Gas Natural Inc. - FORM 10-Q

Gas Natural Inc. - FORM 10-Q - August 14, 2012

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EX-32 - EX-32 - Gas Natural Inc.	d363617dex32.htm
EX-31.1 - EX-31.1 - Gas Natural Inc.	d363617dex311.htm
EX-31.2 - EX-31.2 - Gas Natural Inc.	d363617dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

¨	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		27-3003768
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1 First Avenue South Great Falls, Montana		59401
(Address of principal executive office)		(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 x No ¨

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

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

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

The number of shares outstanding of the registrant’s common stock as of July 30, 2012 was 8,156,926 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, 2012.

GLOSSARY OF TERMS

Unless otherwise stated or the context requires otherwise, references to “we,” “us,” the “Company” and “Gas Natural” refer to Gas Natural Inc. and its consolidated subsidiaries. In addition, this glossary contains terms and acronyms that are relevant to natural gas distribution, natural gas marketing and natural gas pipeline operations and that are used in this Form 10-Q.

AECO. Alberta Energy Company Limited (used in reference to the AECO natural gas price index).

ASC. FASB Accounting Standards Certification, standards issued by FASB with respect to GAAP.

ASU. Accounting Standards Update.

Bangor Gas Company. Bangor Gas Company, LLC.

Brainard. Brainard Gas Corp.

Bcf. One billion cubic feet, used in reference to natural gas.

CIG. Colorado Interstate Gas (used in reference to the Colorado Interstate Gas Index).

Citizens. Citizens Bank of Michigan.

Clarion River. Clarion River Gas Company.

Cut Bank Gas. Cut Bank Gas Company.

Dekatherm. One million British thermal units, used in reference to natural gas. Abbreviated as Dkt.

EPA. The United States Environmental Protection Agency.

EWR. Energy West Resources, Inc.

Energy West. Energy West, Incorporated.

Energy West Development. Energy West Development, Inc.

Exchange Act. The Securities Exchange Act of 1934, as amended.

FASB. Financial Accounting Standards Board.

FERC. The Federal Energy Regulatory Commission.

Frontier Natural Gas. Frontier Natural Gas, LLC.

Frontier Utilities. Frontier Utilities of North Carolina, Inc.

GAAP. Generally accepted accounting principles in the United States of America

GNSC. Gas Natural Service Company, LLC

GPL. Great Plains Land Development Co., Ltd.

Great Plains. Great Plains Natural Gas Company.

Independence. Independence Oil, LLC.

IFRS. International Financial Reporting Standards.

JDOG. John D. Oil and Gas Marketing Co. LLC.

KPSC. Kentucky Public Service Commission.

Kykuit. Kykuit Resources, LLC.

Lightning Pipeline. Lightning Pipeline Company, Inc.

MMcf. One million cubic feet, used in reference to natural gas.

MPSC. The Montana Public Service Commission.

MPUC. The Maine Public Utilities Commission.

NCUC. The North Carolina Utilities Commission.

NEO. Northeast Ohio Natural Gas Corp.

NGA. The Natural Gas Act.

Orwell. Orwell Natural Gas Company.

Osborne Trust. The Richard M. Osborne Trust, dated February 24, 2012.

PaPUC. The Pennsylvania Public Utility Commission.

PGC. Public Gas Company, Inc.

PUCO. The Public Utilities Commission of Ohio.

Penobscot Natural Gas. Penobscot Natural Gas Company, Inc.

SEC. The United States Securities and Exchange Commission.

Spelman. Spelman Pipeline Holdings, LLC.

SunLife. SunLife Assurance Company of Canada

Walker Gas. Walker Gas & Oil Company, Inc.

WPSC. The Wyoming Public Service Commission.

GAS NATURAL INC.

INDEX TO FORM 10-Q


	Page No.
Part I - Financial Information

Item 1 – Financial Statements

Condensed Consolidated Balance Sheets June 30, 2012 and December 31, 2011 (Unaudited)		F-1

Condensed Consolidated Statements of Income and Comprehensive Income Three and Six months ended June 30, 2012 and 2011 (Unaudited)		F-3

Condensed Consolidated Statements of Changes in Stockholders’ Equity Six months ended June 30, 2012 and 2011 (Unaudited)		F-4

Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2012 and 2011 (Unaudited)		F-5

Notes to Unaudited Condensed Consolidated Financial Statements		F-7

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		3

Item 3 – Quantitative and Qualitative Disclosures About Market Risk		17

Item 4 – Controls and Procedures		18

Part II – Other Information

Item 1 - Legal Proceedings		18

Item 6 - Exhibits		20

Signatures

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2012 and December 31, 2011 (Unaudited)


	June 30, 2012		December 31, 2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,457,144	$	10,504,845
Marketable securities		357,750		367,875
Accounts receivable
Trade, less allowance for doubtful accounts of $765,264 and $630,632, respectively		4,968,702		9,381,625
Related parties		559,692		519,084
Unbilled gas		1,066,851		4,232,854
Note receivable - related parties, current portion		10,620		10,256
Inventory
Natural gas and propane		3,181,995		6,967,739
Materials and supplies		2,289,304		1,958,858
Prepaid income taxes		1,071,051		1,584,869
Prepayments and other		396,434		741,101
Recoverable cost of gas purchases		3,091,693		2,627,416
Deferred tax asset		1,146,373		1,061,314

Total current assets		20,597,609		39,957,836

PROPERTY, PLANT AND EQUIPMENT, net		104,644,827		97,612,257

OTHER ASSETS
Notes receivable - related parties, less current portion		30,006		35,408
Regulatory assets
Property taxes		449,098		590,464
Income taxes		452,645		452,645
Rate case costs		202,746		205,714
Debt issuance costs, net		1,204,928		869,593
Goodwill		14,750,924		14,607,952
Customer relationships		627,917		639,333
Investment in unconsolidated affiliate		325,396		330,351
Restricted cash		1,709,304		949,907
Other assets		4,592,743		159,954

Total other assets		24,345,707		18,841,321

TOTAL ASSETS	$	149,588,143	$	156,411,414

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-1

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2012 and December 31, 2011 (Unaudited)


	June 30, 2012		December 31, 2011
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Checks in excess of amounts on deposit	$	806,880	$	1,027,376
Lines of credit		18,662,377		23,160,000
Accounts payable
Trade		3,496,787		8,755,623
Related parties		87,781		191,763
Notes payable, current portion		8,269		7,885
Accrued liabilities
Taxes other than income		2,149,007		3,018,964
Vacation		167,290		115,940
Employee benefit plans		282,247		140,149
Interest		114,540		30,688
Deferred payments received from levelized billing		2,311,173		2,948,188
Customer deposits		734,985		707,062
Property tax settlement, current portion		242,128		242,128
Related parties		258,862		635,192
Other current liabilities		1,946,330		1,280,670
Acquisition settlement		2,250,000		—
Overrecovered gas purchases		1,749,706		2,237,827

Total current liabilities		35,268,362		44,499,455

LONG-TERM LIABILITIES
Deferred investment tax credits		165,848		176,379
Deferred tax liability		4,752,856		2,908,167
Asset retirement obligation		1,766,715		1,689,081
Customer advances for construction		1,023,299		880,851
Regulatory liability for income taxes		83,161		83,161
Regulatory liability for gas costs		35,418		57,570

Total long-term liabilities		7,827,297		5,795,209

NOTES PAYABLE, less current portion		31,340,487		31,344,723

COMMITMENTS AND CONTINGENCIES (see Note 11)

STOCKHOLDERS’ EQUITY
Preferred stock; $0.15 par value, 1,500,000 shares authorized, no shares issued or outstanding		—		—
Common stock; $0.15 par value, 15,000,000 shares authorized, 8,156,551 and 8,154,301 shares issued and outstanding, respectively		1,223,483		1,223,145
Capital in excess of par value		42,008,079		41,978,799
Accumulated other comprehensive income		74,074		80,405
Retained earnings		31,846,361		31,489,678

Total stockholders’ equity		75,151,997		74,772,027

TOTAL CAPITALIZATION		106,492,484		106,116,750

TOTAL LIABILITIES AND CAPITALIZATION	$	149,588,143	$	156,411,414

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-2

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

For the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
REVENUES
Natural gas operations	$	12,801,547		$	17,095,262		$	42,649,632		$	55,314,845
Marketing and production		1,040,354			1,475,665			2,947,448			3,301,167
Pipeline operations		102,093			102,061			209,877			208,385
Propane operations		561,552			—			2,470,710			—

Total revenues		14,505,546			18,672,988			48,277,667			58,824,397

COST OF SALES
Natural gas purchased		5,447,322			9,575,592			22,684,216			34,292,500
Marketing and production		850,311			1,208,379			2,245,727			2,607,786
Propane purchased		418,482			—			1,849,751			—

Total cost of sales		6,716,115			10,783,971			26,779,694			36,900,286

GROSS MARGIN		7,789,431			7,889,017			21,497,973			21,924,111

OPERATING EXPENSES
Distribution, general, and administrative		5,236,512			4,629,976			10,449,432			9,287,296
Maintenance		316,722			271,965			612,957			557,192
Depreciation and amortization		1,304,472			1,068,470			2,547,816			2,103,547
Accretion		39,554			34,803			77,634			69,413
Taxes other than income		880,306			892,981			1,817,796			1,746,946

Total operating expenses		7,777,566			6,898,195			15,505,635			13,764,394

OPERATING INCOME		11,865			990,822			5,992,338			8,159,717

LOSS FROM UNCONSOLIDATED AFFILIATE		(2,214	)		(20,194	)		(4,955	)		(83,151	)
OTHER INCOME (EXPENSE), net		231,624			178,029			350,896			333,444
ACQUISITION EXPENSE		(425,151	)		(15,798	)		(616,476	)		(55,533	)
STOCK SALE EXPENSE		(255,279	)		(46,123	)		(255,279	)		(46,123	)
INTEREST EXPENSE		(625,797	)		(492,674	)		(1,289,866	)		(905,853	)

INCOME (LOSS) BEFORE INCOME TAXES		(1,064,952	)		594,062			4,176,658			7,402,501

INCOME TAX BENEFIT (EXPENSE)		340,762			(233,724	)		(1,618,001	)		(2,767,409	)

NET INCOME (LOSS)		(724,190	)		360,338			2,558,657			4,635,092

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on available for sale securities, net of tax		(15,477	)		855			(6,331	)		19,621

COMPREHENSIVE INCOME (LOSS)	$	(739,667	)	$	361,193		$	2,552,326		$	4,654,713

EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED	$	(0.09	)	$	0.04		$	0.31		$	0.57

WEIGHTED AVERAGE DIVIDENDS DECLARED PER COMMON SHARE	$	0.135		$	0.135		$	0.270		$	0.270

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC		8,155,867			8,151,359			8,155,300			8,150,802

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED		8,155,867			8,159,825			8,162,686			8,158,955

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-3

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2012 and 2011 (Unaudited)


							Accumulated
					Capital In		Other
	Common		Common		Excess Of		Comprehensive			Retained
	Shares		Stock		Par Value		Income			Earnings			Total
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

