UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2016 .
OR
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________.

Commission file number   001-36108

ONE Gas, Inc.
(Exact name of registrant as specified in its charter)

	
		
Oklahoma	46-3561936	
(State or other jurisdiction of
incorporation or organization)	(I.R.S. Employer Identification No.)

15 East Fifth Street, Tulsa, OK	74103	
(Address of principal executive offices)	(Zip Code)	

Registrant’s telephone number, including area code    (918) 947-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X   No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes X No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer X              Accelerated filer __             Non-accelerated filer __             Smaller reporting company__

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __ No X

On July 25, 2016, the Company had 52,241,448 shares of common stock outstanding.

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ONE Gas, Inc.
TABLE OF CONTENTS

			
Part I.	Financial Information	Page No.	
Item 1.	Financial Statements (Unaudited)	6	
 	Statements of Income - Three and Six Months Ended June 30, 2016 and 2015	6	
 	Statements of Comprehensive Income - Three and Six Months Ended June 30, 2016 and 2015	7	
 	Balance Sheets - June 30, 2016 and December 31, 2015	8	
 	Statements of Cash Flows - Six Months Ended June 30, 2016 and 2015	11	
 	Statement of Equity - Six Months Ended June 30, 2016	12	
 	Notes to the Financial Statements	14	
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22	
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32	
Item 4.	Controls and Procedures	33	
Part II.	Other Information	34	
Item 1.	Legal Proceedings	34	
Item 1A.	Risk Factors	34	
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34	
Item 3.	Defaults Upon Senior Securities	34	
Item 4.	Mine Safety Disclosures	34	
Item 5.	Other Information	34	
Item 6.	Exhibits	34	
Signature	 	36	

As used in this Quarterly Report, references to “we,” “our,” “us” or the “company” refer to ONE Gas, Inc., an Oklahoma corporation, and its predecessors and subsidiary, unless the context indicates otherwise.

The statements in this Quarterly Report that are not historical information, including statements concerning plans and objectives of management for future operations, economic performance or related assumptions, are forward-looking statements.  Forward-looking statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “goal,” “forecast,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled” and other words and terms of similar meaning.  Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Forward-Looking Statements,” in this Quarterly Report and under Part I, Item IA, “Risk Factors,” in our Annual Report.

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INFORMATION AVAILABLE ON OUR WEBSITE

We make available, free of charge, on our website ( www.onegas.com ) copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act and reports of holdings of our securities filed by our officers and directors under Section 16 of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.  Copies of our Code of Business Conduct and Ethics, Corporate Governance Guidelines and Director Independence Guidelines are also available on our website, and we will provide copies of these documents upon request.  Our website and any contents thereof are not incorporated by reference into this report.

We also make available on our website the Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T.

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GLOSSARY

The abbreviations, acronyms and industry terminology used in this Quarterly Report are defined as follows:

		
Annual Report	Annual Report on Form 10-K for the year ended December 31, 2015	
ASU	Accounting Standards Update	
Bcf	Billion cubic feet	
CERCLA	Federal Comprehensive Environmental Response, Compensation and Liability
  Act of 1980, as amended	
Clean Air Act	Federal Clean Air Act, as amended	
Clean Water Act	Federal Water Pollution Control Amendments of 1972, as amended	
DOT	United States Department of Transportation	
EPA	United States Environmental Protection Agency	
EPARR	El Paso Annual Rate Review	
EPS	Earnings per share	
EPSA	El Paso Service Area	
Exchange Act	Securities Exchange Act of 1934, as amended	
FASB	Financial Accounting Standards Board	
GAAP	Accounting principles generally accepted in the United States of America	
GRIP	Texas Gas Reliability Infrastructure Program	
GSRS	Kansas Gas System Reliability Surcharge	
Heating Degree Day or HDD
	A measure designed to reflect the demand for energy needed for heating based on
  the extent to which the daily average temperature falls below a reference
  temperature for which no heating is required, usually 65 degrees Fahrenheit
	
KCC	Kansas Corporation Commission	
KDHE	Kansas Department of Health and Environment	
LDCs	Local distribution companies	
MMcf	Million cubic feet	
Moody’s	Moody’s Investors Service, Inc.	
NYMEX	New York Mercantile Exchange	
OCC	Oklahoma Corporation Commission	
ONE Gas	ONE Gas, Inc.	
ONE Gas Credit Agreement	ONE Gas’ $700 million revolving credit agreement, which expires January, 2019	
ONEOK	ONEOK, Inc. and its subsidiaries	
PHMSA	United States Department of Transportation Pipeline and Hazardous Materials
Safety Administration	
Pipeline Safety, Regulatory Certainty
   and Job Creation Act	Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011, as amended	
Quarterly Report(s)	Quarterly Report(s) on Form 10-Q	
RRC	Railroad Commission of Texas	
S&P	S&P Global Ratings	
SEC	Securities and Exchange Commission	
Securities Act	Securities Act of 1933, as amended	
Separation and Distribution Agreement	Separation and Distribution Agreement dated January 14, 2014, between ONEOK
and ONE Gas	
XBRL	eXtensible Business Reporting Language	

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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

																	
ONE Gas, Inc.		 		 					
STATEMENTS OF INCOME		 		 					
		Three Months Ended		Six Months Ended	
 		June 30,		June 30,	
( Unaudited )		2016		2015		2016		2015	
		( Thousands of dollars, except per share amounts )	
Revenues		$	245,923			$	256,786			$	754,288			$	933,317		
Cost of natural gas		56,457			79,949			292,186			493,502		
Net margin		189,466			176,837			462,102			439,815		
Operating expenses		 			 								
Operations and maintenance		97,119			99,422			203,250			205,983		
Depreciation and amortization		35,565			33,006			70,249			64,636		
General taxes		13,161			13,139			28,908			28,921		
Total operating expenses		145,845			145,567			302,407			299,540		
Operating income		43,621			31,270			159,695			140,275		
Other income		416			72			434			885		
Other expense		(314	)		(502	)		(769	)		(956	)	
Interest expense, net		(10,848	)		(11,190	)		(21,695	)		(22,359	)	
Income before income taxes		32,875			19,650			137,665			117,845		
Income taxes		(12,575	)		(7,574	)		(52,621	)		(45,388	)	
Net income		$	20,300			$	12,076			$	85,044			$	72,457		
													
Earnings per share													
Basic		$	0.39			$	0.23			$	1.62			$	1.37		
Diluted		$	0.38			$	0.23			$	1.61			$	1.36		
													
Average shares ( thousands )													
Basic		52,386			52,767			52,452			52,737		
Diluted		52,836			53,438			52,972			53,437		
Dividends declared per share of stock		$	0.35			$	0.30			$	0.70			$	0.60		
See accompanying Notes to the Financial Statements.

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ONE Gas, Inc.	 	 	 	 	 	 	 	
STATEMENTS OF COMPREHENSIVE INCOME	 	 	 	 	 	 	
 	 	 	 	 	 	
 	Three Months Ended	 	Six Months Ended	
 	June 30,	 	June 30,	
( Unaudited )	2016	 	2015	 	2016	 	2015	
 	( Thousands of dollars )	
Net income	$	20,300		 	$	12,076		 	$	85,044		 	$	72,457		
Other comprehensive income (loss), net of tax	 		 	 		 	 		 	 		
Change in pension and other postemployment benefit plan liability, net of tax of $(73), $(88), $(145) and $(176),  respectively	115		 	142		 	231		 	282		
Total other comprehensive income (loss), net of tax	115		 	142		 	231		 	282		
Comprehensive income	$	20,415		 	$	12,218		 	$	85,275		 	$	72,739		
See accompanying Notes to the Financial Statements.

