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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
or
     
o   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 001-34585
GAS NATURAL INC.
(Exact name of registrant as specified in its charter)
     
Ohio
(State or other jurisdiction of
incorporation or organization)
  27-3003768
(I.R.S. Employer
Identification No.)
     
1 First Avenue South
Great Falls, Montana

(Address of principal executive office)
  59401
(Zip Code)
Registrant’s telephone number, including area code: (800) 570-5688
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 þ No o
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 þ No o
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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller Reporting Company þ
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The number of shares outstanding of the registrant’s common stock as of August 9, 2011 was 8,152,426 shares.
As used in this Form 10-Q, the terms “Company,” “Gas Natural,” “Registrant,” “we,” “us” and “our” mean Gas Natural Inc. and its consolidated subsidiaries as a whole, unless the context indicates otherwise. Except as otherwise stated, the information is this Form 10-Q is as of June 30, 2011.
 
 

 


 

GAS NATURAL INC.
INDEX TO FORM 10-Q
         
    Page No.  
       
 
       
       
 
       
    F-1  
 
       
    F-3  
 
       
    F-4  
 
       
    F-5  
 
       
    F-7  
 
       
    3  
 
       
    16  
 
       
    17  
 
       
       
 
       
    17  
 
       
    18  
 
       
    19  
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

2


Table of Contents

Gas Natural Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2011 and December 31, 2010 (Unaudited)
                 
    June 30,     December 31,  
    2011     2010  
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 13,132,727     $ 13,026,585  
Marketable securities
    306,238       274,950  
Accounts receivable
               
Trade, less allowance for doubtful accounts of $282,350 and $354,719, respectively
    4,539,514       9,593,840  
Related parties
    485,132       559,384  
Unbilled gas
    1,322,371       5,724,346  
Note receivable — related parties, current portion
    9,905       9,565  
Inventory
               
Natural gas and propane
    3,834,779       5,876,710  
Materials and supplies
    2,309,597       1,414,367  
Prepaid income taxes
    1,646,751       1,601,798  
Prepayments and other
    399,729       912,959  
Recoverable cost of gas purchases
    2,264,070       2,628,824  
Deferred tax asset
    102,695       114,362  
 
           
Total current assets
    30,353,508       41,737,690  
 
               
PROPERTY, PLANT AND EQUIPMENT, net
    84,465,865       76,134,401  
 
               
OTHER ASSETS
               
Notes receivable — related parties, less current portion
    40,626       45,665  
Deferred tax assets, less current portion
          1,804,264  
Regulatory assets
               
Property taxes
    731,830       873,197  
Income taxes
    452,645       452,645  
Rate case costs
    126,759       64,271  
Debt issuance costs
    900,067       485,244  
Goodwill
    14,607,952       14,607,952  
Customer relationships
    650,750       662,167  
Investment in unconsolidated affiliate
    860,665       644,358  
Restricted cash
    4,351,914        
Other assets
    213,043       216,082  
 
           
Total other assets
    22,936,251       19,855,845  
 
           
 
               
TOTAL ASSETS
  $ 137,755,624     $ 137,727,936  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

F-1


Table of Contents

Gas Natural Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2011 and December 31, 2010 (Unaudited)
                 
    June 30,     December 31,  
    2011     2010  
LIABILITIES AND CAPITALIZATION
               
CURRENT LIABILITIES
               
Checks in excess of amounts on deposit
  $ 366,259     $ 532,145  
Line of credit
    11,840,000       18,149,999  
Accounts payable
               
Trade
    5,529,372       9,200,297  
Related parties
    187,987       417,543  
Notes payable, current portion
          910,917  
Notes payable — related parties, current portion
          49,361  
Accrued liabilities
               
Taxes other than income
    2,429,805       2,961,853  
Vacation
    167,518       86,194  
Employee benefit plans
    216,620       103,257  
Interest
    91,156       29,810  
Deferred payments received from levelized billing
    1,307,894       2,916,408  
Customer deposits
    678,143       679,237  
Property tax settlement, current portion
    242,120       242,120  
Related parties
    13,894       413,399  
Other current liabilities
    283,304       1,020,733  
Overrecovered gas purchases
    2,865,388       1,203,191  
 
           
Total current liabilities
    26,219,460       38,916,464  
 
               
LONG-TERM LIABILITIES
               
Deferred investment tax credits
    186,910       197,441  
Deferred tax liability
    916,795        
Asset retirement obligation
    1,616,280       1,546,867  
Customer advances for construction
    895,456       949,434  
Regulatory liability for income taxes
    83,161       83,161  
Regulatory liability for gas costs
    70,199       131,443  
Property tax settlement, less current portion
    243,008       243,008  
 
           
Total long-term liabilities
    4,011,809       3,151,354  
 
               
NOTES PAYABLE, less current portion
    31,334,000       21,958,616  
 
               
COMMITMENTS AND CONTINGENCIES (see Note 11)
               
 
               
STOCKHOLDERS’ EQUITY
               
Preferred stock; $0.15 par value, 1,500,000 shares authorized, no shares outstanding
           
Common stock; $0.15 par value, 15,000,000 shares authorized, 8,152,051 and 8,149,801 shares outstanding, respectively
    1,222,808       1,222,470  
Capital in excess of par value
    41,944,672       41,910,067  
Accumulated other comprehensive income
    66,211       46,590  
Retained earnings
    32,956,664       30,522,375  
 
           
Total stockholders’ equity
    76,190,355       73,701,502  
 
           
 
               
TOTAL CAPITALIZATION
    107,524,355       95,660,118  
 
           
 
               
TOTAL LIABILITIES AND CAPITALIZATION
  $ 137,755,624     $ 137,727,936  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

F-2


Table of Contents

Gas Natural Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
REVENUES
                               
Natural gas operations
  $ 17,095,262     $ 14,682,109     $ 55,314,845     $ 46,188,269  
Marketing and production
    1,475,665       1,868,009       3,301,167       4,986,332  
Pipeline operations
    102,061       106,355       208,385       214,957  
 
                       
Total revenues
    18,672,988       16,656,473       58,824,397       51,389,558  
 
                               
COST OF SALES
                               
Gas purchased
    9,575,592       7,919,762       34,292,500       27,540,576  
Marketing and production
    1,208,379       1,462,808       2,607,786       4,054,219  
 
                       
Total cost of sales
    10,783,971       9,382,570       36,900,286       31,594,795  
 
                       
 
                               
GROSS MARGIN
    7,889,017       7,273,903       21,924,111       19,794,763  
 
                               
OPERATING EXPENSES
                               
Distribution, general, and administrative
    4,629,976       4,363,496       9,287,296       8,268,405  
Maintenance
    271,965       245,153       557,192       536,482  
Depreciation and amortization
    1,068,470       1,015,817       2,103,547       1,965,279  
Accretion
    34,803       29,745       69,413       58,845  
Taxes other than income
    892,981       752,952       1,746,946       1,759,235  
 
                       
Total operating expenses
    6,898,195       6,407,163       13,764,394       12,588,246  
 
                       
 
                               
OPERATING INCOME
    990,822       866,740       8,159,717       7,206,517  
 
                               
LOSS FROM UNCONSOLIDATED AFFILIATE
    (20,194 )     (12,108 )     (83,151 )     (32,122 )
OTHER INCOME, net
    116,108       360,336       231,788       128,935  
INTEREST EXPENSE
    (492,674 )     (528,972 )     (905,853 )     (1,121,756 )
 
                       
 
                               
INCOME FROM OPERATIONS BEFORE INCOME TAXES
    594,062       685,996       7,402,501       6,181,574  
 
                               
INCOME TAX EXPENSE
    (233,724 )     (220,214 )     (2,767,409 )     (2,052,850 )
 
                       
 
                               
NET INCOME
  $ 360,338     $ 465,782     $ 4,635,092     $ 4,128,724  
 
                       
 
                               
EARNINGS PER SHARE — BASIC
  $ 0.04     $ 0.08     $ 0.57     $ 0.68  
 
                               
EARNINGS PER SHARE — DILUTED
  $ 0.04     $ 0.08     $ 0.57     $ 0.68  
 
                               
WEIGHTED AVERAGE DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.135     $ 0.135     $ 0.270     $ 0.270  
 
                               
WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC
    8,151,359       6,071,538       8,150,802       6,071,538  
 
                               
WEIGHTED AVERAGE SHARES OUTSTANDING — DILUTED
    8,159,825       6,080,617       8,158,955       6,079,527  
The accompanying notes are an integral part of these condensed consolidated financial statements.

F-3


Table of Contents

Gas Natural Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended June 30, 2011 and 2010 (Unaudited)
                                                         
                            Accumulated                    
                    Capital In     Other                    
    Common     Common     Excess Of     Comprehensive     Noncontrolling     Retained        
    Shares     Stock     Par Value     Income (Loss)     Interest     Earnings     Total  
BALANCE AT DECEMBER 31, 2009
    4,361,869     $ 654,280     $ 6,514,851     $ 146,701     $ 100,989     $ 28,270,987     $ 35,687,808  
 
                                                       
Net income
                                  4,128,724       4,128,724  
Net unrealized loss on available for sale securities
                      (83,995 )                 (83,995 )
Stock issued for services
    3,374       507       35,749                         36,256  
Stock option expense
                9,406                         9,406  
Acquisition of Ohio Companies
    1,707,308       256,096       16,816,988                         17,073,084  
Purchase remaining share in Cut
                                                       
Bank Gas Company
                            (100,989 )           (100,989 )
Dividends declared
                                  (1,639,219 )     (1,639,219 )
 
                                         
 
                                                       
BALANCE AT JUNE 30, 2010
    6,072,551     $ 910,883     $ 23,376,994     $ 62,706     $     $ 30,760,492     $ 55,111,075  
 
                                         
 
                                                       
BALANCE AT DECEMBER 31, 2010
    8,149,801     $ 1,222,470     $ 41,910,067     $ 46,590     $     $ 30,522,375     $ 73,701,502  
 
                                                       
Net income
                                  4,635,092       4,635,092  
Net unrealized gain on available for sale securities
                      19,621                   19,621  
Stock issued for services
    2,250       338       25,012                         25,350  
Stock option expense
                9,593                         9,593  
Dividends declared
                                  (2,200,803 )     (2,200,803 )
 
                                         
 
                                                       
BALANCE AT JUNE 30, 2011
    8,152,051     $ 1,222,808     $ 41,944,672     $ 66,211     $     $ 32,956,664     $ 76,190,355  
 
                                         
The accompanying notes are an integral part of these condensed consolidated financial statements.

F-4


Table of Contents

Gas Natural Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2011 and 2010 (Unaudited)
                 
    2011     2010  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net income
  $ 4,635,092     $ 4,128,724  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation and amortization
    2,103,547       1,965,279  
Accretion
    69,413       58,845  
Amortization of debt issuance costs
    68,667       63,396  
Stock based compensation
    34,943       45,662  
Gain on sale of marketable securities
          (109,144 )
Loss on sale of assets
    39,685        
Loss from unconsolidated affiliate
    83,151       32,122  
Investment tax credit
    (10,531 )     (10,531 )
Deferred income taxes
    2,721,060       492,520  
Changes in assets and liabilities
               
Accounts receivable, including related parties
    5,128,578       9,244,965  
Unbilled gas
    4,401,975       1,686,956  
Natural gas and propane inventory
    2,041,931       1,893,096  
Accounts payable, including related parties
    (4,397,430 )     (3,297,878 )
Recoverable/refundable cost of gas purchases
    2,026,951       (2,030,733 )
Prepayments and other
    513,230       (550,691 )
Other assets
    (847,241 )     (323,130 )
Other current liabilities
    (3,097,367 )     (3,568,424 )
 
           
Net cash provided by operating activities
    15,515,654       9,721,034  
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures
    (10,279,331 )     (2,190,624 )
Proceeds from sale of fixed assets
    19,900        
Proceeds from sale of marketable securities
          2,353,878  
Proceeds from related party note receivable
    4,699        
Purchase of Cut Bank shares and Kidron Investment
          (206,067 )
Cash acquired in acquisition
          144,203  
Restricted cash
    (3,403,078 )      
Investment in unconsolidated affiliate
    (303,600 )     (52,500 )
Customer advances for construction
    72,082       34,196  
Contributions in aid of construction
    7,735       19,837  
 
           
Net cash (used in) provided by investing activities
    (13,881,593 )     102,923  
 
               
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from lines of credit
    11,200,000       21,850,000  
Repayment on lines of credit
    (17,509,999 )     (26,552,098 )
Proceeds from notes payable
    18,334,000        
Repayments of notes payable
    (9,869,533 )     (996,796 )
Repayments of related party notes payable
    (49,361 )      
Debt issuance costs
    (483,488 )      
Restricted cash
    (948,836 )      
Dividends paid
    (2,200,702 )     (1,639,066 )
 
           
Net cash used in financing activities
    (1,527,919 )     (7,337,960 )
 
           
 
               
NET INCREASE IN CASH AND CASH EQUIVALENTS
    106,142       2,485,997  
 
               
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    13,026,585       2,752,168  
 
           
 
               
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 13,132,727     $ 5,238,165  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

Gas Natural Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2011 and 2010 (Unaudited)
                 
    2011     2010  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid for interest
  $ 822,174     $ 1,003,733  
Cash paid for income taxes
    91,303       180,000  
 
               
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
               
Shares issued to purchase Ohio Companies
          17,073,084  
Capital expenditures included in accounts payable
    496,384       226,358  
Capitalized interest
    3,444       2,997  
Accrued dividends
    366,842       273,265  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Business and Significant Accounting Policies
Nature of Business
Gas Natural Inc. is the parent company of Energy West, Incorporated (“Energy West”), Lightning Pipeline Company, Inc. (“Lightning Pipeline”), Great Plains Natural Gas Company (“Great Plains”), Brainard Gas Corp. (“Brainard”), and Gas Natural Service Company, LLC (the “Service Company”). Energy West is the parent company of multiple entities that are natural gas utility companies with operations in Montana, Wyoming, North Carolina and Maine. Lightning Pipeline is the parent company of multiple entities that are natural gas utility companies with operations in Ohio and Pennsylvania. Great Plains is the parent company of an entity that is a natural gas utility company with operations in Ohio. Brainard is a natural gas utility company with operations in Ohio. The Service Company manages gas procurement, transportation, and storage for Brainard and subsidiaries of Lightning Pipeline and Great Plains. The Company was originally incorporated in Montana in 1909. The Company currently has four reporting segments:
         
  Natural Gas Operations   Annually distribute approximately 30 billion cubic feet of natural gas to approximately 63,500 customers through regulated utilities operating in Montana, Wyoming, Maine, North Carolina, Ohio and Pennsylvania. The Maine and North Carolina operations were acquired in 2007, while Cut Bank Gas in Montana was added in November 2009 and the Ohio and Pennsylvania operations were acquired in January 2010.
 