BALANCE AT DECEMBER 31, 2011		8,154,301	$	1,223,145	$	41,978,799	$	80,405		$	31,489,678		$	74,772,027

Net income		—		—		—		—			2,558,657			2,558,657
Net unrealized loss on available for sale securities		—		—		—		(6,331	)		—			(6,331	)
Stock issued for services		2,250		338		24,578		—			—			24,916
Stock option expense		—		—		4,702		—			—			4,702
Dividends declared		—		—		—		—			(2,201,974	)		(2,201,974	)

BALANCE AT JUNE 30, 2012		8,156,551	$	1,223,483	$	42,008,079	$	74,074		$	31,846,361		$	75,151,997

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-4

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2012 and 2011 (Unaudited)


	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,558,657		$	4,635,092
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		2,547,816			2,103,547
Accretion		77,634			69,413
Amortization of debt issuance costs		139,388			68,667
Stock based compensation		29,618			34,943
Loss on sale of assets		2,184			39,685
Loss from unconsolidated affiliate		4,955			83,151
Investment tax credit		(10,531	)		(10,531	)
Deferred income taxes		1,628,532			2,721,060
Changes in assets and liabilities
Accounts receivable, including related parties		4,441,447			5,128,578
Unbilled gas		3,166,003			4,401,975
Natural gas and propane inventory		3,785,744			2,041,931
Accounts payable, including related parties		(4,843,189	)		(4,397,430	)
Recoverable/refundable cost of gas purchases		(952,398	)		2,026,951
Prepayments and other		344,667			513,230
Other assets		209,790			(847,241	)
Other liabilities		(897,090	)		(3,097,367	)

Net cash provided by operating activities		12,233,227			15,515,654

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(8,766,629	)		(10,279,331	)
Proceeds from sale of fixed assets		29,302			19,900
Proceeds from related party note receivable		5,038			4,699
Cash acquired in acquisition		502			—
Purchase of Public Gas Company, Inc.		(1,551,478	)		—
Restricted cash		—			(3,403,078	)
Investment in unconsolidated affiliate		—			(303,600	)
Acquisition deposit		(2,250,000	)		—
Customer advances for construction		142,448			72,082
Contributions in aid of construction		47,402			7,735

Net cash used in investing activities		(12,343,415	)		(13,881,593	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lines of credit		7,012,377			11,200,000
Repayment on lines of credit		(11,510,000	)		(17,509,999	)
Proceeds from notes payable		—			18,334,000
Repayments of notes payable		(3,852	)		(9,869,533	)
Repayments of related party notes payable		—			(49,361	)
Debt issuance costs		(474,723	)		(483,488	)
Restricted cash		(759,397	)		(948,836	)
Dividends paid		(2,201,918	)		(2,200,702	)

Net cash used in financing activities		(7,937,513	)		(1,527,919	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(8,047,701	)		106,142
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		10,504,845			13,026,585

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,457,144		$	13,132,727

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-5

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2012 and 2011 (Unaudited)


	2012		2011
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	1,066,626	$	822,174
Cash paid for income taxes		186,600		91,303

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Capital expenditures included in accounts payable	$	477,339	$	496,384
Capitalized interest		3,641		3,444
Accrued dividends		367,000		366,842

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-6

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 Brainard, Energy West, GNSC, Great Plains, Independence, Lightning Pipeline and PGC. Brainard is a natural gas utility company with operations in Ohio. Energy West is the parent company of multiple entities that are natural gas utility companies with regulated operations in Maine, Montana, North Carolina and Wyoming as well as non-regulated operations in Maine, Montana and Wyoming. GNSC manages gas procurement, transportation, and storage for Brainard and subsidiaries of Lightning Pipeline and Great Plains. Lightning Pipeline is the parent company of multiple entities that are regulated natural gas utility companies with operations in Ohio and Pennsylvania. Great Plains is the parent company of an entity that is a regulated natural gas utility company with operations in Ohio. Independence is a non-regulated subsidiary that delivers liquid propane, heating oil, and kerosene to customers in North Carolina and Virginia. On April 1, 2012, the Company acquired PGC, which is a regulated natural gas distribution company in Kentucky. The Company currently has five reporting segments:


• Natural Gas Operations		Annually distribute approximately 32 billion cubic feet of natural gas to approximately 70,000 customers through regulated utilities operating in Kentucky, Maine, Montana, North Carolina, Ohio, Pennsylvania and Wyoming.

• Marketing and Production Operations		Annually market approximately 1.2 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, EWR. EWR owns an average 51% gross working interest (an average 43% net revenue interest) in 160 natural gas producing wells and gas gathering assets in Glacier and Toole Counties in Montana.

• Pipeline Operations		The Shoshone interstate and Glacier gathering natural gas pipelines located in Montana and Wyoming are owned through the subsidiary, EWD. Certain natural gas producing wells owned by EWD are being managed and reported under the marketing and production operations.

• Propane Operations		The operations were acquired in August 2011 and delivers liquid propane, heating oil and kerosene to approximately 4,300 residential, commercial and agricultural customers in North Carolina and Virginia through the subsidiary, Independence.

• 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 consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the unaudited interim condensed consolidated 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 historical financial statements reflect the following reportable business segments: Natural Gas Operations, Marketing and Production Operations, Pipeline Operations, Propane Operations and Corporate and Other.

The Company follows accounting standards set by the FASB. The FASB sets 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

F-7

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

bodies, have issued standards in the form of FASB Statements, Interpretations, FASB Staff Positions, EITF consensuses, AICPA Statements of Position, etc. References to 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, 2012 are not necessarily indicative of the results that may be expected for future fiscal periods. Events occurring subsequent to June 30, 2012 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, 2011.

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 and propane 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 and 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 PUCO and the rate per Mcf is adjusted as necessary.

F-8

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s bad debt expense for the three and six months ended June 30, 2012 was $29,902 and $187,885, respectively. Bad debt expense for the three and six months ended June 30, 2011 was $34,194 and $79,177, respectively.

Recoverable/Refundable Costs of Gas Purchases

The Company accounts for purchased gas costs in accordance with procedures authorized by the utility commissions in the states in which it operates. 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’s 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. On October 26, 2011, the PUCO adopted and approved a Joint Stipulation that finalizes the adjustments for NEO and Orwell to approximately $1,100,000 and ($964,000), respectively. However, the Joint Stipulation modified the refund period for Orwell to one year as compared to two years as originally identified. The Company considered the modification to be material and sought rehearing. On December 22, 2011, the PUCO affirmed its Finding and Order requiring Orwell’s refund to be completed over twelve months.

During the year ended December 31, 2011, the PUCO conducted an audit of Brainard’s rates as filed from July 2009 through June 2011. The Staff of the PUCO recommended a finding that Brainard collected excess gas costs of approximately $104,000. The Company agreed that excess gas costs were collected, but only in the amount of approximately $48,000. An evidentiary hearing was convened on November 3, 2011, resumed on March 27, 2012 and concluded on April 12, 2012. Initial Briefs were submitted by the Company and the Staff of the PUCO on May 18, 2012 and Reply Briefs on June 6, 2012. On August 8, 2012 the PUCO issued its order requiring that Brainard refund approximately $104,000 with interest over twelve months. The Company is reviewing the Opinion and and Order and is considering potential responses.

Regulatory Assets and Liabilities

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. Regulatory liabilities will be refunded over a period of approximately five 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. Amortization expense was $62,366 and $139,388 for the three and six months ended June 30, 2012, respectively. Amortization expense was $57,621 and $68,667 for the three and six months ended June 30, 2011, respectively. The Company has incurred $474,723 during 2012 related to the current bank refinancing opportunities and has included them as debt issuance costs at June 30, 2012. These costs are not being amortized as the financing opportunities are pending final approval by the various public service commissions.

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, 2012 and December 31, 2011, the Company has recorded a net asset of $192,016 and $227,216, and a related liability of $1,766,715 and $1,689,081, 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.

F-9

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:


	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:


	2012		2011
Balance, beginning of period	$	1,689,081	$	1,546,867
Accretion expense		77,634		69,413

Balance, end of period	$	1,766,715	$	1,616,280

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 (Loss)

Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss), 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 income and comprehensive income in computing net income (loss) and reported separately in shareholders’ equity.

Other comprehensive income (loss) for the three and six months ended June 30, 2012 is reported net of tax of ($9,273) and ($3,794), respectively. Other comprehensive income for the three and six months ended June 30, 2011 is reported net of tax of $518 and $11,667, respectively.

Earnings Per Share

Earnings 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.

F-10

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012		2011
Numerator:
Net income (loss)	$	(724,190	)	$	360,338	$	2,558,657	$	4,635,092

Denominator:
Basic weighted average common shares outstanding		8,155,867			8,151,359		8,155,300		8,150,802
Dilutive effect of stock options		—			8,466		7,386		8,153

Diluted weighted average common shares outstanding		8,155,867			8,159,825		8,162,686		8,158,955

The Company excludes outstanding stock options with exercise prices that are greater than the average market price from the calculation of diluted earnings per share because their effect would be anti-dilutive. The Company reported a net loss from continuing operations for the three months ended June 30, 2012 and therefore, the 35,000 stock options outstanding are anti-dilutive. There were no stock options that were anti-dilutive for the three months ended June 30, 2011. There were no stock options that were anti-dilutive for the six months ended June 30, 2012 and 2011, respectively.

Reclassifications

Certain reclassifications of prior year reported amounts have been made for comparative purposes. Such reclassifications had no effect on income (loss).

Recently Adopted 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. The adoption of this guidance did not 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 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 income and comprehensive income or in two separate but consecutive statements. This ASU changed the presentation of other comprehensive income in the accompanying financial statements. However, this ASU did not change the calculation of the other comprehensive income. The adoption of this guidance did not have a material impact on the accompanying financial statements.

Note 2 – Acquisitions

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 to the south of Louisville.

Spelman has reconditioned a portion of the Ohio pipeline, has been authorized by the PUCO to operate as an intrastate pipeline, and expects to initiate transportation service pursuant to its tariff in September 2012.

F-11

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Acquisition of Independence Oil & LP Gas, Inc.

On August 1, 2011 the Company purchased certain assets and assumed certain liabilities of Independence Oil & LP Gas, Inc. for the original price of $1.6 million, of which $200,000 was held back for 90 days. Independence Oil & LP Gas, Inc. delivered liquid propane, heating oil, and kerosene to approximately 4,500 customers from its facilities in West Jefferson, North Carolina and Independence, Virginia. The Company created a new subsidiary named Independence Oil, LLC and is continuing to service the current customers with the intention to expand to other customers in each of the regions. The costs related to the transaction were $13,526 and were expensed during the year ended December 31, 2011.