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ONE Gas, Inc.	 	 	 	 	
BALANCE SHEETS	 	 	 	 	
 	 	 	 	 	
 	 	June 30,	 	December 31,	
( Unaudited )	 	2016	 	2015	
Assets	 	( Thousands of dollars )	
Property, plant and equipment	 	 		 	 		
Property, plant and equipment	 	$	5,259,066		 	$	5,132,682		
Accumulated depreciation and amortization	 	1,647,585		 	1,620,771		
Net property, plant and equipment	 	3,611,481		 	3,511,911		
Current assets	 	 	 	 	
Cash and cash equivalents	 	54,257		 	2,433		
Accounts receivable, net	 	115,265		 	216,343		
Materials and supplies	 	32,618		 	33,325		
Income tax receivable	 	708		 	38,877		
Natural gas in storage	 	103,741		 	142,153		
Regulatory assets	 	54,645		 	32,925		
Other current assets	 	20,222		 	16,789		
Total current assets	 	381,456		 	482,845		
Goodwill and other assets	 	 		 	 		
Regulatory assets	 	410,648		 	435,863		
Goodwill	 	157,953		 	157,953		
Other assets	 	49,294		 	46,193		
Total goodwill and other assets	 	617,895		 	640,009		
Total assets	 	$	4,610,832		 	$	4,634,765		
See accompanying Notes to the Financial Statements.

8

	
									
ONE Gas, Inc.	 	 	 	 	
BALANCE SHEETS	 	 	 	 	
(Continued)	 	 	 	 	
 	 	June 30,	 	December 31,	
( Unaudited )	 	2016	 	2015	
Equity and Liabilities	 	( Thousands of dollars )	
Equity and long-term debt	 	 	 	 	
Common stock, $0.01 par value:
authorized 250,000,000 shares; issued 52,598,005 shares and outstanding 52,240,948 shares at
   June 30, 2016; issued 52,598,005 and outstanding 52,259,224 shares at December 31, 2015	 	$	526		 	$	526		
Paid-in capital	 	1,756,799		 	1,764,875		
Retained earnings	 	142,996		 	95,046		
Accumulated other comprehensive income (loss)	 	(4,170	)	 	(4,401	)	
Treasury stock, at cost: 357,057 shares at June 30, 2016 and 338,781 shares at December 31, 2015	 	(20,563	)	 	(14,491	)	
   Total equity	 	1,875,588		 	1,841,555		
Long-term debt, excluding current maturities and net of issuance costs of   $9,251 and $9,645, respectively	 	1,192,050		 	1,191,660		
Total equity and long-term debt		3,067,638			3,033,215		
Current liabilities	 	 	 	 	
Current maturities of long-term debt	 	7		 	7		
Notes payable	 	—		 	12,500		
Accounts payable	 	59,983		 	107,482		
Accrued interest	 	18,926		 	18,873		
Accrued taxes other than income	 	31,676		 	37,249		
Accrued liabilities	 	15,314		 	31,470		
Customer deposits	 	61,438		 	60,325		
Regulatory liabilities	 	19,675		 	24,615		
Other current liabilities	 	10,965		 	11,700		
Total current liabilities	 	217,984		 	304,221		
Deferred credits and other liabilities	 	 		 	 		
Deferred income taxes	 	987,906		 	951,785		
Employee benefit obligations	 	263,869		 	272,309		
Other deferred credits	 	73,435		 	73,235		
Total deferred credits and other liabilities	 	1,325,210		 	1,297,329		
Commitments and contingencies	 			 			
Total liabilities and equity	 	$	4,610,832		 	$	4,634,765		
See accompanying Notes to the Financial Statements.

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ONE Gas, Inc.	 	 	 	 	
STATEMENTS OF CASH FLOWS	 	 	
 	 	Six Months Ended	
 	 	June 30,	
( Unaudited )	 	2016	 	2015	
 	 	( Thousands of dollars )	
Operating activities	 	 	 	 	
Net income	 	$	85,044		 	$	72,457		
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	
Depreciation and amortization	 	70,249		 	64,636		
Deferred income taxes	 	36,031		 	13,152		
Share-based compensation expense	 	7,451		 	3,684		
Provision for doubtful accounts	 	2,757		 	2,099		
Changes in assets and liabilities:	 	 		 	 	
Accounts receivable	 	98,321		 	181,949		
Materials and supplies	 	707		 	(4,171	)	
Income tax receivable	 	38,169		 	31,644		
Natural gas in storage	 	38,412		 	65,409		
Asset removal costs	 	(27,672	)	 	(20,902	)	
Accounts payable	 	(42,897	)	 	(92,371	)	
Accrued interest	 	53		 	16		
Accrued taxes other than income	 	(5,573	)	 	(10,543	)	
Accrued liabilities	 	(16,156	)	 	(11,368	)	
Customer deposits	 	1,113		 	(824	)	
Regulatory assets and liabilities	 	(2,966	)	 	58,991		
Other assets and liabilities	 	(15,730	)	 	(11,306	)	
Cash provided by operating activities	 	267,313		 	342,552		
Investing activities	 	 		 	 		
Capital expenditures	 	(144,760	)	 	(125,425	)	
Other	 	492		 	—		
Cash used in investing activities	 	(144,268	)	 	(125,425	)	
Financing activities	 	 		 	 		
Repayments of notes payable, net	 	(12,500	)	 	(42,000	)	
Repurchase of common stock	 	(24,066	)	 	(24,122	)	
Issuance of common stock	 	1,983		 	4,471		
Dividends paid	 	(36,638	)	 	(31,533	)	
Cash used in financing activities	 	(71,221	)	 	(93,184	)	
Change in cash and cash equivalents	 	51,824		 	123,943		
Cash and cash equivalents at beginning of period	 	2,433		 	11,943		
Cash and cash equivalents at end of period	 	$	54,257		 	$	135,886		
See accompanying Notes to the Financial Statements.

11

	
										
ONE Gas, Inc.	 	 	 	 	
STATEMENT OF EQUITY	 	 	 	 	
 	 	 	 	 	
( Unaudited )	 	Common Stock Issued	Common Stock	Paid-in Capital	
 	 	(Shares)	( Thousands of dollars )	
 	 	 	 	 	
January 1, 2016	 	52,598,005		$	526		$	1,764,875		
Net income	 	—		—		—		
Other comprehensive income	 	—		—		—		
Repurchase of common stock	 	—		—		—		
Common stock issued and other	 	—		—		(8,532	)	
Common stock dividends - $0.70 per share	 	—		—		456		
June 30, 2016	 	52,598,005		$	526		$	1,756,799		
See accompanying Notes to the Financial Statements.

12

	
														
ONE Gas, Inc.	 	 	 	 	 	
STATEMENT OF EQUITY	 	 	 	
(Continued)	 	 	 	 	 	
( Unaudited )	 	Retained Earnings	Treasury Stock	Accumulated Other Comprehensive Income (Loss)	Total Equity	
 	 	( Thousands of dollars )	
 	 	 	 	 	 	
January 1, 2016	 	$	95,046		$	(14,491	)	$	(4,401	)	$	1,841,555		
Net income	 	85,044		—		—		85,044		
Other comprehensive income	 	—		—		231		231		
Repurchase of common stock	 	—		(24,066	)	—		(24,066	)	
Common stock issued and other	 	—		17,994		—		9,462		
Common stock dividends - $0.70 per share	 	(37,094	)	—		—		(36,638	)	
June 30, 2016	 	$	142,996		$	(20,563	)	$	(4,170	)	$	1,875,588		
See accompanying Notes to the Financial Statements.

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ONE Gas, Inc.
NOTES TO THE FINANCIAL STATEMENTS

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	

Our accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the SEC. These statements also have been prepared in accordance with GAAP and reflect all adjustments that, in our opinion, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The 2015 year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. These unaudited financial statements should be read in conjunction with the audited financial statements and footnotes in our Annual Report. Due to the seasonal nature of our business, the results of operations for the three and six months ended June 30, 2016 , are not necessarily indicative of the results that may be expected for a 12-month period.

