Gas Natural Inc. - FORM 10-Q

Gas Natural Inc. - FORM 10-Q - August 14, 2014

Attached files

Attached files

Gas Natural Inc. Reports

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Gas Natural Inc.	Financial_Report.xls
EX-18 - EX-18 - Gas Natural Inc.	d757934dex18.htm
EX-3.2 - EX-3.2 - Gas Natural Inc.	d757934dex32.htm
EX-32 - EX-32 - Gas Natural Inc.	d757934dex321.htm
EX-31.1 - EX-31.1 - Gas Natural Inc.	d757934dex311.htm
EX-31.2 - EX-31.2 - Gas Natural Inc.	d757934dex312.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, 2014

¨	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.)

8500 Station Street, Suite 100

Mentor, Ohio

44060

(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 August 8, 2014 was 10,487,511 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 in this Form 10-Q is as of June 30, 2014

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.

8500 Station Street. 8500 Station Street, LLC.

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

ASC. Accounting Standard Codification, standards issued by FASB with respect to U.S. GAAP.

ASU. Accounting Standards Update.

Bangor Gas. Bangor Gas Company, LLC.

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

Brainard. Brainard Gas Corp.

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

Clarion River. Clarion River Gas Company.

CNG. Compressed Natural Gas.

Cut Bank Gas. Cut Bank Gas Company.

Dth. Abbreviation of dekatherm. One million British thermal units, used in reference to natural gas.

EBITDA. Earnings before interest, taxes, depreciation, and amortization.

Energy West Development. Energy West Development, Inc.

Energy West Montana. Energy West Montana, Inc.

Energy West Wyoming. Energy West Wyoming, Inc.

Energy West. Energy West, Incorporated.

EPA. The United States Environmental Protection Agency.

EWR. Energy West Resources, 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.

Gas Natural. Gas Natural Inc.

GCR. Gas cost recovery.

GNR. Gas Natural Resources , LLC.

GNSC. Gas Natural Service Company, LLC.

GPL. Great Plains Land Development Co., Ltd.

Great Plains. Great Plains Natural Gas Company.

IFRS. International Financial Reporting Standards.

Independence. Independence Oil, LLC.

JDOG Marketing. John D. Oil and Gas Marketing Company, LLC.

Kidron . Kidron Pipeline LLC.

KPSC. Kentucky Public Service Commission.

Kykuit. Kykuit Resources, LLC.

Lake Shore Gas. Lake Shore Gas Storage, Inc.

LIBOR. London Interbank Offered Rate.

Lightning Pipeline. Lightning Pipeline Company, Inc.

LNG. Liquefied Natural Gas.

Lone Wolfe. Lone Wolfe Insurance, LLC.

MHRA. Maine Human Rights Act.

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.

OCC. Ohio Consumers’ Counsel.

Orwell. Orwell Natural Gas Company.

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

PaPUC. The Pennsylvania Public Utility Commission.

Penobscot Natural Gas. Penobscot Natural Gas Company, Inc.

PGC. Public Gas Company, Inc.

PUCO. The Public Utilities Commission of Ohio.

SEC. The United States Securities and Exchange Commission.

Spelman. Spelman Pipeline Holdings, LLC.

Sun Life. Sun Life Assurance Company of Canada

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

USPF. United States Power Fund, L.P.

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, 2014 (Unaudited) and December 31, 2013		F-1

Condensed Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2014 and 2013 (Unaudited)		F-3

Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2014 and 2013 (Unaudited)		F-4

Notes to Unaudited Condensed Consolidated Financial Statements		F-6

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		1

Item 3 – Quantitative and Qualitative Disclosures About Market Risk		17

Item 4 – Controls and Procedures		18

Part II – Other Information

Item 1 - Legal Proceedings		19

Item 6 - Exhibits		21

Signatures		22

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Balance Sheets


	June 30, 2014			December 31, 2013
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	3,200,502		$	13,147,381
Marketable securities		411,984			406,134
Accounts receivable
Trade, less allowance for doubtful accounts of $295,990 and $1,986,531, respectively		7,954,377			13,440,565
Related parties		209,564			146,225
Unbilled gas		1,853,287			7,729,560
Note receivable – related parties, current portion		1,938			1,938
Inventory
Natural gas		3,645,729			5,464,744
Materials and supplies		2,683,862			2,413,745
Prepaid income taxes		681,628			727,427
Prepayments and other		1,003,116			1,064,845
Recoverable cost of gas purchases		3,736,553			1,298,299
Deferred tax asset		1,230,674			1,225,032
Assets held for sale		35,115			—
Discontinued operations		5,184			34,151

Total current assets		26,653,513			47,100,046

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		196,584,806			185,816,790
Less accumulated depreciation, depletion and amortization		(55,392,666	)		(52,296,504	)

PROPERTY, PLANT AND EQUIPMENT, NET		141,192,140			133,520,286

OTHER ASSETS
Notes receivable – related parties, less current portion		91,475			93,727
Regulatory assets
Deferred costs		2,450,000			—
Property taxes		12,500			25,000
Income taxes		452,645			452,645
Rate case costs		108,566			130,228
Debt issuance costs, net of amortization		1,184,105			1,388,124
Goodwill		16,267,377			16,267,377
Customer relationships		3,078,917			3,230,333
Investment in unconsolidated affiliate		350,748			351,724
Restricted cash		1,955,712			1,137,442
Other assets		38,334			46,683

Total other assets		25,990,379			23,123,283

TOTAL ASSETS	$	193,836,032		$	203,743,615

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

F-1

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Balance Sheets


	June 30, 2014		December 31, 2013
	(unaudited)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Checks in excess of amounts on deposit	$	1,061,972	$	843,634
Line of credit		19,960,799		24,529,799
Accounts payable
Trade		6,399,179		12,418,701
Related parties		171,880		559,933
Notes payable, current portion		542,112		3,502,190
Contingent consideration, current portion		671,638		671,638
Accrued liabilities
Taxes other than income		1,748,613		3,173,640
Vacation		370,302		95,806
Employee benefit plans		308,635		178,789
Interest		203,963		169,581
Deferred payments received from levelized billing		1,141,152		2,469,665
Customer deposits		794,391		761,022
Related parties		21,158		—
Capital lease obligation, current portion		177,570		177,570
Over-recovered gas purchases		821,499		793,184
Build-to-suit liability		2,378,714		—
Other current liabilities		1,043,883		1,482,375
Discontinued operations		7,970		45,855

Total current liabilities		37,825,430		51,873,382

LONG-TERM LIABILITIES
Deferred investment tax credits		123,724		134,255
Deferred tax liability		11,244,112		9,055,166
Asset retirement obligation		2,120,757		2,026,353
Customer advances for construction		1,021,464		1,016,671
Regulatory liability for income taxes		83,161		83,161
Customer deposits		949,540		—
Capital lease obligation, less current portion		1,862,938		1,862,938
Contingent consideration, less current portion		13,362		13,362

Total long-term liabilities		17,419,058		14,191,906

NOTES PAYABLE, less current portion		39,991,983		40,198,552

COMMITMENTS AND CONTINGENCIES (see Note 13)

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, 10,487,511 and 10,451,678 shares issued and outstanding, respectively		1,573,127		1,567,752
Capital in excess of par value		63,817,686		63,468,969
Accumulated other comprehensive income		109,136		104,909
Retained earnings		33,099,612		32,338,145

Total stockholders’ equity		98,599,561		97,479,775

TOTAL CAPITALIZATION		138,591,544		137,678,327

TOTAL LIABILITIES AND CAPITALIZATION	$	193,836,032	$	203,743,615

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

F-2

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
REVENUES
Natural gas operations	$	20,777,468		$	17,746,297		$	81,031,278		$	57,690,959
Marketing and production		1,522,914			2,645,682			6,212,270			6,217,461
Pipeline operations		97,862			105,032			196,876			203,319

Total revenues		22,398,244			20,497,011			87,440,424			64,111,739

COST OF SALES
Natural gas purchased		11,718,997			10,049,089			53,674,432			34,165,510
Marketing and production		1,436,158			2,232,922			5,677,123			5,092,957

Total cost of sales		13,155,155			12,282,011			59,351,555			39,258,467


GROSS MARGIN		9,243,089			8,215,000			28,088,869			24,853,272

OPERATING EXPENSES
Distribution, general, and administrative		6,693,672			5,423,390			13,531,475			10,737,314
Maintenance		366,558			306,325			712,961			635,738
Depreciation and amortization		1,822,902			1,482,643			3,644,080			2,904,213
Accretion		47,826			43,512			94,404			86,119
Provision for doubtful accounts		813,313			14,781			822,188			23,557
Taxes other than income		1,135,039			906,982			2,131,771			1,817,889

Total operating expenses		10,879,310			8,177,633			20,936,879			16,204,830


OPERATING INCOME (LOSS)		(1,636,221	)		37,367			7,151,990			8,648,442

Loss from unconsolidated affiliate		(4	)		(2,947	)		(977	)		(4,027	)
Other income, net		169,480			377,661			275,588			413,064
Acquisition expense		(1,869	)		19,345			(7,197	)		(156,534	)
Interest expense		(761,940	)		(767,128	)		(1,571,321	)		(1,569,145	)

Income (loss) before income taxes		(2,230,554	)		(335,702	)		5,848,083			7,331,800

Income tax benefit (expense)		808,755			41,023			(2,235,830	)		(2,856,869	)


INCOME (LOSS) FROM CONTINUING OPERATIONS		(1,421,799	)		(294,679	)		3,612,253			4,474,931

Discontinued operations, net of tax		(6,819	)		(32,237	)		(22,380	)		(14,124	)


NET INCOME (LOSS)	$	(1,428,618	)	$	(326,916	)	$	3,589,873		$	4,460,807


Basic weighted shares outstanding		10,468,961			8,465,983			10,468,961			8,425,647
Dilutive effect of stock options		—			—			429			847

Diluted weighted shares outstanding		10,468,961			8,465,983			10,469,390			8,426,494


BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations	$	(0.14	)	$	(0.03	)	$	0.35		$	0.53
Discontinued operations		—			(0.01	)		(0.01	)		—

Net income (loss) per share	$	(0.14	)	$	(0.04	)	$	0.34		$	0.53


Weighted average dividends declared per common share	$	0.135		$	0.135		$	0.270		$	0.270


COMPREHENSIVE INCOME:
Net income (loss)	$	(1,428,618	)	$	(326,916	)	$	3,589,873		$	4,460,807
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain on available for sale securities, net of tax of $2,950, $2,209, $1,623 and $4,103, respectively		5,150			3,642			4,227			6,207


COMPREHENSIVE INCOME (LOSS)	$	(1,423,468	)	$	(323,274	)	$	3,594,100		$	4,467,014

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

F-3

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,589,873		$	4,460,807
Loss from discontinued operations		(22,380	)		(14,124	)

Income from continuing operations		3,612,253			4,474,931

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		3,644,080			2,904,213
Accretion		94,404			86,119
Amortization of debt issuance costs		204,019			212,569
Provision for doubtful accounts		822,188			23,557
Stock based compensation		308,330			1,615
Gain on sale of assets		(5,008	)		(126,596	)
Loss from unconsolidated affiliate		977			4,027
Investment tax credit		(10,531	)		(10,531	)
Deferred income taxes		2,181,681			2,835,862
Changes in assets and liabilities
Accounts receivable, including related parties		4,600,661			5,098,484
Unbilled gas		5,876,273			2,975,256
Natural gas inventory		1,819,015			1,464,733
Accounts payable, including related parties		(5,308,532	)		(760,700	)
Recoverable/refundable cost of gas purchases		(2,409,939	)		(781,112	)
Prepayments and other		60,489			1,693,770
Other assets		(2,449,265	)		(904,671	)
Other liabilities		(2,676,669	)		(1,931,178	)

Net cash provided by operating activities of continuing operations		10,364,426			17,260,348

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(10,877,252	)		(9,873,759	)
Proceeds from sale of fixed assets		42,534			1,018,163
Proceeds from related party notes receivable		2,252			5,217
Investment in unconsolidated affiliate		—			(35,000	)
Restricted cash – capital expenditures fund		(106	)		1,060,190
Customer advances for construction		4,793			26,155
Contributions in aid of construction		988,723			273,510

Net cash used in investing activities of continuing operations		(9,839,056	)		(7,525,524	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lines of credit		10,350,000			8,050,000
Repayments of lines of credit		(14,919,000	)		(15,909,755	)
Proceeds from notes payable		102,000			—
Repayments of notes payable		(3,294,190	)		(379,166	)
Debt issuance costs		—			(7,492	)
Exercise of stock options		45,762			159,500
Restricted cash – debt service fund		131,376			1,651
Dividends paid		(2,826,793	)		(2,275,896	)

Net cash used in financing activities of continuing operations		(10,410,845	)		(10,361,158	)

DISCONTINUED OPERATIONS
Operating cash flows		(51,735	)		181,727
Investing cash flows		—			(6,169	)
Financing cash flows		(9,669	)		(201,000	)

Net cash used in discontinued operations		(61,404	)		(25,442	)


NET DECREASE IN CASH AND CASH EQUIVALENTS		(9,946,879	)		(651,776	)
Cash and cash equivalents, beginning of period		13,147,381			3,435,117


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,200,502		$	2,783,341

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

F-4

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six months ended June 30,
	2014		2013
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	1,336,203	$	1,382,445
Cash refunded for income taxes, net		6,025		(14,310	)

NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired under build-to-suit agreement	$	2,378,714	$	—
Restricted cash received from customer as security deposit		949,540		—
Capital expenditures included in accounts payable		917,310		881,054
Accrued dividends		471,938		389,101
Assets acquired through trade-in		85,068		—
Assets acquired through debt		25,543		—
Capitalized interest		9,420		3,796
Customer relationships acquired from JDOG Marketing purchase		—		2,800,000
Shares issued to purchase JDOG Marketing		—		2,641,199
Contingent consideration issued to purchase JDOG Marketing		—		2,250,000
Goodwill acquired from JDOG Marketing purchase		—		2,101,744
Note receivable effectively settled in JDOG Marketing acquisition		—		32,145
Plant, property and equipment acquired from JDOG Marketing purchase		—		21,600
Customer advances for construction moved to contribution in aid of construction		—		15,755

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

F-5

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Business and Basis of Presentation

Nature of Business

Gas Natural Inc. (the “Company”) is a natural gas company with operations in seven states. The Company’s primary operations are natural gas utility companies located throughout these states. The Company’s operations also include marketing and production of natural gas, gas pipeline transmission, and gathering operations. Along with its corporate level operations, these areas of operation represent the Company’s four main operating segments and are described below.


