff property and will have priority in the order of perfection and take precedence over all claims of lien creditors and all competing security interests and other claims other than any security interest previously perfected. The servicer pledges in the servicing agreement to file all necessary continuation statements.

The Securitization Act (K.S.A. §§ 66-1,245(e) and (f)) provides that priority of transfers of and security interests in securitized utility tariff property will not be impaired by:

 

•

The commingling of funds arising from securitized utility tariff charges with other funds; or

 

•

Any later change in the securitized utility tariff charges pursuant to the true-up adjustment mechanism.

Furthermore, any other security interest that may apply to those funds will be terminated when they are transferred to a segregated account for an assignee or a financing party.

 

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The Securitization Act Characterizes the Transfer of Securitized Utility Tariff Property as a True Sale

The Securitization Act (K.S.A. §66-1,246(a)) provides that any sale, assignment or other transfer of securitized utility tariff property is a “true sale” and is not a pledge or secured transaction relating to, the seller’s right, title, and interest in, to, and under the securitized utility tariff property if the documents governing the transaction expressly state that the transaction is a sale or other absolute transfer other than for federal and state income tax purposes. The Securitization Act (K.S.A. §66-1,246(a)) provides that for all purposes other than federal and state income tax purposes, the parties’ characterization of a transaction as a sale of an interest in securitized utility tariff property is conclusive that the transaction is a true sale and that ownership has passed to the party characterized as the purchaser, regardless of whether the purchaser has possession of any documents evidencing or pertaining to such interest in securitized utility tariff property.

 

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KGS’S FINANCING ORDER

Background.    In mid-February 2021, Kansas experienced sub-zero temperatures brought by Winter Storm Uri, which led to a significant increase in demand for electricity and natural gas. On February 14, 2021, a State of Disaster Emergency was issued by Kansas Governor Kelly due to expected prolonged low temperatures and the strain on natural gas and utility providers; at the time, wholesale natural gas prices were reflecting increases from 10 to 100 times their normal rates. On February 15, 2021, pursuant to K.S.A. § 77-536(a), the Kansas commission issued an Emergency Order in Docket No. 21-GIMX-303-MIS (Docket 21-303), directing jurisdictional natural gas utilities to take all reasonably feasible, lawful, and appropriate actions to ensure adequate transportation of natural gas to interconnected, non-jurisdictional Kansas utilities. Jurisdictional natural gas utilities were ordered to do everything necessary to ensure that natural gas service continued to be provided to their customers in Kansas. The Kansas commission authorized every jurisdictional natural gas distribution utility to defer extraordinary costs incurred during the winter event to a regulatory asset account.

In April 2021, the Kansas Legislature established the Utility Financing and Securitization Act (referred to in this prospectus as the Securitization Act), providing for a financing mechanism though which certain utilities can use securitization financing to recover “qualified extraordinary costs” (as defined in the Securitization Act) resulting from Winter Storm Uri, by issuing securitized utility tariff bonds. Securitized utility tariff bonds must be approved in a financing order issued by the Kansas commission. This provision of Kansas law, the Securitization Act—a Kansas senate substitute for House Bill 2072 (Volume 40 - Issue 16 - April 22, 2021)—is codified at K.S.A. §§ 66-1,240 - 66-1,253. A Kansas utility subject to the jurisdiction of the Kansas commission must apply to the Kansas commission in order for a financing order under the Securitization Act to authorize the issuance of securitized utility tariff bonds.

By June 30, 2021, KGS had incurred and deferred approximately $390 million of costs related to the winter event. On March 31, 2022, KGS applied for a financing order under the Securitization Act. Under the Securitization Act and the financing order, KGS retail customers will pay securitized utility tariff charges, which are nonbypassable charges included in their monthly charges. Securitized utility tariff charges will fund payments of principal and interest on the securitized utility tariff bonds, together with related financing costs. Securitized utility tariff charges will be collected by KGS, as initial servicer, or its successor, as provided for in the financing order. Securitized utility tariff charges are required to be adjusted at least semi-annually, and more frequently as necessary, to ensure the projected recovery of amounts sufficient to provide timely payment of the scheduled principal, interest and other required amounts in connection with the securitized utility tariff bonds during the preceding six-month period.