In accordance with GAAP, the Company determined the purchase of the assets acquired and liabilities assumed to be a business combination. Therefore, the Company applied the acquisition method and valued each of the assets acquired (cash, accounts receivable, inventory, and property, plant and equipment) and liabilities assumed (accounts payable) at fair value as of the acquisition date. The cash, accounts receivable and accounts payable were deemed to be at fair value as of the acquisition date. The Company valued the fair value of inventory and property, plant and equipment by performing fair value research of the items acquired. This process resulted in the fair value of the assets acquired, reduced by the liabilities assumed, to be greater than the purchase price. The difference is a gain from bargain purchase and is included as a separate line item in the statements of income for the year ended December 31, 2011. The Company completed the transaction as it provided the opportunity to strengthen its presence in North Carolina, while extending into Virginia, two markets with favorable competitive conditions targeted for growth.

The estimated fair value of the assets acquired and liabilities assumed is reflected in the following table at the date of acquisition.


Current assets	$	429,576
Property and equipment		1,958,717

Total assets acquired		2,388,293

Current liabilities		57,777

Total liabilities assumed		57,777

Net assets acquired	$	2,330,516

The asset purchase agreement included a settlement date 90 days after the acquisition date, determined to be October 31, 2011 by both parties. As a result of this settlement, the Company paid $125,000 of the $200,000 that was held back at the acquisition date on November 1, 2011. The remaining $75,000 was held back to complete an environmental remediation project that was agreed upon at the time of closing. The environmental remediation was completed in December 2011 and the $75,000 was paid for the remediation project and therefore no funds were remaining to provide to the seller. In addition, there was approximately $50,000 of net working capital adjustments made during this settlement. The effects of this settlement were recorded during December 2011 and are reflected in the accompanying condensed consolidated financial statements.

Acquisition of Public Gas Company, Inc.

On April 1, 2012 the Company purchased 100% of the stock of PGC from Kentucky Energy Development, LLC for the original price of $1.6 million, of which $48,522 was held back and a portion is to be settled up 45 days from closing and the remainder is to be settled up 180 days from closing. PGC is a regulated natural gas distribution company serving approximately 1,600 customers in the State of Kentucky in the counties of Breathitt, Jackson, Johnson, Lawrence, Lee, Magoffin, Morgan and Wolf. The costs related to the transaction were $51,187 and were expensed during the three and six months ended June 30, 2012. The Company completed the transaction as it provided the opportunity to expand its presence into Kentucky.

The Company applied the acquisition method to the business combination and valued each of the assets acquired (cash, accounts receivable, and property, plant and equipment) and liabilities assumed (accounts payable) at fair value as of the acquisition date. The cash, accounts receivable and accounts payable were deemed to be recorded at fair value as of the acquisition date. The Company determined the fair value of property, plant and equipment to be historical book value which is the rate base as PGC is a regulated natural gas distribution company and is required to report to the KPSC. The Company also recorded deferred taxes based on the timing difference related to depreciation. As a result of the purchase, $142,971 was allocated to goodwill, is reported in the natural gas operations segment and is unchanged since the acquisition. The Company expects none of the goodwill to be deductible for tax purposes.

F-12

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The estimated fair value of the assets acquired and liabilities assumed is reflected in the following table at the date of acquisition.


Current assets	$	69,634
Property and equipment		1,577,593
Goodwill		142,971

Total assets acquired		1,790,198

Current liabilities		103,828
Long-term liabilities		134,892

Total liabilities assumed		238,720

Net assets acquired	$	1,551,478

The asset purchase agreement included a settlement date 45 days after the acquisition date. As a result of this settlement, the Company owed $105 of the $48,522 that was held back at the acquisition date to the seller. Both parties agreed the $105 will be included with the settlement 180 days after the acquisition date.

Acquisition of Loring Pipeline lease and related property

On April 17, 2012, the Company entered into an agreement with United States Power Fund, L.P. (“USPF”) to place a bid at a public auction on certain assets that were being foreclosed upon by USPF (the “Agreement”). Those assets included various parcels of land as well as a leasehold interest in a pipeline corridor easement running from Searsport to Limestone, Maine. The assets were owned by Loring BioEnergy, LLC (“LBE”) and were being foreclosed upon by USPF due to LBE’s default on a loan that it had obtained from USPF. On June 4, 2012 the Company attended the public foreclosure auction and was the successful bidder with a bid of $4,500,000. The acquisition was set to close 30 days after the public auction but the Company is still in negotiations regarding the leasehold interest and therefore the transaction has not yet closed. The Agreement provides that $2,250,000 of the purchase price will be issued in shares of the Company’s common stock or cash and the balance of the purchase price in the amount of $2,250,000 will be in the form of cash at closing. As of June 30, 2012, the Company has deposited $2,250,000 in escrow, has recorded $2,250,000 as a current liability and $4,500,000 as a non-current other asset on the accompanying condensed consolidated balance sheet.

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, 2012 or December 31, 2011.

F-13

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of available-for-sale securities at:


	June 30, 2012
	Investment at cost		Unrealized Gains		Estimated Fair Value
Common stock	$	238,504	$	119,246	$	357,750


	December 31, 2011
	Investment at cost		Unrealized Gains		Estimated Fair Value
Common stock	$	238,504	$	129,371	$	367,875

Unrealized gains on available-for-sale securities of $74,074 and $80,405, respectively (net of $45,172 and $48,966 in taxes) was included in accumulated other comprehensive income in the accompanying balance sheets at June 30, 2012 and December 31, 2011, respectively.

The Company did not sell any available-for-sale securities during the three and six months ended June 30, 2012 and 2011, respectively.

As of June 30, 2012 and December 31, 2011, the Company did not hold any securities in an unrealized loss position.

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:


	June 30, 2012
	Level 1		Level 2		Level 3		TOTAL
Available-for-sale securities	$	357,750		—		—	$	357,750


	December 31, 2011
	Level 1		Level 2		Level 3		TOTAL
Available-for-sale securities	$	367,875		—		—	$	367,875

The fair value of financial instruments including 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. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of notes payable are classified as Level 2 measurements.

F-14

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Credit Facilities and Long-Term Debt

Bank of America

At June 30, 2012, Energy West had an unsecured $30 million revolving credit facility with the Bank of America. On November 2, 2011, the Company exercised the $10 million accordion feature on the revolving credit facility with Bank of America to increase the capacity from $20 million to $30 million. The expanded credit facility changes the annual commitment fee from 0.20% to a range of 0.25% to 0.45% of the unused portion of the facility. The interest on amounts outstanding changed from 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”) to the monthly LIBOR plus 175 to 225 basis points. The other terms of the agreement remain the same, including the expiration of the facility on June 29, 2012. On June 1, 2012, an agreement was executed to extend the expiration of the facility until August 24, 2012.

For the three months ended June 30, 2012 and 2011, the weighted average interest rate on the facility was 3.26% and 1.76%, respectively, resulting in $105,461 and $45,005 of interest expense, respectively. For the six months ended June 30, 2012 and 2011, the weighted average interest rate on the facility was 3.28% and 1.71%, respectively, resulting in $231,133 and $101,209 of interest expense, respectively. The balance on the revolving credit facility was $18,261,000 and $23,160,000 at June 30, 2012 and December 31, 2011, respectively. The $18.3 million of borrowings as of June 30, 2012, leaves the remaining borrowing capacity on the line of credit at $11.7 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 is 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, 2012 and 2011, respectively.

Citizens Bank

In connection with the acquisition of the Ohio subsidiaries, 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 Osborne Trust, and Great Plains guaranteed NEO’s revolving line of credit and term loans.

The Ohio subsidiaries 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 5.00%, resulting in $38,117 and $156,022 of interest expense, respectively. The term loans were paid off on May 3, 2011.

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 Senior Secured Guaranteed Floating Rate Notes due May 3, 2014 (“Floating Rate Note”). Both notes were placed with SunLife. Approximately $615,000 was incurred related to the debt issuance which was capitalized and is being amortized over the life of the notes.

The Fixed Rate Note, in the amount of $15.3 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”). 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.

F-15

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. 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 prior 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.

For the year ended December 31, 2011, the Company breached a financial covenant under the Fixed Rate Note and Floating Rate Note when the Obligors made restricted payments in the form of dividends to the holding company in excess of the amounts permissible. In addition, the Company did not timely notify Sun Life of certain newly-formed subsidiaries which were required to be obligors under the Fixed Rate Note and Floating Rate Note. The failure to timely notify Sun Life constituted a breach of the Fixed Rate Note and Floating Rate Note. The Company requested that Sun Life waive these breaches and amend the financial covenants.

Sun Life required debt service reserve accounts to be created for $950,000 to cover approximately one year of interest payments. The Company is not able to use these funds in the debt service reserve accounts for operational cash purposes.

Payments for both notes prior to maturity are interest-only.

For the three and six months ended June 30, 2012, the weighted average interest rate on the Fixed Rate Note was 5.38%, resulting in $206,242 and $412,485 of interest expense, respectively. 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.

For the three and six months ended June 30, 2012, the weighted average interest rate on the Floating Rate Note was 4.35% and 4.36% resulting in $32,625 and $65,350 of interest expense, respectively. The Floating Rate Note pays interest quarterly and the first payment was not due until August 2011 and therefore no interest expense was incurred during the three and six months ended June 30, 2011.

On April 9, 2012, the Company entered into a waiver and amendment of the Fixed Rate Note and Floating Rate Note. Pursuant to the amendments, Sun Life waived its rights and remedies of the breaches of the covenants described above.

The amendments also provide that any cash dividends, distributions, redemptions or repurchases of common stock may be made by the obligors to the holding company only if (i) the aggregate amount of all such dividends, distributions, redemptions and repurchases for the fiscal year do not exceed 70% of net income of the obligors for the four fiscal quarters then ending determined as of the end of each fiscal quarter for the four fiscal quarters then ending, and (ii) there exists no other event of default at the time the dividend, distribution, redemption or repurchase is made. Currently, the Company does not expect the obligors to be able to pay a dividend to holding company until the first quarter of 2013. The inability of the obligors to pay a dividend to the holding company may impact the Company’s ability to pay a dividend to shareholders. In addition, the Company agreed to deliver an irrevocable standby letter of credit to Sun Life in the amount of $750,000 to be drawn upon by Sun Life if and when any event of default has occurred and is continuing. After discussion with Sun Life, the parties agreed to change the letter of credit requirement to depositing cash into a reserve account whereas Sun Life is the beneficiary. The terms allow the Company to withdraw that money if a letter of credit is received to replace the restricted cash.

The Fixed Rate Note and Floating Rate Note require, on a consolidated basis, an interest coverage ratio of at least 2.0 to 1.0, measured quarterly on a trailing four quarter basis. The notes generally define the interest coverage ratio as the ratio of EBITDA to gross interest expense, determined in accordance with GAAP. The interest coverage ratio is measured with respect to the Obligors on a consolidated basis and also with respect to the Company and all of its subsidiaries, on a consolidated basis. The notes also require that the Company does not permit indebtedness to exceed 60% of capitalization at any time. Like the interest coverage ratio, the ratio of debt to capitalization is measured on a consolidated basis for the Obligors, and again on a consolidated basis with respect to the Company and all of its subsidiaries.