• Natural Gas Operations		Annually distributes approximately 36 Bcf of natural gas to approximately 73,000 customers. The Company’s natural gas utility subsidiaries are Public Gas Company (Kentucky), Bangor Gas (Maine), Cut Bank Gas Company (Montana), Energy West Montana (Montana), Frontier Natural Gas (North Carolina), Brainard Gas Corp. (Ohio), Northeast Ohio Natural Gas Corporation (Ohio), Orwell Natural Gas Company (Ohio and Pennsylvania) and Energy West Wyoming (Wyoming).

• Marketing and Production Operations		Annually markets approximately 1.5 Bcf of natural gas to commercial and industrial customers in Montana, Wyoming, Ohio, and Pennsylvania through the Company’s EWR and GNR subsidiaries. The EWR subsidiary also manages midstream supply and production assets for transportation customers and utilities. EWR owns an average 51% gross working interest (average 43% net revenue interest) in 160 natural gas producing wells and gas gathering assets located 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.

• Corporate and Other		Encompasses costs associated with business development and acquisitions, dispositions of subsidiary entities, results of discontinued operations, dividend income, recognized gains or losses from the sale of marketable securities, and activity from Lone Wolfe which serves as an insurance agent for the Company and other businesses in the energy industry.

Energy West was originally incorporated in Montana in 1909 and was reorganized as a holding company in 2009 to facilitate future acquisitions and corporate-level financing to support the Company’s growth strategy. On July 9, 2010, the Company changed its name to Gas Natural Inc. and reincorporated from Montana to Ohio. Moving the incorporation to Ohio enhanced the Company’s flexibility and provided a more efficient platform from which to operate and grow.

Basis of Presentation

The accompanying Condensed Consolidated Balance Sheet as of December 31, 2013, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements of Gas Natural Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. In the opinion of the Company, all normal recurring adjustments have been made, that are necessary to fairly present the results of operations for the interim periods. Certain reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported.

Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. A majority of the Company’s revenues are derived from its natural gas utility operations, making its revenue seasonal in nature. Therefore, the largest portion of the Company’s operating revenue is generated during the colder months when its sales volume increases considerably. Reference should be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

F-6

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The effect of stock option exercises equivalent to 78 and 1,053 shares for the three months ended June 30, 2014 and 2013, respectively, would have been anti-dilutive and therefore, were excluded from the computation of diluted earnings per share. There were no stock option exercise equivalents that would have been anti-dilutive for the six months ended June 30, 2014 and 2013.

Change in Accounting Principle

In the second quarter of 2014, the Company changed the timing of its annual goodwill impairment testing. This change in accounting principle is viewed as preferable due to the Company’s accelerated filing status for it 2014 Annual Report on Form 10-K. Historically, the Company has used December 31^st as its annual testing date. This has directly resulted in the Company filing its Annual Report on the 90^th day of its fiscal year, the deadline for non-accelerated filers. Starting in 2014, the Company will use a testing date of October 1^st. This change should save the Company sufficient time to assist it in meeting its new 75 day filing deadline for its 2014 Annual Report. The Company believes that retrospective application of this change in accounting policy would be impracticable because it requires: (1) assumptions about management’s intents over the last several years related to the business units being tested which cannot be independently substantiated and (2) the testing process depends on many significant estimates and it is impossible to distinguish objectively information about those estimates that would have existed on the prior test dates and would have been available to the Company’s management at that time. Due to these factors, the Company will recognize this change in accounting principle on a prospective basis.

There have been no other material changes in the Company’s significant accounting policies during the six months ended June 30, 2014 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. This pronouncement is effective for annual reporting periods beginning after December 15, 2016 and is to be applied using one of two retrospective application methods, with early application not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements.

Note 2 – Acquisitions

On June 1, 2013, the Company and its wholly-owned Ohio subsidiary, GNR, completed the acquisition of substantially all of the assets and certain liabilities of JDOG Marketing, an Ohio company engaged in the marketing of natural gas. The Osborne Trust is the majority owner of JDOG Marketing. Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer, is the sole trustee of the Osborne Trust. The Company believes the natural gas marketing business complements its existing natural gas distribution business in Ohio. In addition, it currently conducts natural gas marketing in Montana and Wyoming, which the Company believes allows it to integrate the Ohio marketing operations into Gas Natural with minimal increases in staff or overhead. Costs related to this acquisition totaled $0.6 million and were expensed as incurred.

Pursuant to the terms of the purchase agreement, the consummation of the transaction depended upon the satisfaction or waiver of a number of certain customary closing conditions, the receipt of regulatory approvals and the consent of certain of Gas Natural’s lenders. In addition, the transaction was subject to the approval of Gas Natural’s shareholders, and the receipt of a fairness opinion by an independent investment banking firm. All of these conditions were satisfied and the acquisition was completed on June 1, 2013. In accordance with U.S. GAAP, the consideration given, assets received, and liabilities assumed by the Company were recorded at their fair market value as of this date.

Under the purchase agreement, Gas Natural issued to JDOG Marketing 256,926 shares of the Company’s common stock. These shares had an acquisition date fair value of $2,641,199. There were no underwriting discounts or commissions in connection with the issuance, as no underwriters were used to facilitate the acquisition. The shares were not registered under the Securities Act of 1933, as amended (the “Act”), in reliance on the exemption from registration provided by Section 4(2) of the Act.

F-7

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In addition, the purchase agreement provides for contingent “earn-out” payments for a period of five years after the closing of the transaction if GNR achieves an annual EBITDA target in the amount of $810,432, which was JDOG Marketing’s EBITDA for the year ended December 31, 2011. If GNR’s actual EBITDA for a given year is less than the target EBITDA, then no earn-out payment will be due and payable for that particular period. If GNR’s actual EBITDA for a given year meets or exceeds the target EBITDA, then an earn-out payment in an amount equal to actual EBITDA divided by target EBITDA times $575,000 will have been earned for that year. Due to the earn-out structure, the maximum amount that could be earned over the five year period is unlimited.

Earn-out payments are to be settled annually in validly issued, fully paid and non-assessable shares of the Company’s common stock. The share price to be used to determine the number of shares to be issued for each earn-out payment will be the average closing price of Gas Natural’s common stock for the 20 trading days preceding issuance of Gas Natural’s common stock for such earn-out payment. The Company estimated the acquisition date fair value of this liability to be $2,250,000, of which $669,396 was classified as current. The fair value of this liability is remeasured on a recurring basis. See Note 4 – Fair Value Measurements for details regarding this valuation. The Company calculated a first year earn-out payment of $671,638 as its best estimate for financial reporting purposes and this amount is included in the Contingent consideration, current portion line of the Company’s Condensed Consolidated Balance Sheet. The Company does not believe an earn-out payment is due to JDOG Marketing as a result of payments made by the Ohio utilities to JDOG Marketing during 2013 that were disallowed by the PUCO. Mr. Osborne believes that JDOG Marketing is entitled to the earn-out. Mr. Osborne and JDOG Marketing have filed a suit against the Company for the earn-out payment. See Note 13 – Commitments and Contingencies for more information.

The Company applied the acquisition method to the business combination and valued each of the assets acquired (property, plant and equipment and customer relationships) and liabilities assumed (earn-out liability) at fair value as of the acquisition date. The Company used the net book value of property, plant, and equipment received as this closely approximated the fair value. The Company used the present value of expected net cash flows associated with the acquired customer contracts to approximate the assets’ fair values. These customer contracts represent established and ongoing contracts to provide natural gas to the former customers of JDOG Marketing acquired by the Company as part of the acquisition. These customer contracts will be fully amortized over their 10 year estimated useful lives. The Company recorded the fair value of the earn-out liability as the present value of estimated future earn-out payments as of the acquisition date. In addition to the assets acquired and liabilities assumed in the transaction, the Company also effectively settled a note due from JDOG Marketing. As a result of the purchase, $2,101,744 was allocated to goodwill. The Company expects none of the goodwill to be deductible for tax purposes.

The following table shows the estimated acquisition date fair values of the assets acquired and liabilities assumed.


	Fair Value at June 1, 2013

Assets acquired:
Property, plant and equipment	$	21,600
Customer relationships		2,800,000
Goodwill		2,101,744

Total assets acquired		4,923,344

Less liabilities assumed:
Current liabilities		669,396
Long-term liabilities		1,580,604

Total liabilities assumed		2,250,000

Less effective settlement of pre-existing relationships:
Settlement of note receivable		32,145


Net assets acquired from John D Marketing acquisition	$	2,641,199

The results of GNR are included in the Company’s Marketing and Production Operations reporting segment. For the three and six months ended June 30, 2014, GNR contributed $0.8 million and $2.4 million to the Company’s revenues, respectively, and losses of $69,326 and $32,079 to the Company’s net income, respectively. For the three and six months ended June 30, 2013, GNR contributed $207,524 to the Company’s revenues and $30,767 to the Company’s net income.

F-8

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Historically, the Company has been a party to transactions with JDOG Marketing primarily for the purchase of natural gas. In addition to these purchases, the Company also had a note receivable outstanding from JDOG Marketing and an operating lease agreement. Both of these relationships were effectively settled with the completion of the transaction. See Note 12 – Related Party Transactions for more information regarding the Company’s transactions with JDOG Marketing prior to the acquisition.

Note 3 – Marketable Securities

The Company’s marketable securities as of June 30, 2014 and December 31, 2013 consisted only of common stock classified as available-for-sale securities. The Company did not sell any available-for-sale securities during the six months ended June 30, 2014 and 2013. All unrealized gains and losses on these securities are included in Other comprehensive income on the Company’s Condensed Consolidated Statement of Comprehensive Income net of tax. No unrealized gains or losses have been reclassified from Other comprehensive income to a component of Net income.

The following is a summary of available-for-sale securities owned by the Company:


	June 30, 2014
	Investment at cost		Unrealized gains		Unrealized losses		Estimated fair value

Common stock	$	238,504	$	173,480	$	—	$	411,984


	December 31, 2013
	Investment at cost		Unrealized gains		Unrealized losses		Estimated fair value

Common stock	$	238,504	$	167,630	$	—	$	406,134

Note 4 – Fair Value Measurements

The Company follows a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:


Level 1 inputs -		observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs -		other inputs that are directly or indirectly observable in the marketplace.

Level 3 inputs -		unobservable inputs which are supported by little or no market activity.

The level in the fair value hierarchy within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

F-9

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the placement in the fair value hierarchy of the Company’s assets and liabilities measured at fair value on a recurring basis:


	June 30, 2014
	Level 1		Level 2		Level 3		Total

ASSETS:
Common stock	$	411,984	$	—	$	—	$	411,984


LIABILITIES:
Contingent consideration	$	—	$	—	$	685,000	$	685,000


	December 31, 2013
	Level 1		Level 2		Level 3		Total

ASSETS:
Common stock	$	406,134	$	—	$	—	$	406,134


LIABILITIES:
Contingent consideration	$	—	$	—	$	685,000	$	685,000

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.

The contingent consideration liability categorized in level 3 of the fair value hierarchy arose as a result of the JDOG Marketing acquisition in June 2013. See Note 2 – Acquisitions for more information regarding this liability.

Valuation of the contingent consideration liability categorized under level 3 of the fair value hierarchy was conducted by an independent third-party valuation firm. Inputs and assumptions used in the valuation were reviewed for reasonableness by the Company in the course of the valuation process and have been updated to reflect changes in the Company’s business environment.

F-10

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table reconciles the beginning and ending balances of the contingent consideration liability categorized under level 3 of the fair value hierarchy.


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Contingent Consideration

Opening balance December 31, 2013	$	685,000

Transfers into level 3		—
Transfers out of level 3		—
Total (gains) losses for period:
Included in net income		—
Included in other comprehensive income		—
Purchases		—
Sales		—
Settlements		—
Issuances		—


Closing balance June 30, 2014	$	685,000

The following table summarizes quantitative information used in determining the fair value of the Company’s liabilities categorized in level 3 of the fair value hierarchy.


Quantitative Information about Level 3 Fair Value Measures
	Fair Value at June 30, 2014		Valuation Techniques	Unobservable Input	Range
Contingent Consideration	$	685,000	Monte Carlo analysis	Forecasted annual EBITDA	$0.4 - $0.6 million
				Weighted avg cost of capital	15.0% - 15.0%
				U.S. Treasury yields	0.1% - 1.1%

			Discounted cash flow	U.S. Treasury yields	0.1% - 1.1%
				Credit spread	1.2% - 1.7%

The significant unobservable inputs used in the fair value measure of the Company’s contingent consideration liability are its weighted average cost of capital, various U.S. Treasury yields, and the Company’s credit spread above the risk free rate. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measure. An additional significant unobservable input for this fair value measure is the Company’s forecasted annual EBITDA related to its GNR subsidiary. A significant increase (decrease) in this input would result in a significant increase (decrease) in the fair value measure.

Note 5 – Regulatory Assets

On June 27, 2014, the Company’s Frontier Natural Gas subsidiary entered into a stipulation with the Public Staff - North Carolina Utilities Commission (Docket No G-40, Sub 124), in which the subsidiary agreed, among other items, to reclassify $2.5 million from its deferred gas cost account to a regulatory asset account. This amount represents a portion of deferred expenses related to the subsidiary’s January and February 2014 gas purchases. The stipulation calls for amortization of this amount as operating expense over a five year period beginning July 1, 2014. Under the stipulation, the Public Staff agreed to not request a change in Frontier Natural Gas’s base margin rates, exclusive of cost of gas, for the same five-year period. The reclassification is reflected in the balances of the Company’s Recoverable costs of gas purchases and Deferred costs regulatory asset line items on its Condensed Consolidated Balance Sheet dated June 30, 2014.

F-11

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6 – Build to Suit Lease

In April 2014, with the approval of its creditors, the Company entered into a build-to-suit lease agreement for its new enterprise resource planning (“ERP”) system. The Company has determined that during the application development stage it possesses substantially all of the project’s risk and as such should be considered the owner of the asset during this period. The Company has recorded a $2.4 million asset included in Property, plant and equipment and a $2.4 million liability included in the Build-to-suit liability line items on its Condensed Consolidated Balance Sheet dated June 30, 2014 related to this project. Upon completion of the ERP project, the Company will assess whether the lease qualifies for sales recognition under sale-leaseback accounting guidance.