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

Use of Estimates - The preparation of our financial statements and related disclosures in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions that cannot be known with certainty that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Items that may be estimated include, but are not limited to, the economic useful life of assets, fair value of assets and liabilities, provision for doubtful accounts, unbilled revenues for natural gas delivered but for which meters have not been read, natural gas purchased but for which no invoice has been received, provision for income taxes, including any deferred tax valuation allowances, the results of litigation and various other recorded or disclosed amounts.

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

Segments - We operate in one reportable business segment: regulated public utilities that deliver natural gas to residential, commercial, industrial, wholesale, public authority and transportation customers. The accounting policies for our segment are the same as described in Note 1 of our Notes to the Financial Statements in our Annual Report. We evaluate our financial performance principally on operating income. For the three and six months ended June 30, 2016 , and 2015 , we had no single external customer from which we received 10 percent or more of our gross revenues.

Recently Issued Accounting Standards Update - In March 2016, the FASB issued ASU 2016-12, “Improvements to Employee Share-Based Payment Accounting,” which includes various new aspects to simplify how share-based payments are accounted for and presented in the financial statements. The new standard will modify several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows. This new guidance is required to be adopted for our interim and annual reports for periods beginning after December 15, 2016, but may be adopted early. We are evaluating the impact of this guidance and the timing of adoption.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which prescribes recognizing lease assets and liabilities on the balance sheet and includes disclosure of key information about leasing arrangements. We are evaluating the impact of this issued guidance, as well as the timing of adoption, which is required for our interim and annual reports for periods beginning after December 15, 2018.

In August 2015, the FASB issued ASU 2015-15, “Interest-Imputation of Interest (Subtopic 835-30),” which addresses the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements. We adopted this guidance in the first quarter 2016, and it did not have an impact on our financial position or results of operations.

In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest,” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. We adopted this guidance in the first quarter of 2016, and have applied the changes retrospectively to all periods presented. We have presented such amounts as a direct deduction from the face amount of our long-term debt, rather than in

14

other assets as a deferred charge in our Balance Sheets. Amortization of the debt issuance costs continues to be reported as interest expense in our Statements of Income. 
  
In April 2015, the FASB issued ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software,” which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. We adopted this guidance prospectively in the first quarter of 2016, and it did not have a material impact on our financial position or results of operations.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which clarifies and converges the revenue recognition principles under GAAP and International Financial Reporting Standards. In July 2015, FASB delayed the effective date for one year. We are evaluating the impact of this issued guidance, as well as the timing of adoption, which is required for our interim and annual reports beginning with the first quarter 2018.

2.	REGULATORY ASSETS AND LIABILITIES	

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

															
 	 	 	 	June 30, 2016	
 	 	 	 	Current	 	Noncurrent	 	Total	
 	 	 	 	( Thousands of dollars )	
Under-recovered purchased-gas costs	 		 	$	10,635		 	$	—		 	$	10,635		
Pension and postemployment benefit costs	 		 	22,988		 	397,068		 	420,056		
Weather normalization	 	 	 	18,154		 	—		 	18,154		
Reacquired debt costs	 		 	812		 	8,514		 	9,326		
Other	 		 	2,056		 	5,066		 	7,122		
Total regulatory assets, net of amortization	 	 	 	54,645		 	410,648		 	465,293		
Accumulated removal costs (a)	 		 	—		 	(6,123	)	 	(6,123	)	
Over-recovered purchased-gas costs	 		 	(18,186	)	 	—		 	(18,186	)	
Ad valorem tax	 	 	 	(1,489	)	 	—		 	(1,489	)	
Total regulatory liabilities	 	 	 	(19,675	)	 	(6,123	)	 	(25,798	)	
Net regulatory assets (liabilities)	 	 	 	$	34,970		 	$	404,525		 	$	439,495		
(a) Included in other deferred credits in our Balance Sheets.

															
 	 	 	 	December 31, 2015	
 	 	 	 	Current	 	Noncurrent	 	Total	
 	 	 	 	( Thousands of dollars )	
Under-recovered purchased-gas costs	 		 	$	13,336		 	$	—		 	$	13,336		
Pension and postemployment benefit costs	 		 	15,670		 	425,175		 	440,845		
Weather normalization	 	 	 	2,198		 	—		 	2,198		
Reacquired debt costs	 		 	812		 	8,919		 	9,731		
Other	 		 	909		 	1,769		 	2,678		
Total regulatory assets, net of amortization	 	 	 	32,925		 	435,863		 	468,788		
Accumulated removal costs (a)	 		 	—		 	(9,032	)	 	(9,032	)	
Over-recovered purchased-gas costs	 		 	(22,884	)	 	—		 	(22,884	)	
Ad valorem tax	 	 	 	(1,731	)	 	—		 	(1,731	)	
Total regulatory liabilities	 	 	 	(24,615	)	 	(9,032	)	 	(33,647	)	
Net regulatory assets (liabilities)	 	 	 	$	8,310		 	$	426,831		 	$	435,141		
(a) Included in other deferred credits in our Balance Sheets.

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

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In January 2016, as a result of the OCC’s approval of our rate case in Oklahoma, we recorded a regulatory asset of $2.4 million to recover certain information technology costs incurred as a result of our separation from ONEOK in 2014, which will be recovered over four years.

3.	CREDIT FACILITY AND SHORT-TERM NOTES PAYABLE	

The ONE Gas Credit Agreement contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining ONE Gas’ debt-to-capital ratio of no more than 70 percent at the end of any calendar quarter. At June 30, 2016 , our debt-to-capital ratio was 39 percent and we were in compliance with all covenants under the ONE Gas Credit Agreement.

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

The ONE Gas Credit Agreement is available to repay the commercial paper notes, if necessary. Amounts outstanding under the commercial paper program reduce the borrowing capacity under the ONE Gas Credit Agreement. At June 30, 2016 , we had no short-term borrowings, $1.0 million in letters of credit issued under the ONE Gas Credit Agreement and $699.0 million of remaining credit available under the ONE Gas Credit Agreement.

4.	LONG-TERM DEBT	

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

5.	EQUITY	

Treasury Shares  - In the first quarter of 2016, we repurchased approximately  407 thousand  shares of our common stock for approximately  $24.1 million .

Dividends - In July 2016, a dividend of $0.35 per share ( $1.40 per share on an annualized basis) was declared for shareholders of record on August 15, 2016, payable September 1, 2016.

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6.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)	

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

																	
 	 	Three Months Ended	 	Six Months Ended	 	 	
Details about Accumulated Other Comprehensive	 	June 30,	 	June 30,	 	Affected Line Item in the	
 Income (Loss) Components	 	2016	2015	 	2016	2015	 	 Statements of Income	
 	 	( Thousands of dollars )	 	 	
Pension and other postemployment benefit plan obligations (a)	 	 	 	 	 	 	 	 	
Amortization of net loss	 	$	10,036		$	12,565		 	$	20,073		$	25,130		 	 	
Amortization of unrecognized prior service cost	 	(908	)	(373	)	 	(1,816	)	(746	)	 	 	
 	 	9,128		12,192		 	18,257		24,384		 	 	
Regulatory adjustments (b)	 	(8,940	)	(11,962	)	 	(17,881	)	(23,926	)	 	 	
 	 	188		230		 	376		458		 	Income before income taxes	
 	 	(73	)	(88	)	 	(145	)	(176	)	 	Income tax expense	
Total reclassifications for the period	 	$	115		$	142		 	$	231		$	282		 	Net income	
(a) These components of accumulated other comprehensive income (loss) are included in the computation of net periodic benefit cost. See Note 8 for additional detail of our net periodic benefit cost .
(b) Regulatory adjustments represent pension and other postemployment benefit costs expected to be recovered through rates and are deferred as part of our regulatory assets. See Note 2 for additional disclosures of regulatory assets and liabilities.