F-16

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Yadkin Valley Bank

On February 13, 2012, Independence entered into a one year, $500,000 revolving credit facility with Yadkin Valley Bank with an interest rate based on the prime rate, with a floor of 4.5% per annum and a maximum of 16% per annum. For the three and six months ended June 30, 2012, the weighted average interest rate on the facility was 4.50%, resulting in $3,674 and $3,682 of interest expense, respectively. The balance on the facility was $401,000 at June 30, 2012. The $401,000 of borrowings as of June 30, 2012, leaves the remaining borrowing capacity on the line of credit at $99,000.

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 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 is in compliance with the financial covenants under its debt agreements or has received waivers for any defaults.

The following table shows the future minimum payments on the credit facilities and long-term debt for the years ended June 30:


2013	$	8,269
2014		3,006,487
2015		—
2016		—
2017		28,334,000
Thereafter		—

Total	$	31,348,756

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, 2012 and December 31, 2011, there were 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.

F-17

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of the stock option plans as follows:


	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic 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


	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding December 31, 2011		35,000	$	8.66
Granted		—	$	—
Exercised		—	$	—
Expired		—	$	—

Outstanding June 30, 2012		35,000	$	8.66	$	50,300

Exerciseable June 30, 2012		27,500	$	8.38	$	47,425

As of June 30, 2012 and December 31, 2011, there was $7,935 and $12,637 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, 2012:


Grant Date	Exercise Price		Number Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Number Exercisable		Weighted Average Exercise Price
12/1/2008	$	7.10		10,000	$	7.10		6.42		10,000	$	7.10
6/3/2009	$	8.44		5,000	$	8.44		1.92		5,000	$	8.44
12/1/2009	$	8.85		10,000	$	8.85		7.42		7,500	$	8.85
12/1/2010	$	10.15		10,000	$	10.15		8.42		5,000	$	10.15

				35,000						27,500

During the three and six months ended June 30, 2012, the Company recorded $2,351 and $4,702, respectively ($1,458 and $2,916, 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, 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.

F-18

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2012, was $115,090 and $236,760, respectively. 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 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 $11,598 and $20,783 for the three and six months ended June 30, 2012, respectively. 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. 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 months ended June 30, 2012 and 2011.

The Company has sponsored a defined benefit postretirement health 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, 2012 and December 31, 2011, the value of plan assets was $173,478 and $182,931, 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 June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Income tax from continuing operations:
Tax expense at statutory rate of 34%	$	(362,084	)	$	201,981		$	1,420,063		$	2,516,851
State income tax, net of federal tax expense		14,225			20,905			197,938			260,487
Amortization of deferred investment tax credits		(5,266	)		(5,266	)		(10,531	)		(10,532	)
Other		12,363			16,104			10,531			603

Total income tax expense (benefit)	$	(340,762	)	$	233,724		$	1,618,001		$	2,767,409

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, 2012 and December 31, 2011.

The tax years after 2007 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.

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.

F-19

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. Interest expense incurred related to both loans was $132 and $529 for the three and six months ended June 30, 2011, respectively.

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 $40,626 and $45,664 (of which, $10,620 and $10,256 is due within one year) as of June 30, 2012 and December 31, 2011, 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, 2012, respectively, which is included in the Natural Gas Purchased column below. Lease expense resulting from this agreement was $3,300 and $6,600 for the three and six months ended June 30, 2011 which is included in the Natural Gas Purchased column below. There was no balance due at June 30, 2012 or December 31, 2011 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, 2012 and December 31, 2011, respectively:


	Accounts Receivable				Accounts Payable
	June 30, 2012		December 31, 2011		June 30, 2012			December 31, 2011
John D. Oil and Gas Marketing	$	4,376	$	3,282	$	37,190		$	126,051
Cobra Pipeline		19,902		448		6,374			1,312
Orwell Trumbell Pipeline		130,910		128,012		19,658			1,043
Great Plains Exploration		141,129		133,928		(2,543	)		9
Big Oats Pipeline Supply		920		432		27,000			53,348
Kykuit Resources		98,037		98,037		—			—
Sleepy Hollow		143,723		138,611		—			—
Other		20,695		16,334		102			10,000

Total	$	559,692	$	519,084	$	87,781		$	191,763

The table below details transactions with related parties, including companies owned or controlled by Mr. Osborne, for the three months ended June 30, 2012:


	Three Months Ended June 30, 2012
	Natural Gas Purchases		Pipeline and Construction Purchases		Rent, Supplies, Consulting, and Other Purchases		Natural Gas Sales		Management and Other Sales
John D. Oil and Gas Marketing	$	402,461	$	—	$	2,132	$	—	$	3,282
Cobra Pipeline		81,159		—		491		—		19,454
Orwell Trumbell Pipeline		86,191		—		19,429		219		2,747
Great Plains Exploration		57,112		—		—		835		2,117
Big Oats Pipeline Supply		—		307,980		34,631		178		6,765
Sleepy Hollow		—		—		—		—		1,326
Other		226,567		—		40,581		4,339		—

Total	$	853,490	$	307,980	$	97,264	$	5,571	$	35,691

F-20

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
	Natural Gas Purchases		Pipeline and Construction Purchases		Rent, Supplies, Consulting, and Other Purchases		Natural Gas Sales		Management and Other 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 six months ended June 30, 2012:


	Six Months Ended June 30, 2012
	Natural Gas Purchases		Pipeline and Construction Purchases		Rent, Supplies, Consulting, and Other Purchases		Natural Gas Sales		Management and Other Sales
John D. Oil and Gas Marketing	$	1,409,395	$	9,870	$	2,132	$	—	$	6,564
Cobra Pipeline		282,518		890		491		—		19,454
Orwell Trumbell Pipeline		297,656		—		19,429		934		2,898
Great Plains Exploration		254,036		—		—		4,886		7,370
Big Oats Pipeline Supply		—		471,463		125,031		1,425		6,765
Sleepy Hollow		—		—		—		—		5,113
Other		600,569		—		81,352		22,454		671

Total	$	2,844,174	$	482,223	$	228,435	$	29,699	$	48,835

F-21

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
	Natural Gas Purchases		Pipeline and Construction Purchases		Rent, Supplies, Consulting, and Other Purchases		Natural Gas Sales		Management and Other 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 Company also accrued a liability of $258,862 and $635,192, respectively, due to companies controlled by Mr. Osborne for natural gas used through June 30, 2012 and December 31, 2011 that is not yet invoiced. The related expense is included in the gas purchased line item in the accompanying statements of income and comprehensive income. These amounts will be trued up to the actual invoices when received in future periods.

In connection with the common shares of stock sold by Mr. Osborne, the Company incurred expenses of $255,279 during the three and six months ended June 30, 2012. The Company incurred expenses of $46,123 during the three and six months ended June 30, 2011. These expenses are recorded in the accompanying income statement as stock sale expense.

On December 20, 2011, the Company consummated a real estate transaction with Black Bear, an Ohio limited liability company owned and controlled by Mr. Osborne, whereby Black Bear sold to the Company approximately 9.24 acres of real estate Black Bear owned in Violet Township, Fairfield County, Ohio for $600,000.

F-22

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 – Segments of Operations

The following tables set forth summarized financial information for the Company’s natural gas, marketing and production, pipeline, propane, 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, propane business and from the federally regulated pipeline business. The Company has regulated utility businesses in the states of Kentucky, Maine, Montana, North Carolina, Ohio, Pennsylvania and Wyoming 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:

Three Months Ended June 30, 2012


	Natural Gas Operations			Marketing and Production			Pipeline Operations		Propane Operations			Corporate and Other			Consolidated
OPERATING REVENUES	$	12,880,690		$	2,151,601		$	102,093	$	561,552		$	—		$	15,695,936
Intersegment eliminations		(79,143	)		(1,111,247	)		—		—			—			(1,190,390	)

Total operating revenue		12,801,547			1,040,354			102,093		561,552			—			14,505,546

COST OF SALES		5,526,465			1,961,558			—		418,482			—			7,906,505
Intersegment eliminations		(79,143	)		(1,111,247	)		—		—			—			(1,190,390	)

Total cost of sales		5,447,322			850,311			—		418,482			—			6,716,115

GROSS MARGIN	$	7,354,225		$	190,043		$	102,093	$	143,070		$	—		$	7,789,431

OPERATING EXPENSES		6,991,710			220,317			61,882		431,539			72,118			7,777,566

OPERATING INCOME (LOSS)	$	362,515		$	(30,274	)	$	40,211	$	(288,469	)	$	(72,118	)	$	11,865

NET INCOME (LOSS)	$	(40,947	)	$	(35,575	)	$	23,035	$	(156,236	)	$	(514,467	)	$	(724,190	)

Three Months Ended June 30, 2011


	Natural Gas Operations			Marketing and Production			Pipeline Operations		Propane Operations		Corporate and Other			Consolidated
OPERATING REVENUES	$	17,992,076		$	3,209,966		$	102,061	$	—	$	—		$	21,304,103
Intersegment eliminations		(896,814	)		(1,734,301	)		—		—		—			(2,631,115	)

Total operating revenue		17,095,262			1,475,665			102,061		—		—			18,672,988

COST OF SALES		10,472,406			2,942,680			—		—		—			13,415,086
Intersegment eliminations		(896,814	)		(1,734,301	)		—		—		—			(2,631,115	)

Total cost of sales		9,575,592			1,208,379			—		—		—			10,783,971

GROSS MARGIN	$	7,519,670		$	267,286		$	102,061	$	—	$	—		$	7,889,017

OPERATING EXPENSES		6,617,487			187,659			53,665		—		39,384			6,898,195

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

F-23

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2012


	Natural Gas Operations			Marketing and Production			Pipeline Operations			Propane Operations			Corporate and Other			Consolidated
OPERATING REVENUES	$	42,813,840		$	5,777,390		$	209,877		$	2,470,710		$	—		$	51,271,817
Intersegment eliminations		(164,208	)		(2,829,942	)		—			—			—			(2,994,150	)

Total operating revenue		42,649,632			2,947,448			209,877			2,470,710			—			48,277,667

COST OF SALES		22,848,424			5,075,669			—			1,849,751			—			29,773,844
Intersegment eliminations		(164,208	)		(2,829,942	)		—			—			—			(2,994,150	)

Total cost of sales		22,684,216			2,245,727			—			1,849,751			—			26,779,694

GROSS MARGIN	$	19,965,416		$	701,721		$	209,877		$	620,959		$	—		$	21,497,973

OPERATING EXPENSES		13,720,982			551,402			100,388			997,952			134,911			15,505,635

OPERATING INCOME (LOSS)	$	6,244,434		$	150,319		$	109,489		$	(376,993	)	$	(134,911	)	$	5,992,338

NET INCOME (LOSS)	$	3,311,587		$	59,740		$	61,258		$	(251,077	)	$	(622,851	)	$	2,558,657

As of June 30, 2012
Goodwill	$	14,750,924		$	—		$	—		$	—		$	—		$	14,750,924
Investment in unconsolidated affiliate	$	—		$	325,396		$	—		$	—		$	—		$	325,396
Total assets	$	140,533,525		$	6,266,724		$	842,812		$	2,829,273		$	63,070,043		$	213,542,377
Intersegment eliminations		(49,820,232	)		(742,487	)		(7,492	)		(2,314,755	)		(11,069,268	)		(63,954,234	)