Note 7 – Restricted Cash

At June 30, 2014 and December 31, 2013, the Company maintained a restricted cash balance of $2.0 million and $1.1 million. Of these amounts, $1.0 million and $1.1 million at June 30, 2014 and December 31, 2013, respectively, are related to the Company’s Sun Life debt covenants. See the Sun Life Debt Covenant section of Note 8 – Credit Facilities and Long-Term Debt for more information regarding these restricted funds. The remaining $0.9 million at June 30, 2014 is related to a deposit paid in the first quarter of 2014 to Bangor Gas, a subsidiary of the Company, by Verso Bucksport Power LLC (“Verso”) as a required condition connected to H.Q. Energy Services (U.S.) Inc. transferring to Verso its rights under a gas transportation service agreement with Bangor Gas. Bangor Gas is restricted from using these funds unless and until a default under this agreement has occurred. This deposit will be refunded to Verso at the termination of the gas transportation service agreement.

Note 8 – Credit Facilities and Long-Term Debt

Line of Credit

The Company has a revolving credit facility with the Bank of America with a maximum borrowing capacity of $30.0 million due April 1, 2017. This revolving credit facility includes an annual commitment fee ranging from 25 to 45 basis points of the unused portion of the facility and interest on the amounts outstanding at LIBOR plus 175 to 225 basis points. The Company had outstanding borrowings under this facility of $20.0 million and $24.5 million at June 30, 2014 and December 31, 2013, respectively. For the three months ended June 30, 2014 and 2013, interest expense related to the line of credit was $0.1 million and $0.1 million, respectively. For the six months ended June 30, 2014 and 2013, interest expense related to the line of credit was $0.3 million and $0.2 million, respectively. The weighted average interest rate for the revolving credit facility was 2.38% and 2.39%, for the three months ended June 30, 2014 and 2013, respectively. The weighted average interest rate for the revolving credit facility was 2.39% and 2.42%, for the six months ended June 30, 2014 and 2013, respectively.

Notes Payable

The following table details the Company’s outstanding long-term debt balances at June 30, 2014 and December 31, 2013.


	June 30, 2014		December 31, 2013

LIBOR plus 1.75 to 2.25%, Bank of America amortizing term loan, due April 1, 2017	$	9,125,000	$	9,375,000
6.16%, Allstate/CUNA Senior unsecured notes, due June 29, 2017		13,000,000		13,000,000
5.38%, Sun Life fixed rate note, due June 1, 2017		15,334,000		15,334,000
LIBOR plus 3.85%, Sun Life floating rate note, due May 3, 2014		—		3,000,000
4.15% Sun Life senior secured guaranteed note, due June 1, 2017		2,989,552		2,989,552
Vehicle & equipment financing loans		85,543		2,190

Total notes payable		40,534,095		43,700,742
Less: current portion		542,112		3,502,190

Notes payable, long-term portion	$	39,991,983	$	40,198,552

F-12

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Debt Covenants

Bank of America

The Bank of America revolving credit agreement and term loan contain various covenants, which require 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 .55-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 including the capital lease related to the Loring pipeline, 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.

In addition, the Bank of America revolving credit agreement and term loan also restricts Energy West’s ability to pay dividends and make distributions, redemptions and repurchases of stock during any 60-month period to 80% 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.

Allstate/CUNA

The Allstate/CUNA senior unsecured notes contain various covenants, including a limitation on Energy West’s total dividends and distributions made in the immediately preceding 60-month period to 100% of aggregate consolidated net income for such period. The notes restrict Energy West from incurring additional senior indebtedness in excess of 65% of capitalization at any time and require Energy West to maintain an interest coverage ratio of more than 150% of the pro forma annual interest charges on a consolidated basis in two of the three preceding fiscal years.

Sun Life

The Sun Life covenants restrict certain cash balances and require two main types of debt service reserve accounts to be maintained to cover approximately one year of interest payments. The total balance in the debt service reserve accounts was $1.0 million and $1.1 million at June 30, 2014 and December 31, 2013, respectively, and is included in restricted cash on the Company’s Consolidated Balance Sheets. The debt service reserve accounts cannot be used for operating cash needs.

The covenants also provide that any cash dividends, distributions, redemptions or repurchases of common stock may be made by the obligors (NEO, Orwell, Brainard, and the Company’s unregulated Ohio subsidiaries) 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, and (ii) there exists no other event of default at the time the dividend, distribution, redemption or repurchase is made. 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.

The obligors are also 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 covenants 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. The note defines EBITDA as net income plus the sum of interest expense, any provision for federal, state, and local taxes, depreciation, and amortization determined on a consolidated basis in accordance with GAAP, but excluding any extraordinary non-operating income or loss and any gain or loss from non-operating transactions. 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-13

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The notes prohibit the Company 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 total assets. Generally, the Company 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. The Company is also generally limited in making acquisitions in excess of 10% of total assets.

An event of default, if not cured or waived, would require the Company to immediately pay the outstanding principal balance of the notes as well as any and all interest and other payments due. An event of default would also entitle Sun Life to exercise certain rights with respect to any collateral that secures the indebtedness incurred under the notes.

The Company believes it is in compliance with the financial covenants under its debt agreements.

Note 9 – Stock Compensation

2012 Incentive and Equity Award Plan

The 2012 Incentive and Equity Award Plan provides for the grant of options, restricted stock, performance awards, other stock-based awards and cash awards to certain eligible employees and directors. The number of shares authorized for issuance under the plan is 500,000.

On March 26, 2014, in order to further align the directors’ interests with those of the Company’s shareholders, the board granted an award of the Company’s common stock to each current director of Gas Natural. The total number of shares awarded was 30,833 with a grant date fair value of $0.3 million. The award was not conditional on any future performance or event and as such, the award was fully expensed on the grant date. These shares were issued on April 3, 2014.

2012 Non-Employee Director Stock Award Plan

The 2012 Non-Employee Director Stock Award Plan allows each non-employee director to receive his or her fees in shares of the Company’s common stock by providing written notice to the Company. The number of shares authorized for issuance under the plan is 250,000. As of June 30, 2014, no shares had been issued under the plan.

2002 Stock Option Plan

The Energy West Incorporated 2002 Stock Option Plan (the “Option Plan”) expired on October 4, 2012 and provided for the issuance of up to 300,000 options to purchase the Company’s common stock to be issued to certain key employees. 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 grant date using the Black-Scholes option pricing model.

A summary of the status of outstanding stock options under the plan is as follows:


	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value

Outstanding December 31, 2013		5,000		$	8.44	$	—
Granted		—
Exercised		(5,000	)	$	8.44
Expired		—

Outstanding June 30, 2014		—		$	—	$	—

Exercisable June 30, 2014		—		$	—	$	—

F-14

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 – 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 months ended June 30, 2014 and 2013 was $171,335 and $104,269, respectively. The expense related to the 401k Plan for the six months ended June 30, 2014 and 2013 was $257,175 and $197,517, 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. For the three months ended June 30, 2014 and 2013, the Company contributed shares of common stock valued at $17,516 and $13,418, respectively. For the six months ended June 30, 2014 and 2013, the Company contributed shares of common stock valued at $25,030 and $27,437, 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. For the six months ended June 31, 2014 and 2013, the Company made no contributions.

The Company has sponsored a defined postretirement health plan (the “Retiree Health Plan”) providing health and life insurance benefits to eligible retirees. The Retiree Health 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, 2014 and December 31, 2013, the value of plan assets was $144,712 and $155,750, respectively. The assets remaining in the trust will be used to fund the plan until the assets are exhausted.

Note 11 – 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,
	2014			2013			2014			2013

Tax expense at statutory rate of 34%	$	(762,292	)	$	(181,941	)	$	1,975,507		$	2,434,919
State income tax, net of Federal tax expense		(75,456	)		(20,014	)		195,546			267,844
Amortization of deferred investment tax credits		(5,265	)		(5,265	)		(10,530	)		(10,531	)
Adjustment to tax return filed		—			—			40,914			—
Other		29,599			984			19,004			8,490


Total income tax expense (benefit)		(813,414	)		(206,236	)		2,220,441			2,700,722
Less: Income tax benefit from discontinued operations		(4,659	)		(165,213	)		(15,389	)		(156,147	)


Income tax expense (benefit) from continuing operations	$	(808,755	)	$	(41,023	)	$	2,235,830		$	2,856,869

The “Adjustment to tax return filed” line above for the six months ended June 30, 2014 includes an income tax adjustment of $40,914 related to the correction of income tax items related to 2012 recorded during the six months ended June 30, 2014.

The Company files its income tax returns on a consolidated basis. Rate-regulated operations record cumulative increases in deferred taxes as income taxes recoverable from customers. The Company uses the deferral method to account for investment tax credits as required by regulatory commissions. Deferred income taxes are determined using the asset and liability method, under which deferred tax assets and liabilities are measured based upon the temporary differences between the financial statement and income tax basis of assets and liabilities, using current tax rates.

Tax positions must meet a more-likely-than-not recognition threshold to be recognized. The Company has no unrecognized tax benefits that would have a material impact to the Company’s financial statements for any open tax years. No adjustments were recognized for uncertain tax positions for the three and six months ended June 30, 2014 and 2013.

The Company recognizes interest and penalties related to unrecognized tax benefits in operating expense. As of June 30, 2014 and December 31, 2013, there were no unrecognized tax benefits nor interest or penalties accrued related to unrecognized tax benefits. For the three and six months ended June 30, 2014 and 2013, the Company did not recognize any interest or penalties related to unrecognized tax benefits.

F-15

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The tax years after 2010 for federal and state returns remain open to examination by the major taxing jurisdictions in which the Company operates.

Note 12 – Related Party Transactions

Purchase of 8500 Station Street

On March 5, 2013, the Company purchased the Matchworks Building in Mentor, Ohio for $1.9 million from McKay Real Estate Corporation, Matchworks, LLC, and Nathan Properties, LLC (collectively, the “Sellers”) by and through Mark E. Dottore as Receiver in the United States District Court. The Sellers are entities owned or controlled by Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer. The acquisition of the Matchworks Building was approved by the independent members of the Company’s board of directors. A subsidiary of Gas Natural, 8500 Station Street, was formed to operate the property. The Company accounted for the transaction as an asset purchase and as such recorded the land and building purchased as Property, plant and equipment on its Condensed Consolidated Balance Sheets in the amounts of $244,859 and $1,607,915, respectively. These amounts were allocated based on the assets’ relative fair values.

Acquisition of John D. Oil and Gas Marketing

On June 1, 2013, the Company and its wholly-owned Ohio subsidiary, GNR, completed the acquisition of substantially all of the assets and certain liabilities of JDOG Marketing, an Ohio company engaged in the marketing of natural gas. The Osborne Trust is the majority owner of JDOG Marketing. Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer, is the sole trustee of the Osborne Trust. The acquisition of JDOG Marketing was approved by the independent members of the Company’s board of directors and the Company’s shareholders. See Note 2 – Acquisitions for details regarding this transaction.

Notes Receivable

The Company has a note receivable from one of its employees with an annual interest rate of 4%. Monthly payments are based on a 30 year amortization schedule with a balloon payment due no later than December 1, 2017. The principal balance due was $93,413 and $95,665, of which $1,938 and $1,938 is due within one year, as of June 30, 2014 and December 31, 2013, respectively.

Accounts Receivable and Accounts Payable

The table below details amounts due from and due to related parties, including companies owned or controlled by Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer, at June 30, 2014 and December 31, 2013. These amounts are presented on the Condensed Consolidated Balance Sheet as Related parties under Accounts receivable and Accounts payable.


	Accounts Receivable				Accounts Payable
	June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013

Cobra Pipeline	$	178,596	$	131,208	$	—	$	76,909
Orwell Trumbell Pipeline		—		—		—		122,693
Great Plains Exploration		13,094		7,033		64,859		73,983
Big Oats Oil Field Supply		6,121		4,945		—		179,447
John D. Oil and Gas Company		95		91		84,985		82,188
OsAir		884		—		14,222		12,979
Other		10,774		2,948		7,814		11,734

Total related party balances		209,564		146,225		171,880		559,933
Less amounts included in discontinued operations		—		—		—		—

Total related party balances included in continuing operations	$	209,564	$	146,225	$	171,880	$	559,933

F-16

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The tables below detail transactions with related parties, including companies owned or controlled by Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer, for the three months ended June 30, 2014 and 2013.


	Three Months Ended June 30, 2014
	Natural Gas Purchases		Pipeline Construction Purchases		Rent, Supplies, Consulting and Other Purchases		Natural Gas Sales		Rental Income and Other Sales

Cobra Pipeline	$	370,912	$	—	$	—	$	44,099	$	13,400
Orwell Trumbell Pipeline		221,371		—		—		307		1,575
Great Plains Exploration		272,827		—		—		2,634		1,500
Big Oats Oil Field Supply		—		447		5,068		591		—
John D. Oil and Gas Company		317,148		—		—		144		12,650
OsAir		66,636		—		—		568		16,500
Lake Shore Gas		51,150		—		—		—		—
Other		35,115		—		9,123		5,162		375

Total	$	1,335,159	$	447	$	14,191	$	53,505	$	46,000


	Three Months Ended June 30, 2013
	Natural Gas Purchases		Pipeline Construction Purchases		Rent, Supplies, Consulting and Other Purchases		Natural Gas Sales		Management and Other Sales

John D. Oil and Gas Marketing	$	376,445	$	—	$	3,186	$	2,188	$	—
Cobra Pipeline		176,102		—		—		26,626		—
Orwell Trumbell Pipeline		105,505		—		—		221		—
Great Plains Exploration		187,289		854		—		2,133		25,587
Big Oats Oil Field Supply		—		1,140,133		138,459		806		125
John D. Oil and Gas Company		284,184		5,976		—		143		14,590
OsAir		72,691		—		62,223		623		31,468
Other		24,288		854		2,322		2,972		31,231

Total	$	1,226,504	$	1,147,817	$	206,190	$	35,712	$	103,001


	Six Months Ended June 30, 2014
	Natural Gas Purchases		Pipeline Construction Purchases		Rent, Supplies, Consulting and Other Purchases		Natural Gas Sales		Rental Income and Other Sales

Cobra Pipeline	$	709,247	$	—	$	8,000	$	104,623	$	13,400
Orwell Trumbell Pipeline		516,603		—		—		1,455		1,575
Great Plains Exploration		490,479		—		—		12,136		3,000
Big Oats Oil Field Supply		—		254,752		93,741		4,453		850
John D. Oil and Gas Company		602,285		—		—		287		29,150
OsAir		143,132		—		6,001		2,845		22,866
Lake Shore Gas		162,360		—		—		—		—
Other		62,443		—		22,808		18,226		1,576

Total	$	2,686,549	$	254,752	$	130,550	$	144,025	$	72,417

F-17

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	Six Months Ended June 30, 2013
	Natural Gas Purchases		Pipeline Construction Purchases		Rent, Supplies, Consulting and Other Purchases		Natural Gas Sales		Management and Other Sales

John D. Oil and Gas Marketing	$	952,899	$	—	$	7,271	$	5,470	$	—
Cobra Pipeline		509,871		—		—		44,481		25
Orwell Trumbell Pipeline		418,040		—		—		10,768		301
Great Plains Exploration		316,725		854		—		12,679		30,309
Big Oats Oil Field Supply		—		1,477,683		298,170		2,746		125
John D. Oil and Gas Company		367,545		5,976		—		143		14,590
OsAir		130,980		—		80,473		623		31,468
Other		34,399		854		30,011		18,423		46,015

Total	$	2,730,459	$	1,485,367	$	415,925	$	95,333	$	122,833

In addition, the Company accrued a liability of $21,158 due to companies controlled by Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer, for natural gas used through June 30, 2014 that had not yet been invoiced. The related expense is included in the gas purchased line item in the accompanying Statements of Comprehensive Income.