7.	EARNINGS PER SHARE	

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

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

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

	
											
 	Three Months Ended June 30, 2015	
 	Income	 	Shares	 	Per Share
Amount	
 	( Thousands, except per share amounts )	
Basic EPS Calculation	 	 	 	 	 	
Net income available for common stock	$	12,076		 	52,767		 	$	0.23		
Diluted EPS Calculation	 	 	 		 	 		
Effect of dilutive securities	—		 	671		 	 		
Net income available for common stock and common stock equivalents	$	12,076		 	53,438		 	$	0.23		

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

	
											
 	Six Months Ended June 30, 2015	
 	Income	 	Shares	 	Per Share
Amount	
 	( Thousands, except per share amounts )	
Basic EPS Calculation	 	 	 	 	 	
Net income available for common stock	$	72,457		 	52,737		 	$	1.37		
Diluted EPS Calculation	 		 	 		 	 		
Effect of dilutive securities	—		 	700		 	 		
Net income available for common stock and common stock equivalents	$	72,457		 	53,437		 	$	1.36		

8.	EMPLOYEE BENEFIT PLANS	

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

														
 	Pension Benefits	
 	Three Months Ended	 	Six Months Ended	
 	June 30,	 	June 30,	
 	2016	2015	 	2016	2015	
 	( Thousands of dollars )	
Components of net periodic benefit cost	 	 	 	 	 	
Service cost	$	3,014		$	3,497		 	$	6,028		$	7,021		
Interest cost	11,388		10,652		 	22,775		21,304		
Expected return on assets	(15,296	)	(15,362	)	 	(30,592	)	(30,724	)	
Amortization of unrecognized prior service cost	—		67		 	—		134		
Amortization of net loss	8,885		11,055		 	17,771		22,110		
Net periodic benefit cost	$	7,991		$	9,909		 	$	15,982		$	19,845		

	
														
 	Other Postemployment Benefits	
 	Three Months Ended	 	Six Months Ended	
 	June 30,	 	June 30,	
 	2016	2015	 	2016	2015	
 	( Thousands of dollars )	
Components of net periodic benefit cost	 	 	 	 	 	
Service cost	$	638		$	849		 	$	1,276		$	1,698		
Interest cost	2,627		2,666		 	5,254		5,332		
Expected return on assets	(3,071	)	(2,908	)	 	(6,142	)	(5,816	)	
Amortization of unrecognized prior service cost	(908	)	(440	)	 	(1,816	)	(880	)	
Amortization of net loss	1,151		1,510		 	2,302		3,020		
Net periodic benefit cost	$	437		$	1,677		 	$	874		$	3,354		

We recover qualified pension benefit plan and other postemployment benefit plan costs through rates charged to our customers. Certain utility commissions require that the recovery of these costs be based on specific guidelines. The difference between these regulatory-based amounts and the periodic benefit cost calculated pursuant to GAAP is deferred as a regulatory asset or

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liability and amortized to expense over periods in which this difference will be recovered in rates, as authorized by the applicable utility commission. Regulatory deferrals related to net periodic benefit cost were not material for the three and six months ended June 30, 2016.

9.	COMMITMENTS AND CONTINGENCIES	

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

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

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

Our expenditures for environmental evaluation, mitigation, remediation and compliance to date have not been significant in relation to our financial position, results of operations or cash flows, and our expenditures related to environmental matters had no material effects on earnings or cash flows during the three and six months ended June 30, 2016 and 2015 . We do not expect expenditures for these matters to have a material adverse effect on our financial condition, results of operations or cash flows.

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

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

In April 2016, PHMSA published a notice of proposed rulemaking (NPRM) in the Federal Register to revise pipeline safety regulations applicable to the safety of onshore natural gas transmission and gathering pipelines. Proposals include changes to pipeline integrity management requirements and other safety-related requirements. The NPRM comment period ended July 7, 2016. The potential capital and operating expenditures associated with the NPRM are currently being evaluated, but could be significant depending on the final regulations.

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

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10.	DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS	

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

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

The table below summarizes the various ways in which we account for our derivative instruments and the impact on our financial statements:

					
 	 	Recognition and Measurement	
Accounting Treatment	 	Balance Sheet	 	Income Statement	
Normal purchases and
normal sales	-	Recorded at historical cost	-	Change in fair value not recognized in earnings	
Mark-to-market	-	Recorded at fair value	-	Change in fair value recognized in, and
recoverable through, the purchased-gas cost adjustment mechanisms	

We have not elected to designate any of our derivative instruments as hedges. Premiums paid and any cash settlements received associated with the commodity derivative instruments entered into by us are included in, and recoverable through, the purchased-gas cost adjustment mechanisms.

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

Fair Value Hierarchy - At each balance sheet date, we utilize a fair value hierarchy to classify fair value amounts recognized or disclosed in our financial statements based on the observability of inputs used to estimate such fair value. The levels of the hierarchy are described below:

•	Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;	
		
•	Level 2 - Significant observable pricing inputs other than quoted prices included within Level 1 that are, either directly or indirectly, observable as of the reporting date. Essentially, this represents inputs that are derived principally from or corroborated by observable market data; and	
		
•	Level 3 - May include one or more unobservable inputs that are significant in establishing a fair value estimate. These unobservable inputs are developed based on the best information available and may include our own internal data.	

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

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

Derivative Instruments -   At June 30, 2016 , we held purchased natural gas call options for the heating season ending March 2017, with total notional amounts of 12.4 Bcf, for which we paid premiums of $4.1 million , and had a fair value of $6.4 million . At December 31, 2015 , we held purchased natural gas call options for the heating season ended March 2016, with total notional amounts of 17.0 Bcf, for which we paid premiums of $5.8 million , and had a fair value of $0.4 million . The premiums paid and any cash settlements received are recorded as part of our unrecovered purchased-gas costs in current regulatory assets as these contracts are included in, and recoverable through, the purchased-gas cost adjustment mechanisms. Additionally, changes in fair value associated with these contracts are deferred as part of our unrecovered purchased-gas costs in our Balance Sheets. Our natural gas call options are classified as Level 1 as fair value amounts are based on unadjusted quoted prices in

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active markets including NYMEX-settled prices. There were no transfers between levels for the three and six months ended June 30, 2016 and 2015 .

Other Financial Instruments -   The approximate fair value of cash and cash equivalents, accounts receivable and accounts payable is equal to book value, due to the short-term nature of these items. Our cash and cash equivalents of $54.3 million includes $26.0 million of commercial paper that is classified as held-to-maturity, with the remaining comprised of bank and money market accounts. Our bank and money market accounts are classified as Level 1 fair value measurements in our fair value hierarchy, and our investments in commercial paper are classified as Level 2 in our fair value hierarchy.

Short-term notes payable and commercial paper are due upon demand and, therefore, the carrying amounts approximate fair value and are classified as Level 1. The book value of our long-term debt, including current maturities, was $1.2 billion at both June 30, 2016 and December 31, 2015 . The estimated fair value of our long-term debt, including current maturities, was $1.3 billion and $1.2 billion at June 30, 2016 and December 31, 2015 , respectively. The estimated fair value of our Senior Notes at June 30, 2016 and December 31, 2015 , was determined using quoted market prices, and are classified as Level 2 in our fair value hierarchy.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	

The following discussion and analysis should be read in conjunction with our unaudited financial statements and the Notes to the Financial Statements in this Quarterly Report, as well as our Annual Report.  Due to the seasonal nature of our business, the results of operations for the three and six months ended June 30, 2016 , are not necessarily indicative of the results that may be expected for a 12-month period.

RECENT DEVELOPMENTS

Dividend - In July 2016, a dividend of $0.35 per share ( $1.40 per share on an annualized basis) was declared for shareholders of record on August 15, 2016, payable September 1, 2016.