       
  Marketing and Production Operations   Annually market approximately 1.3 billion cubic feet of natural gas to commercial and industrial customers in Montana and Wyoming and manage midstream supply and production assets for transportation customers and utilities through the subsidiary, Energy West Resources, Inc. (“EWR”). EWR owns an average 48% gross working interest (an average 42% net revenue interest) in 160 natural gas producing wells and gas gathering assets. The production holds approximately 20,000 acres of lease rights on state lands in Montana.
 
       
  Pipeline Operations   The Shoshone interstate and Glacier gathering natural gas pipelines located in Montana and Wyoming are owned through the subsidiary Energy West Development, Inc. (“EWD”). Certain natural gas producing wells owned by EWD are being managed and reported under the marketing and production operations.
 
       
  Corporate and Other   Corporate and other encompasses the results of corporate acquisitions and other equity transactions. Included in corporate and other are costs associated with business development and acquisitions, dividend income and recognized gains from the sale of marketable securities.
Basis of Presentation
The accompanying condensed balance sheet as of December 31, 2010, which has been derived from audited financial statements, and the unaudited interim condensed financial statements of Gas Natural Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature.
The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets generally accepted accounting principles (“GAAP”) to ensure the consistent reporting of the Company’s financial condition, results of operations and cash flows. Over the years, the FASB and other designated GAAP-setting bodies, have issued standards in the form of FASB Statements, Interpretations, FASB Staff Positions, EITF consensuses, AICPA Statements of Position, etc. References to

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC.
Operating results for the six month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for future fiscal periods. Events occurring subsequent to June 30, 2011 have been evaluated as to their potential impact to the financial statements through the date of issuance. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2010.
Effects of Regulation
The Company follows the provisions of ASC 980, Regulated Operations, and the accompanying financial statements reflect the effects of the different rate-making principles followed by the various jurisdictions regulating the Company. The economic effects of regulation can result in regulated companies recording costs that have been, or are expected to be, allowed in the rate-making process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses in the periods when those same amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for amounts that are expected to be refunded to customers which are recorded as liabilities in the balance sheet (regulatory liabilities).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The Company has used estimates in measuring certain deferred charges and deferred credits related to items subject to approval of the various public service commissions’ with jurisdiction over the Company. Estimates are also used in development of the allowances for doubtful accounts, unbilled gas, asset retirement obligations, and determination of depreciable lives of utility plant. The deferred tax asset and valuation allowance require a significant amount of judgment and are significant estimates. The estimates are based on projected future tax deductions, future taxable income, estimated limitations under the Internal Revenue Code, and other assumptions.
Such estimates could change in the near term and could significantly impact the Company’s results of operations and financial position.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less, at the date of acquisition, to be cash equivalents. The Company maintains, at various financial institutions, cash and cash equivalents which may exceed federally insurable limits and which may, at times, significantly exceed balance sheet amounts.
Receivables
The accounts receivable are generated from sales and delivery of natural gas as measured by inputs from meter reading devices. Trade accounts receivable are carried at the expected net realizable value. There is credit risk associated with the collection of these receivables. As such, a provision is recorded for the receivables considered to be uncollectible. The provision is based on management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable and historical write-off amounts. The underlying assumptions used for the provision can change from period to period and the provision could potentially cause a negative material impact to the income statement and working capital.
Two of the Company’s utilities in Ohio, Orwell Natural Gas Company (“Orwell”) and Northeast Ohio Natural Gas Corp. (“NEO”) collect from their customers, through rates, an amount to provide an allowance for doubtful accounts. As accounts are identified as uncollectible, they are written off against this allowance for doubtful accounts with no income statement impact. In effect, all bad debt expense is funded by the customer base. The total amount collected from customers and the amounts written off are reviewed annually by the Public Utility Commission of Ohio (“PUCO”) and the rate per Mcf is adjusted as necessary.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s bad debt expense for the three and six months ended June 30, 2011 was $34,194 and $79,177, respectively. Bad debt expense for the three and six months ended June 30, 2010 was $35,090 and $79,342, respectively.
Recoverable/Refundable Costs of Gas Purchases
The Company accounts for purchased gas costs in accordance with procedures authorized by the Montana Public Service Commission (“MPSC”), the Wyoming Public Service Commission (“WPSC”), the North Carolina Utilities Commission (“NCUC”), the Maine Public Utilities Commission (“MPUC”), the PUCO and the Pennsylvania Public Utility Commission (“PaPUC”). Purchased gas costs that are different from those provided for in present rates, and approved by the respective commission, are accumulated and recovered or credited through future rate changes. The gas cost recoveries are monitored closely by the regulatory commissions in all of the states in which the Company operates and are subject to periodic audits or other review processes.
During the year ended December 31, 2010, the PUCO conducted audits of NEO and Orwell of the rates as filed from September 2007 through August 2009 and January 2008 through June 2010, respectively. The PUCO provided the primary audit findings during the fourth quarter of 2010, taking the position that NEO had not included approximately $1,050,000 of costs and Orwell included an excess of approximately $1,100,000 of costs in the filings under audit. The Company is currently reviewing the primary findings with the PUCO.
In accordance with ASC 980, Regulated Operations, the Company recorded an adjustment of $1,050,000 and ($1,100,000) during the year ended December 31, 2010 for NEO and Orwell, respectively. When the PUCO concludes each audit, if the amounts are different than initially recorded, the Company will record an additional adjustment.
Regulatory Assets
The regulatory asset for property tax is recovered in rates over a ten-year period starting January 1, 2004. The income taxes earn a return equal to that of the Company’s rate base. The rate case costs do not earn a return. Regulatory assets will be recovered over a period of approximately three to twenty years.
Debt Issuance Costs
Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing and are recognized as assets and are amortized as interest expense over the term of the related debt. The unamortized balance of debt issuance costs was $900,067 and $485,244 as of June 30, 2011 and December 31, 2010, respectively, including the costs related to refinancing the debt in Ohio. Amortization expense was $57,621 and $68,667 for the three and six months ended June 30, 2011, respectively. Amortization expense was $49,533 and $63,396 for the three and six months ended June 30, 2010, respectively.
Asset Retirement Obligations
The Company records the fair value of a liability for an asset retirement obligation (“ARO”) in the period in which it was incurred or acquired. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an asset retirement cost is included in “Property, plant and equipment, net” in the accompanying balance sheets. The Company amortizes the amount added to property, plant, and equipment, net. The accretion of the asset retirement liability is allocated to operating expense using a systematic and rational method. As of June 30, 2011 and December 31, 2010, the Company has recorded a net asset of $262,417 and $297,617, and a related liability of $1,616,280 and $1,546,867, respectively.
The Company, excluding Orwell and Brainard, has identified but not recognized ARO liabilities related to gas transmission and distribution assets resulting from easements over property not owned by the Company. These easements are generally perpetual and only require retirement action upon abandonment or cessation of use of the property for the specified purpose. The ARO liability is not estimable for such easements as the Company intends to utilize these properties indefinitely. In the event the Company decides to abandon or cease the use of a particular easement, an ARO liability would be recorded at that time.
As a result of regulatory action by the PUCO related to prior audits, Orwell and Brainard accrue an estimated liability for removing gas mains, meter and regulator station equipment and service lines at the end of their useful lives. The liability is equal to a percent of the asset cost according to the following table:

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                 
    Percent of Asset Cost  
    Orwell     Brainard  
Mains
    15 %     20 %
Meter/regulator stations
    10 %     10 %
Service lines
    75 %     75 %
The Company has no assets legally restricted for purposes of settling its asset retirement obligations. The schedule below is a reconciliation of the Company’s liability for the six months ended June 30:
                 
    2011     2010  
Balance, beginning of period
  $ 1,546,867     $ 787,233  
Liabilities incurred or acquired
          647,446  
Liabilities settled
           
Accretion expense
    69,413       58,845  
 
           
 
               
Balance, end of period
  $ 1,616,280     $ 1,493,524  
 
           
Revenue Recognition
Revenues are recognized in the period that services are provided or products are delivered. The Company records gas distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the accounting period. The Company periodically collects revenues subject to possible refunds pending final orders from regulatory agencies. When this occurs, appropriate liabilities for such revenues collected subject to refund are established.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income, which for the Company is primarily comprised of unrealized holding gains or losses on available-for-sale securities that are excluded from the statement of operations in computing net loss and reported separately in shareholders’ equity. Comprehensive income and its components are as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
    2011     2010     2011     2010  
Net Income
  $ 360,338     $ 465,782     $ 4,635,092     $ 4,128,724  
Other comprehensive income
                               
Change in unrealized gain/(loss) on available-for-sale securities, net of tax
    855       83,052       19,621       (83,995 )
 
                       
 
                               
Comprehensive Income
  $ 361,193     $ 548,834     $ 4,654,713     $ 4,044,729  
 
                       
Other comprehensive income for the three and six months ended June 30, 2011 is reported net of tax of $518 and $11,667, respectively. Other comprehensive income for the three and six months ended June 30, 2010 is reported net of tax of $51,904 and ($52,534), respectively.
Earnings Per Share
Net income per common share is computed by both the basic method, which uses the weighted average number of common shares outstanding, and the diluted method, which includes the dilutive common shares from stock options and other dilutive securities, as calculated using the treasury stock method.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 
    Three months ended June 30,     Six months ended June 30,  
    2011     2010     2011     2010  
Weighted average number of common shares outstanding used in the basic earnings per common share calculations
    8,151,359       6,071,538       8,150,802       6,071,538  
Dilutive effect of stock options
    8,466       9,079       8,153       7,989  
 
                       
Weighted average number of common shares outstanding adjusted for effect of dilutive options
    8,159,825       6,080,617       8,158,955       6,079,527  
 
                       
Reclassifications
Certain reclassifications of prior year reported amounts have been made for comparative purposes. Such reclassifications had no effect on income.
Recently Adopted Accounting Pronouncements
ASU No. 2010-28, “Intangibles — Goodwill and Other (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”
In January 2011, the Company adopted new authoritative guidance under this ASU, which modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The adoption of this guidance did not have a material impact on the accompanying financial statements.
ASU No. 2010-29, “Business Combinations (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations”
In January 2011, the Company adopted new authoritative guidance under this ASU, which provides clarification regarding the acquisition date that should be used for reporting pro forma financial information disclosures required by Topic 805 when comparative financial statements are presented. This ASU also requires entities to provide a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. The adoption of this guidance did not have a material impact on the accompanying financial statements.
Recently Issued Accounting Pronouncements
ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRSs”
In May 2011, the FASB issued ASU 2011-04, which changes the wording used to describe many of the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. Currently, the guidance is anticipated to be effective for interim and annual periods beginning after December 15, 2011; early application is not permitted. This ASU is not expected to have a material impact on the accompanying financial statements.
ASU No. 2011-05, “Presentation of Comprehensive Income”
In June 2011, the FASB issued ASU 2011-05, which is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of US GAAP and IFRS, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The ASU requires all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
two separate but consecutive statements. This ASU is expected to change the presentation of other comprehensive income in the accompanying financial statements. However, this ASU does not change the calculation of the other comprehensive income. Currently, the guidance is anticipated to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011; early adoption is permitted. The Company does not expect to implement this ASU prior to the required date.
Note 2 — Acquisitions
On January 5, 2010, the Company completed the acquisition of Lightning Pipeline, Great Plains, Brainard and collectively with Lightning Pipeline, Great Plains and Brainard, the “Ohio Companies” and each an “Ohio Company”. Lightning Pipeline is the parent company of Orwell and Great Plains is the parent company of NEO. Orwell, NEO and Brainard are natural gas distribution companies that serve approximately 24,000 customers in Northeastern Ohio and Western Pennsylvania. The acquisition increased the Company’s customers by more than 50%.
Merger Consideration-Issuance of Shares
The final aggregate purchase price for the Ohio Companies was $37.9 million, which consisted of approximately $20.8 million in debt of the Ohio Companies with the remainder of the purchase price paid in unregistered shares of common stock of the Company. In accordance with the Merger Agreements, on January 5, 2010, the shares of common stock of Lightning Pipeline, Great Plains and Brainard were converted into the right to receive unregistered shares of common stock of the Company (the “Shares”) in accordance with the following calculation:
The total number of Shares the Shareholders received equaled the total of $34,304,000 plus $3,565,339, which was the number of additional active customers of the Ohio Companies in excess of 20,900 at closing (23,131 — 20,900 = 2,231 multiplied by $1,598.09), less $20,796,254 (which was the debt of the Ohio Companies at closing), divided by $10.
Based on this calculation, the Company issued 1,707,308 Shares in the aggregate. The Company issued Richard M. Osborne (“Mr. Osborne”), as trustee, 1,565,701 Shares, Thomas J. Smith (“Mr. Smith”) 73,244 Shares and Rebecca Howell (“Ms. Howell”) 19,532 Shares. Mr. Osborne is chairman of the board and chief executive officer, Mr. Smith is a director and the chief financial officer, and Ms. Howell is the corporate secretary of the Company. After the closing of the Merger Transaction on January 5, 2010, Mr. Osborne owned 2,487,972 Shares, or 41.0% of the Company, Mr. Smith owned 86,744 Shares, or 1.4% of the Company and Ms. Howell owned 19,532 Shares, or less than 1% of the Company.
The acquisition of the Ohio Companies was accounted for under the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The estimated fair value of the assets acquired and liabilities assumed is reflected in the following table at the date of acquisition.
                                 