On August 18, 2022, the Kansas commission issued its final order determining that KGS is entitled, pursuant to the Securitization Act, to finance, through the issuance of securitized utility tariff bonds in one or more tranches with an estimated aggregate principal amount equal to $336.0 million (the qualified extraordinary costs and related financing costs). The financing order also: (1) authorizes the issuance of securitized utility tariff bonds in an aggregate amount not to exceed the qualified extraordinary costs less the portion of such costs attributable to the Sales for Resale customer class; (3) approves the structure of the proposed securitization financing through an issuance advice letter process; (4) approves the creation of the securitized utility tariff property consisting of the right to impose and collect securitized utility tariff charges in an amount to be calculated as provided in the financing order; and (5) approves the form of tariff, as provided in the financing order, to implement securitized utility tariff charges. The financing order became final and nonappealable on September 2, 2022.

KGS has filed the financing order with the SEC as an exhibit to the registration statement of which this prospectus forms a part.

 

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Issuance of Securitized Utility Tariff Bonds.    The financing order authorizes KGS to cause us to issue securitized utility tariff bonds in an estimated aggregate principal amount of $336.0 million. Securitized utility tariff bonds are limited to a term of not longer than 32 years and are secured by or payable from securitized utility tariff property. The net proceeds from the sale of the securitized utility tariff bonds must be used to directly or indirectly to recover, finance or refinance qualified extraordinary costs.

Collection of Securitized Utility Tariff Charges.    The financing order authorizes KGS to collect securitized utility tariff charges from its retail customers in an amount sufficient to provide for recovery of KGS’s qualified extraordinary costs and upfront and ongoing financing costs, which include principal and interest and certain ongoing fees and expenses associated with the securitized utility tariff bonds.

There is no “cap” on the level of securitized utility tariff charges that may be imposed on retail customers to pay on a timely basis scheduled principal and interest on the securitized utility tariff bonds. There is also no limit on how long securitized utility tariff charges may be imposed; pursuant to the financing order, the charges will be imposed until the securitized utility tariff bonds and all related financing costs have been paid in full.

Issuance Advice Letter.    Following the determination of the final terms of the securitized utility tariff bonds and prior to their issuance, KGS is required to submit an issuance advice letter to the Kansas commission no later than the end of the first day after the pricing of the securitized utility tariff bonds. The issuance advice letter will:

 

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Demonstrate compliance with the provisions of the financing order;

 

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Indicate the final structure of the securitized utility tariff bonds;

 

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Provide the dollar amount of the initial securitized utility tariff charges and other information specific to the securitized utility tariff bonds;

 

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Provide the best available estimate of total ongoing financing costs;

 

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Report the initial securitized utility tariff charges and other information specific to the securitized utility tariff bonds to be issued, as the Kansas commission requires;

 

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Require KGS to update the benefit analysis to verify that the final structure of the securitization satisfies the statutory financial tests;

 

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Certify to the Kansas commission that the structure and pricing of the securitized utility tariff bonds results in the lowest securitized utility tariff charges consistent with market conditions at the time that the securitized utility tariff bonds are priced utilizing the lowest cost standard; and

 

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Specify the scheduled final maturity of the securitized utility tariff bond tranches and the legal maturity for the securitized utility tariff bond tranches.

The initial securitized utility tariff charges and the final terms of the securitized utility tariff bonds set forth in the issuance advice letter shall become effective on the date of issuance of the securitized utility tariff bonds (which shall not occur prior to the fifth business day after pricing) unless prior to noon on the fourth business day after pricing the Kansas commission issues a disapproval letter finding that the proposed issuance advice letter does not comply with the Securitization Act and the financing order.

Form of Tariff: Winter Event Securitized Cost Rider (WESCR).    KGS is required, prior to the issuance of any securitized utility tariff charges, to complete and file rate schedules in the form of tariff attached to the financing order. The WESCR establishes the initial securitized utility tariff charges. The WESCR also implements the procedures for periodic adjustments to the securitized utility tariff charges.