Regulatory Activities - Oklahoma - In March 2016, Oklahoma Natural Gas filed its energy-efficiency program true-up application for its 2015 program year, requesting a utility incentive of $1.9 million and a program true-up adjustment of $3.1 million. This filing also seeks approval for the demand portfolio of conservation and energy efficiency programs for calendar years 2017 through 2019. In July 2016, the staff of the OCC filed testimony in support of the filing. If approved, the new programs are expected to be effective in January 2017.

In July 2015, Oklahoma Natural Gas filed a request with the OCC for an increase in base rates, reflecting system investments and operating costs necessary to maintain the safety and reliability of its natural gas distribution system. In January 2016, the OCC approved a joint stipulation and settlement agreement to allow an increase in revenue of $29,995,000. We also recorded a regulatory asset of $2.4 million to recover certain information technology costs incurred as a result of our separation from ONEOK in 2014, which will be recovered over four years. The agreement set Oklahoma Natural Gas’ authorized return on equity at 9.5 percent, which represents the midpoint of the allowed range of 9.0 to 10.0 percent, and approved a rate base of approximately $1.2 billion. The agreement includes the continuation, with certain modifications, of the Performance-Based Rate Change tariff that was established in 2009. Oklahoma Natural Gas expects to make its next Performance-Based Rate Change filing on or before March 15, 2017.

Kansas - In May 2016, Kansas Gas Service filed a request with the KCC for an increase in base rates, reflecting system investments and operating costs necessary to maintain the safety and reliability of its natural gas distribution system. Kansas Gas Service’s request, if approved, represents a net base rate increase of $28.0 million. Kansas Gas Service is already recovering $7.4 million from customers through the GSRS, resulting in a total base rate increase of $35.4 million. The filing is based on a 10.0 percent return on equity and the previously agreed upon 55.0 percent common equity ratio. The filing represents a rate base of $903 million, compared with $826 million included in existing base rates plus previously approved GSRS-eligible investments. Since the last general rate case in 2012, Kansas Gas Service has invested $231 million in its systems and facilities. The company’s filing also includes a proposed cost of service adjustment mechanism that would reset rates annually, based on a review of the previous year’s financial results. The proposed rate mechanism is intended to reduce the need to file full rate cases, thereby saving on costs associated with traditional rate cases. In accordance with Kansas law, the KCC has 240 days to consider Kansas Gas Service’s filing.

In August 2015, Kansas Gas Service submitted an application to the KCC requesting an increase of approximately $2.4 million related to its GSRS. In November 2015, the KCC approved the $2.4 million increase effective December 2015.
 
Texas - In June 2016, Texas Gas Service filed a rate case requesting an increase in revenues of $11.6 million for its Central Texas and South Texas service areas. The filing included a request to consolidate the South Texas service area with the Central Texas service area. Texas Gas Service filed this rate case directly with the incorporated cities of the Central Texas service area, which includes the city of Austin, and the RRC for the unincorporated areas. If approved, new rates are expected to be effective in December 2016.
   
In November 2015, Texas Gas Service notified the EPSA that it would be filing a full rate case in 2016 in lieu of the EPARR. In March 2016, Texas Gas Service filed a rate case requesting an increase in revenues of $12.8 million for the EPSA and its Dell City and Permian service areas. The filing included a request to consolidate these three service areas into a new West Texas service area. Texas Gas Service filed this rate case directly with the incorporated cities of the EPSA and Dell City service area and the RRC for the unincorporated areas. In July 2016, several incorporated cities that are parties to the filing, including the city of El Paso, denied the request and Texas Gas Service appealed the denial to the RRC.  The Hearing on the Merits was held in July 2016, with a final decision from the RRC expected in October 2016.

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In December 2015, Texas Gas Service filed a rate case requesting an increase in revenues of $3.1 million for its Galveston and South Jefferson County service areas.  The filing included a request to consolidate these two service areas into a new Gulf Coast service area. Texas Gas Service filed this rate case directly with the incorporated cities and the RRC for the unincorporated areas. Texas Gas Service reached a unanimous settlement agreement with representatives of the incorporated cities and the staff of the RRC on behalf of the unincorporated areas for an increase in revenues of $2.3 million. New rates became effective in May 2016.

In March 2015, Texas Gas Service filed under the annual rate review mechanism called EPARR, requesting an increase in revenues totaling $11.2 million in the city of El Paso and surrounding incorporated cities in the EPSA. In August 2015, Texas Gas Service and the incorporated cities in the EPSA reached an agreement on a rate increase of $8.0 million to take effect in August 2015. In April 2015, Texas Gas Service filed with the RRC under the GRIP statute, requesting an increase of $0.4 million in revenues for the unincorporated areas of the EPSA. GRIP is a capital-recovery mechanism that allows for a rate adjustment providing recovery of and a return on incremental capital investments made between rate cases. The RRC approved the filing in July 2015.

Texas Gas Service received approval under the GRIP statute with the city of Austin, Texas, and surrounding communities in May 2015, for an increase in revenues of approximately $3.7 million. The new rates were effective in June 2015.

In the normal course of business, Texas Gas Service has filed rate cases and sought GRIP and cost of service adjustments in various other Texas jurisdictions to address investments in rate base and changes in expenses. Annual rate increases associated with these filings totaling $4.8 million were approved in 2015. To date in 2016, the increases approved total $2.0 million.

FINANCIAL RESULTS AND OPERATING INFORMATION

We operate in one reportable business segment: regulated public utilities that deliver natural gas to residential, commercial, industrial, wholesale, public authority and transportation customers. We evaluate our financial performance principally on operating income.

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

																														
 	Three Months Ended	 	Six Months Ended	 	Three Months	 	Six Months	
 	June 30,	 	June 30,	 	2016 vs. 2015	 	2016 vs. 2015	
Financial Results	2016	 	2015	 	2016	 	2015	 	Increase (Decrease)	 	Increase (Decrease)	
 	( Millions of dollars, except percentages )	
Natural gas sales	$	217.2		 	$	229.0		 	$	688.6		 	$	865.8		 	$	(11.8	)	 	(5	)%	 	$	(177.2	)	 	(20	)%	
Transportation revenues	21.2		 	20.6		 	51.0		 	52.0		 	0.6		 	3	 %	 	(1.0	)	 	(2	)%	
Cost of natural gas	56.5		 	79.9		 	292.2		 	493.5		 	(23.4	)	 	(29	)%	 	(201.3	)	 	(41	)%	
Net margin, excluding other revenues	181.9		 	169.7		 	447.4		 	424.3		 	12.2		 	7	 %	 	23.1		 	5	 %	
Other revenues	7.6		 	7.1		 	14.7		 	15.5		 	0.5		 	7	 %	 	(0.8	)	 	(5	)%	
Net margin	189.5		 	176.8		 	462.1		 	439.8		 	12.7		 	7	 %	 	22.3		 	5	 %	
Operating costs	110.4		 	112.5		 	232.2		 	234.9		 	(2.1	)	 	(2	)%	 	(2.7	)	 	(1	)%	
Depreciation and amortization	35.5		 	33.0		 	70.2		 	64.6		 	2.5		 	8	 %	 	5.6		 	9	 %	
Operating income	$	43.6		 	$	31.3		 	$	159.7		 	$	140.3		 	$	12.3		 	39	 %	 	$	19.4		 	14	 %	
Capital expenditures	$	69.5		 	$	70.5		 	$	144.8		 	$	125.4		 	$	(1.0	)	 	(1	)%	 	$	19.4		 	15	 %	