Total assets	$	90,713,293		$	5,524,237		$	835,320		$	514,518		$	52,000,775		$	149,588,143

Six Months Ended June 30, 2011


	Natural Gas Operations			Marketing and Production			Pipeline Operations			Propane Operations		Corporate and Other			Consolidated
OPERATING REVENUES	$	56,301,969		$	7,550,218		$	208,385		$	—	$	—		$	64,060,572
Intersegment eliminations		(987,124	)		(4,249,051	)		—			—		—			(5,236,175	)

Total operating revenue		55,314,845			3,301,167			208,385			—		—			58,824,397

COST OF SALES		35,279,624			6,856,837			—			—		—			42,136,461
Intersegment eliminations		(987,124	)		(4,249,051	)		—			—		—			(5,236,175	)

Total cost of sales		34,292,500			2,607,786			—			—		—			36,900,286

GROSS MARGIN	$	21,022,345		$	693,381		$	208,385		$	—	$	—		$	21,924,111

OPERATING EXPENSES		13,233,295			387,156			95,989			—		47,954			13,764,394

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

As of June 30, 2011
Goodwill	$	14,607,952		$	—		$	—		$	—	$	—		$	14,607,952
Investment in unconsolidated affiliate	$	—		$	860,665		$	—		$	—	$	—		$	860,665
Total assets	$	129,347,991		$	5,278,371		$	849,911		$	—	$	55,582,507		$	191,058,780
Intersegment eliminations		(42,320,659	)		(1,267,242	)		(18,130	)		—		(9,697,125	)		(53,303,156	)

Total assets	$	87,027,332		$	4,011,129		$	831,781		$	—	$	45,885,382		$	137,755,624

F-24

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.

On June 20, 2012, the Company was named as a defendant in a lawsuit captioned RBS Citizens N.A., dba Charter One v. Richard M. Osborne, Gas Natural Inc. (f/k/a Energy, Inc.) and the Richard M. Osborne Trust, Case No. CV-12-784656, which was filed in the Cuyahoga County Court of Common Pleas in Ohio. In an effort to collect on judgments obtained against Richard M. Osborne, Chairman and Chief Executive Officer, the complaint seeks (1) an order requiring the Company to pay over to RBS Citizens any distributions due to Mr. Osborne by virtue of his ownership in Gas Natural as well as any proceeds payable to him as part of the previously announced proposed acquisition of John D. Oil and Gas Marketing Company, LLC (“JDOGM”), (2) the imposition of a constructive trust on dividends or assets that Mr. Osborne might receive as part of the acquisition of JDOGM and (3) an injunction preventing the acquisition of JDOGM. The Company’s response to the complaint is due by August 29, 2012.

In 2010, Bangor Gas Company, the Company’s Maine utility, asserted a claim against H.Q. Energy Services (US), Inc. (“HQ”) for a breach of a firm gas transportation service agreement between the parties. HQ filed a counterclaim against the Company for reimbursement of certain transportation charges that HQ paid to a third party. The parties agreed to arbitration and on September 1, 2011, the arbitrators awarded HQ the sum of approximately $280,000 for past transportation charges that HQ paid to the Company. The arbitrators also ordered the Company to pay future transportation charges that will be incurred during the remaining term of the agreement while HQ was ordered to pay the Company for future fuel reimbursements for the remaining term of the agreement. On September 23, 2011, the arbitrators clarified their initial order to require HQ to reimburse the Company for the past transportation charges awarded by the arbitrators if the FERC determined that our payment of the transportation charges was not consistent with FERC policy. On November 10, 2011, the FERC’s Office of General Counsel issued a no-action letter indicating that the FERC staff could not assure the Company that the FERC would not recommend enforcement action if the Company made the payments to HQ required by the arbitration award. As a result, on November 30, 2011, the Company filed an action in the United States District Court, District of Maine against HQ seeking to vacate the arbitration award against the Company and confirm that portion of the award requiring HQ to return the transportation payments to the Company and obtain an award of past fuel reimbursements in addition to the prospective award made by the arbitrators. On March 1, 2012, the court issued an order confirming the arbitration award against the Company, rejecting the Company’s claim for past fuel costs, and denying the Company’s claim for reimbursement of transportation charges on the grounds that the FERC no-action letter was not a final, binding finding by the FERC of the consistency of the payments with FERC policy. On March 30, 2012, the Company filed an action with the United States Court of Appeals for the First Circuit appealing the district court’s decision in its entirety. The Company intends to vigorously pursue the claim against HQ.

On April 15, 2011, the Company and Richard M. Osborne, Chairman and CEO, filed a lawsuit captioned “Richard M. Osborne and Gas Natural Inc. v. Michael I. German, Henry B. Cook, Ted W. Gibson, George J. Welch and Corning Natural Gas Corporation,” Case No. 1:11-CV-744 which was filed in the U.S. District Court for the Northern District of Ohio. The lawsuit claims that Messrs. German, Cook, Gibson and Welch, as directors of Corning Natural Gas Corporation (“Corning”), breached their fiduciary duties to shareholders of Corning by (i) failing to maximize shareholder value in connection with the Company’s offers to acquire all of Corning’s outstanding shares of common stock and (ii) instituting a rights offering to dilute Mr. Osborne and the Company’s ownership of Corning. Alternatively, the lawsuit provides for a derivative claim against the directors of Corning for the same conduct. The Company and Mr. Osborne seek to rescind the rights offering. Corning and the directors of Corning filed a motion to dismiss the lawsuit. The court granted the motion to dismiss on March 23, 2012.

In a related proceeding, on August 11, 2011, the Company filed a lawsuit against Corning in the Supreme Court of the State of New York, County of Steuben, to inspect the corporate books and records of Corning concerning the rights offering. On February 16, 2012, the court granted in part the petition of the Company to inspect the corporate books and records of Corning.

The Company reached agreement with the Montana Department of Revenue (“DOR”) to settle personal property tax claims for the years 1997-2002. The settlement amount is being paid in ten annual installments of $243,000 each, beginning November 30, 2003. The Company has obtained rate relief that includes full recovery of the property tax associated with the DOR settlement. The last payment under this settlement is November 2012.

In the Company’s opinion, the outcome of these legal actions will not have a material adverse effect on the financial condition, cash flows or results of operations of the Company.

F-25

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 the 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, 2012 and December 31, 2011, 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

The Company declared a dividend of $0.045 per share on June 28, 2012 that is payable to shareholders of record as of July 13, 2012. There were 8,156,551 shares outstanding on July 13, 2012 resulting in a total dividend of $367,045 which was paid to shareholders on July 31, 2012.

F-26

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 Securities and Exchange Commission (“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, 2011 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 seven states and serving approximately 70,000 customers. Our natural gas utility subsidiaries are Bangor Gas Company (Maine), Brainard Gas Corp. (Ohio), Cut Bank Gas Company (Montana), Energy West, Incorporated (Montana and Wyoming), Frontier Natural Gas (North Carolina), Northeast Ohio Natural Gas Corporation (Ohio), Orwell Natural Gas Company (Ohio and Pennsylvania) and Public Gas Company (Kentucky). Our operations also include production and marketing of natural gas, gas pipeline transmission and gathering and propane operations. Approximately 88% of our revenues in the three and six months ended June 30, 2012 were derived from our natural gas utility operations.

The following summarizes the critical events that impacted our results of operations during the three and six months ended June 30, 2012:

•

Warm weather in our weather sensitive service territories caused gross margin and net income from natural gas operations to decrease as compared to the comparable periods for the prior year.

•

Our recently acquired propane operations returned a net loss for the current quarter and six month period.

•

Our interest expense increased primarily as the result of our Ohio subsidiaries refinancing their debt in May 2011. There were loans paid off in preparation of the refinancing in 2011 and therefore a lower amount of debt was outstanding. In addition, the average balance on our Bank of America line of credit was higher during the current period.

•

We had increased costs related to completed and potential acquisitions in our corporate and other segment.

Our historical financial statements reflect the following reportable business segments: Natural Gas Operations, Marketing and Production Operations, Pipeline Operations and Corporate and Other. In addition, the financial statements now reflect a new segment for Propane Operations as a result of the new subsidiary, Independence Oil, LLC, in connection with the 2011 acquisition.

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, 2011. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of June 30, 2012 and for the three and six month periods ended June 30, 2012. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

Net Income (Loss) — Net loss for the three months ended June 30, 2012 was $724,000, or $0.09 per diluted share, compared to a net income of $360,000, or $0.04 per diluted share for the three months ended June 30, 2011, a decrease of $1,084,000. Net income from our natural gas operations decreased by $401,000, due primarily to warm weather in our weather sensitive service territories. Net income from our gas marketing and production operations decreased by $60,000 to a loss of $36,000. Net income from our pipeline operations decreased by $4,000. Our recently acquired propane operations returned a net loss of $156,000. Net loss from our corporate and other segment increased by $463,000 to a loss of $514,000.

Revenues — Revenues decreased by $4,167,000 to $14,506,000 for the three months ended June 30, 2012 compared to $18,673,000 for the same period in 2011. The decrease was primarily attributable to a natural gas revenue decrease of $4,294,000 due to warm weather in all of our weather sensitive service territories, a decrease of $436,000 in the revenue from our marketing and production operation due to lower prices received for volumes sold and produced, offset by revenue from our recently acquired propane operations segment of $561,000.

Gross Margin — Gross margin decreased by $100,000 to $7,789,000 for the three months ended June 30, 2012 compared to $7,889,000 for the same period in 2011. Our natural gas operation’s margins decreased $165,000, due to the warm weather and offset somewhat by increased margin from customer growth in our Maine and North Carolina markets. Gross margin from our marketing and production operations decreased $78,000. Our propane operations returned gross margin of $143,000.

Operating Expenses — Operating expenses, other than cost of sales, increased by $880,000 to $7,778,000 for the three months ended June 30, 2012 compared to $6,898,000 for the same period in 2011. The propane operations segment accounted for $432,000 of the increase and the newly acquired PGC accounted for $107,000 of the increase. Increases in depreciation due to increased capital expenditures in the natural gas segment totaled $140,000. The remainder is primarily the result of increases in costs for professional services.

Other Income (Expense), net — Other income (expense) increased by $54,000 to $232,000 for the three months ended June 30, 2012 compared to $178,000 for the same period in 2011. The increase is a result of our natural gas operations increased income by $163,000 due to additional service sales, our propane operations contributed other income of $50,000, offset by our corporate and other operations increased expenses by $150,000.

Acquisition Expense — Acquisition expense increased by $409,000 to $425,000 for the three months ended June 30, 2012 compared to $16,000 for the same period in 2011. The increase is primarily the result of the cost related to various growth opportunities including $213,000 for potential expansion of natural gas into a new states and $140,000 related to the proposed acquisition of John D. Oil and Gas Marketing.

Stock Sale Expense — Stock sale expense increased by $209,000 to $255,000 for the three months ended June 30, 2012 compared to $46,000 for the same period in 2011. The increase is due to the expenses paid in connection with our CEO’s stock sale which was mainly completed during the three months ended June 30, 2012.