Note 13 – 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.

Richard M. Osborne Suits

On June 13, 2014, Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer, filed a lawsuit against the Company and the Company’s corporate secretary captioned, “Richard M. Osborne and Richard M. Osborne Trust, Under Restated and Amended Trust Agreement of February 24, 2012 v. Gas Natural, Inc. et al.,” Case No. 14CV001210 which was filed in the Court of Common Pleas in Lake County, Ohio. In this lawsuit, Mr. Osborne seeks an order requiring the Company to provide him with “the minutes and any corporate resolutions for the past five years.” The Company has provided Mr. Osborne with all the board minutes he requested that have been approved by the board.

On June 26, 2014, Mr. Osborne filed a lawsuit against Gas Natural and the Company’s board of directors captioned “Richard M. Osborne, Richard M. Osborne Trust, Under Restated and Amended Trust Agreement of February 24, 2012 and John D. Oil and Gas Marketing Company, LLC v. Gas Natural, Inc. et al.,” Case No. 14CV001290, filed in the Court of Common Pleas in Lake County, Ohio. In this lawsuit, among other things, Mr. Osborne (1) demanded payment of an earnout associated with Gas Natural’s purchase of assets from John D. Marketing, (2) alleged that the board of directors breached its fiduciary duties, primarily by removing Mr. Osborne as chairman of the board and chief executive officer, (3) sought injunctive relief to restrain the Company’s board members from “taking any actions on behalf of Gas Natural until they are in compliance with the law and the documents governing corporate governance” and (4) asked the Court to enjoin the 2014 annual meeting that was scheduled to take place on July 30, 2014 and to delay it until such time that the board of directors would be “in compliance with the law and corporate governance.”

Mr. Osborne dismissed the lawsuit above on July 15, 2014 without prejudice, as the parties started to engage in settlement negotiations in an attempt to resolve the dispute. After settlement negotiations broke down, Mr. Osborne refiled the lawsuit on July 28, 2014 against Gas Natural and the Company’s board members. In the re-filed lawsuit, among other things, Mr. Osborne (1) demands payment of an earnout amount associated with Gas Natural’s purchase of assets from John D. Marketing, (2) alleges that the board of directors has breached its fiduciary duties by removing Mr. Osborne as chairman and chief executive officer, (3) seeks to enforce a July 15, 2014 settlement term sheet, where the parties memorialized certain discussions they had in connection with their efforts to resolve the dispute arising out of the lawsuit, which included a severance payment of $1.0 million, and (4) seeks to invalidate the results of the July 30, 2014 shareholder meeting and asks the court to order Gas Natural to hold a new meeting at a later date. Mr. Osborne is also seeking compensatory and punitive damages. Gas Natural believes that Mr. Osborne’s claims in this lawsuit are wholly without merit and will vigorously defend this case on all grounds.

F-18

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Shareholders Suit

Beginning on December 10, 2013, five putative shareholder derivative lawsuits were filed by five different individuals, in their capacity as shareholders of Gas Natural, in the United States District Court for the Northern District of Ohio, purportedly on behalf of Gas Natural and naming certain of the Company’s current and former executive officers and directors as individual defendants. These five shareholder lawsuits are captioned as follows: (1) Richard J. Wickham v. Richard M. Osborne, et al., (Case No. 1:13-cv-02718-LW); (2) John Durgerian v. Richard M. Osborne, et al., (Case No. 1:13-cv-02805-LW); (3) Joseph Ferrigno v. Richard M. Osborne, et al., (Case No. 1:13-cv-02822-LW); (4) Kyle Warner v. Richard M. Osborne, et al., (Case No. 1:14-cv-00007-LW) and (5) Gary F. Peters v. Richard M. Osborne, (Case No. 1:14-cv-0026-CAB). On February 6, 2014, the five lawsuits were consolidated solely for purposes of conducting limited pretrial discovery, and on February 21, 2014, the Court appointed lead counsel for all five lawsuits. No formal discovery has been conducted to date.

The consolidated action contains claims against various current or former directors or officers of Gas Natural alleging, among other things, violations of federal securities laws, breaches of fiduciary duty, waste of corporate assets and unjust enrichment arising primarily out of the Company’s acquisition of the Ohio utilities, services provided by JDOG Marketing and the acquisition of JDOG Marketing, and the sale of the Company’s common stock by Richard M. Osborne, the Company’s former chairman and chief executive officer, and Thomas J. Smith, a director of the Company and its former chief financial officer. The suit seeks the recovery of unspecified damages allegedly sustained by Gas Natural, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, the recovery of plaintiffs’ attorney’s fees and other relief.

Gas Natural and the other defendants filed a motion to dismiss the consolidated action in its entirety on May 8, 2014. The motion to dismiss was based on, among other things, the failure of the plaintiffs to make demand on Gas Natural’s board of directors to address the alleged wrongdoing prior to filing their lawsuits and the failure to state viable claims against various individual defendants. Richard M. Osborne, individually, is now represented by counsel independent of all other defendants in the case and is entitled to submit a filing in support of the motion to dismiss on his own behalf.

At this time the Company is unable to provide an estimate of any possible future losses that it may incur in connection to this suit. The Company carries insurance that it believes will cover any negative outcome associated with this action. This insurance carries a $250,000 deductible, which the Company has reached. Although the Company believes these insurance proceeds are available, the Company may incur costs and expenses related to the lawsuits that are not covered by insurance which may be substantial. Any unfavorable outcome of the pending lawsuits could adversely impact the Company’s business and results of operations.

Harrington Employment Suit

On February 25, 2013, one of the Company’s former officers, Jonathan Harrington, filed a lawsuit captioned “Jonathan Harrington v. Energy West, Inc. and Does 1-4,” Case No. DDV-13-159 in the Montana Eighth Judicial District Court, Cascade County. Mr. Harrington claims he was terminated in violation of Montana statute requiring just cause for termination. In addition, he alleges claims for negligent infliction of emotional distress and negligent slander. Mr. Harrington is seeking relief for economic loss, including lost wages and fringe benefits for a period of at least four years from the date of discharge, together with interest. Mr. Harrington is an Ohio resident and was employed in Gas Natural’s Ohio corporate offices. On March 20, 2013, the Company filed a motion to dismiss the lawsuit on the basis that Mr. Harrington was an Ohio employee, not a Montana employee, and therefore the statute does not apply. The court had asked the parties to file comprehensive statements of fact and scheduled a hearing on the motion to dismiss on July 1, 2014. On July 1, 2014, the court conducted a hearing, made extensive findings on the record, and issued an Order finding in favor of the Company and dismissing all of Mr. Harrington’s claims. On July 21, 2014, Mr. Harrington appealed the dismissal to the Montana Supreme Court where the matter is presently pending awaiting full briefing by the parties. The Company continues to believe Mr. Harrington’s claims under Montana law are without merit, and will continue to vigorously defend this case on all grounds.

Special Committee of the Board Investigation

On March 26, 2014, the board of directors formed a special committee comprised of three independent directors to investigate the allegations contained in a letter received from one of our shareholders. The letter demands that the board take legal action to remedy alleged breaches of fiduciary duties by the board and certain of our executive officers in connection with the Order and Opinion issued by the PUCO on November 13, 2013. The special committee has the power to retain any advisors, including legal counsel and accounting, financial and regulatory advisors, that the committee determines to be appropriate to carry out its responsibilities in

F-19

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

connection with its investigation. The special committee has retained legal counsel and is in the process of investigating and evaluating the allegations in order to determine the position Gas Natural will take with respect to the letter. Although the Company believes that insurance proceeds are available for the cost of the investigation, the Company may incur costs and expenses related to the investigation that are not covered by insurance which may be substantial.

PUCO Audits

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 GCRs 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. The PUCO retrospectively audits the Ohio utility companies’ purchases of natural gas on an annual basis. The purpose of this GCR audit is to reconcile the differences, if any, between the amount the companies paid for natural gas and the amount the companies’ customers paid for natural gas.

2010 NEO Audit

During the year ended December 31, 2010, the PUCO conducted an audit of NEO’s GCR as filed from September 2007 through August 2009. In connection with the audits, the PUCO found that NEO had under-recovered gas costs of approximately $1.1 million. The collection of the under-recovery for NEO began in February of 2012. This adjustment appeared on the accompanying Condensed Consolidated Balance Sheets as part of “recoverable cost of gas purchases”. The remaining balance in NEO’s recoverable cost of gas purchases was $84,463 and $234,253 at June 30, 2014 and December 31, 2013, respectively. The recovery period for these under collected amounts has concluded. The remaining balance will be included as an adjustment in NEO’s future GCR audits until fully recovered.

2012 NEO & Orwell Audits

On January 23, 2012, the PUCO directed its staff to examine the compliance of NEO and Orwell under the GCR mechanism. In a non-binding report to the PUCO in February 2013, its staff asserted that NEO could have purchased natural gas from local producers for less and recommended an adjustment to the GCR calculations that would result in a liability for NEO and Orwell to its customers.

In July 2013, after a hearing with the PUCO and its staff, the Company determined it was probable that the GCR adjustments recommended by the staff would be adopted by the PUCO and as a result the Company recorded these liabilities in its financial statements for the period ended June 30, 2013. Based on the PUCO staff’s calculations and management’s assessment, a $943,550 liability to its customers was recorded as the Company’s best estimate of the required adjustment to NEO’s GCR and a liability for Orwell to its customers of $251,081.

On November 13, 2013, the PUCO issued an Opinion and Order in the NEO and Orwell GCR cases; case numbers 12-209-GA-GCR and 12-212-GA-GCR. The Order concluded that adjustments to NEO and Orwell’s GCRs were appropriate in the amounts of $0.8 million and $0.2 million, respectively. These adjustments represent disallowed agent fees paid by NEO and Orwell to JDOG Marketing for natural gas procurement, disallowed processing and treatment fees paid by NEO to Cobra for NEO’s natural gas supply being delivered through Cobra’s pipeline, and certain excess costs associated with local production gas purchased by NEO and Orwell from JDOG Marketing. Both JDOG Marketing and Cobra were companies controlled by Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer, during the periods covered by these audits. The Company examined NEO and Orwell’s GCRs for the periods immediately following the companies’ audit periods. As a result, the Company calculated that a total liability to its NEO and Orwell customers to be in the range of $1.5 million to $1.9 million. As a result, the Company accrued an additional $0.3 million in the fourth quarter of 2013 to increase its initial estimated liability to $1.5 million. The Company believes that this amount continues to be the best estimate to resolve this matter. New information may cause the Company to materially change this estimate in future periods. This amount is included as a reduction of the Recoverable cost of gas purchases line item on the accompanying Condensed Consolidated Balance Sheets.

In addition to the GCR adjustments, the PUCO ordered an investigative audit to be conducted of NEO, Orwell and all affiliated and related companies to be undertaken by Rehmann Corporate Investigative Services, LLC. These audits will examine the companies’ corporate separation and management structures, internal regulatory and financial controls, compensation systems, gas purchasing transactions and practices related to GCR calculations, and financial and accounting statements filed with regulatory agencies. The final results of these audits are to be reported to the PUCO by January 5, 2015. The PUCO capped the cost for the audit at $200,000 and provided for an additional $50,000 in fees for the preparation and presentation of expert testimony. These costs associated with the audit will be the responsibility of the Company.

F-20

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Trade Receivables

At December 31, 2013, included in the accounts receivable, trade line item on the accompanying Condensed Consolidated Balance Sheet was $1,059,224, net of allowance for doubtful accounts of $1,421,000, due from a large industrial customer in bankruptcy proceedings. At the time, the Company believed that it had an administrative claim for the unreserved portion and that it was likely to collect the amount. In June 2014, the bankruptcy court denied the Company’s administrative claim on the customer. The Company’s claim is now considered that of an unsecured creditor and as such the Company believes that it is unlikely that it will collect any of the previously unreserved amounts. As a result, the Company has written-off the remaining balance of the receivable. This receivable was related to the Company’s Marketing & Production operating segment. The impact of the amount written-off is reflected in the Provision for doubtful accounts line of the Company’s Condensed Consolidated Statement of Comprehensive Income.

Note 14 – Operating Segments

The Company classifies its operating segments to provide investors with a view of the business through management’s eyes. The Company primarily separates state regulated utility businesses from the non-regulated marketing and production business, and pipeline business. 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 and payable, equity, and subsidiary investments.

The following tables set forth summarized financial information for the Company’s natural gas, marketing and production, pipeline, and corporate & other operations.