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

																														
 	Three Months Ended	 	Six Months Ended	 	Three Months	 	Six Months	
Net Margin, Excluding Other	June 30,	 	June 30,	 	2016 vs. 2015	 	2016 vs. 2015	
Revenues	2016	 	2015	 	2016	 	2015	 	Increase (Decrease)	 	Increase (Decrease)	
Natural gas sales	( Millions of dollars, except percentages )	
Residential	$	132.8		 	$	122.8		 	$	327.5		 	$	306.9		 	$	10.0		 	8	%	 	$	20.6		 	7	 %	
Commercial and industrial	26.7		 	25.1		 	65.5		 	62.1		 	1.6		 	6	%	 	3.4		 	5	 %	
Wholesale and public authority	1.2		 	1.2		 	3.4		 	3.3		 	—		 	—	%	 	0.1		 	3	 %	
Net margin on natural gas sales	160.7		 	149.1		 	396.4		 	372.3		 	11.6		 	8	%	 	24.1		 	6	 %	
Transportation revenues	21.2		 	20.6		 	51.0		 	52.0		 	0.6		 	3	%	 	(1.0	)	 	(2	)%	
Net margin, excluding other revenues	$	181.9		 	$	169.7		 	$	447.4		 	$	424.3		 	$	12.2		 	7	%	 	$	23.1		 	5	 %	

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

																														
 	Three Months Ended	 	Six Months Ended	 	Three Months	 	Six Months	
 	June 30,	 	June 30,	 	2016 vs. 2015	 	2016 vs. 2015	
Net Margin on Natural Gas Sales	2016	 	2015	 	2016	 	2015	 	Increase (Decrease)	 	Increase (Decrease)	
Net margin on natural gas sales	( Millions of dollars, except percentages )	 	 	 	 	
Fixed margin	$	139.9		 	$	129.5		 	$	281.8		 	$	259.8		 	$	10.4		 	8	%	 	$	22.0		 	8	%	
Variable margin	20.8		 	19.6		 	114.6		 	112.5		 	1.2		 	6	%	 	2.1		 	2	%	
Net margin on natural gas sales	$	160.7		 	$	149.1		 	$	396.4		 	$	372.3		 	$	11.6		 	8	%	 	$	24.1		 	6	%	

Net margin increased $12.7 million for the three months ended June 30, 2016 , compared with the same period last year, due primarily to the following:

•	an increase of $10.5 million from new rates in Oklahoma and Texas;	
		
•	an increase of $0.9 million in residential sales due primarily to net customer growth in Oklahoma and Texas; and	
		
•	an increase of $0.8 million due to higher line extension revenue in Oklahoma from commercial and industrial customers.	

Net margin increased $22.3 million for the six months ended June 30, 2016 , compared with the same period last year, due primarily to the following:

•	an increase of $24.3 million from new rates in Oklahoma and Texas; and	
		
•	an increase of $1.8 million in residential sales due primarily to net customer growth in Oklahoma and Texas; offset partially by	
		
•	a decrease of $2.6 million due to lower sales volumes, net of weather normalization, primarily from warmer weather in the first quarter of 2016 compared with first quarter of 2015; and	
		
•	a decrease of $1.5 million due primarily to lower transportation volumes from weather-sensitive customers in Kansas and Oklahoma.	

Operating costs decreased $2.1 million for the three months ended June 30, 2016 , compared with the same period last year, due primarily to the following:

•	a decrease of $2.0 million in outside services, fleet and other costs; and	
		
•	a decrease of $1.0 million in information technology costs; offset partially by	
		
•	an increase of $1.5 million in employee-related costs.	

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Operating costs decreased $2.7 million for the six months ended June 30, 2016 , compared with the same period last year, due primarily to the following:

•	a decrease of $4.6 million in outside services, fleet and other costs;	
		
•	a decrease of $2.4 million from the deferral of certain information technology costs incurred as a result of our separation from ONEOK in 2014, which was approved in Oklahoma as a regulatory asset in the recent rate proceeding; and	
		
•	a decrease of $2.4 million in information technology costs in addition to those referred to above; offset partially by	
		
•	an increase of $5.1 million in employee-related costs; and	
		
•	an increase of $2.3 million in legal-related costs.	

Depreciation and amortization expense increased $2.5 million and $5.6 million for the three and six months ended June 30, 2016 , respectively, compared with the same periods last year, due primarily to an increase in depreciation from our capital expenditures being placed in service.

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

Capital expenditures increased $19.4 million for the six months ended June 30, 2016 , compared with the same period last year, due primarily to increased system integrity activities and extending service to new areas, which were facilitated by warmer and drier weather in the first quarter of 2016.

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

																										
 	 	Three Months Ended	Variances	
 	 	June 30,	2016 vs. 2015	
(in thousands)	 	2016	2015	Increase (Decrease)	
Average Number of Customers	 	OK	KS	TX	Total	OK	KS	TX	Total	OK	KS	TX	Total	
Residential	 	789		583		612		1,984		784		581		608		1,973		5		2		4		11		
Commercial and industrial	 	73		50		35		158		73		50		34		157		—		—		1		1		
Wholesale and public authority	 	—		—		3		3		—		—		3		3		—		—		—		—		
Transportation	 	5		6		1		12		6		6		1		13		(1	)	—		—		(1	)	
Total customers	 	867		639		651		2,157		863		637		646		2,146		4		2		5		11		

	
																										
 	 	Six Months Ended	Variances	
 	 	June 30,	2016 vs. 2015	
(in thousands)	 	2016	2015	Increase (Decrease)	
Average Number of Customers	 	OK	KS	TX	Total	OK	KS	TX	Total	OK	KS	TX	Total	
Residential	 	791		584		612		1,987		786		584		607		1,977		5		—		5		10		
Commercial and industrial	 	74		50		35		159		73		50		35		158		1		—		—		1		
Wholesale and public authority	 	—		—		3		3		—		—		3		3		—		—		—		—		
Transportation	 	5		6		1		12		6		6		1		13		(1	)	—		—		(1	)	
Total customers	 	870		640		651		2,161		865		640		646		2,151		5		—		5		10		

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 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
Volumes (MMcf)	 	2016	 	2015	 	2016	 	2015	
Natural gas sales	 	 	 	 	 	 	 	 	
Residential	 	10,576		 	11,399		 	62,262		 	71,511		
Commercial and industrial	 	4,330		 	4,640		 	18,818		 	21,784		
Wholesale and public authority	 	338		 	363		 	1,281		 	1,472		
Total volumes sold	 	15,244		 	16,402		 	82,361		 	94,767		
Transportation	 	49,601		 	46,783		 	108,821		 	107,555		
Total volumes delivered	 	64,845		 	63,185		 	191,182		 	202,322		

Total volumes delivered decreased for the six months ended June 30, 2016 , compared with the same period last year, due primarily to warmer temperatures in 2016. The impact on residential and commercial margins was mitigated significantly by weather-normalization mechanisms. Transportation volumes increased for the three and six months ended June 30, 2016, compared with the same periods last year, due to a large industrial customer’s facility undergoing maintenance in the prior year, offset by a decrease in transportation volumes associated with smaller weather-sensitive customers.

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

	
																						
 	 	Three Months Ended	
 	 	June 30,	
 	 	2016	 	2015	 	2016 vs 2015	 	2016	 	2015	
Heating Degree Days	 	Actual	 	Normal	 	Actual	 	Normal	 	Actual Variance	 	Actual as a percent of Normal	
Oklahoma	 	162		 	191		 	156		 	195		 	4	%	 	85	%	 	80	%	
Kansas	 	320		 	411		 	300		 	411		 	7	%	 	78	%	 	73	%	
Texas	 	45		 	51		 	31		 	51		 	45	%	 	88	%	 	61	%	

	
																						
 	 	Six Months Ended	
 	 	June 30,	
 	 	2016	 	2015	 	2016 vs 2015	 	2016	 	2015	
Heating Degree Days	 	Actual	 	Normal	 	Actual	 	Normal	 	Actual Variance	 	Actual as a percent of Normal	
Oklahoma	 	1,727		 	1,966		 	2,067		 	1,998		 	(16	)%	 	88	%	 	103	%	
Kansas	 	2,440		 	2,913		 	2,815		 	2,913		 	(13	)%	 	84	%	 	97	%	
Texas	 	899		 	1,034		 	1,125		 	1,033		 	(20	)%	 	87	%	 	109	%	

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

•	10-year weighted average HDDs as of December 31, 2014, for years 2005-2014, as calculated using 11 weather stations across Oklahoma and weighted on average customer count for Oklahoma;	
		
•	30-year average for years 1981-2010 published by the National Oceanic and Atmospheric Administration, as calculated using 13 weather stations across Kansas and weighted on HDDs by weather station and customers for Kansas; and	
		
•	a rolling 10-year average of actual natural gas distribution sales volumes by service area for Texas.	