Interest Expense — Interest expense increased by $133,000 to $626,000 for the three months ended June 30, 2012 compared to $493,000 for the same period in 2011. The increase is primarily the result of our Ohio subsidiaries refinancing their debt in May 2011. There were loans paid off in preparation of the refinancing and therefore a lower amount of debt was outstanding during the three months ended June 30, 2011. In addition, the balance on our Bank of America and Yadkin Valley Bank lines of credit averaged $16,788,000 and $270,000 during the three months ended June 30, 2012, compared to $9,910,000 and $0 during the 2011 period, causing additional interest expense.

Income Tax Benefit (Expense) — Income tax benefit (expense) decreased by $575,000 to a benefit of $341,000 for the three months ended June 30, 2012 compared to an expense of $234,000 for the same period in 2011. The decrease is primarily due to the reduction in pre-tax income.

Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

Net Income — Net income for the six months ended June 30, 2012 was $2,559,000, or $0.31 per diluted share, compared to a net income of $4,635,000, or $0.57 per diluted share for the six months ended June 30, 2011, a decrease of $2,076,000. Net income from our natural gas operations decreased by $1,307,000, due primarily to warm weather in our weather sensitive service territories. Net income from our gas marketing and production operations decreased by $49,000. Net income from our pipeline operations decreased by $4,000. Our propane operations incurred a net loss of $251,000. Net loss from our corporate and other segment increased by $465,000 to a loss of $623,000.

Revenues — Revenues decreased by $10,546,000 to $48,278,000 for the six months ended June 30, 2012 compared to $58,824,000 for the same period in 2011. The decrease was primarily attributable to a natural gas revenue decrease of $12,666,000 due to warm weather in all of our weather sensitive service territories, a decrease of $354,000 in the revenue from our marketing and production operation due to lower prices received for volumes sold and produced, offset by revenue from our recently acquired propane operations segment of $2,471,000.

Gross Margin — Gross margin decreased by $426,000 to $21,498,000 for the six months ended June 30, 2012 compared to $21,924,000 for the same period in 2011. Our natural gas operation’s margins decreased $1,057,000, due to the warm weather and offset somewhat by increased margin from customer growth in our Maine and North Carolina markets. Gross margin from our propane operations returned gross margin of $621,000 and our marketing and production operations increased $9,000.

Operating Expenses — Operating expenses, other than cost of sales, increased by $1,742,000 to $15,506,000 for the six months ended June 30, 2012 compared to $13,764,000 for the same period in 2011. The propane operations segment contributed $998,000 of the increase and the newly acquired PGC accounted for $107,000 of the increase. Increases in depreciation due to increased capital expenditures in the natural gas segment totaled $283,000. The remainder is primarily the result of increases in costs for professional services.

Other Income (Expense), net — Other income (expense) increased by $18,000 to $351,000 for the six months ended June 30, 2012 compared to $333,000 for the same period in 2011. The increase is a result of our natural gas operations increased income by $81,000 due to increased service sales, our marketing and production operations decreasing expenses by $80,000, offset by our propane operations contributed other expense of $22,000 and our corporate and other operations increased expenses by $131,000.

Acquisition Expense — Acquisition expense increased by $560,000 to $616,000 for the three months ended June 30, 2012 compared to $56,000 for the same period in 2011. The increase is primarily the result of the cost related to various growth opportunities including $243,000 for potential expansion of natural gas into a new states and $250,000 related to the proposed acquisition of John D. Oil and Gas Marketing.

Interest Expense — Interest expense increased by $384,000 to $1,290,000 for the six months ended June 30, 2012 compared to $906,000 for the same period in 2011. The increase is primarily the result of our Ohio subsidiaries refinancing their debt in May 2011. There were loans paid off in preparation of the refinancing and therefore a lower amount of average debt was outstanding during the six months ended June 30, 2011. In addition, the balance on our Bank of America and Yadkin Valley Bank lines of credit averaged $18,372,000 and $135,000 during the six months ended June 30, 2012, compared to $11,879,000 and $0 during the 2011 period, causing additional interest expense.

Income Tax Expense — Income tax expense decreased by $1,149,000 to $1,618,000 for the six months ended June 30, 2012 compared to $2,767,000 for the same period in 2011. The decrease is primarily due to the reduction in pre-tax income.

Net Income (Loss) by Segment and Service Area

The components of net income (loss) for the three and six months ended June 30, 2012 and 2011 are:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Natural Gas Operations
Energy West Montana (MT)	$	(22	)	$	283		$	658		$	1,147
Energy West Wyoming (WY)		(78	)		(2	)		160			313
Frontier Natural Gas (NC)		297			262			872			925
Bangor Gas (ME)		245			274			1,110			1,142
Ohio Companies (OH)		(450	)		(457	)		545			1,092
Public Gas Company (KY)		(33	)		—			(33	)		—

Total Natural Gas Operations	$	(41	)	$	360		$	3,312		$	4,619
Marketing & Production Operations		(36	)		24			60			109
Pipeline Operations		23			27			61			65
Propane Operations		(156	)		—			(251	)		—

		(210	)		411			3,182			4,793
Corporate & Other		(514	)		(51	)		(623	)		(158	)

Consolidated Net Income (Loss)	$	(724	)	$	360		$	2,559		$	4,635

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)	2012			2011			2012			2011
Natural Gas Operations
Operating revenues	$	12,801		$	17,095		$	42,649		$	55,315
Gas Purchased		5,447			9,576			22,684			34,293

Gross Margin		7,354			7,519			19,965			21,022
Operating expenses		6,992			6,617			13,721			13,233

Operating income		362			902			6,244			7,789
Other income		295			132			409			328

Income before interest and taxes		657			1,034			6,653			8,117
Interest expense		(593	)		(467	)		(1,230	)		(854	)

Income before income taxes		64			567			5,423			7,263
Income tax expense		(105	)		(207	)		(2,111	)		(2,644	)

Net Income (Loss)	$	(41	)	$	360		$	3,312		$	4,619

Operating Revenues


	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)	2012		2011		2012		2011
Full Service Distribution Revenues
Residential	$	4,786	$	7,207	$	18,534	$	25,811
Commercial		5,389		7,250		17,966		23,311
Industrial		136		262		398		487
Other		47		43		70		79

Total full service distribution		10,358		14,762		36,968		49,688

Transportation		2,155		2,045		5,106		5,052
Bucksport		288		288		575		575

Total operating revenues	$	12,801	$	17,095	$	42,649	$	55,315

Utility Throughput


	Three Months Ended June 30,				Six Months Ended June 30,
(in million cubic feet (MMcf))	2012		2011		2012		2011
Full Service Distribution
Residential		567		737		2,377		2,899
Commercial		738		882		2,375		2,829
Industrial		31		44		84		84

Total full service		1,336		1,663		4,836		5,812

Transportation		2,380		1,883		5,332		4,568
Bucksport		3,253		2,988		6,914		6,789

Total Volumes		6,969		6,534		17,082		17,169

Heating Degree Days

A heating degree day is a measure designed to reflect the demand for energy needed for heating, based on the extent to which the daily average temperature falls below a reference temperature which no heating is required, usually 65 degrees Fahrenheit.


	Normal		Three Months Ended June 30,				Percent (Warmer) Colder 2012 Compared to
			Three Months Ended June 30,				Percent (Warmer) Colder 2012 Compared to
			2012		2011		Normal			2011
Great Falls, MT		1,212		1,090		1,498		(10.07	%)		(27.24	%)
Cody, WY		1,072		905		1,408		(15.58	%)		(35.72	%)
Bangor, ME		1,072		952		1,052		(11.19	%)		(9.51	%)
Elkin, NC		337		361		318		7.12	%		13.52	%
Youngstown, OH		825		669		711		(18.91	%)		(5.91	%)


			Six Months Ended June 30,				Percent (Warmer) Colder 2012 Compared to
	Normal		2012		2011		Normal			2011
Great Falls, MT		4,392		4,004		5,160		(8.83	%)		(22.40	%)
Cody, WY		4,102		3,643		4,685		(11.19	%)		(22.24	%)
Bangor, ME		4,807		4,225		4,860		(12.11	%)		(13.07	%)
Elkin, NC		2,454		1,977		2,414		(19.44	%)		(18.10	%)
Youngstown, OH		3,943		3,082		4,019		(21.84	%)		(23.31	%)

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

Revenues and Gross Margin

Revenues decreased by $4,294,000 to $12,801,000 for the three months ended June 30, 2012 compared to $17,095,000 for the same period in 2011. This decrease is the result of the following factors:

Revenue from our Montana and Wyoming markets decreased $3,099,000 on a volume decrease of 238 MMcf in the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Revenue from our Maine and North Carolina markets increased by $229,000 on a volume increase from full service and transportation customers of 123 MMcf in the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Revenues from our Ohio market decreased $1,525,000. Revenue to full service customers decreased $1,550,000 on a volume decrease of 150 MMcf in the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

The recently acquired PGC accounted for $101,000 of additional revenue.

Gas purchased decreased by $4,129,000 to $5,447,000 for the three months ended June 30, 2012 compared to $9,576,000 for the same period in 2011. The decrease is due primarily to the decrease in sales volumes. Our gas costs are passed on dollar for dollar to our customers under tariffs regulated by the various 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 decreased by $165,000 to $7,354,000 for the three months ended June 30, 2012 compared to $7,519,000 for the same period in 2011. Warmer weather in our weather sensitive markets in 2012, both compared to normal and compared to 2011, is the primary driver of the decrease in gross margin. The decrease is offset by increased gross margin due to customer growth in our Maine and North Carolina markets. Our Ohio market accounted for $261,000 of the decrease, and Montana and Wyoming for $427,000, offset by an increase in Maine and North Carolina of $471,000 and the gross margin from PGC of $52,000.

Earnings

The Natural Gas Operations segment’s loss for the three months ended June 30, 2012 was $41,000, or $0.005 per diluted share, compared to earnings of $360,000, or $0.044 per diluted share for the three months ended June 30, 2011.

Operating expenses increased by $375,000 to $6,992,000 for the three months ended June 30, 2012 compared to $6,617,000 for the same period in 2011. Depreciation increased by $140,000 due to increased capital expenditures and operating expenses from the newly acquired PGC accounted for $107,000 of additional expenses. The remainder is due to increases in distribution, general and administrative expenses, primarily professional services.

Other income increased by $163,000 to $295,000 for the three months ended June 30, 2012 compared to $132,000 for the same period in 2011. The increase is primarily due to increased service sales.

Interest expense increased by $126,000 to $593,000 for the three months ended June 30, 2012 compared to $467,000 for the same period in 2011. The increase is primarily the result of our Ohio subsidiaries refinancing their debt in May 2011. There were loans paid off in preparation of the refinancing and therefore a lower amount of debt was outstanding during the three months ended June 30, 2011. In addition, the balance on our Bank of America and Yadkin Valley Bank lines of credit averaged $16,788,000 and $270,000 during the three months ended June 30, 2012, compared to $9,910,000 and $0 during the 2011 period, causing additional interest expense.