    Total                      
    Ohio             Lightning        
    Companies     Great Plains     Pipeline     Brainard  
Current assets
  $ 11,475,898     $ 7,343,434     $ 4,012,842     $ 119,625  
Property and equipment
    29,530,634       18,290,609       10,818,924       421,101  
Deferred Tax Assets
    76,772             11,535       65,237  
Other Noncurrent assets
    152,585       1,000       140,002       11,583  
Customer Relationships
    685,000       640,000       45,000        
Goodwill
    13,551,181       9,112,901       4,312,007       126,273  
 
                       
 
Total assets acquired
    55,472,070       35,387,944       19,340,310       743,819  
 
                       
 
Current liabilities
    13,836,120       7,589,554       5,842,518       404,051  
Asset Retirement Obligation
    487,447             477,939       9,508  
Deferred Tax Liability
    3,279,164       1,483,525       1,651,769       143,870  
 
                       
Total liabilities assumed
    17,602,731       9,073,079       7,972,226       557,429  
 
                       
 
                               
Net assets acquired
  $ 37,869,339     $ 26,314,865     $ 11,368,084     $ 186,390  
 
                       

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Approximately $13.6 million of the total purchase price was allocated to goodwill. None of the goodwill is expected to be deductible for tax purposes. Transaction costs related to the mergers totaled $10,978 and $136,346 for the three and six months ended June 30, 2010, respectively, and are recorded in the accompanying statements of income within the other income (expense).
The results of operations for the Ohio Companies for the period from January 1, 2010 to January 4, 2010 were not material.
Acquisition of Spelman Pipeline
On April 8, 2011 the Company’s indirect subsidiary, Spelman Pipeline Holdings, LLC (“Spelman”), a subsidiary of Lightning Pipeline, completed the acquisition of dormant refined products pipeline assets from Marathon Petroleum Company LP. The cash purchase price for the assets was $3.34 million.
The acquired assets include pipelines and rights-of-way located in Ohio and Kentucky. In Ohio, the assets include more than 140 miles of pipeline spanning almost a third of the state from Marion to Youngstown. Other Ohio assets are located in metropolitan and south suburban Cleveland. The Kentucky assets include more than 60 miles of right-of-way in the area surrounding and to the south of Louisville.
Spelman intends to recondition and convert the Ohio pipelines to transport natural gas to new markets where natural gas service is currently not available, as well as to connect to markets served by the Ohio Companies. The Company expects to fund $2.4 million of capital expenditures in 2011 to convert the existing facilities to natural gas. The expenditures include reestablishment and clearing of rights-of-way, “pigging” and pressure test of the line, replacement of some existing pipe, connect to supply sources and establishment of interconnections to customers. The current assets are cathodically protected and reside in a protective nitrogen bath.
Spelman expects to file an application known as a “First Filing” to establish intrastate transportation rates with the PUCO. Should the Commission find that the rates proposed by the Company are not unjust and unreasonable, it may approve the rates without a hearing. Spelman expects to begin delivering gas during the fourth quarter of 2011.
Future plans include extending the lines to participate in the transportation of Utica and Marcellus Shale production. The Company does not currently have definitive plans for the Kentucky assets.
Note 3 — Marketable Securities
Securities investments that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and recorded at amortized cost. Securities investments bought expressly for the purpose of selling in the near term are classified as trading securities and are measured at fair value with unrealized gains and losses reported in earnings. Securities investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities. Available-for-sale securities are recorded at fair value in marketable securities in the accompanying balance sheets, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of other comprehensive income. Realized gains and losses, and declines in value judged to be other than temporary, are in the accompanying statements of income. The Company did not hold any held-to-maturity or trading securities as of June 30, 2011 or December 31, 2010.
The following is a summary of available-for-sale securities at:
                         
    June 30, 2011  
    Investment     Unrealized     Estimated  
    at cost     Gains     Fair Value  
Common Stock
  $ 199,500     $ 106,738     $ 306,238  
 
                 
                         
    December 31, 2010  
    Investment     Unrealized     Estimated  
    at cost     Gains     Fair Value  
Common Stock
  $ 199,500     $ 75,450     $ 274,950  
 
                 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unrealized gains on available-for-sale securities of $66,211 and $46,590, respectively (net of $40,527 and $28,860 in taxes) was included in accumulated other comprehensive income in the accompanying balance sheets at June 30, 2011 and December 31, 2010, respectively.
The gross realized gains are summarized below:
                         
                    Gross  
Three Months Ended   Sales             Realized  
June 30,   Proceeds     Cost     Gains  
2011
  $     $     $  
2010
  $ 2,051,981     $ 1,969,446     $ 82,535  
                         
                    Gross  
Six Months Ended   Sales             Realized  
June 30,   Proceeds     Cost     Gains  
2011
  $     $     $  
2010
  $ 2,353,878     $ 2,244,734     $ 109,144  
As of June 30, 2011 and December 31, 2010, the Company did not hold any securities in an unrealized loss position.
The fair value of cash and cash equivalents, notes and accounts receivable and notes and accounts payable are not materially different from their carrying amounts. The fair values of marketable securities are estimated based on closing share price on the quoted market price for those investments. Cost basis is determined by specific identification of securities sold.
Note 4 — Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Measuring fair value requires the use of market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, corroborated by market data, or generally unobservable. Valuation techniques are required to maximize the use of observable inputs and minimize the use of unobservable inputs.
Valuation Hierarchy
A fair value hierarchy that prioritizes the inputs used to measure fair value, and requires fair value measurements to be categorized based on the observability of those inputs has been established by the applicable accounting guidance. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
The following tables represent the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of:

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 
    June 30, 2011  
    Level 1     Level 2     Level 3     TOTAL  
Available-for-sale securities
  $ 306,238                 $ 306,238  
 
                       
                                 
    December 31, 2010  
    Level 1     Level 2     Level 3     TOTAL  
Available-for-sale securities
  $ 274,950                 $ 274,950  
 
                       
Note 5 — Credit Facilities and Long-Term Debt
Bank of America
Energy West has a $20,000,000 revolving credit facility with the Bank of America that includes an annual commitment fee equal to 0.20% of the unused portion of the facility and interest on amounts outstanding at the monthly London Interbank Offered Rate (“LIBOR”) plus 120 to 145 basis points for interest periods selected by Energy West (the “Bank of America Credit Facility”). For the three months ended June 30, 2011 and 2010, the weighted average interest rate on the facility was 1.76% and 2.06%, respectively, resulting in $45,005 and $37,504 of interest expense, respectively. For the six months ended June 30, 2011 and 2010, the weighted average interest rate on the facility was 1.71% and 2.50%, respectively, resulting in $101,209 and $119,388 of interest expense, respectively. The balance on the revolving credit facility was $11,840,000 and $18,149,999 at June 30, 2011 and December 31, 2010, respectively.
The $11.8 million of borrowings as of June 30, 2011, leaves the remaining borrowing capacity on the line of credit at $8.2 million.
Senior Unsecured Notes
On June 29, 2007, Energy West authorized the sale of $13,000,000 aggregate principal amount of its 6.16% Senior Unsecured Notes, due June 29, 2017 (the “Senior Unsecured Notes”). The proceeds of these notes were used to refinance existing notes. Approximately $463,000 was incurred related to the debt issuance which was capitalized and are being amortized over the life of the notes.
Interest expense was $200,200 and $400,400 for the three and six months ended June 30, 2011 and 2010, respectively.
Citizens Bank
In connection with the acquisition of the Ohio Companies, NEO and Great Plains each entered modifications/amendments to its credit facility with Citizens Bank (the “Citizens Credit Facility”). The Citizens Credit Facility consisted of a revolving line of credit and term loan to NEO, and two other term loans to Great Plains respectively. Each amendment/modification was initially effective as of December 1, 2009, but was later modified to be effective as of January 5, 2010. Gas Natural guaranteed each loan. Mr. Osborne guaranteed each loan both individually and as trustee of the Richard M. Osborne Trust, and Great Plains guaranteed NEO’s revolving line of credit and term loans.
The Ohio Companies had term loans with Citizens Bank in the aggregate amount of $11.3 million. Each term note had a maturity date of July 1, 2013 and bore interest at an annual rate of 30-day LIBOR plus 400 basis points with an interest rate floor of 5.00% per annum. For the three and six months ended June 30, 2011 the weighted average interest rate on the term loans was 5%, resulting in $38,117 and $156,022 of interest expense, respectively. For the three and six months ended June 30, 2010 the weighted average interest rate on the term loans was 5%, resulting in $128,696 and $233,680 of interest expense, respectively.
NEO’s revolving credit line with Citizens Bank matured on November 29, 2010 and was repaid and extinguished at that time. For the three and six months ended June 30, 2010, the weighted average interest rate on the revolving credit line was 5%, resulting in $26,833 and $53,236 of interest expense, respectively.

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The term loans were paid off on May 3, 2011 resulting in no outstanding balance at June 30, 2011. At December 31, 2010, $9.6 million had been borrowed under the term loans.
Huntington Bank
On December 31, 2009, Orwell entered into an amended and restated short-term credit facility with The Huntington National Bank, N.A. (the “Huntington Credit Facility”). The Huntington Line of Credit and Term Loan both had a maturity date of November 28, 2010. Orwell repaid and extinguished these debt obligations at that time.
For the three and six months ended June 30, 2010, the weighted average interest rate on the term note was 4% resulting in $42,639 and $88,208 of interest expense, respectively. The weighted average interest rate on the credit line was 4% resulting in $15,158 and $31,273 of interest expense, respectively.
SunLife Assurance Company of Canada
On May 2, 2011, the Company and its Ohio subsidiaries, NEO, Orwell and Brainard (together “the Issuers”), issued $15.3 million of 5.38% Senior Secured Guaranteed Fixed Rate Notes due June 1, 2017 (“Fixed Rate Note”). Additionally, Great Plains issued $3.0 million of 4.12% Senior Secured Guaranteed Floating Rate Notes due May 3, 2014 (“Floating Rate Note”). Both notes were placed with SunLife Assurance Company of Canada (“SunLife”). Approximately $636,000 was incurred related to the debt issuance which was capitalized and are being amortized over the life of the notes.
The Fixed Rate Note, in the amount of $15.334 million, is a joint obligation of the Issuers, and is guaranteed by the Company, Lightning Pipeline and Great Plains (together with the Issuers, “the Fixed Rate Obligors”). This note received approval from the PUCO on March 30, 2011. The note is governed by a Note Purchase Agreement (“NPA”) as filed with the Securities and Exchange Commission (“SEC”), on Form 8-K on November 2, 2010. Concurrent with the funding and closing of this transaction, which occurred on May 3, 2011, the Fixed Rate Obligors signed an amended NPA that is substantially the same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is subject to a 50 basis point make-whole premium.
The Floating Rate Note, in the amount of $3.0 million, is an obligation of Great Plains and is guaranteed by the Company (together, “the Floating Rate Obligors”). The note is priced at a fixed spread of 385 basis points over three month Libor. Pricing for this note will reset on a quarterly basis to the then current yield of three month Libor. The note is governed by a NPA as filed with the SEC on Form 8-K on November 2, 2010. Concurrent with the funding of this transaction, which occurred on May 3, 2011, the Floating Rate Obligors signed an amended NPA that is substantially the same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is at par.
The use of proceeds for both notes extinguished existing amortizing bank debt and other existing indebtedness, funded $3.4 million for the 2011 capital program for Orwell and NEO, established two debt service reserve accounts, and replenished the Company’s treasuries for the previously announced repayment of maturing bank debt and transaction expenses. The capital program funds and debt service reserve accounts are in interest bearing accounts and included in restricted cash.
Payments for both notes prior to maturity are interest-only.
For the three and six months ended June 30, 2011, the weighted average interest rate on the Fixed Rate Note was 5.38% resulting in $137,495 of interest expense. The Floating Rate Note pays interest quarterly and the first payment is not due until August 2011 and therefore no interest expense was incurred during the three and six months ended June 30, 2011.
Debt Covenants
The Company’s Bank of America Credit Facility and the Senior Unsecured Notes contain various covenants, which include, among others, limitations on total dividends and distributions made in the immediately preceding 60-month period to 75% of aggregate consolidated net income for such period, restrictions on certain indebtedness, limitations on asset sales, and maintenance of certain debt-to-capital and interest coverage ratios.
The Citizens Credit Facility, which was paid off on May 3, 2011 required a minimum debt service coverage ratio of at least 1.25 to 1.0 measured quarterly on a rolling four quarter basis. The Citizens Credit Facility also required a minimum tangible net worth equal to the sum of $1,815,000 plus 100% of net income less the pro-rata share of any dividend paid to Gas Natural, measured on a quarterly basis beginning with the quarter ended December 31, 2009. The Citizens Credit Facility allowed the payment of dividends to Gas Natural Inc. if the net worth (as defined in the Citizens loan documents) after payment of any dividends was not less than $1,815,000 as positively increased by 100% of net income as of the end of each fiscal quarter and fiscal year.