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

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

CONTINGENCIES

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

LIQUIDITY AND CAPITAL RESOURCES

General - We have relied primarily on operating cash flow and commercial paper for our liquidity and capital resource requirements. We fund operating expenses, working capital requirements, including purchases of natural gas, and capital expenditures primarily with cash from operations and commercial paper.

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

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

Short-term Financing - The ONE Gas Credit Agreement contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining a debt-to-capital ratio of no more than 70 percent at the end of any calendar quarter. At June 30, 2016 , our debt-to-capital ratio was 39 percent , and we were in compliance with all covenants under the ONE Gas Credit Agreement.

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

The ONE Gas Credit Agreement is available to repay the commercial paper notes, if necessary. Amounts outstanding under the commercial paper program reduce the borrowing capacity under the ONE Gas Credit Agreement. At June 30, 2016 , we had no short-term borrowings and $1.0 million in letters of credit issued under the ONE Gas Credit Agreement. At June 30, 2016 , we had approximately $54.3 million of cash and cash equivalents and $699.0 million of remaining credit available under the ONE Gas Credit Agreement. The total amount of short-term borrowings authorized by ONE Gas’ Board of Directors is $1.2 billion.

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

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Credit Ratings -  Our credit ratings as of June 30, 2016 , were:

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

Our commercial paper is currently rated Prime-1 by Moody’s and A-2 by S&P. We intend to maintain strong credit metrics while we pursue a balanced approach to capital investment and a return of capital to shareholders via a dividend that we believe will be competitive with our peer group. In June 2016, S&P changed our outlook to Positive from Stable.

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

CASH FLOW ANALYSIS

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

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

												
 	Six Months Ended	 	Variances	
 	June 30,	 	2016 vs. 2015	
 	2016	 	2015	 	Increase (Decrease)	
 	( Millions of dollars )	
Total cash provided by (used in):	 	 	 	 	 	
Operating activities	$	267.3		 	$	342.6		 	$	(75.3	)	
Investing activities	(144.2	)	 	(125.4	)	 	(18.8	)	
Financing activities	(71.2	)	 	(93.2	)	 	22.0		
Change in cash and cash equivalents	51.9		 	124.0		 	(72.1	)	
Cash and cash equivalents at beginning of period	2.4		 	11.9		 	(9.5	)	
Cash and cash equivalents at end of period	$	54.3		 	$	135.9		 	$	(81.6	)	

Operating Cash Flows - Changes in cash flows from operating activities, before changes in operating assets and liabilities, are due primarily to changes in net margin and operating expenses discussed in Financial Results and Operating Information. Changes in natural gas prices and demand for our services or natural gas, whether because of general economic conditions, changes in supply or increased competition from other service providers, could affect our earnings and operating cash flows. Typically, our cash flows from operations are greater in the first half of the year compared with the second half of the year.

Cash flows from operating activities, before changes in operating assets and liabilities, increased for the six months ended June 30, 2016 , compared with the same period in 2015 . The increase was due primarily to changes in net margin and operating income discussed in Financial Results and Operating Information, and the positive impact on income taxes from bonus depreciation.

The net decrease in cash flows from operating assets and liabilities was due primarily to the impact of lower natural gas prices on accounts receivable, accounts payable and natural gas in storage. We purchase natural gas for storage during the second and third quarters and withdraw gas from storage for our heating season during the first and fourth quarters. With lower gas costs for the 2015/2016 heating season compared with the 2014/2015 heating season, the value of natural gas withdrawn from storage was lower resulting in less cash collected as our storage was utilized. Additionally, through the second quarter of 2015, our net over-recovered purchased gas costs increased by $51.0 million. Through the second quarter of 2016, our net over-

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recovered purchased gas costs decreased by $2.0 million. The change in the recoveries between periods also contributed to the decrease in cash flows from operating assets and liabilities.

Investing Cash Flows - Cash used in investing activities increased for the six months ended June 30, 2016 , compared with the prior period, due primarily to increased system integrity activities and extending service to new areas during the six months ended June 30, 2016 . Capital expenditures for fiscal 2016 are expected to be comparable to fiscal 2015.

Financing Cash Flows - Cash used in financing activities decreased for the six months ended June 30, 2016 , compared with the prior period, due primarily to an increase in dividends, offset by a decrease in repayments of notes payable.

ENVIRONMENTAL, SAFETY AND REGULATORY MATTERS

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

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

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

Our expenditures for environmental evaluation, mitigation, remediation and compliance to date have not been significant in relation to our financial position, results of operations or cash flows, and our expenditures related to environmental matters had no material effects on earnings or cash flows during the three and six months ended June 30, 2016 and 2015. We do not expect expenditures for these matters to have a material adverse effect on our financial condition, results of operations or cash flows.

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

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

In April 2016, PHMSA published a notice of proposed rulemaking (NPRM) in the Federal Register to revise pipeline safety regulations applicable to the safety of onshore natural gas transmission and gathering pipelines. Proposals include changes to pipeline integrity management requirements and other safety-related requirements. The NPRM comment period ended July 7,

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2016. The potential capital and operating expenditures associated with the NPRM are currently being evaluated, but could be significant depending on the final regulations.

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

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

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

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

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

We participate in the EPA’s Natural Gas STAR Program to voluntarily reduce methane emissions. We continue to focus on maintaining low rates of lost-and-unaccounted-for natural gas through expanded implementation of best practices to limit the release of natural gas during pipeline and facility maintenance and operations. Additionally, in March 2016, we were one of 40 founding partners to launch the EPA’s Natural Gas STAR Methane Challenge Program, whereby oil and natural gas companies agree to promote and track commitments to reduce methane emissions beyond what is federally required. Our Methane Challenge Program commitments are aligned with our planned system integrity expenditures for infrastructure replacements.  

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

IMPACT OF NEW ACCOUNTING STANDARDS

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

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ESTIMATES AND CRITICAL ACCOUNTING POLICIES

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

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

FORWARD-LOOKING STATEMENTS

Some of the statements contained and incorporated in this Quarterly Report are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.  The forward-looking statements relate to our anticipated financial performance, liquidity, management’s plans and objectives for our future operations, our business prospects, the outcome of regulatory and legal proceedings, market conditions and other matters.  We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.  The following discussion is intended to identify important factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

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

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

•	our ability to recover operating costs and amounts equivalent to income taxes, costs of property, plant and equipment and regulatory assets in our regulated rates;	
		
•	our ability to manage our operations and maintenance costs;	
		
•	changes in regulation, including the application of market rates by state and local agencies;	
		
•	the economic climate and, particularly, its effect on the natural gas requirements of our residential and	
commercial industrial customers;
		
•	competition from alternative forms of energy, including, but not limited to, electricity, solar power, wind power, geothermal energy and biofuels;	
		
•	conservation efforts of our customers;	
		
•	variations in weather, including seasonal effects on demand, the occurrence of storms and disasters, and climate change;	
		
•	indebtedness could make us more vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds and/or place us at competitive disadvantage compared with competitors;	
		