Income tax expense decreased by $102,000 to $105,000 for the three months ended June 30, 2012 compared to $207,000 for the same period in 2011. The decrease is primarily due to the reduction in pre-tax income.

Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

Revenues and Gross Margin

Revenues decreased by $12,666,000 to $42,649,000 for the six months ended June 30, 2012 compared to $55,315,000 for the same period in 2011. This decrease is the result of the following factors:

Revenue from our Montana and Wyoming markets decreased $6,368,000 on a volume decrease of 631 MMcf in the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Revenue from our Maine and North Carolina markets increased by $261,000 on a volume increase from full service and transportation customers of 236 MMcf in the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Revenues from our Ohio market decreased $6,660,000. Revenue to full service customers decreased $6,669,000 on a volume decrease of 483 MMcf in the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

The recently acquired PGC accounted for $101,000 of additional revenue.

Gas purchased decreased by $11,609,000 to $22,684,000 for the six months ended June 30, 2012 compared to $34,293,000 for the same period in 2011. The decrease is due primarily to the decrease in sales volumes. Our gas costs are passed on dollar for dollar to our customers under tariffs regulated by the various 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 decreased by $1,057,000 to $19,965,000 for the six months ended June 30, 2012 compared to $21,022,000 for the same period in 2011. Warmer weather in 2012, both compared to normal and compared to 2011, is the primary driver of the decrease in gross margin. The decrease is offset somewhat by increased gross margin due to customer growth in our Maine and North Carolina markets. Our Ohio market accounted for $1,033,000 of the decrease, and Montana and Wyoming for $856,000, offset by an increase in Maine and North Carolina of $780,000 and the gross margin from PGC of $52,000.

Earnings

The Natural Gas Operations segment’s income for the six months ended June 30, 2012 was $3,312,000, or $0.406 per diluted share, compared to $4,619,000, or $0.566 per diluted share for the six months ended June 30, 2011.

Operating expenses increased by $488,000 to $13,721,000 for the six months ended June 30, 2012 compared to $13,233,000 for the same period in 2011. Depreciation increased by $140,000 due to increased capital expenditures and operating expenses from the newly acquired PGC accounted for $107,000 of additional expenses. The remainder is due primarily to professional services increases in distribution, general and administrative expenses.

Other income increased by $81,000 to $409,000 for the six months ended June 30, 2012 compared to $328,000 for the same period in 2011. The increase is primarily due to increased service sales.

Interest expense increased by $376,000 to $1,230,000 for the six months ended June 30, 2012 compared to $854,000 for the same period in 2011. The increase is primarily the result of our Ohio subsidiaries refinancing their debt in May 2011. There were loans paid off in preparation of the refinancing and therefore a lower amount of average debt was outstanding during the six months ended June 30, 2011. In addition, the balance on our Bank of America and Yadkin Valley Bank lines of credit averaged $18,372,000 and $135,000 during the six months ended June 30, 2012, compared to $11,879,000 and $0 during the 2011 period, causing additional interest expense.

Income tax expense decreased by $537,000 to $2,111,000 for the six months ended June 30, 2012 compared to $2,644,000 for the same period in 2011. The decrease is primarily due to the reduction in pre-tax income.

MARKETING AND PRODUCTION OPERATIONS

Income Statement


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Marketing and Production Operations
Operating revenues	$	1,040		$	1,476		$	2,947		$	3,301
Gas Purchased		850			1,208			2,245			2,608

Gross Margin		190			268			702			693
Operating expenses		220			188			552			387

Operating income (loss)		(30	)		80			150			306
Other expense		(2	)		(20	)		(3	)		(83	)

Income (loss) before interest and taxes		(32	)		60			147			223
Interest expense		(26	)		(22	)		(47	)		(45	)

Income (loss) before income taxes		(58	)		38			100			178
Income tax benefit (expense)		22			(14	)		(40	)		(69	)

Net Income (Loss)	$	(36	)	$	24		$	60		$	109

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

Revenues and Gross Margin

Revenues decreased by $436,000 to $1,040,000 for the three months ended June 30, 2012 compared to $1,476,000 for the same period in 2011. $330,000 of this decrease is due to lower prices received for volumes sold in our marketing operation, and $106,000 is caused by a decrease in production revenues due to lower prices received for volumes produced.

Gross margin decreased by $78,000 to $190,000 for the three months ended June 30, 2012 compared to $268,000 for the same period in 2011. Gross margin from our production operation decreased by $137,000 due primarily to the lower prices received for volumes produced. Offsetting this is an increase in gross margin from our gas marketing operation of $60,000.

Earnings

The Marketing and Production segment’s loss for the three months ended June 30, 2012 was $36,000, or $0.004 per diluted share, compared to earnings of $24,000, or $0.003 per diluted share for the three months ended June 30, 2011.

Operating expenses increased by $32,000 to $220,000 for the three months ended June 30, 2012 compared to $188,000 for the same period in 2011. The increase is primarily due to higher fees for professional services, offset by lower accretion costs.

Other expense decreased by $18,000 to $2,000 for the three months ended June 30, 2012 compared to $20,000 for the same period in 2011. The decrease is due to the reduction in the loss from unconsolidated affiliate of $18,000.

Income tax benefit (expense) decreased by $36,000 to a benefit of $22,000 for the three months ended June 30, 2012 compared to an expense of $14,000 for the same period in 2011. The decrease is primarily due to the pre-tax loss in the 2012 period, compared to pre-tax income in the 2011 period.

Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

Revenues and Gross Margin

Revenues decreased by $354,000 to $2,947,000 for the six months ended June 30, 2012 compared to $3,301,000 for the same period in 2011. $200,000 of this decrease is due to lower prices received for volumes sold in our marketing operation, offset somewhat by increased sales volumes, and $154,000 is caused by a decrease in production revenues due to lower prices received for volumes produced.

Gross margin increased by $9,000 to $702,000 for the six months ended June 30, 2012 compared to $693,000 for the same period in 2011. Gross margin from gas marketing increased by $166,000 due to the increased sales volumes and is offset by a decrease in gross margin from our production operation of $157,000 due primarily to the lower prices received for volumes produced.

Earnings

The Marketing and Production segment’s earnings for the six months ended June 30, 2012 was $60,000, or $0.007 per diluted share, compared to earnings of $109,000, or $0.013 per diluted share for the six months ended June 30, 2011.

Operating expenses increased by $165,000 to $552,000 for the six months ended June 30, 2012 compared to $387,000 for the same period in 2011. The increase is primarily due to the additional estimate for uncollectible accounts.

Other expense decreased by $80,000 to $3,000 for the six months ended June 30, 2012 compared to $83,000 for the same period in 2011. The decrease is primarily due to the reduction in the loss from unconsolidated affiliate of $78,000.

Income tax expense decreased by $29,000 to $40,000 for the six months ended June 30, 2012 compared to $69,000 for the same period in 2011. The decrease is primarily due to the lower pre-tax income.

PIPELINE OPERATIONS

Income Statement


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Pipeline Operations
Operating revenues	$	102		$	102		$	209		$	208
Gas Purchased		—			—			—			—

Gross Margin		102			102			209			208
Operating expenses		62			54			100			96

Operating income		40			48			109			112
Other expense		—			—			—			—

Income before interest and taxes		40			48			109			112
Interest expense		—			(3	)		(6	)		(7	)

Income before income taxes		40			45			103			105
Income tax expense		(17	)		(18	)		(42	)		(40	)

Net Income	$	23		$	27		$	61		$	65

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

Net income decreased by $4,000 to $23,000 for the three months ended June 30, 2012 compared to $27,000 for the same period in 2011. The overall impact of the results of our pipeline operations was not material to our results of consolidated operations.

Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

Net income decreased by $4,000 to $61,000 for the six months ended June 30, 2012 compared to $65,000 for the same period in 2011. The overall impact of the results of our pipeline operations was not material to our results of consolidated operations.

PROPANE OPERATIONS

Income Statement


	Three Months Ended June 30,					Six Months Ended June 30,
($ in thousands)	2012			2011		2012			2011
Propane Operations
Operating revenues	$	561		$	—	$	2,471		$	—
Gas Purchased		418			—		1,850			—

Gross Margin		143			—		621			—
Operating expenses		432			—		998			—

Operating loss		(289	)		—		(377	)		—
Other income (expense)		50			—		(22	)		—

Income (loss) before interest and taxes		(239	)		—		(399	)		—
Interest expense		(6	)		—		(6	)		—

Income (loss) before income taxes		(245	)		—		(405	)		—
Income tax benefit		89			—		154			—

Net Loss	$	(156	)	$	—	$	(251	)	$	—

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

Net loss is $156,000, or $0.019 per diluted share for the three months ended June 30, 2012. The propane operations were acquired on August 1, 2011 and there are no comparative amounts for 2011.

Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

Net loss is $251,000, or $0.031 per diluted share for the six months ended June 30, 2012. The propane operations were acquired on August 1, 2011 and there are no comparative amounts for 2011.

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)	2012			2011			2012			2011
Corporate and Other Operations
Operating revenues	$	—		$	—		$	—		$	—
Gas Purchased		—			—			—			—

Gross Margin		—			—			—			—
Operating expenses		72			39			135			48

Operating loss		(72	)		(39	)		(135	)		(48	)
Other expense		(794	)		(16	)		(909	)		(96	)

Income (loss) before interest and taxes		(866	)		(55	)		(1,044	)		(144	)
Interest expense		—			—			—			—

Income (loss) before income taxes		(866	)		(55	)		(1,044	)		(144	)
Income tax benefit (expense)		352			4			421			(14	)

Net Loss	$	(514	)	$	(51	)	$	(623	)	$	(158	)

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

Results of corporate and other operations for the three months ended June 30, 2012 include administrative costs of $72,000, costs related to expenses for our CEO’s stock sale of $255,000, acquisition activities of $425,000, corporate expenses of $117,000, offset by income tax benefit of $352,000 and interest income of $3,000, for a net loss of $514,000.

Results of corporate and other operations for the three months ended June 30, 2011 include administrative costs of $39,000, costs related to expenses for our CEO’s stock sale of $46,000, costs related to acquisition activities of $16,000, offset by $44,000 of a previously expensed asset, interest income of $2,000 and income tax benefit of $4,000, for a net loss of $51,000.

Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

Results of corporate and other operations for the six months ended June 30, 2012 include administrative costs of $135,000, costs related to expenses for our CEO’s stock sale of $255,000, acquisition activities of $616,000, corporate expenses of $44,000, offset by income tax benefits of $421,000 and interest income of $6,000, for a net loss of $623,000.

Results of corporate and other operations for the six months ended June 30, 2011 include administrative costs of $48,000, costs related to expenses for our CEO’s stock sale of $46,000, costs related to acquisition activities of $56,000, income tax expense of $14,000, offset by interest income of $6,000, for a net loss of $158,000.

Sources and Uses of Cash

Operating activities provide our primary source of cash. Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciations, depletion, amortization, deferred income taxes, and changes in working capital.