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Fixed Rate Note and the Floating Rate Note carry a 60% debt-to-capitalization financial covenant on a consolidated basis for Ohio, as well as, a 2.0x interest coverage test based on a trailing twelve-month basis. Additional covenants customary for asset sales and purchases, additional indebtedness, dividends, change of control and other matters are also included.
The Company believes it was in compliance with the financial covenants under its debt agreements.
The following table shows the future minimum payments on the credit facilities and long-term debt for the years ended June 30:
         
2012
  $  
2013
     
2014
    3,000,000  
2015
     
2016
     
Thereafter
    28,334,000  
 
     
 
       
Total
  $ 31,334,000  
 
     
Note 6 — Stockholders’ Equity
2002 Stock Option Plan
The Energy West Incorporated 2002 Stock Option Plan (the “Option Plan”) provides for the issuance of up to 300,000 options to purchase the Company’s common stock to be issued to certain key employees. As of June 30, 2011 and December 31, 2010, there are 35,000 and 39,500 options outstanding, respectively. The maximum number of shares available for future grants under this plan is 58,000 shares. Under the Option Plan, the option price may not be less than 100% of the common stock fair market value on the date of grant (in the event of incentive stock options, 110% of the fair market value if the employee owns more than 10% of the outstanding common stock). Pursuant to the Option Plan, the options vest over four to five years and are exercisable over a five to ten-year period from date of issuance.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the stock option plans as follows:
                         
            Weighted     Aggregate  
    Number of     Average     Intrinsic  
    Shares     Exercise Price     Value  
Outstanding December 31, 2009
    44,500     $ 8.52          
Granted
        $          
Exercised
        $          
Expired
    (15,000 )   $ 9.93          
 
                   
 
                       
Outstanding June 30, 2010
    29,500     $ 7.81     $ 90,110  
 
                 
 
                       
Exerciseable June 30, 2010
    10,000     $ 7.87     $ 29,875  
 
                 
                         
            Weighted     Aggregate  
    Number of     Average     Intrinsic  
    Shares     Exercise Price     Value  
Outstanding December 31, 2010
    39,500     $ 8.52          
Granted
        $          
Exercised
        $          
Expired
    (4,500 )   $ 9.93          
 
                   
 
                       
Outstanding June 30, 2011
    35,000     $ 8.66     $ 62,038  
 
                 
 
                       
Exerciseable June 30, 2011
    18,750     $ 8.24     $ 101,050  
 
                 
As of June 30, 2011 and December 31, 2010, there was $12,636 and $31,824 of total unrecognized compensation cost related to stock-based compensation, respectively. That cost is expected to be recognized over a period of three years.
The following information applies to options outstanding at June 30, 2011:
                         
                Weighted        
                Average        
            Weighted   Remaining       Weighted
            Average   Contractual       Average
Grant   Exercise   Number   Exercise   Life   Number   Exercise
Date   Price   Outstanding   Price   (Years)   Exercisable   Price
12/1/2008
  $7.10   10,000   $7.10   7.42   7,500   $7.10
6/3/2009   $8.44   5,000   $8.44   2.93   3,750   $8.44
12/1/2009   $8.85   10,000   $8.85   8.42   5,000   $8.85
12/1/2010   $10.15   10,000   $10.15   9.42   2,500   $10.15
                         
        35,000           18,750    
                         

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the three and six months ended June 30, 2011, the Company recorded $5,677 and $9,593, respectively ($3,548 and $6,003, respectively, net of related tax effects), of compensation expense for stock options granted after July 1, 2005, and for the unvested portion of previously granted stock options that remained outstanding as of July 1, 2005. During the three and six months ended June 30, 2010, the Company recorded $4,702 and $9,406, respectively ($2,915 and $5.832, respectively, net of related tax effects), of compensation expense for stock options granted after July 1, 2005, and for the unvested portion of previously granted stock options that remained outstanding as of July 1, 2005.
Note 7 — Employee Benefit Plans
The Company has a defined contribution plan (the “401k Plan”) which covers substantially all of its employees. The plan provides for an annual contribution of 3% of salaries, with a discretionary contribution of up to an additional 3%. The expense related to the 401k Plan for the three and six months ended June 30, 2011, was $100,109 and $211,442, respectively. The expense related to the 401k Plan for the three and six months ended June 30, 2010, was $90,970 and $158,320, respectively.
The Company makes matching contributions in the form of Company common stock equal to 10% of each participant’s elective deferrals in the 401k Plan. The Company contributed shares of common stock valued at $11,249 and $23,205 for the three and six months ended June 30, 2011, respectively. The Company contributed shares of common stock valued at $14,562 and $20,682 for the three and six months ended June 30, 2010, respectively. In addition, a portion of the 401k Plan consists of an Employee Stock Ownership Plan (“ESOP”) that covers most employees. The ESOP receives contributions of common stock from the Company each year as determined by the Board of Directors. The contribution is recorded based on the current market price of the Company’s common stock. The Company made no contributions for the three and six months ended June 30, 2011 and 2010.
The Company has sponsored a defined postretirement health benefit plan (the “Retiree Health Plan”) providing health and life insurance benefits to eligible retirees. The Plan pays eligible retirees (post-65 years of age) up to $125 per month in lieu of contracting for health and life insurance benefits. The amount of this payment is fixed and will not increase with medical trends or inflation. In addition, the Retiree Health Plan allows retirees between the ages of 60 and 65 and their spouses to remain on the same medical plan as active employees by contributing 125% of the current COBRA rate to retain this coverage. The amounts paid in excess of the current COBRA rate is held in a VEBA trust account, and benefits for this plan are paid from assets held in the VEBA Trust account. The Company discontinued contributions in 2006 and is no longer required to fund the Retiree Health Plan. As of June 30, 2011 and December 31, 2010, the value of plan assets was $202,496 and $212,678, respectively. The assets remaining in the trust will be used to fund the plan until these assets are exhausted.
Note 8 — Income Taxes
Income tax position differs from the amount computed by applying the federal statutory rate to pre-tax income or loss as demonstrated in the table below:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Income tax from continuing operations:
                               
Tax expense at statutory rate of 34%
  $ 201,981     $ 233,238     $ 2,516,851     $ 2,101,735  
State income tax, net of federal tax expense
    20,905       (4,980 )     260,487       (44,878 )
Amortization of deferred investment tax credits
    (5,266 )     (5,265 )     (10,532 )     (5,265 )
Other
    16,104       (2,779 )     603       1,258  
 
                       
 
                               
Total income tax expense
  $ 233,724     $ 220,214     $ 2,767,409     $ 2,052,850  
 
                       
The Company recognizes interest accrued related to unrecognized tax positions in interest expense and penalties in operating expense. No interest and penalties related to unrecognized tax positions were accrued at June 30, 2011 and December 31, 2010.
The tax years after 2005 remain open to examination by the major taxing jurisdictions in which the Company operates, although no material changes to unrecognized tax positions are expected within the next twelve months.

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Related Party Transactions
The Company is party to certain agreements and transactions with Mr. Osborne, or companies owned or controlled by Mr. Osborne.
Notes Payable
The Company had two notes payable to Mr. Osborne. The first note was payable on demand and bore interest at a rate equal to the prime rate as published by Key Bank. On December 1, 2010, the Company repaid the first note in full, including all interest accrued to date. The second note had a maturity date of January 3, 2014 and bore interest at 6.0% annually. On May 3, 2011, the Company repaid the second note in full, including all interest accrued to date, using the SunLife proceeds. As of June 30, 2011 and December 31, 2010, the second note had a balance of $0 and $52,578, which included $0 and $3,217 of accrued interest, respectively. Interest expense incurred related to both loans was $132 and $529, respectively, for the three and six months ended June 30, 2011. Interest expense incurred related to both loans was $30,104 and $77,653, respectively, for the three and six months ended June 30, 2010.
Note Receivable
The Company has a note receivable from John D. Oil and Gas Marketing, a company controlled by Mr. Osborne, with a maturity date of December 31, 2016 and an annual interest rate of 7.0% relating to funds loaned to John D. Oil and Gas Marketing to finance the acquisition of a gas pipeline. The balance due from John D. Oil and Gas Marketing was $50,531 and $55,230 (of which, $9,905 and $9,565 is due within one year) as of June 30, 2011 and December 31, 2010, respectively. The Company has a corresponding agreement to lease the pipeline from John D. Oil and Gas Marketing through December 31, 2016. Lease expense resulting from this agreement was $3,300 and $6,600 for the three and six months ended June 30, 2011, respectively, which is included in the Natural Gas Purchased column below. Lease expense resulting from this agreement was $3,300 and $7,827 for the three and six months ended June 30, 2010, respectively, which is included in the Natural Gas Purchased column below. The balance due at June 30, 2011 and December 31, 2010 was $2,200 and $0, respectively, to John D. Oil and Gas Marketing related to these lease payments.
Accounts Receivable and Accounts Payable
The table below details amounts due from and due to related parties, including companies owned or controlled by Mr. Osborne, at June 30, 2011 and December 30, 2010, respectively:
                                 
    Accounts Receivable     Accounts Payable  
    June 30, 2011     December 31, 2010     June 30, 2011     December 31, 2010  
John D. Oil and Gas Marketing
  $ 3,282     $ 42,938     $ 75,270     $ 247,430  
Cobra Pipeline
    929       22,071       250       84,597  
Orwell Trumbell Pipeline
    126,540       120,975             77,325  
Great Plains Exploration
    125,080       148,252              
Big Oats Pipeline Supply
    1,543       863       99,467       4,723  
Kykuit Resources
    97,264       97,154              
Sleepy Hollow
    112,163       100,640              
Other
    18,331       26,491       13,000       3,468  
 
                       
Total
  $ 485,132     $ 559,384     $ 187,987     $ 417,543  
 
                       

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below details transactions with related parties, including companies owned or controlled by Mr. Osborne, for the three months ended June 30, 2011:
                                         
    Three Months Ended June 30, 2011  
            Pipeline and     Rent, Supplies             Management  
    Natural Gas     Construction     Consulting, and     Natural Gas     and Other  
    Purchased     Purchases     and Other Purchases     Sold     Sales  
John D. Oil and Gas Marketing
  $ 954,623     $     $ 1,646     $     $ 3,282  
Cobra Pipeline
    64,176       68,767       452             929  
Orwell Trumbell Pipeline
    55,656             638       386       850  
Great Plains Exploration
    554,728       111,750             1,242       3,854  
Big Oats Pipeline Supply
          89,886       270,140       539       1,000  
Kykuit Resources
                            110  
Sleepy Hollow
                            5,318  
Other
                42,257       9,073       1,308  
 
                             
TOTAL
  $ 1,629,183     $ 270,403     $ 315,133     $ 11,240     $ 16,651  
 
                             
The table below details transactions with related parties, including companies owned or controlled by Mr. Osborne, for the three months ended June 30, 2010:
                                         
    Three Months Ended June 30, 2010  
            Pipeline and     Rent, Supplies             Management  
    Natural Gas     Construction     Consulting, and     Natural Gas     and Other  
    Purchased     Purchases     and Other Purchases     Sold     Sales  
John D. Oil and Gas Marketing
  $ 1,033,792     $     $     $     $  
Cobra Pipeline
    82,601             50,863             7,819  
Orwell Trumbell Pipeline
    104,388             430              
Great Plains Exploration
    3,783                   945,550       1,888  
Big Oats Pipeline Supply
          41,382       105,620       273       1,505  
Kykuit Resources
                            4,813  
Sleepy Hollow
                            17,937  
Other
          8,400       43,849       10,135       16,509  
 
                             
TOTAL
  $ 1,224,564     $ 49,782     $ 200,762     $ 955,958     $ 50,471  
 
                             

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below details transactions with related parties, including companies owned or controlled by Mr. Osborne, for the six months ended June 30, 2011:
                                         
    Six Months Ended June 30, 2011  
            Pipeline and     Rent, Supplies             Management  
    Natural Gas     Construction     Consulting, and     Natural Gas     and Other  
    Purchased     Purchases     and Other Purchases     Sold     Sales  
John D. Oil and Gas Marketing
  $ 2,426,724     $     $ 1,772     $     $ 6,564  
Cobra Pipeline
    243,779       68,767       452             1,056  
Orwell Trumbell Pipeline
    276,174             49,718       1,757       5,565  
Great Plains Exploration
    573,871       197,430       150       2,484       12,836  
Big Oats Pipeline Supply
          256,668       409,012       2,712       1,000  
Kykuit Resources
                39,600             110  
Sleepy Hollow
                            11,523  
Other
                97,873       50,313       3,057  
 
                             
TOTAL
  $ 3,520,548     $ 522,865     $ 598,577     $ 57,266     $ 41,711  
 
                             
The table below details transactions with related parties, including companies owned or controlled by Mr. Osborne, for the six months ended June 30, 2010:
                                         