 

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True-Ups.    The financing order provides that securitized utility tariff charges will be reviewed and adjusted semi-annually to:

 

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Correct any over-collections or under-collections during the preceding six months; and

 

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Ensure the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the securitized utility tariff bonds.

Amounts remaining unpaid after final legal maturity of the securitized utility tariff bonds may be recovered but only to the extent that the securitized utility tariff charges are attributable to services rendered prior to the final legal maturity of the securitized utility tariff bonds.

In addition to semi-annual true-up adjustments, true-up adjustments may be made by the servicer more frequently at any time during the term of the securitized utility tariff bonds to correct any under-collection or over-collection to ensure timely payment of securitized utility tariff bonds as scheduled. In the event an interim true-up is necessary, the interim true-up adjustment should be filed by the fifteenth day of the current month for implementation in the first billing cycle of the following month. In no event would such interim true-up adjustments occur more frequently than every six months; provided, however, that there shall be quarterly true-up adjustments for the securitized utility tariff bonds remaining outstanding during the year immediately preceding the scheduled final payment date for the securitized utility tariff bonds.

Any delinquencies or under-collections in one retail customer class will be taken into account in the true-up mechanism to adjust the securitized utility tariff charges for all retail customers of KGS, not just the class of retail customers from which the delinquency or under-collection arose.

The financing order requires the servicer to make true-up adjustment filings with the Kansas commission. True-up adjustment filings must set forth the servicer’s calculation of the true-up adjustment to the securitized utility tariff charges. The Kansas commission has 30 days after the date of a true-up adjustment filing to confirm the mathematical accuracy of the servicer’s adjustment and to confirm that there are no clerical errors. Any true-up adjustment filed with the Kansas commission should be effective on its proposed effective date, which shall be not less than 30 days after filing. Any necessary corrections to the true-up adjustment, due to mathematical or clerical errors in the calculation of such adjustment or otherwise, must be made in future true-up adjustment filings.

The financing order provides that upon issuance of securitized utility tariff bonds, the financing order and the securitized utility tariff charges authorized by the financing order become irrevocable and not subject to reduction, impairment, or adjustment by further act of the Kansas commission, except for any true-up adjustments made in accordance with the true-up adjustment mechanism in the financing order; provided, however, that such irrevocability shall not preclude the Kansas commission from extending the deadline for the issuance of securitized utility tariff bonds if requested to do so by KGS.

For more discussion of the true-up mechanism, see “The Servicing Agreement—Securitized Utility Tariff Charge Adjustment Process” in this prospectus.

State and Commission Pledges.    The State of Kansas and its agencies, including the Kansas commission, have pledged and agreed with bondholders that, pursuant to the Securitization Act, the state and its agencies will not: (a) alter the statute that authorizes the Kansas commission to create an irrevocable contract right or chose in action by the issuance of a financing order, to create securitized utility tariff property and to make the securitized utility tariff charges imposed by a financing order irrevocable, binding or nonbypassable charges for all existing and future retail customers within the service area of the public utility; (b) take any action that

 

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would impair the value of securitized utility tariff property or the security for the securitized utility tariff bonds, or revises the Securitized Utility Tariff Costs (as defined in the Securitization Act) for which recovery is authorized; (c) impair the rights and remedies of the securitized utility tariff bondholders, assignees and other financing parties in any way; or (d) except for changes made pursuant to the true-up adjustment mechanism expressly allowed by law, reduce, alter, or impair the securitized utility tariff charges to be imposed, billed, charged, collected, and remitted for the benefit of the securitized utility tariff bondholders, any assignee, and any other financing parties, until any and all principal, interest, premium, financing costs and other fees, expenses or charges incurred and any contracts to be performed in connection with the related securitized utility tariff bonds have been paid and performed in full.

The Kansas commission has jurisdiction over KGS and its application for a financing order to recover qualified extraordinary costs and related financing costs pursuant to K.S.A. § 66-1,241(b).