Our ability to maintain liquidity depends upon our credit facilities with Bank of America and Yadkin Valley Bank, shown as lines of credit on the accompanying balance sheets. Our use of the revolving lines of credit was $18.7 million and $23.2 million at June 30, 2012 and December 31, 2011, respectively.

We made capital expenditures for continuing operations of $8.8 million and $10.3 million for the six months ended June 30, 2012 and 2011, respectively, including $3.3 million related to the Spelman 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 revolving lines of credit.

We periodically repay our short-term borrowings under the revolving lines of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $31.3 and $31.4 million at June 30, 2012 and December 31, 2011, respectively, including the amount due within one year.

Cash, excluding restricted cash, decreased to $2.5 million at June 30, 2012, compared to $10.5 million at December 31, 2011.


	Six Months Ended June 30,
	2012			2011
Cash provided by operating activities	$	12,233,000		$	15,516,000
Cash used in investing activities		(12,343,000	)		(13,882,000	)
Cash used in financing activities		(7,938,000	)		(1,528,000	)

Increase (decrease) in cash	$	(8,048,000	)	$	106,000

OPERATING CASH FLOW

For the six months ended June 30, 2012, cash provided by operating activities decreased by $3.3 million as compared to the six months ended June 30, 2011. Major items affecting operating cash included a $3.0 million decrease in collections of recoverable costs of gas, a $2.1 million decrease in net income, a $446,000 increase in payments on accounts payable, a $687,000 decrease in accounts receivable collections, and a $1.2 million decrease in unbilled revenue.

INVESTING CASH FLOW

For the six months ended June 30, 2012, cash used in investing activities decreased by $1.5 million as compared to the six months ended June 30, 2011, primarily due to a reduction in capital expenditures of $1.5 million, a reduction in the investment to unconsolidated affiliate of $304,000, a reduction in the use of restricted cash of $3.4 million, offset by the $1.6 million purchase of PGC and $2.25 million for the Loring Pipeline deposit.

Capital Expenditures

Our capital expenditures for continuing operations totaled $8.8 million and $10.3 million for the six months ended June 30, 2012 and 2011, respectively. We finance our capital expenditures on an interim basis by the use of our operating cash flow and use of the Bank of America and Yadkin Valley Bank revolving lines 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, 2012 and 2011 and provides an estimate of future cash requirements for capital expenditures:


					Remaining Cash
	Six Months ended June 30,				Requirements through
($ in thousands)	2012		2011		December 31, 2012
Natural Gas Operations	$	5,764	$	10,273	$	7,358
Marketing and Production Operations		1,548		—		1,053
Pipeline Operations		23		—		46
Propane Operations		77		—		873
Corporate and Other Operations		1,355		6		119

Total Capital Expenditures	$	8,767	$	10,279	$	9,449

FINANCING CASH FLOW

For the six months ended June 30, 2012, cash used in financing activities increased by $6.4 million as compared with the six months ended June 30, 2011. The primary increase is due to the change in long-term borrowings of $8.5 million offset by the net decrease in lines of credit repayments of $1.8 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 credit facilities with Bank of America and Yadkin Valley Bank, shown as lines of credit on the accompanying balance sheets. Our use of the revolving lines of credit was $18.7 million and $23.2 million at June 30, 2012 and December 31, 2011, respectively. We periodically repay our short-term borrowings under the revolving lines of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $31.3 and $31.4 million at June 30, 2012, and December 31, 2011, respectively, including the amount due within one year.

Citizens Bank Term Loans

The following discussion describes our credit facilities as of June 30, 2012.

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 Senior Secured Guaranteed Floating Rate Notes due May 3, 2014 (“Floating Rate Note”). Both notes were placed with SunLife. Approximately $615,000 was incurred related to the debt issuance which was capitalized and is being amortized over the life of the notes.

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. 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.

Payments for both notes prior to maturity are interest-only.

We are prohibited from creating, assuming or incurring additional indebtedness except for (i) obligations under certain financing agreements, (ii) indebtedness incurred under certain capitalized leases and purchase money obligations not to exceed $500,000 at any one time outstanding, (iii) indebtedness outstanding as of March 31, 2011, (iv) certain unsecured intercompany indebtedness and (v) certain other indebtedness permitted under the notes.

The notes prohibit us from selling or otherwise transferring assets except in the ordinary course of business and to the extent such sales or transfers, in the aggregate, over each rolling twelve month period, do not exceed 1% of our total assets. Generally, we may consummate a merger or consolidation if there is no event of default and the provisions of the notes are assumed by the surviving or continuing corporation. We are also generally limited in making acquisitions in excess of 10% of our total assets.

Bank of America

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, 2012 and 2011.


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Minimum borrowing	$	15,100,000	$	8,390,000	$	15,100,000	$	8,390,000
Maximum borrowing	$	18,261,000	$	11,840,000	$	23,610,000	$	18,150,000
Average borrowing	$	16,788,000	$	9,910,000	$	18,372,000	$	11,879,000

The credit facility requires that Energy West and its subsidiaries maintain compliance with a number of financial covenants, including a limitation on investments in another entity by acquisition of any debt or equity securities or assets or by making loans or advances to such entity. In addition, Energy West must maintain a total debt to total capital ratio of not more than .65-to-1.00 and an interest coverage ratio of no less than 2.0-to-1.0. The credit facility restricts Energy West’s ability to create, incur or assume indebtedness except (i) indebtedness under the credit facility (ii) indebtedness incurred under certain capitalized leases and purchase money obligations not to exceed $500,000, (iii) certain indebtedness of Energy West’s subsidiaries, (iv) certain subordinated indebtedness, (v) certain hedging obligations and (vi) other indebtedness not to exceed $1.0 million.

The credit facility also restricts Energy West’s ability to pay dividends and make distributions, redemptions and repurchases of stock during any 60-month period to 75% of its net income over that period. In addition, no event of default may exist at the time such

dividend, distribution, redemption or repurchase is made. Energy West is also prohibited from consummating a merger or consolidation or selling all or substantially all of its assets or stock except for (i) any merger consolidation or sale by or with certain of its subsidiaries, (ii) any such purchase or other acquisition by Energy West or certain of its subsidiaries and (iii) sales and dispositions of assets for at least fair market value so long as the net book value of all assets sold or otherwise disposed of in any fiscal year does not exceed 5% of the net book value of Energy West’s assets as of the last day of the preceding fiscal year.

Senior Unsecured Notes

The notes contain various covenants, including a limitation on Energy West’s total dividends and distributions made in the immediately preceding 60-month period to 75% of aggregate consolidated net income for such period. The notes restrict Energy West from incurring additional senior indebtedness in excess of 60% of capitalization at any time and require Energy West to maintain an interest coverage ratio of not more than 150% of the pro forma annual interest charges on a consolidated basis in two of the three preceding fiscal years.

Energy West is prohibited from selling or otherwise disposing of any of its property or assets except (i) in the ordinary course of business, (ii) property or assets that are no longer usable in its business or (iii) property or assets transferred between Energy West and its subsidiaries if the aggregate net book value of all properties and assets so disposed of during the twelve month period next preceding the date of such sale or disposition would constitute more than 15% of the aggregate book value of all Energy West’s tangible assets. In addition, Energy West may only consummate a merger or consolidation, dissolve or otherwise dispose of all or substantially all of its assets (i) if there is no event of default, (ii) the provisions of the notes are assumed by the surviving or continuing corporation and such entity further agrees that it will continue to operate its facilities as part of a system comprising a public utility regulated by the Public Service Commission of Montana or another federal or state agency or authority and (iii) the surviving or continuing corporation has a net worth immediately subsequent to such acquisition, consolidation or merger equal to or greater than $10 million.

Yadkin Valley Bank

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, 2012, with $8,300 being due within one year.

The provisions in our debt agreements limit the amount of indebtedness we can obtain or issue, which could impact our ability to finance our operations and fund growth.

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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30, 2012, 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, 2012.

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.

In 2010, Bangor Gas Company, our Maine utility, asserted a claim against H.Q. Energy Services (US), Inc. (“HQ”) for a breach of a firm gas transportation service agreement between the parties. HQ filed a counterclaim against us for reimbursement of certain transportation charges that HQ paid to a third party. The Parties agreed to arbitration and on September 1, 2011, the arbitrators awarded HQ the sum of approximately $280,000 for past transportation charges that HQ paid to us. The arbitrators also ordered us to pay future transportation charges that will be incurred during the remaining term of the agreement while HQ was ordered to pay us for future fuel reimbursements for the remaining term of the agreement. On September 23, 2011, the arbitrators clarified their initial order to require HQ to reimburse us for the past transportation charges awarded by the arbitrators if the FERC determined that our payment of the transportation charges was not consistent with FERC policy. On November 10, 2011, the FERC’s Office of General Counsel issued a no-action letter indicating that the FERC staff could not assure us that the FERC would not recommend

enforcement action if we made the payments to HQ required by the arbitration award. As a result, on November 30, 2011, we filed an action in the United States District Court, District of Maine against HQ seeking to vacate the arbitration award against us and confirm that portion of the award requiring HQ to return the transportation payments to us and obtain an award of past fuel reimbursements in addition to the prospective award made by the arbitrators. On March 1, 2012, the court issued an order confirming the arbitration award against us, rejecting our claim for past fuel costs, and denying our claim for reimbursement of transportation charges on the grounds that the FERC no-action letter was not a final, binding finding by the FERC of the consistency of the payments with FERC policy. On March 30, 2012, we filed an action with the United States Court of Appeals for the First Circuit appealing the district court’s decision in its entirety. We intend to vigorously pursue our claim against HQ.

On April 15, 2011, Gas Natural and Richard M. Osborne, our Chairman and CEO, filed a lawsuit captioned “Richard M. Osborne and Gas Natural Inc. v. Michael I. German, Henry B. Cook, Ted W. Gibson, George J. Welch and Corning Natural Gas Corporation,” Case No. 1:11-CV-744 which was filed in the U.S. District Court for the Northern District of Ohio. The lawsuit claims that Messrs. German, Cook, Gibson and Welch, as directors of Corning Natural Gas Corporation (“Corning”), breached their fiduciary duties to shareholders of Corning by (i) failing to maximize shareholder value in connection with our offers to acquire all of Corning’s outstanding shares of common stock and (ii) instituting a rights offering to dilute Mr. Osborne and our ownership of Corning. Alternatively, the lawsuit provides for a derivative claim against the directors of Corning for the same conduct. We and Mr. Osborne sought to rescind the rights offering. Corning and the directors of Corning filed a motion to dismiss the lawsuit. The court granted the motion to dismiss on March 23, 2012.

In a related proceeding, on August 11, 2011, we filed a lawsuit against Corning in the Supreme Court of the State of New York, County of Steuben, to inspect the corporate books and records of Corning concerning the rights offering. On February 16, 2012, the court granted in part the petition of us to inspect the corporate books and records of Corning.

In our opinion, the outcome of these legal actions will not have a material adverse effect on our financial condition, cash flows or results of operations.

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.

*	Furnished herewith.

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 14, 2012						Chief Financial Officer
						(principal financial officer and principal accounting officer)

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