    Six Months Ended June 30, 2010  
            Pipeline and     Rent, Supplies             Management  
    Natural Gas     Construction     Consulting, and     Natural Gas     and Other  
    Purchased     Purchases     and Other Purchases     Sold     Sales  
John D. Oil and Gas Marketing
  $ 2,404,756     $     $ 127     $ 49,824     $  
Cobra Pipeline
    237,451       83,010       107,447             21,044  
Orwell Trumbell Pipeline
    303,527             430              
Great Plains Exploration
    20,649                     1,953,052       2,345  
Big Oats Pipeline Supply
          87,224       221,423       2,267        
Kykuit Resources
                            10,559  
Sleepy Hollow
                            54,506  
Other
          42,600       246,348       58,367       120,274  
 
                             
TOTAL
  $ 2,966,383     $ 212,834     $ 575,775     $ 2,063,510     $ 208,728  
 
                             
The Company also accrued a liability of $13,894 and $413,399, respectively, due to companies controlled by Mr. Osborne for natural gas used through June 30, 2011 and December 31, 2010 that is not yet invoiced. The related expense is included in the gas purchased line item in the accompanying statements of income. These amounts will be trued up to the actual invoices when received in future periods.
Note 10 — Segments of Operations
The following tables set forth summarized financial information for the Company’s natural gas, marketing and production, pipeline, and corporate and other operations. The Company classifies its segments to provide investors with a view of the business through management’s eyes. The Company primarily separates its state regulated utility businesses from the non-regulated marketing and production business and from the federally regulated pipeline business. The Company has regulated utility businesses in the states of Montana, Wyoming, North Carolina, Maine, Ohio, and Pennsylvania and these businesses are aggregated together to form the natural gas operations. Transactions between reportable segments are accounted for on the accrual basis, and eliminated prior to external financial reporting. Inter-company eliminations between segments consist primarily of gas sales from the marketing and production operations to the natural gas operations, inter-company accounts receivable, accounts payable, equity, and subsidiary investment:

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended June 30, 2011
                                                 
            Marketing                          
    Natural Gas     and     Pipeline     Corporate and              
    Operations     Production     Operations     Other     Eliminations     Consolidated  
OPERATING REVENUES
                                               
Natural gas operations
  $ 17,176,027     $     $     $ 816,049     $ (896,814 )   $ 17,095,262  
Marketing and production
          3,209,966                   (1,734,301 )     1,475,665  
Pipeline operations
                102,061                   102,061  
 
                                   
 
Total operating revenue
    17,176,027       3,209,966       102,061       816,049       (2,631,115 )     18,672,988  
 
                                               
COST OF SALES
                                               
Gas purchased
    9,656,357                   816,049       (896,814 )     9,575,592  
Marketing and production
          2,942,680                   (1,734,301 )     1,208,379  
 
                                   
Total cost of sales
    9,656,357       2,942,680             816,049       (2,631,115 )     10,783,971  
 
                                   
 
                                               
GROSS MARGIN
  $ 7,519,670     $ 267,286     $ 102,061     $     $     $ 7,889,017  
 
                                   
 
                                               
OPERATING INCOME (LOSS)
  $ 902,183     $ 79,627     $ 48,396     $ (39,384 )   $     $ 990,822  
 
                                   
 
                                               
NET INCOME (LOSS)
  $ 359,742     $ 23,625     $ 27,752     $ (50,781 )   $     $ 360,338  
 
                                   
Three Months Ended June 30, 2010
                                                 
            Marketing                          
    Natural Gas     and     Pipeline     Corporate and              
    Operations     Production     Operations     Other     Eliminations     Consolidated  
OPERATING REVENUE
                                               
Natural gas operations
  $ 14,760,696     $     $     $     $ (78,587 )   $ 14,682,109  
Marketing and production
          3,704,869                   (1,836,860 )     1,868,009  
Pipeline operations
                106,355                   106,355  
 
                                   
 
Total operating revenue
    14,760,696       3,704,869       106,355             (1,915,447 )     16,656,473  
 
                                               
COST OF SALES
                                               
Gas purchased
    7,998,349                         (78,587 )     7,919,762  
Marketing and production
          3,299,668                   (1,836,860 )     1,462,808  
 
                                   
Total cost of sales
    7,998,349       3,299,668                   (1,915,447 )     9,382,570  
 
                                   
 
                                               
GROSS MARGIN
  $ 6,762,347     $ 405,201     $ 106,355     $     $     $ 7,273,903  
 
                                   
 
                                               
OPERATING INCOME (LOSS)
  $ 632,599     $ 207,305     $ 35,679     $ (8,843 )   $     $ 866,740  
 
                                   
 
                                               
NET INCOME
  $ 247,979     $ 113,145     $ 24,485     $ 80,173     $     $ 465,782  
 
                                   

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2011
                                                 
            Marketing                          
    Natural Gas     and     Pipeline     Corporate and              
    Operations     Production     Operations     Other     Eliminations     Consolidated  
OPERATING REVENUES
                                               
Natural gas operations
  $ 55,485,920     $     $     $ 816,049     $ (987,124 )   $ 55,314,845  
Marketing and production
          7,550,218                   (4,249,051 )     3,301,167  
Pipeline operations
                208,385                   208,385  
 
                                   
 
Total operating revenue
    55,485,920       7,550,218       208,385       816,049       (5,236,175 )     58,824,397  
 
                                               
COST OF SALES
                                               
Gas purchased
    34,463,575                   816,049       (987,124 )     34,292,500  
Marketing and production
          6,856,837                   (4,249,051 )     2,607,786  
 
                                   
Total cost of sales
    34,463,575       6,856,837             816,049       (5,236,175 )     36,900,286  
 
                                   
 
                                               
GROSS MARGIN
  $ 21,022,345     $ 693,381     $ 208,385     $     $     $ 21,924,111  
 
                                   
 
                                               
OPERATING INCOME (LOSS)
  $ 7,789,050     $ 306,225     $ 112,396     $ (47,954 )   $     $ 8,159,717  
 
                                   
 
                                               
NET INCOME (LOSS)
  $ 4,618,867     $ 109,407     $ 64,554     $ (157,736 )   $     $ 4,635,092  
 
                                   
 
Total assets
  $ 118,582,518     $ 3,929,493     $ 636,991     $ 71,829,841     $ (57,223,219 )   $ 137,755,624  
Goodwill
  $ 14,607,952     $     $     $     $     $ 14,607,952  
Six Months Ended June 30, 2010
                                                 
            Marketing                          
    Natural Gas     and     Pipeline     Corporate and              
    Operations     Production     Operations     Other     Eliminations     Consolidated  
OPERATING REVENUES
                                               
Natural gas operations
  $ 46,345,465     $     $     $     $ (157,196 )   $ 46,188,269  
Marketing and production
          9,188,180                   (4,201,848 )     4,986,332  
Pipeline operations
                214,957                   214,957  
 
                                   
Total operating revenue
    46,345,465       9,188,180       214,957             (4,359,044 )     51,389,558  
 
                                               
COST OF SALES
                                               
Gas purchased
    27,697,772                         (157,196 )     27,540,576  
Marketing and production
          8,256,067                   (4,201,848 )     4,054,219  
 
                                   
Total cost of sales
    27,697,772       8,256,067                   (4,359,044 )     31,594,795  
 
                                   
 
                                               
GROSS MARGIN
  $ 18,647,693     $ 932,113     $ 214,957     $     $     $ 19,794,763  
 
                                   
 
                                               
OPERATING INCOME (LOSS)
  $ 6,561,089     $ 557,461     $ 99,331     $ (11,364 )   $     $ 7,206,517  
 
                                   
 
                                               
NET INCOME
  $ 3,979,274     $ 34,195     $ 60,720     $ 54,535     $     $ 4,128,724  
 
                                   
 
Total assets
  $ 106,298,682     $ 4,737,608     $ 755,112     $ 58,037,889     $ (51,845,781 )   $ 117,983,510  
Goodwill
  $ 13,813,626     $     $     $     $     $ 13,813,626  
 
                                               

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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Commitments and Contingencies
Legal Proceedings
From time to time, the Company is involved in lawsuits that have arisen in the ordinary course of business. The Company is contesting each of these lawsuits vigorously and believes it has defenses to the allegations that have been made.
Note 12 — Financial Instruments and Risk Management
Management of Risks Related to Fixed Contracts
The Company and its subsidiaries are subject to certain risks related to changes in certain commodity prices and risks of counterparty performance. The Company has established policies and procedures to manage such risks. The Company has a Risk Management Committee comprised of Company officers and management to oversee our risk management program as defined in its risk management policy. The purpose of the risk management program is to minimize adverse impacts on earnings resulting from volatility of energy prices, counterparty credit risks, and other risks related to the energy commodity business.
In order to mitigate the risk of natural gas market price volatility related to firm commitments to purchase or sell natural gas, from time to time the Company and its subsidiaries have entered into fixed contracts. Such arrangements may be used to protect profit margins on future obligations to deliver gas at a fixed price, or to protect against adverse effects of potential market price declines on future obligations to purchase gas at fixed prices.
The Company accounts for these contracts in accordance with ASC 815, Derivatives and Hedging. In accordance with ASC 815, such contracts are reflected in the balance sheet as assets or liabilities and valued at “fair value,” determined as of the balance sheet date. Fair value accounting treatment is also referred to as “mark-to-market” accounting. Mark-to-market accounting results in disparities between reported earnings and realized cash flow. The changes in the derivative values are reported in the income statement as an increase or (decrease) in revenues without regard to whether any cash payments have been made between the parties to the contract. ASC 815 specifies that contracts for purchase or sale at fixed prices and volumes must be valued at fair value (under mark-to-market accounting) unless the contracts qualify for treatment as a “normal purchase or normal sale.”
At June 30, 2011 and December 31, 2010, all of the Company’s fixed contracts for purchase or sale at fixed prices and volumes qualified for treatment as a “normal purchase or normal sale.”
Note 13 — Subsequent Events
On August 1, 2011 the Company purchased the assets of Independence Oil & LP Gas, Inc. (Independence Oil) for $1.6 million. Independence Oil delivered heating oil, liquid propane, and kerosene to approximately 4,500 customers from its offices in West Jefferson, North Carolina and Independence, Virginia. The Company plans to continue service to the current customers in addition to expanding to other customers in each of the regions. Due to the timing of the transaction, the Company is still reviewing the documentation to evaluate if the purchase is required to be accounted for a business combination under ASC 805.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which represent our expectations or beliefs concerning future events. Forward-looking statements generally include words such as “anticipates,” “believes,” “expects,” “planned,” “scheduled” or similar expressions and statements concerning our operating capital requirements, utilization of tax benefits, recovery of property tax payments, our environmental remediation plans, and similar statements that are not historical are forward-looking statements that involve risks and uncertainties. Although we believe these forward-looking statements are based on reasonable assumptions, statements made regarding future results are subject to a number of assumptions, uncertainties and risks that could cause future results to be materially different from the results stated or implied in this document.
Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of us from time to time, including statements contained in filings with the SEC and our reports to shareholders, involve known and unknown risks and other factors that may cause our company’s actual results in future periods to differ materially from those expressed in any forward-looking statements. See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC. Any such forward looking statement is qualified by reference to these risk factors. We caution that these risk factors are not exclusive. We do not undertake to update any forward looking statements that may be made from time to time by or on behalf of us except as required by law.
OVERVIEW
Gas Natural is a natural gas company, primarily operating local distribution companies in six states and serving approximately 63,500 customers. Our natural gas utility subsidiaries are Energy West, Incorporated (Montana and Wyoming), Cut Bank Gas Company (Montana), Northeast Ohio Natural Gas Corporation (Ohio), Brainard Gas Corp. (Ohio), Orwell Natural Gas Company (Ohio and Pennsylvania), Bangor Gas Company (Maine) and Frontier Natural Gas (North Carolina). Our operations also include production and marketing of natural gas and gas pipeline transmission and gathering. Approximately 92% and 94% of our revenues in the three and six months ended June 30, 2011 were derived from our utility operations.
For the quarter, our net income was $360,000 compared to $466,000 in 2010, a decrease of 23%. Net income for the six months ended June 30, 2011 was approximately $4.6 million compared with approximately $4.1 million for the same period in 2010, an increase of $500,000 or 12%.
In our natural gas segment, increased sales volumes driven by continued customer growth and colder weather in the majority of our service areas lead to the results for both the three months and six months ended June 30, 2011. For the quarter ended June 30, 2011, earnings from natural gas operations increased to $360,000 from $248,000 in the same quarter of 2010, an increase of $112,000 or 45%. Net income for the six months ended June 30, 2011 was approximately $4.6 million compared with net income of approximately $4.0 million in the same period of 2010, an increase of $600,000 or 15%.
In our marketing and production segment, lower sales volumes due to the widening of the unfavorable differential between the AECO and CIG Rockies natural gas indices and lower production from our natural gas wells caused lower gross margin in the second quarter of 2011 than in the second quarter of 2010. This led to a decline of 79% in earnings for the quarter to net income of $24,000 from net income of $113,000 for the same period in 2010. Earnings for the six months ended June 30, 2011 increased by 221% to $109,000 from $34,000 in the 2010 period. The decrease in gross margin from lower sales and production volumes in 2011 was offset by an expense of $440,000 included in the six months ended June 30, 2010 related to the conclusion of the lawsuit with Shelby Gas Association.
Our pipeline operations segment returned net income of $28,000 for the three months ended June 30, 2011 compared to $24,000 for 2010 and $65,000 for the six months ended June 30, 2011 compared with $61,000 for the same period in 2010.
Our corporate and other operations segment incurred a net loss of $51,000 for the three months ended June 30, 2011 compared to net income of $80,000 for the 2010 period. For the six months ended June 30, 2011, the net loss was $158,000 compared to net income of $55,000 for the same period of 2010. Both of the 2010 periods included dividends and gains on the sale of marketable securities that did not occur in the 2011 periods.