Three Months Ended June 30, 2014
	Natural Gas Operations			Marketing & Production			Pipeline Operations		Corporate & Other			Consolidated

OPERATING REVENUES	$	20,856,269		$	3,071,792		$	97,862	$	—		$	24,025,923
Intersegment elimination		(78,801	)		(1,548,878	)		—		—			(1,627,679	)

Total operating revenue		20,777,468			1,522,914			97,862		—			22,398,244

COST OF SALES		11,797,798			2,985,036			—		—			14,782,834
Intersegment elimination		(78,801	)		(1,548,878	)		—		—			(1,627,679	)

Total cost of sales		11,718,997			1,436,158			—		—			13,155,155


GROSS MARGIN	$	9,058,471		$	86,756		$	97,862	$	—		$	9,243,089

OPERATING EXPENSES		9,188,987			1,401,544			58,105		256,419			10,905,055
Intersegment elimination		(500	)		—			—		(25,245	)		(25,745	)

Total operating expenses		9,188,487			1,401,544			58,105		231,174			10,879,310


OPERATING INCOME (LOSS)	$	(130,016	)	$	(1,314,788	)	$	39,757	$	(231,174	)	$	(1,636,221	)


DISCONTINUED OPERATIONS	$	—		$	—		$	—	$	(6,819	)	$	(6,819	)


NET INCOME (LOSS)	$	(409,928	)	$	(849,438	)	$	17,521	$	(186,773	)	$	(1,428,618	)

F-21

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Three Months Ended June 30, 2013
	Natural Gas Operations			Marketing & Production			Pipeline Operations		Corporate & Other			Consolidated

OPERATING REVENUES	$	17,825,910		$	4,227,929		$	105,032	$	—		$	22,158,871
Intersegment elimination		(79,613	)		(1,582,247	)		—		—			(1,661,860	)

Total operating revenue		17,746,297			2,645,682			105,032		—			20,497,011

COST OF SALES		10,128,702			3,815,169			—		—			13,943,871
Intersegment elimination		(79,613	)		(1,582,247	)		—		—			(1,661,860	)

Total cost of sales		10,049,089			2,232,922			—		—			12,282,011


GROSS MARGIN	$	7,697,208		$	412,760		$	105,032	$	—		$	8,215,000

OPERATING EXPENSES		7,645,708			243,838			43,457		257,199			8,190,202
Intersegment elimination		(12,569	)		—			—		—			(12,569	)

Total operating expenses		7,633,139			243,838			43,457		257,199			8,177,633


OPERATING INCOME (LOSS)	$	64,069		$	168,922		$	61,575	$	(257,199	)	$	37,367


DISCONTINUED OPERATIONS	$	—		$	—		$	—	$	(32,237	)	$	(32,237	)


NET INCOME (LOSS)	$	(235,899	)	$	178,872		$	33,978	$	(303,867	)	$	(326,916	)


Six Months Ended June 30, 2014
	Natural Gas Operations			Marketing & Production			Pipeline Operations		Corporate & Other			Consolidated

OPERATING REVENUES	$	81,196,623		$	11,001,565		$	196,876	$	—		$	92,395,064
Intersegment elimination		(165,345	)		(4,789,295	)		—		—			(4,954,640	)

Total operating revenue		81,031,278			6,212,270			196,876		—			87,440,424

COST OF SALES		53,839,777			10,466,418			—		—			64,306,195
Intersegment elimination		(165,345	)		(4,789,295	)		—		—			(4,954,640	)

Total cost of sales		53,674,432			5,677,123			—		—			59,351,555


GROSS MARGIN	$	27,356,846		$	535,147		$	196,876	$	—		$	28,088,869

OPERATING EXPENSES		17,791,147			1,784,002			80,117		1,282,113			20,937,379
Intersegment elimination		(500	)		—			—		—			(500	)

Total operating expenses		17,790,647			1,784,002			80,117		1,282,113			20,936,879


OPERATING INCOME (LOSS)	$	9,566,199		$	(1,248,855	)	$	116,759	$	(1,282,113	)	$	7,151,990


DISCONTINUED OPERATIONS	$	—		$	—		$	—	$	(22,380	)	$	(22,380	)


NET INCOME (LOSS)	$	5,283,318		$	(828,637	)	$	62,469	$	(927,277	)	$	3,589,873

F-22

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Six Months Ended June 30, 2013
	Natural Gas Operations			Marketing & Production			Pipeline Operations		Corporate & Other			Consolidated

OPERATING REVENUES	$	57,856,318		$	9,816,141		$	203,319	$	—		$	67,875,778
Intersegment elimination		(165,359	)		(3,598,680	)		—		—			(3,764,039	)

Total operating revenue		57,690,959			6,217,461			203,319		—			64,111,739

COST OF SALES		34,330,869			8,691,637			—		—			43,022,506
Intersegment elimination		(165,359	)		(3,598,680	)		—		—			(3,764,039	)

Total cost of sales		34,165,510			5,092,957			—		—			39,258,467


GROSS MARGIN	$	23,525,449		$	1,124,504		$	203,319	$	—		$	24,853,272

OPERATING EXPENSES		15,222,579			505,089			91,135		398,596			16,217,399
Intersegment elimination		(12,569	)		—			—		—			(12,569	)

Total operating expenses		15,210,010			505,089			91,135		398,596			16,204,830


OPERATING INCOME (LOSS)	$	8,315,439		$	619,415		$	112,184	$	(398,596	)	$	8,648,442


DISCONTINUED OPERATIONS	$	—		$	—		$	—	$	(14,124	)	$	(14,124	)


NET INCOME (LOSS)	$	4,475,307		$	427,333		$	61,092	$	(502,925	)	$	4,460,807

The following table shows the Company’s assets by operating segment.


June 30, 2014	Natural Gas Operations			Marketing & Production			Pipeline Operations			Corporate & Other			Consolidated

Investment in unconsolidated affiliate	$	—		$	350,748		$	—		$	—		$	350,748
Goodwill		14,891,377			1,376,000			—			—			16,267,377

Total assets	$	199,900,130		$	7,970,323		$	658,756		$	79,296,977		$	287,826,186
Intersegment eliminations		(65,592,999	)		(2,824,047	)		(15,470	)		(25,557,638	)		(93,990,154	)

Total assets	$	134,307,131		$	5,146,276		$	643,286		$	53,739,339		$	193,836,032


December 31, 2013	Natural Gas Operations			Marketing & Production			Pipeline Operations			Corporate & Other			Consolidated

Investment in unconsolidated affiliate	$	—		$	351,724		$	—		$	—		$	351,724
Goodwill		14,891,377			1,376,000			—			—			16,267,377

Total assets	$	195,219,938		$	11,633,544		$	685,760		$	83,173,644		$	290,712,886
Intersegment eliminations		(53,670,915	)		(3,678,311	)		(28,100	)		(29,591,945	)		(86,969,271	)

Total assets	$	141,549,023		$	7,955,233		$	657,660		$	53,581,699		$	203,743,615

Note 15 – Subsequent Events

Dividends

On July 1, 2014, the Company declared a dividend of $0.045 per share that is payable to shareholders of record on July 15, 2014. There were 10,487,511 shares outstanding on July 15, 2014 resulting in a total dividend of $471,938 which was paid to shareholders on July 31, 2014.

F-23

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, the outcome of litigation, 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, 2013 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 73,000 customers. Our natural gas utility subsidiaries are Bangor Gas (Maine), Brainard Gas Corp. (Ohio), Cut Bank Gas Company (Montana), Energy West Montana (Montana), Energy West Wyoming (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 operations. Approximately 93% of our revenues in the three and six months ended June 30, 2014 were derived from our natural gas utility operations. Due to the sale of Independence in November 2013, the Company’s propane operations were classified as discontinued operations as of June 30, 2014. See Note 4 – Discontinued Operations to the notes of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC for more information regarding the sale of Independence. Our revenue is seasonal in nature; therefore, the largest portion of our operating revenue is generated during the colder months when our sales volumes increase considerably. The interim results on the accompanying condensed consolidated statement of comprehensive income are not indicative of the estimated results for a full fiscal year.

The following summarizes the critical events that impacted our results of operations during the three and six months ended June 30, 2014:

•

Revenue increased significantly due primarily to the increase in the price paid for natural gas passed on to our customers in all of our markets. Customer growth and colder weather also contributed to the increase in revenue for the six months ended June 30, 2014.

•

Gross margin increased due to customer growth in our North Carolina, Maine and Ohio markets and was amplified by colder weather throughout our service territories in the first quarter of 2014.

•

Our newly-formed GNR subsidiary, formed in June 2013 contributed to revenue and gross margin.

•

Our operating cash flow was significantly affected by amounts paid for gas cost in the first quarter of 2014. A portion of these costs will be recovered through rates over the remaining months of 2014.

•

General and administrative expenses include $1,056,000 in uncollectible accounts expense resulting from a ruling against our favor in a large industrial customer’s Chapter 11 bankruptcy proceeding. We had two administrative claims in this proceeding totaling $1,059,000, net of allowance for doubtful accounts of $1,421,000 as of December 31, 2013 and believed that collection was likely. In June 2014, our administrative claim on the customer was denied by the bankruptcy court, causing the claim to be considered as that of an unsecured creditor. As such, we no longer believe we will collect any of the previously unreserved amounts and as a result we have written off the remaining balance of the receivable and recorded uncollectible accounts expense in the results of our Marketing and Production operating segment. See Note 13 – Commitments and Contingencies for further detail.

•

Expenses for professional services related to increased regulatory proceedings and the hiring of new auditors in 2014 have caused general and administrative expenses to increase significantly for the three and six month periods ended June 30, 2014 as compared to the same period in 2013.

•

On June 27, 2014, the Company’s Frontier subsidiary entered into a stipulation with the Public Staff—North Carolina Utilities Commission (Docket No G-40, Sub 124), in which the subsidiary agreed to, among other items, reclassify $2,450,000 from its deferred gas cost account to a regulatory asset account. This amount represents a portion of deferred expenses related to the subsidiary’s January and February 2014 gas purchases. The stipulation calls for amortization of this amount as operating expense over a five year period beginning July 1, 2014. In addition, the parties agree there will be no change in Frontier’s margin rates for the same five year period. The result is a rate of return acceptable to both the Public Staff and the Company. The reclassification is reflected in the balances of the Company’s Recoverable costs of gas purchases and Deferred costs regulatory asset line items on its Condensed Consolidated Balance Sheet dated June 30, 2014.

Our financial statements reflect the following reportable business segments: Natural Gas Operations, Marketing and Production Operations, Pipeline Operations, and Corporate and Other.

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, 2013. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of June 30, 2014 and for the three and six month periods ended June 30, 2014. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.

Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013

(Loss) from Discontinued Operations — The 2014 and 2013 results of the Company’s Propane Operations segment have been classified as discontinued operations as a result of the sale of the assets of Independence in November 2013. See Note 4 – Discontinued Operations to the notes of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC for more information regarding the sale of Independence. The Company’s loss from discontinued operations for the three months ended June 30, 2014 was $7,000 or $0.001 per share, compared to a net loss of $32,000 or $0.004 per share for the three months ended June 30, 2013, a decrease of $25,000. The decreased loss is primarily due to the decreased activity in Independence due to the discontinuance of its operations in 2013.

Net Loss from Continuing Operations — Net loss for the three months ended June 30, 2014 was $1,422,000, or $0.14 per diluted share, compared to a net loss of $295,000 or $0.03 per diluted share for the three months ended June 30, 2013, an increase of $1,127,000. Net loss from our natural gas operations increased by $174,000. Net income from our gas marketing and production operations decreased by $1,028,000 to a loss of $849,000 due primarily to the uncollectible accounts expense resulting from the bankruptcy proceedings of a large industrial customer as discussed in the Overview section above. Net income from our pipeline operations decreased by $16,000. Net loss from our corporate and other segment decreased by $92,000 to a loss of $180,000. Our secondary public offering in July 2013 resulted in 1.7 million additional shares outstanding and decreases the per share amounts in 2014 compared to 2013.

Revenues — Revenues increased by $1,901,000 to $22,398,000 for the three months ended June 30, 2014 compared to $20,497,000 for the same period in 2013. The increase was primarily attributable to; (1) a natural gas revenue increase of $3,031,000 due to an increase in the price of natural gas in all of our markets passed through to our customers and increased sales volumes due to customer growth; and (2) a decrease of $1,123,000 in the revenue from our marketing and production operation primarily due to the loss of our LNG customer in April 2014.

Gross Margin — Gross margin increased by $1,028,000 to $9,243,000 for the three months ended June 30, 2014 compared to $8,215,000 for the same period in 2013. Our natural gas operation’s margins increased $1,361,000, due to increased sales volumes from continued customer growth in Maine, North Carolina and Ohio. Gross margin from our marketing and production operations decreased $326,000 primarily due to higher cost of natural gas supplied to our fixed price sales commitments in our existing marketing operation.

Operating Expenses — Operating expenses, other than cost of sales, increased by $2,702,000 to $10,879,000 for the three months ended June 30, 2014 compared to $8,178,000 for the same period in 2013. Operating expenses from our natural gas operations increased by $1,555,000 due to the following: (1) distribution, general and administrative expenses increased by $999,000 due to a)

increases in professional fees related to increased regulatory proceedings in all of our markets and b) increases in allocations of corporate expenses related to the hiring of additional corporate personnel and new auditors in 2014; (2) depreciation expense increased by $283,000 due to increased capital expenditures; and (3) taxes other than income increased by $211,000 due to increased property and gross receipts tax. Operating expenses in our marketing and production segment increased by $1,158,000 due to the write-off of $1,056,000 of receivables related to a customer that filed for Chapter 11 Bankruptcy. See the Overview section above for further detail. Operating expenses in our corporate and other segment decreased by $26,000.

Other Income, net — Other income, net decreased by $209,000 to $169,000 for the three months ended June 30, 2014 compared to $378,000 for the same period in 2013. In the 2013 period, our marketing and production segment recorded a gain on the sale of compressed natural gas equipment of $154,000.

Acquisition Expense — Acquisition expense increased by $21,000 to expense of $2,000 for the three months ended June 30, 2014 compared to a benefit of $19,000 for the same period in 2013. The 2013 period included $20,000 of acquisition costs offset by an adjustment to acquisition costs of $39,000 from the final accounting related to the Matchworks Building asset acquisition.

Interest Expense — Interest expense decreased by $5,000 to $762,000 for the three months ended June 30, 2014 compared to $767,000 in 2013.

Income Tax Benefit — Income tax benefit increased by $768,000 to $809,000 for the three months ended June 30, 2014 compared to $41,000 for the same period in 2013. The increase is primarily due to an increase in pre-tax income. The Company’s effective tax rate decreased to 37.5% for the three months ended June 30, 2014 compared to 38.9% in the 2013 period.

Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013

(Loss) from Discontinued Operations — The 2014 and 2013 results of the Company’s Propane Operations segment have been classified as discontinued operations as a result of the sale of the assets of Independence in November 2013. See Note 4 – Discontinued Operations to the notes of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC for more information regarding the sale of Independence. The Company’s loss from discontinued operations for the six months ended June 30, 2014 was $22,000 or $0.002 per share, compared to a net loss of $14,000 or $0.002 per share for the six months ended June 30, 2013, an increase of $8,000. The increased loss is primarily due to the decreased activity in Independence due to the discontinuance of its operations in 2013.