The Securitization Act and financing order provides that securitized utility tariff property (whether associated with a single bond series covering the entire qualified extraordinary costs or with one of multiple bond series covering only a portion of the qualified extraordinary costs) constitutes a present property right for purposes of contracts concerning the sale or pledge of property and the property will continue to exist until securitized utility tariff bonds issued pursuant to the financing order have been paid in full and all financing costs and other costs of such securitized utility tariff bonds have been recovered in full. In addition, the interests of an assignee or pledgee in securitized utility tariff property (as well as the revenues and collections arising from the property) are not subject to setoff, counterclaim, surcharge, or defense by the utility or any other person or in connection with the bankruptcy of the utility or any other entity. The State of Kansas has pledged in the Securitization Act that it will not alter the provisions of the part of the Securitization Act which authorizes the Kansas commission to create a present contract right by the issuance of a financing order, to create securitized utility tariff property, and to make the securitized utility tariff charges imposed by a financing order irrevocable, binding and nonbypassable charges, take or permit any action that would impair the value of the securitized utility tariff property, or, except for adjustments discussed in “—True-ups” and “The Servicing Agreement—Securitized Utility Tariff Charge Adjustment Process,” reduce, alter or impair the securitized utility tariff charges to be imposed, collected and remitted to bondholders until the principal, interest and premium, if any, and any other charges incurred and contracts to be performed in connection with the securitized utility tariff bonds have been paid and performed in full. However, nothing will preclude limitation or alteration if and when full compensation is made for the full protection of the securitized utility tariff charges collected pursuant to the financing order and the full protection of the bondholders and any assignee or financing party. Please read “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions.”

Adjustments to Allocation of Securitized Utility Tariff Charges.    The financing order provides that KGS will allocate securitized utility tariff charges to its retail customer classes based on each customer classes’ percentage of the total estimated February 2021 sales volumes (“initial percentages”). The initial percentages will remain in effect throughout the life of the securitized utility tariff bonds. However, retail customer classes are cross-collateralized in the true-up adjustment mechanism, that is, projected revenue shortfalls in one retail customer class are remedied by adjustments to the securitized utility tariff charges for each retail customer class, not only the retail customer class with the projected revenue shortfalls. Please read “—Additional Other Similar Bonds.”

Any delinquencies or under-collections in one retail customer class will be taken into account in the true-up mechanism to adjust the securitized utility tariff charge for all retail customers of KGS, not just the class of retail customers from which the delinquency or under-collection arose.

Servicing Agreement.    In the financing order, the Kansas commission authorized KGS, as the initial servicer, to enter into the servicing agreement which is described under “The Servicing Agreement” in this prospectus.

 

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Additional Other Similar Bonds.    KGS, upon receipt of an additional financing order, may finance qualified extraordinary costs through the issuance of additional securitized utility tariff bonds issued by another subsidiary or affiliated entity of KGS pursuant to a separate financing order and secured by separate securitized utility tariff property.

Binding on Successors.    The financing order, along with the securitized utility tariff charges authorized in the financing order, is binding on:

 

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KGS;

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Any successor to KGS;

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Any other entity responsible for billing and collecting securitized utility tariff charges on behalf of us; and

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Any successor to the Kansas commission.

 

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THE DEPOSITOR, SELLER, INITIAL SERVICER AND SPONSOR

About KGS

Background Information.     KGS is a division of ONE Gas, Inc., an Oklahoma corporation. KGS serves residential, commercial and transportation customers in Kansas, with the largest markets being in Kansas City, Wichita and Topeka, and distributes natural gas to approximately 72 percent of the natural gas distribution customers in Kansas. KGS, as a regulated utility, is subject to the regulations and oversight of various state and local regulatory authorities in Kansas, including the Kansas commission. Generally, KGS, acting as the initial servicer, and any successor servicer, referred to in this prospectus as the “servicer,” will service the securitized utility tariff property securing the securitized utility tariff bonds under a servicing agreement with us. Neither KGS nor any other affiliate (other than us) is an obligor on the securitized utility tariff bonds.