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Company Structure
On July 9, 2010, we reincorporated from Montana to Ohio. The reincorporation effected a change in the legal domicile of the Company and other changes of a legal nature, but did not result in any change in our business, our management personnel, our operations or the location of our facilities. The effect of the reincorporation is described in greater detail in our proxy statement for the June 30, 2010 annual meeting of shareholders. As part of the reincorporation, we changed our name to “Gas Natural Inc.”
RESULTS OF CONSOLIDATED OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the period ended December 31, 2010. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of June 30, 2011 and for the three and six month periods ended June 30, 2011. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
     Net Income — Our net income for the three months ended June 30, 2011 was $360,000 or $0.04 per diluted share, compared to net income of $466,000 or $0.08 per diluted share for the three months ended June 30, 2010, a decrease of $106,000. Net income from our natural gas operations increased by $112,000, due primarily to customer growth and colder weather in most of our service territories, which led to increased revenues and gross margin. Our gas marketing and production operation returned net income of $24,000 in the three months ended June 30, 2011, a decrease of $89,000 from the income of $113,000 for the same period in 2010 due to lower revenues and gross margin as explained below. Our corporate and other segment incurred a net loss of $51,000 in the three months ended June 30, 2011 compared to net income of $80,000 in 2010, a difference of $131,000. The 2010 period included dividends and gains on the sale of marketable securities that did not occur in 2011. Our secondary public offering in November 2010 resulted in 2.075 million additional shares outstanding and leads to the dilutive effect on the per share amounts in 2011 compared to 2010.
     Revenues — Our revenues for the three months ended June 30, 2011 were approximately $18.7 million compared to approximately $16.7 million for the three months ended June 30, 2010. This $2.0 million increase was primarily attributable to: (1) a natural gas revenue increase of $2.4 million due to increased customers and colder weather in the majority of the markets we serve, partly offset by (2) a decrease in our marketing and production operation’s revenue of $392,000 caused by lower sales due to the widening of the unfavorable differential between the AECO and CIG Rockies natural gas indices and production from our natural gas wells.
     Gross Margin — Gross margin was approximately $7.9 million in the three months ended June 30, 2011 compared to approximately $7.3 million in the three months ended June 30, 2010, an increase of $600,000. Our natural gas operation’s margins increased $757,000, due to the increased customers and colder weather. Gross margin from our marketing and production operations decreased $137,000, due to reduction in sales and the lower volumes produced.
     Operating Expenses — Expenses other than cost of sales increased by $500,000 to approximately $6.9 million in the three months ended June 30, 2011 from approximately $6.4 million in the three months ended June 30, 2010. The increase is due to increases in administrative expenses including salaries and professional services, increases in depreciation due to the increases in capital expenditures, and increases in taxes other than income due primarily to timing differences in the expense portion of the Ohio Companies’ gross receipts tax.
     Other Income, net — Other income decreased by $244,000 to income of $116,000 in the three months ended June 30, 2011 from income of $360,000 in the three months ended June 30, 2010 as a result of the following: (1) other income from natural gas operations decreased by $171,000 due primarily to decreased revenue from service sales; and (2) our corporate and other segment posted other expense of $16,000 in 2011 compared to other income in 2010 of $57,000, resulting in an increase in costs of $73,000.
     Interest Expense — Interest expense decreased by $36,000 to $493,000 in the three months ended June 30, 2011 from $529,000 in the three months ended June 30, 2010. The Ohio Companies repaid a portion of their debt in November 2010. The Ohio Companies did not enter into new financing arrangements until May 2011 resulting in less average debt outstanding in the three months ended June 30, 2011 which resulted in lower interest expense.
     Income Tax Expense — Income tax expense increased by $14,000 to $234,000 in the three months ended June 30, 2011 from $220,000 in the three months ended June 30, 2010. The three months ended June 30, 2010 included an income tax benefit due to a change in the effective state tax rate for 2010 related to the acquisition of the Ohio Companies.

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Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
     Net Income — Our net income for the six months ended June 30, 2011 was approximately $4.6 million or $0.57 per diluted share, compared to net income of approximately $4.1 million or $0.68 per diluted share for the six months ended June 30, 2010, an increase of $500,000. Net income from our natural gas operations increased by $600,000, due primarily to customer growth and colder weather in most of our service territories, which led to increased revenues and gross margin. Our gas marketing and production operation returned net income of $109,000 in the six months ended June 30, 2011, an increase of $75,000 from income of $34,000 for the same period in 2010 due to lower revenues and gross margin as explained below. Offsetting these improvements is the net loss from our corporate and other segment of $158,000 compared to net income of $55,000 in 2010, a difference of $213,000. The 2010 period included dividends and gains on the sale of marketable securities that did not occur in 2011. Our secondary public offering in November 2010 resulted in 2.075 million additional shares outstanding and leads to the dilutive effect on the per share amounts in 2011 compared to 2010.
     Revenues — Our revenues for the six months ended June 30, 2011 were approximately $58.8 million compared to approximately $51.4 million for the six months ended June 30, 2010. This $7.4 million increase was primarily attributable to: (1) a natural gas revenue increase of $9.1 million due to increased customers and colder weather in the majority of the markets we serve, partly offset by (2) a decrease in our marketing and production operation’s revenue of $1.7 million caused by a reduction in sales due to the widening of the unfavorable differential between the AECO and CIG Rockies natural gas indices and lower production volumes from our natural gas wells.
     Gross Margin — Gross margin was approximately $21.9 million in the six months ended June 30, 2011 compared to approximately $19.8 million in the six months ended June 30, 2010, an increase of $2.1 million. Our natural gas operation’s margins increased $2.4 million, due to the increased customers and colder weather. Gross margin from our marketing and production operations decreased $239,000, due to the reduced sales and the lower prices received and lower volumes produced from our natural gas wells.
     Operating Expenses — Expenses other than cost of sales increased by $1.2 million to approximately $13.8 million in the six months ended June 30, 2011 from approximately $12.6 million in the six months ended June 30, 2010. The increase is due to increases in administrative expenses including salaries, professional services and vehicle fuel, and increases in depreciation due to the increases in capital expenditures.
     Other Income, net — Other income increased by $103,000 to income of $232,000 in the six months ended June 30, 2011 from income of $129,000 in the six months ended June 30, 2010 as a result of the following: (1) the 2010 period included expense from the conclusion of the lawsuit with Shelby Gas Association of $440,000; (2) other income from natural gas operations decreased by $148,000 due primarily to decreased revenue from service sales; and (3) our corporate and other segment posted other expense of $96,000 in 2011 compared to other income in 2010 of $93,000, resulting in an increase in costs of $189,000.
     Interest Expense — Interest expense decreased by $216,000 to approximately $906,000 in the six months ended June 30, 2011 from approximately $1.1 million in the six months ended June 30, 2010. The Ohio Companies repaid a portion of their debt in November 2010. The Ohio Companies did not enter into new financing arrangements until May 2011 resulting in less average debt outstanding in the six months ended June 30, 2011 which resulted in lower interest expense.
     Income Tax Expense — Income tax expense increased by $715,000 to approximately $2.8 million in the six months ended June 30, 2011 from approximately $2.1 million in the six months ended June 30, 2010. The six months ended June 30, 2010 included an income tax benefit of $286,000 due to a change in the effective state tax rate for 2010 related to the acquisition of the Ohio Companies. The remaining increase is due primarily to the increase in pre-tax income in 2011 compared to 2010.

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Net Income by Segment and Service Area
The components of net income for 2011 and 2010 are:
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
($ in thousands)   2011     2010     2011     2010  
Natural Gas Operations
                               
Energy West Montana (MT)
  $ 283     $ 119     $ 1,147     $ 1,050  
Energy West Wyoming (WY)
    (2 )     (13 )     313       244  
Frontier Natural Gas (NC)
    262       333       925       977  
Bangor Gas (ME)
    274       280       1,142       771  
Ohio Companies (OH)
    (457 )     (471 )     1,092       937  
 
                       
Total Natural Gas Operations
  $ 360     $ 248     $ 4,619     $ 3,979  
Marketing & Production Operations
    24       113       109       34  
Pipeline Operations
    27       25       65       61  
 
                       
 
    411       386       4,793       4,074  
Corporate & Other
    (51 )     80       (158 )     55  
 
                       
 
                               
Consolidated Net Income
  $ 360     $ 466     $ 4,635     $ 4,129  
 
                       
The following highlights our results by operating segments:

NATURAL GAS OPERATIONS
Income Statement
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
($ in thousands)   2011     2010     2011     2010  
Natural Gas Operations
                               
Operating revenues
  $ 17,095     $ 14,682     $ 55,315     $ 46,188  
Gas Purchased
    9,576       7,920       34,293       27,540  
 
                       
Gross Margin
    7,519       6,762       21,022       18,648  
Operating expenses
    6,617       6,129       13,233       12,087  
 
                       
Operating income
    902       633       7,789       6,561  
Other income
    132       303       328       476  
 
                       
Income before interest and taxes
    1,034       936       8,117       7,037  
Interest (expense)
    (467 )     (509 )     (854 )     (1,078 )
 
                       
Income before income taxes
    567       427       7,263       5,959  
Income tax (expense)
    (207 )     (179 )     (2,644 )     (1,980 )
 
                       
Net Income
  $ 360     $ 248     $ 4,619     $ 3,979  
 
                       

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Operating Revenues
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
($ in thousands)   2011     2010     2011     2010  
Full Service Distribution Revenues
                               
Residential
  $ 7,207     $ 6,313     $ 25,811     $ 21,927  
Commercial
    7,250       5,892       23,311       18,441  
Industrial
    262       205       487       410  
Other
    43       88       79       216  
 
                       
Total full service distribution
    14,762       12,498       49,688       40,994  
 
                               
Transportation
    2,045       1,896       5,052       4,619  
Bucksport
    288       288       575       575  
 
                       
 
Total operating revenues
  $ 17,095     $ 14,682     $ 55,315     $ 46,188  
 
                       
Utility Throughput
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
(in million cubic feet (MMcf))   2011     2010     2011     2010  
Full Service Distribution
                               
Residential
    737       654       2,899       2,492  
Commercial
    882       667       2,829       2,267  
Industrial
    44       37       84       82  
 
                       
Total full service
    1,663       1,358       5,812       4,841  
 
                               
Transportation
    1,883       1,684       4,568       3,730  
Bucksport
    2,988       3,341       6,789       7,089  
 
                       
 
Total Volumes
    6,534       6,383       17,169       15,660  
 
                       
Degree Days
                                         
            Three Months Ended     Percent (Warmer) Colder  
            June 30,     2011 Compared to  
    Normal     2011     2010     Normal     2010  
Great Falls, MT
    1,225       1,498       1,414       22.29 %     5.94 %
Cody, WY
    1,072       1,408       1,269       31.34 %     10.95 %
Bangor, ME
    1,072       1,052       804       (1.87 %)     30.85 %
Elkin, NC
    337       318       163       (5.64 %)     95.09 %
Youngstown, OH
    862       711       503       (17.52 %)     41.35 %

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            Six Months Ended     Percent (Warmer) Colder  
            June 30,     2011 Compared to  
    Normal     2011     2010     Normal     2010  
Great Falls, MT
    4,449       5,160       4,335       15.98 %     19.03 %
Cody, WY
    4,102       4,685       4,348       14.21 %     7.75 %
Bangor, ME
    4,807       4,860       3,905       1.10 %     24.46 %
Elkin, NC
    2,454       2,414       2,276       (1.63 %)     6.06 %
Youngstown, OH
    4,121       4,019       3,474       (2.48 %)     15.69 %
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Revenues and Gross Margin
Operating revenues for the three months ended June 30, 2011 increased to approximately $17.1 million from approximately $14.7 million in the three months ended June 30, 2010. This $2.4 million increase is the result of the following factors:
  1)   Revenue from our Montana and Wyoming markets increased $728,000 on a volume increase of 61 MMcf in the three months ended June 30, 2011 compared to the three months ended June, 2010, due to colder than normal weather.
  2)   Revenue from our Maine and North Carolina markets increased by approximately $651,000 on a volume increase from full service and transportation customers of 160 MMcf in 2011 compared to 2010, caused by increased customer count in both markets and colder weather in our Maine market in the 2011 period.
  3)   Revenues from our Ohio market increased $1.0 million on a volume increase of 283 MMcf, due to colder weather in 2011 than in 2010.
Gas purchases in natural gas operations increased to approximately $9.6 million for the three months ended June 30, 2011 from approximately $7.9 million for the three months ended June 30, 2010. The increase of $1.7 million is due primarily to the increase in sales volumes discussed above. Our gas costs are passed on dollar for dollar to our customers under tariffs regulated by the various public utility commissions in the jurisdictions in which we operate. Our gas costs are subject to periodic audits and prudency reviews in all of these jurisdictions.
Gross margin increased to approximately $7.5 million for the three months ended June 30, 2011 from approximately $6.8 million for the three months ended June 30, 2010, an increase of $757,000. The increase in customers and cold weather discussed above are the primary drivers of the increase. Montana and Wyoming accounted for $149,000 of the increase, Maine and North Carolina for $288,000 and Ohio for $320,000.
Earnings
The Natural Gas Operations segment’s earnings for the three months ended June 30, 2011 were $360,000, or $.044 per diluted share, compared to earnings of $248,000 or $.041 per diluted share for the three months ended June 30, 2010.
Operating expenses increased by $500,000 to approximately $6.6 million for the three months ended June 30, 2011 from approximately $6.1 million for the three months ended June 30, 2010. The increase is due to increases in administrative expenses including salaries and professional services, increases in depreciation due to the increases in capital expenditures, and increases in taxes other than income due primarily to timing differences in the expense portion of the Ohio Companies’ gross receipts tax.
Other Income decreased by $171,000 to $132,000 for the three months ended June 30, 2011 from $303,000 for the three months ended June 30, 2010 due primarily to decreased revenue from service sales in our Montana and Ohio markets.
Interest expense decreased by $42,000 to $467,000 for the three months ended June 30, 2011 from $509,000 for the three months ended June 30, 2010. The Ohio Companies had less average debt outstanding in the three months ended June 30, 2011 because the debt that was repaid in November 2010 was not refinanced until May 2, 2011, resulting in lower interest expense.
Income tax expense increased by $28,000 to approximately $207,000 in the three months ended June 30, 2011 compared with approximately $179,000 in the three months ended June 30, 2010, due primarily to the increase in pre-tax income in 2011 compared to 2010.