Net Income from Continuing Operations — Net income for the six months ended June 30, 2014 was $3,612,000, or $0.35 per diluted share, compared to a net income of $4,475,000 or $0.53 per diluted share for the six months ended June 30, 2013, a decrease of $863,000. Net income from our natural gas operations increased by $808,000 due primarily to colder weather and customer growth. Net income from our gas marketing and production operations decreased by $1,256,000 due primarily to the bad debt expense resulting from the bankruptcy proceedings of a large industrial customer as discussed in the Overview section above. Net income from our pipeline operations increased by $1,000. Net loss from our corporate and other segment increased by $416,000 to a loss of $905,000 due to increases in operating expenses as discussed below. Our secondary public offering in July 2013 resulted in 1.7 million additional shares outstanding and decreases the per share amounts in 2014 compared to 2013.

Revenues — Revenues increased by $23,329,000 to $87,440,000 for the six months ended June 30, 2014 compared to $64,112,000 for the same period in 2013. The increase was primarily attributable to; (1) a natural gas revenue increase of $23,340,000 due to an increase in the price of natural gas in all of our markets passed through to our customers and increased sales volumes due to customer growth and colder weather; and (2) a decrease of $5,000 in the revenue from our marketing and production operation primarily due to sales from our newly-acquired marketing company, GNR, offset by a decrease in sales in our LNG business due to the loss of our customer.

Gross Margin — Gross margin increased by $3,236,000 to $28,089,000 for the six months ended June 30, 2014 compared to $24,853,000 for the same period in 2013. Our natural gas operation’s margins increased $3,831,000, due to increased sales volumes from continued customer growth in Maine, North Carolina and Ohio amplified by colder weather in all our markets. Gross margin from our marketing and production operations decreased $589,000 primarily due to higher cost of natural gas supplied to our fixed price sales commitments in our existing marketing operation.

Operating Expenses — Operating expenses, other than cost of sales, increased by $4,732,000 to $20,937,000 for the six months ended June 30, 2014 compared to $16,205,000 for the same period in 2013. Operating expenses from our natural gas operations increased by $2,581,000 due to the following: (1) distribution, general and administrative expenses increased by $1,555,000 due to a) increases in professional fees related to increased regulatory proceedings in all of our markets and b) increases in allocations of corporate expenses related to the hiring of additional corporate personnel and new auditors in 2014; (2) depreciation expense increased by $627,000 due

to increased capital expenditures; and (3) taxes other than income increased by $315,000 due to increased expenses for payroll, property and gross receipts taxes. Operating expenses in our marketing and production segment increased by $1,279,000 due primarily to the write-off of receivables from a large industrial customer that filed for Chapter 11 bankruptcy as explained in the Overview section above. Operating expenses in our corporate and other segment increased by $884,000 due to increases in professional services due to various corporate lawsuits, expense related to a director stock compensation award of $308,000, and the write-off of $197,000 of construction work in progress related to a software conversion project that has been terminated.

Other Income, net — Other income, net decreased by $137,000 to income of $276,000 for the six months ended June 30, 2014 compared to income of $413,000 for the same period in 2013.

Acquisition Expense — Acquisition expense decreased by $150,000 to $7,000 for the six months ended June 30, 2014 compared to $157,000 for the same period in 2013. The 2013 period included $185,000 related to the JDOG Marketing assets acquisition

Interest Expense — Interest expense increased by $2,000 to $1,571,000 for the six months ended June 30, 2014 compared to $1,569,000 in 2013.

Income Tax Expense — Income tax expense decreased by $621,000 to $2,236,000 for the six months ended June 30, 2014 compared to $2,857,000 for the same period in 2013. The increase is primarily due to a decrease in pre-tax income. The Company’s effective tax rate decreased to 37.5% for the six months ended June 30, 2014 compared to 37.8% in the 2013 period.

Net Income (Loss) by Segment and Service Area

The components of net income for the three and six months ended June 30, 2014 and 2013 are:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2014			2013			2014			2013

Natural Gas Operations
Energy West Montana (MT)	$	130		$	105		$	1,016		$	912
Energy West Wyoming (WY)		(92	)		(32	)		214			248
Frontier Natural Gas (NC)		217			469			1,309			1,503
Bangor Gas (ME)		(6	)		186			1,387			1,284
Ohio Companies (OH)		(572	)		(919	)		1,408			548
Public Gas (PGC)		(87	)		(45	)		(51	)		(20	)

Total Natural Gas Operations		(410	)		(236	)		5,283			4,475
Marketing & Production Operations		(849	)		179			(829	)		427
Pipeline Operations		18			34			62			61

		(1,241	)		(23	)		4,516			4,963
Corporate & Other		(180	)		(272	)		(905	)		(488	)


Income (loss) from Continuing Operations		(1,421	)		(295	)		3,611			4,475
Propane Operations - Discontinued Operations		(7	)		(32	)		(22	)		(14	)


Consolidated Net Income (Loss)	$	(1,428	)	$	(327	)	$	3,589		$	4,461

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)	2014			2013			2014			2013

Natural Gas Operations
Operating revenues	$	20,777		$	17,746		$	81,031		$	57,691
Gas Purchased		11,719			10,049			53,674			34,166

Gross Margin		9,058			7,697			27,357			23,525
Operating expenses		9,188			7,633			17,791			15,210

Operating income (loss)		(130	)		64			9,566			8,315
Other income		205			259			317			298

Income before interest and taxes		75			323			9,883			8,613
Interest expense		(699	)		(698	)		(1,443	)		(1,416	)

Income before income taxes		(624	)		(375	)		8,440			7,197
Income tax expense		214			139			(3,157	)		(2,722	)


Net Income (Loss)	$	(410	)	$	(236	)	$	5,283		$	4,475

Operating Revenues


	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)	2014		2013		2014		2013

Full Service Distribution Revenues
Residential	$	8,099	$	6,894	$	36,001	$	24,534
Commercial		9,351		7,642		37,245		25,931
Industrial		304		228		579		442
Other		15		20		37		46

Total full service distribution		17,769		14,784		73,862		50,953

Transportation		2,720		2,674		6,594		6,163
Bucksport		288		288		575		575


Total operating revenues	$	20,777	$	17,746	$	81,031	$	57,691

Utility Throughput


	Three Months Ended June 30,				Six Months Ended June 30,
(in million cubic feet (MMcf))	2014		2013		2014		2013

Full Service Distribution Revenues
Residential		806		704		3,612		2,948
Commercial		986		926		3,308		2,897
Industrial		56		42		107		91

Total full service distribution		1,848		1,672		7,027		5,936

Transportation		2,648		2,733		5,994		5,902
Bucksport		1,803		3,110		2,760		6,873


Total Volumes		6,299		7,515		15,781		18,711

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.


			Three Months Ended June 30,				Percent Colder (Warmer) 2014 Compared to
	Normal		2014		2013		Normal			2013

Great Falls, MT		2,141		1,273		1,310		(40.54	%)		(2.82	%)
Cody, WY		2,074		1,116		1,155		(46.19	%)		(3.38	%)
Bangor, ME		1,934		1,078		1,171		(44.26	%)		(7.94	%)
Elkin, NC		1,320		359		451		(72.80	%)		(20.40	%)
Youngstown, OH		1,686		709		740		(57.95	%)		(4.19	%)
Jackson, KY		902		385		446		(57.32	%)		(13.68	%)

			Six Months Ended June 30,				Percent Colder (Warmer) 2014 Compared to
	Normal		2014		2013		Normal			2013

Great Falls, MT		4,399		4,863		4,192		10.55	%		16.01	%
Cody, WY		4,374		4,457		4,130		1.90	%		7.92	%
Bangor, ME		4,554		5,117		4,757		12.36	%		7.57	%
Elkin, NC		2,960		2,793		2,683		(5.64	%)		4.10	%
Youngstown, OH		3,928		4,411		3,893		12.30	%		13.31	%
Jackson, KY		2,672		3,081		2,906		15.31	%		6.02	%

Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013

Revenues and Gross Margin

Revenues increased by $3,031,000 to $20,777,000 for the three months ended June 30, 2014 compared to $17,746,000 for the same period in 2013. This increase is the result of the following factors:

Revenue from our Montana and Wyoming markets increased $1,341,000 due primarily to increased natural gas prices passed on to our customers.

Revenue from our Maine and North Carolina markets increased by $1,277,000 due primarily to increased natural gas prices passed on to our customers. Continued customer growth caused a volume increase from full service customers of 89 MMcf in the three months ended June 30, 2014 compared to the same period in 2013 and also contributed to the increase in revenue.

Revenues from our Ohio market increased $435,000. Revenue to full service customers increased $407,000, due primarily to higher prices paid for natural gas passed on to our customers. Also contributing to the increase in revenue was the increase in volumes sold of 49 MMcf in the three months ended June 30, 2014 compared to the same period in 2013, due to customer growth.

Revenue from our Kentucky market decreased $22,000 in the three months ended June 30, 2014 compared to the same period in 2013.

Gas purchased increased by $1,670,000 to $11,719,000 for the three months ended June 30, 2014 compared to $10,049,000 for the same period in 2013 and is due primarily to increase in the price paid for natural gas in all of our markets. 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 increased by $1,361,000 to $9,058,000 for the three months ended June 30, 2014 compared to $7,697,000 for the same period in 2013. Gross margin in our Ohio market increased by $1,141,000 due primarily to customer growth. Increased customer growth in our Maine and North Carolina markets resulted in a $101,000 increase in gross margin. Gross margin in our Montana and Wyoming markets increased by $126,000 and PGC decreased gross margin by $7,000.

Earnings

The Natural Gas Operations segment’s net loss for the three months ended June 30, 2014 was $410,000 or $0.04 per diluted share, compared to a loss of $236,000, or $0.03 per diluted share for the three months ended June 30, 2013.

Operating expenses increased by $1,555,000 to $9,188,000 for the three months ended June 30, 2014 compared to $7,633,000 for the same period in 2013. Distribution, general and administrative expenses increased by $999,000 due to 1) increases in professional fees related to increased regulatory proceedings in all of our markets and 2) increases in allocations of corporate expenses related to the hiring of additional corporate personnel and new auditors in 2014. Depreciation increased by $283,000 due to increased capital expenditures and taxes other than income increased by $211,000 due to an increase in payroll and property taxes.

Other income decreased by $54,000 to $205,000 for the three months ended June 30, 2014 compared to $259,000 for the same period in 2013. Interest income increased $84,000 primarily due to interest income allowed on deferred gas costs in our North Carolina market. Gains on disposal of property decreased $23,000 for the three months ended June 30, 2014 compared to the same period in 2013. Acquisition costs were $0 in 2014, compared to a benefit of $39,000 related to the adjustment to acquisition cost from the final accounting related to the Matchworks building asset acquisition in 2013. Other corporate and other expenses decreased $76,000 for the three months ended June 30, 2014 compared to the same period in 2013.

Interest expense increased by $1,000 to $699,000 for the three months ended June 30, 2014 compared to $698,000 for the same period in 2013. The average borrowing on the line of credit was $5.3 million higher during the second quarter of 2014 compared to the same period in 2013, resulting in $27,000 increased interest expense. This was partially offset by a decrease in interest expense on the Bank of America term loan due to decreased principal balances and on the senior secured guaranteed floating rate note, which was paid off on May 3, 2014.

Income tax benefit increased by $75,000 to a benefit of $214,000 for the three months ended June 30, 2014 compared to a benefit off $139,000 for the same period in 2013, due primarily to the decrease in pre-tax income in 2014 compared to the 2013 period.

Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013

Revenues and Gross Margin

Revenues increased by $23,340,000 to $81,031,000 for the six months ended June 30, 2014 compared to $57,691,000 for the same period in 2013. This increase is the result of the following factors:

Revenue from our Maine and North Carolina markets increased by $10,618,000 due primarily to increased natural gas prices passed on to our customers. Continued customer growth magnified by colder weather caused a volume increase from full service and transportation customers of 353 MMcf in the six months ended June 30, 2014 compared to the same period in 2013 and also contributed to the increase in revenue.

Revenues from our Ohio market increased $7,205,000. Revenue to full service customers increased $7,069,000, due primarily to higher prices paid for natural gas passed on to our customers. Also contributing to the increase in revenue was the increase in volumes sold of 425 MMcf in the six months ended June 30, 2014 compared to the same period in 2013, due to customer growth combined with much colder weather in 2014 than in 2013.

Revenue from our Montana and Wyoming markets increased $5,319,000 due primarily to increased natural gas prices passed on to our customers. Also contributing to the revenue increase was the volume increase of 286 MMcf in the six months ended June 30, 2014 compared to the same period in 2013, due to colder weather.

Revenue from our Kentucky market increased $198,000 in the six months ended June 30, 2014 compared to the same period in 2013.

Gas purchased increased by $19,508,000 to $53,674,000 for the six months ended June 30, 2014 compared to $34,166,000 for the same period in 2013 and is due primarily to increase in the price paid for natural gas in all of our markets as well as the increase 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 increased by $3,832,000 to $27,357,000 for the six months ended June 30, 2014 compared to $23,525,000 for the same period in 2013. Gross margin in our Ohio market increased by $2,213,000 due primarily to customer growth and colder weather in 2014. Increased customer growth amplified by colder weather in our Maine and North Carolina markets resulted in a $1,073,000 increase in gross margin. Gross margin in our Montana and Wyoming markets increased by $455,000 due to colder weather, and PGC increased gross margin by $89,000.

Earnings

The Natural Gas Operations segment’s net income for the six months ended June 30, 2014 was $5,283,000 or $0.50 per diluted share, compared to earnings of $4,475,000, or $0.53 per diluted share for the six months ended June 30, 2013.

Operating expenses increased by $2,581,000 to $17,791,000 for the six months ended June 30, 2014 compared to $15,210,000 for the same period in 2013. Distribution, general and administrative expenses increased by $1,555,000 due to 1) increases in professional fees related to increased regulatory proceedings in all of our markets and 2) increases in allocations of corporate expenses related to the hiring of additional corporate personnel and new auditors in 2014. Depreciation increased by $627,000 due to increased capital expenditures and taxes other than income increased by $315,000 due to an increase in payroll and property taxes.

Other income increased by $19,000 to $317,000 for the six months ended June 30, 2014 compared to $298,000 for the same period in 2013. Interest income increased $140,000 primarily due to interest income allowed on deferred gas costs in our North Carolina market. Gains on disposal of property increased $4,000 for the six months ended June 30, 2014 compared to the same period in 2013. Acquisition costs were $7,000 in 2014, compared to $47,000 related to the purchase of the Matchworks building asset in 2013. Other corporate and other expenses decreased $172,000 for the six months ended June 30, 2014 compared to the same period in 2013 and in the 2014 period, our Ohio subsidiaries recorded other expense of $76,000 for civil fines related to the GCR audit.