•	our ability to secure reliable, competitively priced and flexible natural gas transportation and supply, including decisions by natural gas producers to reduce production or shut-in producing natural gas wells and expiration of existing supply, and transportation and storage arrangements that are not replaced with contracts with similar terms and pricing;	
		
•	the mechanical integrity of facilities operated;	
		
•	operational hazards and unforeseen operational interruptions;	
		
•	adverse labor relations;	
		
•	the effectiveness of our strategies to reduce earnings lag, margin protection strategies and risk mitigation strategies;	
		
•	our ability to generate sufficient cash flows to meet all our cash needs;	
		
•	changes in the financial markets during the periods covered by the forward-looking statements, particularly those affecting the availability of capital and our ability to refinance existing debt and fund investments and acquisitions;	
		
•	actions of rating agencies, including the ratings of debt, general corporate ratings and changes in the rating agencies’ ratings criteria;	

31

		
•	changes in inflation and interest rates;	
		
•	our ability to purchase and sell assets at reasonable prices and on other reasonable terms;	
		
•	our ability to recover the costs of natural gas purchased for our customers;	
		
•	impact of potential impairment charges;	
		
•	volatility and changes in markets for natural gas;	
		
•	possible loss of LDC franchises or other adverse effects caused by the actions of municipalities;	
		
•	payment and performance by counterparties and customers as contracted and when due;	
		
•	changes in regulation of natural gas distribution services, particularly those in Oklahoma, Kansas and Texas;	
		
•	changes in law resulting from new federal or state legislation;	
		
•	changes in environmental, safety, tax and other laws to which we and our subsidiaries are subject;	
		
•	advances in technology;	
		
•	population growth rates and changes in the demographic patterns of the markets we serve;	
		
•	acts of nature and the potential effects of threatened or actual terrorism, including cyber attacks or breaches of technology systems and war;	
		
•	the sufficiency of insurance coverage to cover losses;	
		
•	the effects of our strategies to reduce tax payments;	
		
•	the effects of litigation and regulatory investigations, proceedings, including our rate cases, or inquiries;	
		
•	changes in accounting standards;	
		
•	changes in corporate governance standards;	
		
•	discovery of material weaknesses in our internal controls;	
		
•	our ability to attract and retain talented management and directors;	
		
•	the results of financing efforts, including our ability to obtain financing on favorable terms, which can be affected by various factors, including our credit ratings and general economic conditions;	
		
•	declines in the discount rates on, declines in the market value of the debt and equity securities of, and increases in funding requirements for, our defined benefit plans;	
		
•	the ability to successfully complete merger, acquisition or divestiture plans, regulatory or other limitations imposed as a result of a merger, acquisition or divestiture, and the success of the business following a merger, acquisition or divestiture;	
		
•	the final resolutions or outcomes with respect to our contingent and other corporate liabilities related to the natural gas distribution business and any related actions for indemnification made pursuant to the Separation and Distribution Agreement with ONEOK; and	
		
•	the costs associated with increased regulation and enhanced disclosure and corporate governance requirements pursuant to the Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010.	

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

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	

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

Commodity Price Risk

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

Interest-Rate Risk

We would be exposed to interest-rate risk with any new debt financing. We are able to manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and, at times, interest-rate swaps. Fixed-rate swaps may be used to reduce our risk of

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increased interest costs during periods of rising interest rates. Floating-rate swaps may be used to convert the fixed rates of long-term borrowings into short-term variable rates.

Counterparty Credit Risk

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

ITEM 4.	CONTROLS AND PROCEDURES	

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

Changes in Internal Control Over Financial Reporting - There have been no changes in our internal control over financial reporting during the second quarter ended June 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	

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

ITEM 1A.	RISK FACTORS	

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

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	

Not Applicable.

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	

Not Applicable.

ITEM 4.	MINE SAFETY DISCLOSURES	

Not applicable.

ITEM 5.	OTHER INFORMATION	

Not applicable.

ITEM 6.	EXHIBITS	

Readers of this report should not rely on or assume the accuracy of any representation or warranty or the validity of any opinion contained in any agreement filed as an exhibit to this Quarterly Report, because such representation, warranty or opinion may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent an allocation of risk between parties in the particular transaction, may be qualified by materiality standards that differ from what may be viewed as material for securities law purposes, or may no longer continue to be true as of any given date.  All exhibits attached to this Quarterly Report are included for the purpose of complying with requirements of the SEC.  Other than the certifications made by our officers pursuant to the Sarbanes-Oxley Act of 2002 included as exhibits to this Quarterly Report, all exhibits are included only to provide information to investors regarding their respective terms and should not be relied upon as constituting or providing any factual disclosures about us, any other persons, any state of affairs or other matters.

34

The following exhibits are filed as part of this Quarterly Report:

			
Exhibit No.	Exhibit Description	
 	 	 	
 	31.1	Certification of Pierce H. Norton II pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	 	
 	31.2	Certification of Curtis L. Dinan pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	 	
 	32.1	Certification of Pierce H. Norton II pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished only pursuant to Rule 13a-14(b)).	
 	 	 	
 	32.2	Certification of Curtis L. Dinan pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished only pursuant to Rule 13a-14(b)).	

			
 	101.INS	XBRL Instance Document.	
 	 	 	
 	101.SCH	XBRL Schema Document.	
 	 	 	
 	101.CAL	XBRL Calculation Linkbase Document.	
 	 	 	
 	101.LAB	XBRL Label Linkbase Document.	
 	 	 	
 	101. PRE	XBRL Presentation Linkbase Document.	
 	 	 	
 	101.DEF	XBRL Extension Definition Linkbase Document.	

Attached as Exhibit 101 to this Quarterly Report are the following XBRL-related documents: (i) Document and Entity Information; (ii) Statements of Income for the three and six months ended June 30, 2016 and 2015 ; (iii) Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015 ; (iv) Balance Sheets at June 30, 2016 and December 31, 2015 ; (v) Statements of Cash Flows for the six months ended June 30, 2016 and 2015 ; (vi) Statement of Equity for the six months ended June 30, 2016 ; and (vii) Notes to the Financial Statements.

We also make available on our website the Interactive Data Files submitted as Exhibit 101 to this Quarterly Report.

35

SIGNATURE

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	
			
Date: August 2, 2016	 	ONE Gas, Inc.	
 	 	Registrant	
 	 	 	
 	By:	/s/ Curtis L. Dinan	
 	 	Curtis L. Dinan	
 	 	Senior Vice President,	
 	 	Chief Financial Officer and Treasurer	
 	 	(Principal Financial Officer)	

36

Exhibit 31.1

Certification

I, Pierce H. Norton II, certify that:

I have reviewed this quarterly report on Form 10-Q of ONE Gas, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
		
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
		
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
		
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
		
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Date: August 2, 2016

	
		
 	/s/ Pierce H. Norton II	
 	Pierce H. Norton II	
 	Chief Executive Officer	

Exhibit 31.2

Certification

I, Curtis L. Dinan, certify that:

I have reviewed this quarterly report on Form 10-Q of ONE Gas, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
		
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
		
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
		
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
		
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Date: August 2, 2016

	
		
 	/s/ Curtis L. Dinan	
 	Curtis L. Dinan	
 	Chief Financial Officer	

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of ONE Gas, Inc. (the “Registrant”) for the period ending June 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Pierce H. Norton II, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	

(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.	

/s/ Pierce H. Norton II
Pierce H. Norton II
Chief Executive Officer

August 2, 2016

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ONE Gas, Inc. and will be retained by ONE Gas, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of ONE Gas, Inc. (the “Registrant”) for the period ending June 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Curtis L. Dinan, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	

(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.	

/s/ Curtis L. Dinan
Curtis L. Dinan
Chief Financial Officer

August 2, 2016

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ONE Gas, Inc. and will be retained by ONE Gas, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.