Municipalization.     Kansas law authorizes municipalities to seek to acquire portions of a utility’s natural gas distribution facilities through voluntary transactions or the power of expropriation for use as part of municipally owned utility systems. The Securitization Act specifies that securitized utility tariff charges approved by a financing order shall be collected by a utility as well as its “successors or assignees.” In the servicing agreement, KGS has covenanted to assert in an appropriate forum that any municipality that acquires any portion of KGS’s natural gas distribution facilities by expropriation, including upon the expiration of any franchise agreement, must be treated as a successor to KGS under the Securitization Act and the financing order. However, the involved municipality might assert that it should not be treated as a successor to KGS for these purposes and that its distribution customers are not responsible for payment of securitized utility tariff charges. Please read “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions—A municipal entity may seek to acquire portions of KGS’s gas distribution facilities and avoid payment of the securitized utility tariff charges” in this prospectus.

Service Area.     KGS is the largest natural gas distributor in Kansas. As of December 31, 2021, KGS supplied natural gas service to approximately 647,000 customers, of which approximately 641,000 retail customers will be subject to the securitized utility tariff charges. As of December 31, 2021, KGS had 11,700 miles of distribution pipelines and 1,500 miles of transmission pipeline, had monthly fixed service charges that comprise 55% of the total net margin on natural gas service, had 100% weather normalization and had 4,722 average annual heating degree days (normal). Below is a map of KGS’s service area (darker blue areas).

 

 

Executive Offices.     KGS’s principal executive offices are located at 15 East Fifth Street, Tulsa, Oklahoma 74103. The phone number at this address is (918) 947-7000.

Where to Find Information About KGS.     KGS is a division of ONE Gas. ONE Gas is required to file periodic reports with the SEC. These SEC filings are available to the public over the internet at the SEC’s website at www.sec.gov. ONE Gas maintains a website at www.onegas.com/investors/, where it posts its SEC filings. Except as specifically provided in this prospectus, no other information contained on that website constitutes part of this prospectus.

 

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Servicing Experience.     On August 25, 2022, The Oklahoma Development Finance Authority (“ODFA”), a public trust and instrumentality of the State of Oklahoma, issued $1,354,200,000 initial principal amount of its Ratepayer-Backed Bonds (Oklahoma Natural Gas Company) Series 2022 (Federally Taxable) (the “ODFA ONG Bonds”), for the purpose of allowing Oklahoma Natural Gas Company (“ONG”), a Division of ONE Gas, to recover certain costs it incurred as a result of Winter Storm Uri, under and pursuant to Oklahoma’s February 2021 Regulated Utility Consumer Protection Act. ONG is a division of ONE Gas separate and apart from KGS. In connection with the issuance of the ODFA ONG Bonds, ONG entered into a Servicing Agreement with ODFA with servicing standards that were substantially similar to those set forth in KGS’s servicing agreement with us. The initial scheduled payment date on the ODFA ONG Bonds is May  1, 2023.

KGS’s Customer Base and Natural Gas Consumption

The following tables show the natural gas usage billed to retail customers, natural gas billed revenues and number of retail customers by residential and non-residential customer types for the five preceding years and the six months ended June 30, 2022, within Kansas. There can be no assurances that the retail natural gas sales, retail natural gas revenues and number of retail customers or the composition of any of the foregoing will remain at or near the levels reflected in the following tables.

Natural Gas Sales Volumes (as Measured by MMcf)*

 

Retail Customer type		2017								2018								2019								2020								2021								Six months ended June 30, 2022
Residential			36,936				79.4%				44,909				78.9%				45,884				79.1%				42,206				80.1%				39,968				78.7%				26,382				76.0%
Non-residential			9,601				20.6%				12,028				21.1%				12,113				20.9%				10,463				19.9%				10,809				21.3%				8,348				24.0%
Total			46,537				100.0%				56,937				100.0%				57,997				100.0%				52,669				100.0%				50,777				100.0%				34,730				100.0%

 

*

Columns may not add due to rounding.

Total Natural Gas Sales Revenues by Retail Customer Type (in $000s)*¹

 

Retail Customer type		2017								2018								2019								2020								2021								Six months ended June 30, 2022
Residential		$	414,517				81.1%			$	435,297				80.0%			$	446,543				81.1%			$	421,780				82.3%			$	476,434				80.9%			$	370,678				77.6%
Non-residential			96,618				18.9%				108,716				20.0%				103,932				18.9%				90,722				17.7%				112,469				19.1%				107,138				22.4%
Total		$	511,136				100.0%			$	544,013				100.0%			$	550,476				100.0%			$	512,501				100.0%			$	588,903				100.0%			$	477,817				100.0%

 

*

Columns may not add due to rounding.