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Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
Revenues and Gross Margin
Operating revenues for the six months ended June 30, 2011 increased to approximately $55.3 million from approximately $46.2 million in the six months ended June 30, 2010. This $9.1 million increase is the result of the following factors:
  1)   Revenue from our Montana and Wyoming markets increased $3.3 million on a volume increase of 445 MMcf in the six months ended June 30, 2011 compared to the six months ended June, 2010, due to colder than normal weather throughout the six months.
 
  2)   Revenue from our Maine and North Carolina markets increased by approximately $2.2 million on a volume increase from full service and transportation customers of 400 MMcf in 2011 compared to 2010, caused by increased customer count in both markets and colder weather in our Maine market in the 2011 period.
 
  3)   Revenues from our Ohio markets increased $3.6 million on a volume increase of 964 MMcf, due to colder weather in 2011 than in 2010.
Gas purchases in natural gas operations increased to approximately $34.3 million for the six months ended June 30, 2011 from approximately $27.5 million for the six months ended June 30, 2010. The increase of $6.8 million is due primarily to the increase in sales volumes discussed above. Our gas costs are passed on dollar for dollar to our customers under tariffs regulated by the various public utility commissions in the jurisdictions in which we operate. Our gas costs are subject to periodic audits and prudency reviews in all of these jurisdictions.
Gross margin increased to approximately $21.0 million for the six months ended June 30, 2011 from approximately $18.6 million for the six months ended June 30, 2010, an increase of $2.4 million. The increased customer count and cold weather discussed above are the primary drivers of the increase. Montana and Wyoming accounted for $519,000 of the increase, Maine and North Carolina $1.0 million and Ohio $807,000.
Earnings
The Natural Gas Operations segment’s earnings for the six months ended June 30, 2011 were approximately $4.6 million, or $0.566 per diluted share, compared to earnings of approximately $4.0 million or $0.655 per diluted share for the six months ended June 30, 2010.
Operating expenses increased by $1.1 million to approximately $13.2 million for the six months ended June 30, 2011 from approximately $12.1 million for the six months ended June 30, 2010. The increase is due to increases in administrative expenses including salaries, professional services and vehicle fuel, and increases in depreciation due to the increases in capital expenditures, offset slightly by a decrease in taxes other than income.
Other Income decreased by $148,000 to $328,000 for the six months ended June 30, 2011 from $476,000 for the six months ended June 30, 2010 due primarily to decreased revenue from service sales in our Montana and Ohio markets.
Interest expense decreased by $224,000 to approximately $854,000 for the six months ended June 30, 2011 from approximately $1.1 million for the six months ended June 30, 2010. The Ohio Companies had less average debt outstanding in the six months ended June 30, 2011 because the debt that was repaid in November 2010 was not refinanced until May 2, 2011, resulting in lower interest expense.
Income tax expense increased by $663,000 to approximately $2.6 million in the six months ended June 30, 2011 compared with approximately $2.0 million in the six months ended June 30, 2010. The six months ended June 30, 2010 included an income tax benefit of $180,000 due to a change in the effective state tax rate for 2010 related to the acquisition of the Ohio Companies. The remaining increase is due primarily to the increase in pre-tax income in 2011 compared to 2010.

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MARKETING AND PRODUCTION OPERATIONS (EWR)
Income Statement
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
($ in thousands)   2011     2010     2011     2010  
Energy West Resources
                               
Operating revenues
  $ 1,476     $ 1,868     $ 3,301     $ 4,986  
Gas Purchased
    1,208       1,463       2,608       4,054  
 
                       
Gross Margin
    268       405       693       932  
Operating expenses
    188       198       387       375  
 
                       
Operating income
    80       207       306       557  
Other expense
    (20 )     (12 )     (83 )     (472 )
 
                       
Income before interest and taxes
    60       195       223       85  
Interest (expense)
    (22 )     (15 )     (45 )     (34 )
 
                       
Income before income taxes
    38       180       178       51  
Income tax (expense) benefit
    (14 )     (67 )     (69 )     (17 )
 
                       
Net Income
  $ 24     $ 113     $ 109     $ 34  
 
                       
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Revenues and Gross Margin
Revenues decreased $392,000 to approximately $1.5 million for the three months ended June 30, 2011 from approximately $1.9 million for the three months ended June 30, 2010. $368,000 of this decrease is caused by the widening of the unfavorable differential between the AECO and CIG Rockies natural gas indexes, leading to lower sales in our marketing operation. Production revenues decreased by $24,000 due to lower volumes produced and a lower price received for these volumes.
Gross margin decreased $137,000 to $268,000 in the three months ended June 30, 2011 from $405,000 in the three months ended June 30, 2010. Gross margin from our marketing operation decreased by $125,000, due to the lower sales volumes, and decreased $12,000 from our gas production.
Earnings
The Marketing and Production segment’s earnings in the three months ended June 30, 2011 were $24,000 or $0.003 per diluted share, compared to income of $113,000 or $0.019 per diluted share in the three months ended June 30, 2010.
Our operating expenses decreased $10,000, to $188,000 in the three months ended June 30, 2011 from $198,000 in the three months ended June 30, 2010.
The loss from unconsolidated affiliate increased $8,000 to $20,000 in the three months ended June 30, 2011 from $12,000 in the three months ended June 30, 2010.
Income tax expense decreased approximately $53,000 to $14,000 in the three months ended June 30, 2011 from $67,000 in the three months ended June 30, 2010. The decrease is due to the decrease in pre-tax income in 2011 compared to 2010.
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
Revenues and Gross Margin
Revenues decreased $1.7 million to approximately $3.3 million for the six months ended June 30, 2011 from approximately $5.0 million for the six months ended June 30, 2010. $1.5 million is caused by the widening of the unfavorable differential between the AECO and CIG Rockies natural gas indexes, leading to lower sales in our marketing operation. Production revenues decreased by $147,000 due to lower volumes produced and a lower price received for these volumes.

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Gross margin decreased $239,000 to approximately $693,000 in the six months ended June 30, 2011 from approximately $932,000 in the six months ended June 30, 2010. Gross margin from our marketing operation decreased $152,000 due to lower sales volumes and gross margin from gas production decreased by $86,000.
Earnings
The Marketing and Production segment’s earnings in the six months ended June 30, 2011 were $109,000 or $0.013 per diluted share, compared to income of $34,000 or $0.006 per diluted share in the six months ended June 30, 2010.
Our operating expenses increased $12,000, to $387,000 in the six months ended June 30, 2011 from $375,000 in the six months ended June 30, 2010.
The loss from unconsolidated affiliate increased $51,000 to $83,000 in the six months ended June 30, 2011, from $32,000 in the six months ended June 30, 2010.
Other expense was zero in the six months ended June 30, 2011. The six months ended June 30, 2010 included an expense of $440,000 related to the conclusion of the lawsuit with Shelby Gas Association.
Income tax expense increased $52,000 to an expense of $69,000 in the six months ended June 30, 2011 from expense of $17,000 in the six months ended June 30, 2010. The increase is due to the increase in pre-tax income in 2011 compared to 2010.
PIPELINE OPERATIONS
Income Statement
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
($ in thousands)   2011     2010     2011     2010  
Pipeline Operations
                               
Operating revenues
  $ 102     $ 106     $ 208     $ 215  
Gas Purchased
                       
 
                       
Gross Margin
    102       106       208       215  
Operating expenses
    54       71       96       116  
 
                       
Operating income
    48       35       112       99  
Other income
                       
 
                       
Income before interest and taxes
    48       35       112       99  
Interest (expense)
    (3 )     (5 )     (7 )     (9 )
 
                       
Income before income taxes
    45       30       105       90  
Income tax (expense)
    (17 )     (6 )     (40 )     (29 )
 
                       
Net Income
  $ 28     $ 24     $ 65     $ 61  
 
                       
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
     Net income in the three months ended June 30, 2011 was $28,000 compared to $24,000 in the three months ended June 30, 2010. The overall impact of the results of our pipeline operations was not material to our results of consolidated operations.
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
     Net income in the six months ended June 30, 2011 was $65,000 compared to $61,000 in the six months ended June 30, 2010. The overall impact of the results of our pipeline operations was not material to our results of consolidated operations.

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Corporate and Other Operations
     Our Corporate and Other reporting segment is intended primarily to encompass the results of corporate acquisitions and other equity transactions, as well as certain other income and expense items associated with Gas Natural’s holding company functions. Therefore, it does not have standard revenues, gas purchase costs, or gross margin.
Income Statement
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
($ in thousands)   2011     2010     2011     2010  
Corporate and Other
                               
Operating revenues
  $     $     $     $  
Gas Purchased
                       
 
                       
Gross Margin
                       
Operating expenses
    39       9       48       11  
 
                       
Operating loss
    (39 )     (9 )     (48 )     (11 )
Other (expense) income
    (16 )     57       (96 )     93  
 
                       
Income before interest and taxes
    (55 )     48       (144 )     82  
Interest expense
                       
 
                       
Income (Loss) before income taxes
    (55 )     48       (144 )     82  
Income tax benefit (expense)
    4       32       (14 )     (27 )
 
                       
Net Loss
  $ (51 )   $ 80     $ (158 )   $ 55  
 
                       
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
     Results of corporate and other operations for the three months ended June 30, 2011 include administrative costs of $39,000, costs related to acquisition activities of $18,000, offset by interest income of $2,000 and income tax benefit of $4,000, for a net loss of $51,000.
     Results of corporate and other operations for the three months ended June 30, 2010 include dividends from marketable securities of $39,000, interest income of $2,000, and gains on the sale of marketable equity securities of $82,000 offset by administrative costs of $9,000, and costs related to acquisition activities of $66,000. After the related income tax benefit of $32,000, the result is net income of $80,000.
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
     Results of corporate and other operations for the six months ended June 30, 2011 include administrative costs of $48,000, costs related to acquisition activities of $102,000, and income tax expense of $14,000, offset by interest income of approximately $6,000, for a net loss of $158,000.
     Results of corporate and other operations for the six months ended June 30, 2010 included dividends from marketable securities of approximately $118,000, interest income of $4,000, and gains on the sale of marketable equity securities of $82,000, offset by administrative costs of $11,000, costs related to acquisition activities of $112,000, and the related income tax expense of $27,000, resulting in net income of $55,000.
Sources and Uses of Cash
Operating activities provide our primary source of cash. Cash provided by operating activities consists of net income (loss) adjusted for non-cash items, including depreciation, depletion, amortization, deferred income taxes, and changes in working capital.
Our ability to maintain liquidity depends upon our $20.0 million credit facility with Bank of America, shown as line of credit on the accompanying balance sheets. Our use of the Bank of America revolving line of credit was $11.8 million and $18.1 million at June 30, 2011 and December 31, 2010, respectively. This change in our cash position is due to the withdrawal of our gas storage inventory to furnish a portion of our gas supply needs and the seasonal increase in cash inflow from the winter heating season, causing cash to be available to pay down the line of credit.

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We made capital expenditures for continuing operations of $10.3 million and $2.2 million for the six months ended June 30, 2011 and 2010, respectively, including $3.3 million related to the Spelman Pipeline acquisition in April 2011. We finance our capital expenditures on an interim basis by the use of our operating cash flow and use of the Bank of America revolving line of credit.
We periodically repay our short-term borrowings under the Bank of America revolving line of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $31.3 million and $22.9 million at June 30, 2011 and December 31, 2010, respectively, including the amount due within one year.
Cash increased slightly to $13.1 million at June 30, 2011, compared with $13.0 million at December 31, 2010.
                 