Interest expense increased by $27,000 to $1,443,000 for the six months ended June 30, 2014 compared to $1,416,000 for the same period in 2013. The average borrowing on the line of credit was $3.9 million higher during the first six months of 2014 compared to the same period in 2013, resulting in $41,000 increased interest expense. This was partially offset by a decrease in interest expense on the Bank of America term loan due to decreased principal balances and on the senior secured guaranteed floating rate note, which was paid off on May 3, 2014.

Income tax expense increased by $435,000 to $3,157,000 for the six months ended June 30, 2014 compared to $2,722,000 for the same period in 2013, due primarily to the increase in pre-tax income in 2014 compared to the 2013 period.

MARKETING AND PRODUCTION OPERATIONS

Income Statement


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2014			2013			2014			2013

Marketing and Production Operations
Operating revenues	$	1,523		$	2,646		$	6,212		$	6,217
Gas Purchased		1,436			2,233			5,677			5,093

Gross Margin		87			413			535			1,124
Operating expenses		1,402			244			1,784			505

Operating income (loss)		(1,315	)		169			(1,249	)		619
Other expense		—			152			(1	)		151

Income before interest and taxes		(1,315	)		321			(1,250	)		770
Interest expense		(22	)		(34	)		(54	)		(83	)

Income before income taxes		(1,337	)		287			(1,304	)		687
Income tax expense		488			(108	)		475			(260	)


Net Income (Loss)	$	(849	)	$	179		$	(829	)	$	427

Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013

Revenues and Gross Margin

Revenues decreased by $1,123,000 to $1,523,000 for the three months ended June 30, 2014 compared to $2,646,000 for the same period in 2013. Revenue from our LNG business decreased by $1,373,000, due to the loss of our LNG customer to pipeline competition. Revenue decreased from our existing marketing operation and production operation by $313,000 due primarily to lower sales volumes and revenue from our production operations decreased by $21,000. Offsetting these, our newly-formed GNR subsidiary contributed increased revenue of $584,000.

Gross margin decreased by $326,000 to $87,000 for the three months ended June 30, 2014 compared to $413,000 for the same period in 2013. Gross margin from our existing marketing operation decreased by $173,000 due to the lower sales volumes and a lower margin per Dth on volumes sold. Gross margin from our LNG business and from our production operation decreased by 45,000 and 58,000, respectively. Margin from our GNR subsidiary decreased by $51,000.

Earnings

The Marketing and Production segment’s loss for the three months ended June 30, 2014 was $849,000, or $0.08 per diluted share, compared to earnings of $179,000, or $0.02 per diluted share for the three months ended June 30, 2013.

Operating expenses increased by $1,158,000 to $1,402,000 for the three months ended June 30, 2014 compared to $244,000 for the same period in 2013. Operating expenses from the newly-formed GNR accounted for $107,000 of additional expenses and included amortization of customer relationships of $70,000. General and administrative expenses included $1,056,000 in uncollectible accounts expense resulting from a ruling against our favor in a large industrial customer’s Chapter 11 bankruptcy proceedings, as explained in the Overview section above.

Income tax expense decreased by $596,000 to benefit of $488,000 for the three months ended June 30, 2014 compared to expense of $108,000 for the same period in 2013, due primarily to the decrease in pre-tax income in 2014 compared to the 2013 period.

Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013

Revenues and Gross Margin

Revenues decreased by $5,000 to $6,212,000 for the six months ended June 30, 2014 compared to $6,217,000 for the same period in 2013. Revenue from our LNG business decreased by $2,045,000 due to the loss of our LNG customer to pipeline competition in April 2014. Revenue from our existing marketing operation decreased by $212,000, due to lower sales volumes. Offsetting these is the increase in revenue from our newly-formed GNR subsidiary of $2,220,000 and the revenue increase from our production operation of $32,000.

Gross margin decreased by $589,000 to $535,000 for the six months ended June 30, 2014 compared to $1,124,000 for the same period in 2013. Gross margin from our existing marketing operation decreased by $503,000 due to the lower sales volumes and a lower margin per Dth on volumes sold. Gross margin from our LNG business and from our production operation decreased by $119,000 and $76,000, respectively. Partially offsetting these, GNR returned increased margin of $108,000.

Earnings

The Marketing and Production segment’s loss for the six months ended June 30, 2014 was $829,000, or $0.08 per diluted share, compared to earnings of $427,000, or $0.05 per diluted share for the six months ended June 30, 2013.

Operating expenses increased by $1,279,000 to $1,784,000 for the six months ended June 30, 2014 compared to $505,000 for the same period in 2013. Operating expenses from the newly-formed GNR accounted for $209,000 of additional expenses and included amortization of customer relationships of $140,000. General and administrative expenses included $1.1 million in bad debt expense resulting from a ruling against our favor in a large industrial customer’s Chapter 11 bankruptcy proceedings. See Note 14 – Commitments and Contingencies for further detail.

Income tax expense decreased by $735,000 to benefit of $475,000 for the six months ended June 30, 2014 compared to expense of $260,000 for the same period in 2013, due primarily to the decrease in pre-tax income in 2014 compared to the 2013 period.

PIPELINE OPERATIONS

Income Statement


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2014			2013			2014			2013

Pipeline Operations
Operating revenues	$	98		$	105		$	197		$	203
Gas Purchased		—			—			—			—

Gross Margin		98			105			197			203
Operating expenses		58			43			80			91

Operating income		40			62			117			112
Other income		—			—			—			—

Income before interest and taxes		40			62			117			112
Interest expense		(12	)		(7	)		(19	)		(14	)

Income before income taxes		28			55			98			98
Income tax expense		(10	)		(21	)		(36	)		(37	)


Net Income	$	18		$	34		$	62		$	61

Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013

Net income decreased by $16,000 to $18,000 for the three months ended June 30, 2014 compared to $34,000 for the same period in 2013. The overall impact of the results of our pipeline operations was not material to the results of our consolidated operations.

Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013

Net income increased by $1,000 to $62,000 for the six months ended June 30, 2014 compared to $61,000 for the same period in 2013. The overall impact of the results of our pipeline operations was not material to the results of our consolidated operations.

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. It also includes the results of our insurance business. 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)	2014			2013			2014			2013

Corporate and Other
Operating revenues	$	—		$	—		$	—		$	—
Gas Purchased		—			—			—			—

Gross Margin		—			—			—			—
Operating expenses		231			257			1,282			399

Operating loss		(231	)		(257	)		(1,282	)		(399	)
Other expense		(37	)		(17	)		(49	)		(196	)

Loss before interest and taxes		(268	)		(274	)		(1,331	)		(595	)
Interest expense		(29	)		(29	)		(55	)		(56	)

Loss before income taxes		(297	)		(303	)		(1,386	)		(651	)
Income tax benefit		117			31			481			162

Net loss from continuing operations		(180	)		(272	)		(905	)		(489	)
Discontinued operations		(7	)		(32	)		(22	)		(14	)


Net Loss	$	(187	)	$	(304	)	$	(927	)	$	(503	)

Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013

Results of corporate and other operations for the three months ended June 30, 2014 include administrative costs of $231,000, acquisition related costs of $2,000, corporate expenses of $38,000, interest expense of $29,000, offset by an income tax benefit of $117,000, and interest income of $3,000, for a net loss from continuing operations of $180,000.

Results of corporate and other operations for the three months ended June 30, 2013 include administrative costs of $257,000, acquisition related costs of $20,000, corporate expenses of $1,000, interest expense of $29,000, offset by income tax benefits of $31,000 and interest and other income of $4,000 for a net loss from continuing operations of $272,000.

Loss from discontinued operations

A portion of the prior period and current period results of operations relate to the sale of the Independence assets and related business operations that have been reclassified as income (loss) from discontinued operations. See Note 4 – Discontinued Operations to the notes of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for more information regarding the sale of Independence. Net loss from discontinued operations decreased by $25,000 to a loss of $7,000 for the three months ended June 30, 2014 as compared to a loss of $32,000 for the same period in 2013 due primarily to the lack of operating activity in 2014.

Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013

Results of corporate and other operations for the six months ended June 30, 2014 include administrative costs of $1,282,000, acquisition related costs of $7,000, corporate expenses of $49,000, interest expense of $55,000, offset by an income tax benefit of

$481,000, and interest income of $7,000, for a net loss from continuing operations of $905,000. Included in administrative costs is expense related to director stock compensation awards of $308,000, and the write-off of $197,000 of construction work in progress related to a software conversion project that has been terminated.

Results of corporate and other operations for the six months ended June 30, 2013 include administrative costs of $399,000, acquisition related costs of $109,000, corporate expenses of $107,000, interest expense of $56,000, offset by income tax benefits of $162,000 and interest and other income of $6,000 for a net loss from continuing operations of $489,000.

Loss from discontinued operations

A portion of the prior period and current period results of operations relate to the sale of the Independence assets and related business operations that have been reclassified as income (loss) from discontinued operations. See Note 4 – Discontinued Operations to the notes of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for more information regarding the sale of Independence. Net loss from discontinued operations increased by $8,000 to a loss of $22,000 for the six months ended June 30, 2014 as compared to income of $14,000 for the same period in 2013 due primarily to the lack of operating activity in 2014.

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 depreciation, depletion, amortization, deferred income taxes, and changes in working capital.

Cash provided by discontinued operations is presented separately from cash flows from continuing operations in the Consolidated Statement of Cash Flows. The disposition of the propane operations during the fourth quarter of 2013 is not expected to have a material negative impact on the Company’s liquidity.

Our ability to maintain liquidity depends upon our credit facility with Bank of America, shown as line of credit on the accompanying Consolidated Balance Sheets. Our use of the revolving line of credit was $20.0 million and $24.5 million at June 30, 2014 and December 31, 2013, respectively.

We periodically repay our short-term borrowings under the revolving line of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $40.5 and $43.7 million at June 30, 2014 and December 31, 2013, respectively, including the amount due within one year.

Cash, excluding restricted cash, decreased to $3.2 million at June 30, 2014, compared to $13.1 million at December 31, 2013.


	Six Months Ended June 30,
	2014			2013

Cash Flows from Continuing Operations
Cash provided by operating activities	$	10,364,000		$	17,260,000
Cash used in investing activities		(9,839,000	)		(7,526,000	)
Cash used in financing activities		(10,411,000	)		(10,361,000	)

Decrease in cash	$	(9,886,000	)	$	(627,000	)


Cash Flows from Discontinued Operations
Cash provided by (used in) operating activities	$	(52,000	)	$	182,000
Cash used in investing activities		—			(6,000	)
Cash used in financing activities		(9,000	)		(201,000	)

Decrease in cash	$	(61,000	)	$	(25,000	)

OPERATING CASH FLOW

For the six months ended June 30, 2014, cash provided by operating activities decreased by $6.9 million as compared to the six months ended June 30, 2013. Major items affecting operating cash included a $863,000 decrease in income from continuing operations, a $4.5 million decrease in accounts payable, a $2.9 million decrease in unbilled revenue, a $1.6 million decrease in collections of recoverable costs of gas, a $1.6 million increase in prepayments, a $1.5 million increase in other assets, a $498,000 decrease in accounts receivable receipts, a $745,000 decrease in other current liabilities and a $354,000 decrease in inventory purchases.

INVESTING CASH FLOW

For the six months ended June 30, 2014, cash used in investing activities increased by $2,313,000 as compared to the six months ended June 30, 2013. The increase is primarily attributable to a $1.1 million reduction in the use of restricted cash, an increase of $1.0 million in cash paid for capital expenditures, a $1.0 million reduction in proceeds from sale of fixed assets, and an increase of $715,000 in contributions in aid of construction.

Capital Expenditures

Our capital expenditures for continuing operations totaled $10.9 million and $9.9 million for the six months ended June 30, 2014 and 2013, 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 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, 2014 and 2013 and provides an estimate of future cash requirements for capital expenditures:


					Remaining Cash Requirements through
	Six Months Ended June 30,				Remaining Cash Requirements through
($ in thousands)	2014		2013		December 31, 2014

Natural Gas Operations	$	10,693	$	9,102	$	5,665
Marketing and Production Operations		60		217		—
Pipeline Operations		—		2		45
Corporate and Other Operations		124		553		—

Total Capital Expenditures	$	10,877	$	9,874	$	5,710

We expect to fund our future cash requirements for capital expenditures through December 31, 2014 from cash provided by operating activities.

FINANCING CASH FLOW

For the six months ended June 30, 2014, cash used in financing activities increased by $50,000 as compared with the six months ended June 30, 2013. The change is due primarily to $3.3 million in additional net proceeds from our line of credit, partially offset by the payment of the Sun Life Floating Rate Note of $3.0 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 facility with Bank of America, shown as line of credit on the accompanying Consolidated Balance Sheets. Our use of the revolving line of credit was $20.0 million and $24.5 million at June 30, 2014 and December 31, 2013, respectively. We periodically repay our short-term borrowings under the revolving line of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $40.5 and $43.7 million at June 30, 2014, and December 31, 2013, respectively, including the amount due within one year.

The following discussion describes our credit facilities as of June 30, 2014.

Bank of America Credit Agreement and Line of Credit

On September 20, 2012, the Company’s subsidiary, Energy West, entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), with the Bank of America, N.A. (“Bank of America”) which modifies the original credit agreement entered into on June 29, 2007, as amended from time to time. The Credit Agreement renewed the $30.0 million revolving credit facility available to Energy West and provides for a maturity date of April 1, 2017. In addition, Energy West entered into a $10.0 million term loan with Bank of America with a maturity date of April 1, 2017 (the “Term Loan”). Pursuant to the terms of the Credit Agreement, Energy West issued a second amended and substitute note to Bank of America in the amount of $30.0 million for the revolving credit facility and another note in the original principal amount of $10.0 million for the Term Loan.

The Credit Agreement includes an annual commitment fee ranging from 25 to 45 basis points of the unused portion of the Credit Agreement and interest on the amounts outstanding at the LIBOR rate plus 175 to 225 basis points.