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Revenues includes taxes

Average Number of Customers by Retail Customer Type *

 

Retail Customer type		2017								2018								2019								2020								2021								Six months ended June 30, 2022
Residential			582,341				92.1%				583,583				92.1%				584,157				92.2%				589,076				92.2%				591,118				92.2%				595,559				92.1%
Non-residential			49,974				7.9%				49,840				7.9%				49,707				7.8%				49,835				7.8%				50,127				7.8%				50,900				7.9%
Total			632,315				100.0%				633,423				100.0%				633,864				100.0%				638,911				100.0%				641,245				100.0%				646,459				100.0%

 

*

Columns may not add due to rounding.

 

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Credit Policy

KGS is required to service all applicants in its service area, subject to certain exceptions enumerated by the Kansas commission. KGS’s current business practice is to gather and enter residential and non-residential customer information into the ONE Gas Customer Service System. The ONE Gas Customer Service System is searched for matching bad debt that can be collected via payment in full or payment arrangement before service is established. New customers may also be assessed a deposit based on deposit guidelines, and existing customers may be billed a deposit based on Kansas commission regulations and internal guidelines. A deposit is generally assessed if a customer has been late numerous times and has been disconnected for non-payment in the last 12 months.

Billing Process

KGS bills its customers on average every 30 days. For the six months ended June 30, 2022, KGS generated a daily average of 32,479 bills. Customers are considered delinquent if payment is not received by the due date. For accounts with potential billing error exceptions, reports are generated for manual review. This review examines accounts that have abnormally high or low bills, potential meter-reading errors, possible meter malfunctions and/or unbilled accounts.

Collection, Termination of Service and Write-off Policy

KGS customers have a variety of payment options, including autopay, website/phone, online banking, mailing in checks, and third parties, including kiosks and pay stations. Payment information is tallied at the end of each business day and transmitted to KGS for posting. Funds are transferred daily to a designated KGS bank account.

For residential accounts, payment of bills is due 18 business days after mailing and a 10-day disconnect notice is issued if a balance remains due three business days after the regular bill due date. When service is disconnected for non-payment, a final bill is issued after ten business days, and payment is due 18 business days thereafter. A post-disconnect final letter is issued two business days after the final bill to residential accounts with a balance of $49 or greater. After final bill reminder notices and telephone calls, unpaid final bills are written off 49-55 days after the final bill due date (approximately 85 days after service disconnection for residential accounts).

For nonresidential accounts, payment of bills is due 12 business days after mailing and a 10-day disconnect notice is issued if a balance remains due three business days after the regular bill due date. When service is disconnected for non-payment, a final bill is issued after 10 business days, and payment is due 12 business days thereafter. After final bill reminder notices and telephone calls, unpaid final bills are written off 49-55 days after the final bill due date (approximately 77 days after service disconnection for nonresidential accounts).

Following the write-off of residential and nonresidential accounts, they are turned over to a third-party collection agency.

KGS may change its credit, billing, collections and disconnection of service policies and procedures from time to time. It is expected that any such changes would be designed to enhance KGS’s ability to bill and collect customer charges on a timely basis.

In the event a customer orders a disconnection and a reconnection at the same premises within a period of 12 months, KGS will collect, as a reconnection charge, the sum of the minimum bills as would have occurred during the period of disconnection, but in no event less than the reconnection charge provided for in KGS’s applicable tariff.