    For the Six Months Ended June 30,  
    2011     2010  
Cash provided by operating activities
  $ 15,515,654     $ 9,721,034  
Cash (used in) provided by investing activities
    (13,881,593 )     102,923  
Cash used in financing activities
    (1,527,919 )     (7,337,960 )
 
           
Increase in cash
  $ 106,142     $ 2,485,997  
 
           
OPERATING CASH FLOW
For the six months ended June 30, 2011, cash provided by operating activities increased $5.8 million as compared to the six months ended June 30, 2010. Major items affecting the use of cash included a decrease in accounts receivable collections of $4.1 million, a $4.1million increase in collections of recoverable costs of gas, a $2.7 million increase in unbilled revenue, a $2.2 million increase in net deferred tax assets, and a $1.1 million increase in prepayments.
INVESTING CASH FLOW
For the six months ended June 30, 2011, cash used in investing activities increased by $14.0 million as compared to the six months ended June 30, 2010, primarily due to increased construction expenditures of $8.1 million, including expenditures of $3.3 million in 2011 for the acquisition of Spelman Pipeline. Other major changes include expenditures in 2011 for setting up restricted cash funds of $3.4 million, and a decrease in the proceeds from sale of marketable securities of $2.4 million. The restricted cash funds were created at the direction of the PUCO and are set aside for capital expenditures by the Ohio Companies in 2011.
Capital Expenditures
Our capital expenditures for continuing operations totaled $10.3 million and $2.2 million for the six months ended June 30, 2011 and 2010, respectively, including $3.3 million related to the Spelman Pipeline acquisition in April 2011. We finance our capital expenditures on an interim basis by the use of our operating cash flow and use of the Bank of America revolving line of credit.
The majority of our capital spending is focused on the growth of our Natural Gas Operations segment. We conduct ongoing construction activities in all of our utility service areas in order to support expansion, maintenance, and enhancement of our gas pipeline systems. We are actively expanding our systems in North Carolina and Maine to meet the high customer interest in natural gas service in those two service areas.
Estimated Capital Expenditures
The table below details our capital expenditures for the six months ended June 30, 2011 and 2010 and provides an estimate of future cash requirements for capital expenditures:
                         
                    Remaining Cash  
    Six Months ended June 30,     Requirements through  
($ in thousands)   2011     2010     December 31, 2011  
Natural Gas Operations
  $ 10,273     $ 2,191     $ 7,922  
Marketing and Production
                 
Pipeline Operations
                114  
Corporate and Other
    6             87  
 
                 
Total Capital Expenditures
  $ 10,279     $ 2,191     $ 8,123  
 
                 

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FINANCING CASH FLOW
For the six months ended June 30, 2011, cash used in financing activities decreased by $5.8 million as compared with the six months ended June 30, 2010. The closing of the SunLife transaction increased proceeds from long term debt by $18.3 million, along with a corresponding increase in repayments of notes payable to pay off existing debt of $8.9 million. The SunLife transaction required debt service reserve accounts to be created in the amount of $950,000 to cover one year of interest payments. Other items include an increase of $483,000 in debt issuance costs a $562,000 increase in dividends paid as a result of the secondary offering in November 2010 and a decrease in the net line of credit proceeds of $1.6 million.
We fund our operating cash needs, as well as dividend payments and capital expenditures, primarily through cash flow from operating activities and short-term borrowing. Historically, to the extent cash flow has not been sufficient to fund these expenditures, we have used our working capital line of credit. We have greater need for short-term borrowing during periods when internally generated funds are not sufficient to cover all capital and operating requirements, including costs of gas purchased and capital expenditures. In general, our short-term borrowing needs for purchases of gas inventory and capital expenditures are greatest during the summer and fall months and our short-term borrowing needs for financing customer accounts receivable are greatest during the winter months. Our ability to maintain liquidity depends upon our $20.0 million credit facility with Bank of America, shown as line of credit on the accompanying balance sheets. Our use of the Bank of America revolving line of credit was $11.8 million and $18.1 million at June 30, 2011 and December 31, 2010, respectively. We periodically repay our short-term borrowings under the Bank of America revolving line of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $31.3 million and $22.9 million at June 30, 2011, and December 31, 2010, respectively, including the amount due within one year.
Secondary Public Offering
In November 2010, Gas Natural completed a 2.415 million share secondary public offering. Of these shares, 340,000 were selling shareholder shares and 2.075 million were primary shares. The primary shares sold by Gas Natural include a full exercise of the over-allotment option. Gas Natural did not receive any of the proceeds from the selling shareholder shares. Net proceeds to Gas Natural were approximately $19.0 million after sales concessions, underwriting expenses, and deal expenses. The primary uses of proceeds are for investment in utility operations as we continue to expand our organic footprint. Additionally, proceeds were used to repay debt of our Ohio Companies.
In November 2010, NEO repaid upon maturity the Citizens Bank Line of Credit in the amount of $2.1 million and Orwell repaid upon maturity the Huntington Bank Line of Credit in the amount of $1.5 million and the Huntington Bank Term Loan in the amount of $4.1 million. These notes were secured by all assets of the Ohio Companies, as well as a personal guarantee from our chairman and CEO. These three instruments matured at the end of November 2010. These notes were repaid and extinguished with no ability to redraw at this time. In addition to these notes that had a pending maturity date, a related party demand note was also repaid in November 2010. Lightning Pipeline Company, the intermediate holding company for Orwell, had a $2.0 million unsecured demand note payable with our chairman, which was repaid in November of 2010, including accrued interest.
Citizens Bank Term Loans
In connection with the acquisition of the Ohio Companies, NEO and Great Plains each entered modifications/amendments to its credit facility with Citizens Bank (the “Citizens Credit Facility”). The Citizens Credit Facility consisted of a revolving line of credit and term loan to NEO, and two other term loans to Great Plains respectively. Each amendment/modification was initially effective as of December 1, 2009, but was later modified to be effective as of January 5, 2010. Gas Natural guaranteed each loan. Mr. Osborne guaranteed each loan both individually and as trustee of the Richard M. Osborne Trust, and Great Plains guaranteed NEO’s revolving line of credit and term loans.
The Ohio Companies had term loans with Citizens Bank in the aggregate amount of $11.3 million. Each term note had a maturity date of July 1, 2013 and bore interest at an annual rate of 30-day LIBOR plus 400 basis points with an interest rate floor of 5.00% per annum. For the three and six months ended June 30, 2011 the weighted average interest rate on the term loans was 5%, resulting in $38,117 and $156,022 of interest expense, respectively. For the three and six months ended June 30, 2010 the weighted average interest rate on the term loans was 5%, resulting in $128,696 and $233,680 of interest expense, respectively.
The term loans were paid off on May 3, 2011.
The following discussion describes our credit facilities as of June 30, 2011, after the repayment of the Citizens debt and completion of the SunLife financing.
SunLife Assurance Company of Canada
On May 2, 2011, the Company and its Ohio subsidiaries, NEO, Orwell and Brainard (together the “Issuers”), issued $15.334 million of 5.38% Senior Secured Guaranteed Fixed Rate Notes due June 1, 2017 (“Fixed Rate Note”). Additionally, Great Plains issued $3.0 million of 4.12% Senior Secured Guaranteed Floating Rate Notes due May 3, 2014 (“Floating Rate Note”). Both notes were placed

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with SunLife Assurance Company of Canada (“SunLife”). Approximately $636,000 was incurred related to the debt issuance which was capitalized and are being amortized over the life of the note.
The Fixed Rate Note, in the amount of $15.334 million, is a joint obligation of the Issuers, and is guaranteed by the Company, Lightning Pipeline and Great Plains (together with the Issuers, “the Fixed Rate Obligors”). This note received approval from the PUCO on March 30, 2011. The note is governed by a Note Purchase Agreement (“NPA”) as filed with the Securities and Exchange Commission (“SEC”), on Form 8-K on November 2, 2010. Concurrent with the funding and closing of this transaction, which occurred on May 3, 2011, the Fixed Rate Obligors signed an amended NPA that is substantially the same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is subject to a 50 basis point make-whole premium.
The Floating Rate Note, in the amount of $3.0 million, is an obligation of Great Plains and is guaranteed by the Company (together, “the Floating Rate Obligors”). The note is priced at a fixed spread of 385 basis points over three month LIBOR. Pricing for this note will reset on a quarterly basis to the then current yield of three month Libor. The note is governed by a NPA as filed with the SEC on Form 8-K on November 2, 2010. Concurrent with the funding of this transaction, which occurred on May 3, 2011, the Floating Rate Obligors signed an amended NPA that is substantially the same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is at par.
The use of proceeds for both notes extinguished existing amortizing bank debt and other existing indebtedness, funded $3.4 million for the 2011 capital program for Orwell and NEO, established two debt service reserve accounts, and replenished the Company’s treasuries for the previously announced repayment of maturing bank debt and transaction expenses. The capital program funds and debt service reserve accounts are in interest bearing accounts and included in restricted cash.
Payments for both notes prior to maturity are interest-only.
For the three and six months ended June 30, 2011, the weighted average interest rate on the Fixed Rate Note was 5.38% resulting in $137,495 of interest expense. The Floating Rate Note pays interest quarterly and the first payment is not due until August 2011 and therefore no interest expense was incurred during the three and six months ended June 30, 2011.
The notes carry a 60% debt-to-capitalization financial covenant on a consolidated basis for Ohio, as well as, a 2.0x interest coverage test based on a trailing twelve-month basis. Additional covenants customary for asset sales and purchases, additional indebtedness, dividends, change of control and other matters are also included.
Bank of America
Energy West has a $20,000,000 revolving credit facility that includes an annual commitment fee equal to 0.20% of the unused portion of the facility and interest on amounts outstanding at the monthly London Interbank Offered Rate (“LIBOR”) plus 120 to 145 basis points for interest periods selected by us.
The following tables represent borrowings under the Bank of America revolving line of credit for each of the three and six months ended June 30, 2011 and 2010.
         
Quarter Ended June 30, 2011
       
Minimum borrowing
  $ 8,390,000  
Maximum borrowing
  $ 11,840,000  
Average borrowing
  $ 9,909,560  
 
       
Quarter Ended June 30, 2010
       
Minimum borrowing
  $ 5,197,903  
Maximum borrowing
  $ 14,447,903  
Average borrowing
  $ 7,457,673  
 
       
Six Months Ended June 30, 2011
       
Minimum borrowing
  $ 8,390,000  
Maximum borrowing
  $ 18,150,000  
Average borrowing
  $ 11,879,116  
 
       
Six Months Ended June 30, 2010
       
Minimum borrowing
  $ 3,000,000  
Maximum borrowing
  $ 14,650,000  
Average borrowing
  $ 7,886,261  

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At June 30, 2011 and December 31, 2010, we had $11.8 million and $18.1 million of borrowings under the $20.0 million Bank of America revolving line of credit. For the three months ended June 30, 2011 and 2010, the weighted average interest rate on the facility was 1.76% and 2.06%, respectively, resulting in $45,005 and $37,504 of interest expense, respectively. For the six months ended June 30, 2011 and 2010, the weighted average interest rate on the facility was 1.71% and 2.50%, respectively, resulting in $101,209 and $119,388 of interest expense, respectively.
Senior Unsecured Notes
On June 29, 2007, Energy West authorized the sale of $13,000,000 aggregate principal amount of its 6.16% Senior Unsecured Notes, due June 29, 2017 (the “Senior Unsecured Notes”). The proceeds of these notes were used to refinance existing notes. Approximately $463,000 was incurred related to the debt issuance which was capitalized and are being amortized over the life of the notes.
Our 6.16% Senior Unsecured Note and Bank of America credit facility agreements contain various covenants, which include, among others, limitations on total dividends and distributions made in the immediately preceding 60-month period to 75% of aggregate consolidated net income for such period, restrictions on certain indebtedness, limitations on asset sales, and maintenance of certain debt-to-capital and interest coverage ratios.
The cash flow from our business is seasonal and the line of credit balance in December normally represents the high point of borrowings in our annual cash flow cycle. Our cash flow increases and our borrowings decrease, beginning in January, as monthly heating bills are paid and the gas we paid for and placed in storage in the summer months is used to supply our customers. The total amount outstanding under all of our long term debt obligations was approximately $31.3 million at June 30, 2011, with none being due within one year.
We believe we are in compliance with the financial covenants under our debt agreements or have received waivers for any defaults
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance-sheet arrangements, other than those currently disclosed that have or are reasonably likely to have a current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item 3. Quantitative And Qualitative Disclosure About Market Risk
We are subject to certain market risks, including commodity price risk (i.e., natural gas prices) and interest rate risk. The adverse effects of potential changes in these market risks are discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions management may take to mitigate our exposure to such changes. Actual results may differ. See the Notes to our Condensed Consolidated Financial Statements for a description of our accounting policies and other information related to these financial instruments.
Commodity Price Risk
We seek to protect against natural gas price fluctuations by limiting the aggregate level of net open positions that are exposed to market price changes. We manage such open positions with policies that are designed to limit the exposure to market risk, with regular reporting to management of potential financial exposure. Our risk management committee has limited the types of contracts we will consider to those related to physical natural gas deliveries. Therefore, management believes that although revenues and cost of sales are impacted by changes in natural gas prices, our margin is not significantly impacted by these changes.
Credit Risk
Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties of their contractual obligations under the various instruments with us. Credit risk may be concentrated to the extent that one or more groups of counterparties have similar economic, industry or other characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in market or other conditions. In addition, credit risk includes not only the risk that a counter-party may default due to circumstances relating directly to it, but also the risk that a counterparty may default due to circumstances that relate to other market participants that have a direct or indirect relationship with such counterparty. We seek to mitigate credit risk by evaluating the financial strength of potential counterparties. However, despite mitigation efforts, defaults by counterparties may occur from time to time. To date, no such default has occurred.

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Item 4. Controls And Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2011, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. The evaluation was carried out under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer. Based upon this evaluation, our chief executive officer and chief financial officer each concluded that our disclosure controls and procedures were effective as of June 30, 2011.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in lawsuits that have arisen in the ordinary course of business. We are contesting each of these lawsuits vigorously and believe we have defenses to the allegations that have been made.

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Item 6. Exhibits
     
Exhibit Number   Description
31.1*
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2*
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32*
  Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*   Filed or furnished herewith.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  Gas Natural Inc.
 
 
  /s/ Thomas J. Smith    
  Thomas J. Smith   
August 12, 2011  Chief Financial Officer
(principal financial officer
and principal accounting officer) 
 
 

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