For the three months ended June 30, 2014 and 2013, the weighted average interest rate on the existing and renewed revolving credit facility was 2.38% and 2.39%, respectively, resulting in $130,192 and $103,163 of interest expense, respectively. For the six months ended June 30, 2014 and 2013, the weighted average interest rate on the existing and renewed revolving credit facility was 2.39% and 2.42%, respectively, resulting in $275,356 and $234,657 of interest expense, respectively. The balance on the revolving credit facility was $20.0 million and $24.5 million at June 30, 2014 and December 31, 2013, respectively. The $20.0 million of borrowings as of June 30, 2014, leaves the remaining borrowing capacity on the line of credit at $10.0 million.

Bank of America Term Loan

The Term Loan portion of the Bank of America credit agreement has an interest rate of LIBOR plus 175 to 225 basis points with an interest rate swap provision that allows for the interest rate to be fixed in the future. The Term Loan is amortized at a rate of $125,000 per quarter. As of June 30, 2014, the Company had not exercised the interest rate swap provision for the fixed interest rate.

For the three months ended June 30, 2014 and 2013, the weighted average interest rate was 2.15% and 2.20%, respectively, resulting in interest expense of $50,293 and $53,718, respectively. For the six months ended June 30, 2014 and 2013, the weighted average interest rate was 2.16% and 2.20%, respectively, resulting in interest expense of $100,710 and $108,752, respectively. The balance outstanding on the Term Loan at June 30, 2014 and December 31, 2013 was $9,125,000 and $9,375,000, respectively.

Senior Unsecured Notes of Energy West

On June 29, 2007, Energy West authorized the sale of $13,000,000 aggregate principal amount of its 6.16% Senior Unsecured Notes with Allstate/CUNA, due June 29, 2017 (the “Senior Unsecured Notes”). The proceeds of these notes were used to refinance existing notes. Interest expense was $200,200 and $400,400 for the three and six months ended June 30, 2014 and 2013, respectively.

Sun Life Assurance Company of Canada

On May 2, 2011, the Company and its Ohio subsidiaries, NEO, Orwell and Brainard (together “the Issuers”), issued a $15.3 million, 5.38% Senior Secured Guaranteed Fixed Rate Note due June 1, 2017 (“Fixed Rate Note”). Additionally, Great Plains issued a $3.0 million, Senior Secured Guaranteed Floating Rate Note due May 3, 2014 (“Floating Rate Note”). Both notes were placed with Sun Life. On May 3, 2014, the credit facility was paid off and extinguished.

Each of the notes is governed by a Note Purchase Agreement (“NPA”). Concurrent with the funding and closing of the notes, which occurred on May 3, 2011, the parties executed amended note purchase agreements that are substantially the same as the note purchase agreements executed on November 2, 2010. On April 9, 2012, the Company entered into a waiver and amendment of the Fixed Rate Note and Floating Rate Note to cure certain breaches of covenants which the Company has remedied.

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”). Prepayment of this note prior to maturity is subject to a 50 basis point make-whole premium.

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 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.

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

For the three and six months ended June 30, 2014 and 2013, the weighted average interest rate on the Fixed Rate Note was 5.38%. Interest expense was $206,242 and $412,485 for the three and six months ended June 30, 2014 and 2013, respectively. For the three months ended June 30, 2014 and 2013, the weighted average interest rate on the Floating Rate Note was 4.09% and 4.14%, resulting in $11,402 and $30,975 of interest expense, respectively. For the six months ended June 30, 2014 and 2013, the weighted average interest rate on the Floating Rate Note was 4.10% and 4.13%, resulting in $40,900 and $62,125 of interest expense, respectively.

On October 24, 2012, Orwell, NEO, and Brainard issued a Senior Secured Guaranteed Note in the amount of $2.989 million. The Senior Note was placed with Sun Life, pursuant to a third amendment to the original NPA dated as of November 1, 2010, by and among Orwell, NEO, and Brainard, and Great Plains, Lightning Pipeline, Gas Natural and Sun Life. The Senior Note bears an interest rate of 4.15%, compounded semi-annually, and it matures on June 1, 2017. The Senior Note is a joint obligation of the Ohio subsidiaries and is guaranteed by Gas Natural’s non-regulated Ohio subsidiaries. For the three and six months ended June 30, 2014 and 2013, the weighted average interest rate on the Senior Note was 4.15% resulting in $30,752 and $61,504 of interest expense, respectively.

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. The revolving credit facility expired February 13, 2013. On April 12, 2013, Yadkin Valley Bank extended the $500,000 commercial line of credit beginning May 12, 2013. The debt was secured by a blanket lien on all assets owned or acquired by Independence. For the three and six months ended June 30, 2013, the weighted average interest rate on the facility was 4.5%, resulting in $3,116 and $8,043 of interest expense, respectively. On November 6, 2013, the credit facility was paid off and extinguished as part of the sale of the assets of Independence. See Note 4 – Discontinued Operations to the notes of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for more information regarding the sale of Independence.

Debt Covenants

The Bank of America revolving credit agreement and term loan contain various covenants, which include limitations on total dividends and distributions, limitations on investments in other entities, maintenance of certain debt-to-capital and interest coverage ratios, and restrictions on certain indebtedness as outlined below.

The credit facility restricts Energy West’s ability to pay dividends and make distributions, redemptions and repurchases of stock during any 60-month period to 80% (previously 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.

The amended credit facility limits investments in another entity by acquisition of any debt or equity securities or assets or by making loans or advances to such entity. 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.

Energy West must maintain a total debt- to-capital ratio of not more than .55-to-1.00 and an interest coverage ratio of no less than 2.0-to-1.0. The credit facility restricted Energy West’s ability to create, incur or assume indebtedness except (i) indebtedness under the credit facility (ii) indebtedness incurred under certain capitalized leases including the capital lease related to the Loring pipeline, 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 Senior Unsecured Notes contain various covenants, which include limitations on Energy West’s total dividends and distributions, restrictions on certain indebtedness as outlined below, maintenance of certain interest coverage ratios, and limitations on asset sales as outlined below.

The credit facility limits Energy West’s total dividends and distributions made in the immediately preceding 60-month period to 100% of aggregate consolidated net income for such period.

The notes restrict Energy West from incurring additional senior indebtedness in excess of 65% of capitalization at any time.

The credit facility also requires Energy West to maintain an interest coverage ratio of 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.

The Sun Life Fixed Rate Note, Floating Rate Note, and Senior Note contain various covenants, which include, among others, limitations on total dividends and distributions, restrictions on certain indebtedness, limitations on asset sales, and maintenance of certain debt-to-capital and interest coverage ratios as outlined below.

The amendments 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. Due to the covenants, the Obligors are unable to pay a dividend to the holding company, which may impact the Company’s ability to pay a dividend to shareholders.

The Ohio subsidiaries and PGC 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. An event of default, if not cured, would require us to immediately pay the outstanding principal balance of the notes as well as any and all interest and other payments due. An event of default would also entitle Sun Life to exercise certain rights with respect to the collateral that secures the indebtedness incurred under the notes.

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. The note defines EBITDA as net income plus the sum of interest expense, any provision for federal, state, and local taxes, depreciation, and amortization determined on a consolidated basis in accordance with GAAP, but excluding any extraordinary non-operating income or loss and any gain or loss from non-operating transactions. 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.

Additionally, Sun Life restricted certain cash balances and required two main types of debt service reserve accounts to be created to cover approximately one year of interest payments. The balance in the debt service reserve accounts was $949,000 and $1,080,000 at June 30, 2014 and December 31, 2013, respectively, and is included in restricted cash. The debt service reserve accounts cannot be used for operating cash needs. The Company had deposited $132,000 into a debt service reserve account where Sun Life was the beneficiary. In May 2014, the loan was repaid and the cash became unrestricted. In addition, the Company had deposited $750,000 into a reserve account where Sun Life is the beneficiary. In July, 2013, this additional covenant was lifted and the cash became unrestricted.

The Senior Note is a joint obligation of the Ohio subsidiaries and is guaranteed by Gas Natural’s non-regulated Ohio subsidiaries. The Senior Note is subject to other customary loan covenants and default provisions.

We believe we are in compliance with the financial covenants under our debt agreements or have received waivers for any defaults.

Ring Fencing Restrictions

In addition to the financial covenants, usage of the Bank of America line of credit is regulated by ring fencing provisions from the MPSC, MPUC, NCUC and WPSC. In particular, usage of the line of credit is limited to use by Energy West and its subsidiaries. In addition, the MPSC requires that of the $30.0 million line of credit available, $11.2 million must be used by or available to be used by Energy West Montana at all times. The $18.8 million balance of the line of credit is available for use by Energy West and its other Montana, Wyoming, North Carolina and Maine subsidiaries. Energy West and Energy West Montana are required to provide monthly financial reports to the MPSC. On April 18, 2014, Energy West reported to the MPSC it had temporarily violated the $11.2 million allocation of the line of credit for use by Energy West Montana. Specifically, Energy West and Energy West Montana reported that on April 11, 2014 it discovered it did not have the full $11.2 million allocated to Energy West Montana available to Energy West Montana, and instead had a deficiency of $913,000. Energy West corrected the deficiency by April 18, 2014. On May 23, 2014 the MPSC issued a Notice of Non-Compliance and Opportunity to Comment related to the temporary ring fencing violation. Both Energy West and the Montana Consumer Counsel submitted comments. The matter is pending further action by the MPSC.

The ring fencing provisions required by the regulatory commissions impose additional limitations on our liquidity beyond the financial covenants. We believe we are in compliance with all ring fencing provisions at June 30, 2014.

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). 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, 2014, 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, 2014.

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.

Beginning on December 10, 2013, five putative shareholder derivative lawsuits were filed by five different individuals, in their capacity as shareholders of Gas Natural, in the United States District Court for the Northern District of Ohio, purportedly on behalf of Gas Natural and naming certain of our current and former executive officers and directors as individual defendants. These five shareholder lawsuits are captioned as follows: (1) Richard J. Wickham v. Richard M. Osborne, et al., (Case No. 1:13-cv-02718-LW); (2) John Durgerian v. Richard M. Osborne, et al., (Case No. 1:13-cv-02805-LW); (3) Joseph Ferrigno v. Richard M. Osborne, et al., (Case No. 1:13-cv-02822-LW); (4) Kyle Warner v. Richard M. Osborne, et al., (Case No. 1:14-cv-00007-LW) and (5) Gary F. Peters v. Richard M. Osborne, (Case No. 1:14-cv-0026-CAB). On February 6, 2014, the five lawsuits were consolidated solely for purposes of conducting limited pretrial discovery, and on February 21, 2014, the Court appointed lead counsel for all five lawsuits. No formal discovery has been conducted to date.

The consolidated action contains claims against various current or former directors or officers of Gas Natural alleging, among other things, violations of federal securities laws, breaches of fiduciary duty, waste of corporate assets and unjust enrichment arising primarily out of our acquisition of the Ohio utilities, services provided by JDOG Marketing and the acquisition of JDOG Marketing, and the sale of our common stock by Richard M. Osborne, the Company’s former chairman and chief executive officer, and Thomas J. Smith, a director of the Company and its former chief financial officer. The suit seeks the recovery of unspecified damages allegedly sustained by Gas Natural, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, the recovery of plaintiffs’ attorney’s fees and other relief.

Gas Natural and the other defendants filed a motion to dismiss the consolidated action in its entirety on May 8, 2014. The motion to dismiss was based on, among other things, the failure of the plaintiffs to make demand on Gas Natural’s board of directors to address the alleged wrongdoing prior to filing their lawsuits and the failure to state viable claims against various individual defendants. Richard Osborne, individually, is now represented by counsel independent of all other defendants in the case and is entitled to submit a filing in support of the motion to dismiss on his own behalf.

On June 13, 2014, Richard M. Osborne, our former chairman of the board of directors and chief executive officer, filed a lawsuit against the Company and our corporate secretary captioned, “Richard M. Osborne and Richard M. Osborne Trust, Under Restated and Amended Trust Agreement of February 24, 2012 v. Gas Natural, Inc. et al.,” Case No. 14CV001210 which was filed in the Court of Common Pleas in Lake County, Ohio. In this lawsuit, Mr. Osborne seeks an order requiring the Company to provide him with “the minutes and any corporate resolutions for the past five years.” The Company has provided Mr. Osborne with all the board minutes he requested that have been approved by the board.

On June 26, 2014, Mr. Osborne filed a lawsuit against Gas Natural and our board of directors captioned “Richard M. Osborne, Richard M. Osborne Trust, Under Restated and Amended Trust Agreement of February 24, 2012 and John D. Oil and Gas Marketing Company, LLC v. Gas Natural, Inc. et al.,” Case No. 14CV001290, filed in the Court of Common Pleas in Lake County, Ohio. In this lawsuit, among other things, Mr. Osborne (1) demanded payment of an earnout associated with Gas Natural’s purchase of assets from John D. Marketing, (2) alleged that the board of directors breached its fiduciary duties, primarily by removing Mr. Osborne as chairman of the board and CEO, (3) sought injunctive relief to restrain our board members from “taking any actions on behalf of Gas Natural until they are in compliance with the law and the documents governing corporate governance” and (4) asked the Court to enjoin the 2014 annual meeting scheduled to take place on July 30, 2014 and to delay it until such time that the board of directors would be “in compliance with the law and corporate governance.”

Mr. Osborne dismissed the lawsuit above on July 15, 2014 without prejudice, as the parties started to engage in settlement negotiations in an attempt to resolve the dispute. After settlement negotiations broke down, Mr. Osborne refiled the lawsuit on July 28, 2014 against Gas Natural and our board members. In the re-filed lawsuit, among other things, Mr. Osborne (1) demands payment of an earnout amount associated with Gas Natural’s purchase of assets from John D. Marketing, (2) alleges that the board of directors has breached its fiduciary duties by removing Mr. Osborne as chairman and CEO, (3) seeks to enforce a July 15, 2014 settlement term sheet, where the parties memorialized certain discussions they had in connection with their efforts to resolve the dispute arising out of the lawsuit, which included a severance payment of $1.0 million, and (4) seeks to invalidate the results of the scheduled July 30, 2014 shareholder meeting, as opposed to delaying it, and asks the court to order Gas Natural to hold a new meeting at a later date. Mr. Osborne is also seeking compensatory and punitive damages. Gas Natural believes that Mr. Osborne’s claims in this lawsuit are wholly without merit and will vigorously defend this case on all grounds.

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 except as described above.

ITEM 6. EXHIBITS


Exhibit Number		Description

3.2*		Amended and Restated Code of Regulations of Gas Natural Inc.

18*		Preferability Letter Regarding Change in Accounting Principle

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.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

*	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.

August 14, 2014				/s/ James E. Sprague
				James E. Sprague, Chief Financial Officer
				(principal financial officer)

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