 

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Alternatives to Gas as An Energy Source for KGS Customers

Natural gas is an important source of fuel for customers in Kansas as an efficient, cost-competitive alternative to electricity. In 2021, the Kansas Legislature passed SB 24 – the Kansas Energy Choice Act (codified at K.S.A. §66-1,288) — preventing a municipality from imposing any ordinance, resolution, code, rule, provision, standard, permit, plan, or any other binding action that prohibits, discriminates against, restricts, limits, impairs, or has a similar effect on an end-use customer’s use of a utility service, defined as the retail provision of natural gas or propane. Based on an analysis by the American Gas Association (“AGA”), a natural gas home requires about one-quarter less total energy on a full fuel-cycle basis than is required for a comparable all-electric home for those appliances. In addition, natural gas is cheaper on a per unit basis. According to the Department of Energy through April 2022, U.S. representative average unit cost for residential gas is $4.54 per million British thermal units (MMBtu) versus $14.97 per MMBtu for electricity. On a MMBtu basis this represents more than a 3 to 1 cost advantage for natural gas over electricity. Using 2021 rates, KGS’s analysis indicates that it maintains a significant cost advantage of 3.7 times compared to electricity in Kansas. Switching energy sources also entails significant upfront costs. Households that use natural gas for heating, cooking and clothes drying save an average of $1,041 per year compared to homes using electricity for those applications, an 18% increase since the publication of the 2021 AGA Playbook. Given the high switching costs and significant cost advantage compared to electricity, KGS expects that the risk of customers switching from gas to alternative energy sources is low.

Additional Natural Gas Utility Considerations

An objective of KGS’s supply-sourcing strategy is to provide value to its customers through reliable, competitively priced and flexible natural gas supply and transportation from multiple production areas and suppliers. This strategy is designed to mitigate the impact on KGS’s supply from physical interruption, financial difficulties of a single supplier, natural disasters and other unforeseen force majeure events, as well as to ensure that adequate supply is available to meet the variations of customer demand.

KGS does not anticipate problems with securing natural gas supply to satisfy customer demand; however, if supply shortages were to occur, KGS has curtailment provisions in KGS’s tariffs that allow KGS to reduce or discontinue natural gas service to large industrial users and to request that residential and commercial customers reduce their natural gas requirements to an amount essential for public health and safety. In addition, during times of critical supply disruptions, curtailments of deliveries to customers with firm contracts may be made by KGS in accordance with guidelines established by appropriate federal, state and local regulatory agencies.

Weather Rules

Kansas statutory requirements and the rules and regulations of the Kansas commission, which may change from time to time, regulate and control the right to disconnect service. The Kansas commission enforces specific weather rules on KGS in extreme weather conditions. A natural gas utility must not disconnect service for a residential customer on a day when the temperature is predicted to fall below 35 degrees Fahrenheit within the following 48 hours, according to the applicable local National Weather Service forecast. To the extent these customers do not pay for their natural gas service, KGS will not be able to collect securitized utility tariff charges from these customers. Weather moratoriums prohibit KGS from disconnecting a customer for a short period of time during a weather event, typically a few days.

 

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Forecasting Natural Gas Customers

For all classes, including residential and small commercial, KGS forecasts natural gas customers based on trend and reasonable expectations of future growth. Past data for residential and commercial customers shows trends to be at a consistent rate of increase for KGS’s service area. Historically, the number of KGS’s larger industrial customers has not changed significantly and KGS does not usually forecast any industrial customer growth unless there is a known customer coming into its service area.

Once per year (typically in the fourth quarter), KGS completes a five-year forecast of customers where the models are completely re-estimated and where large individual customers are evaluated. The output of this exercise is the customer count and sales forecast that underlies KGS’s annual five-year business plan. This forecast is typically the first step in a multi-stage planning process that determines customer growth, average volume usage, and revenue.

Annual Forecast Variance

The following table sets forth information related to annual forecast variance for retail customer counts by customer type (residential or non-residential) for the past five years and the six months ended June 30, 2022. Variances between actual customer counts and forecasted customer counts can be caused by a number of factors such as: the timing of completion of new housing development (i.e., when meter connected), delinquent customers not disconnected due to COVID-19 moratoriums during 2020 and 2021, the timing of completion of KGS capital projects; abnormal weather conditions (i.e., colder or warmer than normal) impacting the timing of when a customer reconnects or disconnects service, and the health of the overall economy.

Annual Forecast Variance for Retail Customer Count by Customer Type

 

		2017				2018				2019				2020				2021				Six months ended June 30, 2022
Residential
Forecast			581,601				582,956				584,576				585,200				586,294				594,858
Actual			582,341				583,583				584,157				589,076				591,118				595,559
Variance (%)			0.13%				0.11%				(0.07)%				0.66%				0.82%				0.12%
Non-residential
Forecast			50,153				49,881				49,878				49,650				49,863				50,357
Actual			49,974				49,840				49,707				49,835				50,127				50,900
Variance (%)			(0.36)%				(0.08)%				(0.34)%				0.37%				0.53%				1.08%
Total
Forecast			631,754				632,837				634,454				634,850				636,157				645,215
Actual			632,315				633,423				633,864				638,911				641,245				646,459
Variance (%)			0.09%				0.09%				(0.09)%				0.64%				0.80%				0.19%

Write-off and Delinquency Experience

The following tables set forth information relating to the total billed revenues and write-off experience for the past five years. Such historical information is presented because KGS’s actual experience with respect to write-offs and delinquencies may be indicative of its future experience, which will affect the timing of securitized

 

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utility tariff charge collections. KGS does not expect, but there can be no certainty, that the delinquency or write-off experience with respect to securitized utility tariff charge collections will differ substantially from the rates indicated. Write-off and delinquency data is affected by factors such as the overall economy, weather and changes in collection practices. The net write-off and delinquency experience is expected, but there can be no certainty, to be similar to KGS’s previous experience.

The following table sets forth information relating to KGS’s days sales outstanding for all retail customers in its service area for the past five years and the six months ended June 30, 2022. Days sales outstanding is a measure of the average number of days that KGS takes to collect its revenue.

Days Sales Outstanding¹

 

		Dec, 31, 2017				Dec, 31, 2018				Dec, 31, 2019				Dec, 31, 2020				Dec, 31, 2021				June 30, 2022
Days Sales Outstanding			42.3				37.1				31.3				36.3				32.7				34.6

 

1

Days sales outstanding as of December 31 for 2017 through 2021 and as of June 30 for 2022.

The following table shows gross and net write-offs for natural gas as a percentage of revenues for the past five years and the six months ended June 30, 2022.

Write-offs as a Percentage of Revenues (in $000s)^{1, 2}

 

		2017				2018				2019				2020				2021				Six months ended June 30, 2022
Residential
Residential Gross Write-offs		$	6,850			$	9,291			$	8,986			$	5,783			$	6,367			$	2,419
Residential Net Write-offs		$	2,697			$	3,777			$	3,522			$	2,484			$	2,341			$	651
Residential Revenue		$	414,517			$	435,297			$	446,543			$	421,780			$	476,434			$	370,678
Gross Write-offs (% of Revenue)			1.65%				2.13%				2.01%				1.37%				1.34%				0.65%
Net Write-offs (% of Revenue)			0.65%				0.87%				0.79%				0.59%				0.49%				0.18%
Non-residential
Non-residential Gross Write-offs		$	319			$	345			$	282			$	317			$	357			$	218
Non-residential Net Write-offs		$	105			$	119			$	95			$	156			$	149			$	72
Non-residential Revenue		$	96,618			$	108,716			$	103,932			$	90,722			$	112,469			$	107,138
Gross Write-offs (% of Revenue)			0.33%				0.32%				0.27%				0.35%				0.32%				0.20%
Net Write-offs (% of Revenue)			0.11%				0.11%				0.09%				0.17%				0.13%				0.07%
Total
Total Gross Write-offs		$	7,170			$	9,636			$	9,268			$	6,100			$	6,724			$	2,637
Total Net Write-offs		$	2,803			$	3,897			$	3,617			$	2,640			$	2,490			$	723
Total Revenue		$	511,136			$	544,013			$	550,476			$	512,501			$	588,903			$	477,817
Gross Write-Off (%)			1.40%				1.77%				1.68%				1.19%				1.14%				0.55%
Net Write-offs (% of Revenue)			0.55%				0.72%				0.66%				0.52%				0.42%				0.15%

 

1

Revenues include taxes.

2

Totals may not add due to rounding.

 

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