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 September 30, 2011

or

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

For the transition period from              to             

Commission file number 001-34585

GAS NATURAL INC.

(Exact name of registrant as specified in its charter)

Ohio	27-3003768
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1 First Avenue South Great Falls, Montana	59401
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (800) 570-5688

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

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

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller Reporting Company	x

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 November 2, 2011 was 8,153,551 shares.

As used in this Form 10-Q, the terms “Company,” “Gas Natural,” “Registrant,” “we,” “us” and “our” mean Gas Natural Inc. and its consolidated subsidiaries as a whole, unless the context indicates otherwise. Except as otherwise stated, the information is this Form 10-Q is as of September 30, 2011.

GAS NATURAL INC.

INDEX TO FORM 10-Q

	Page No.
Part I – Financial Information
Item 1 – Financial Statements
Condensed Consolidated Balance Sheets September 30, 2011 and December 31, 2010 (Unaudited)		F-1
Condensed Consolidated Statements of Income Three and Nine months ended September  30, 2011 and 2010 (Unaudited)		F-3
Condensed Consolidated Statements of Changes in Stockholders’ Equity Nine months ended September  30, 2011 and 2010 (Unaudited)		F-4
Condensed Consolidated Statements of Cash Flows Nine months ended September  30, 2011 and 2010 (Unaudited)		F-5
Notes to Unaudited Condensed Consolidated Financial Statements		F-7
Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		3
Item 3 – Quantitative and Qualitative Disclosures About Market Risk		17
Item 4 – Controls and Procedures		17
Part II – Other Information
Item 1 – Legal Proceedings		18
Item 6 – Exhibits		19
Signatures

2

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

September 30, 2011 and December 31, 2010 (Unaudited)

	September 30, 2011		December 31, 2010
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	10,490,103	$	13,026,585
Marketable securities		367,500		274,950
Accounts receivable
Trade, less allowance for doubtful accounts of $480,320 and $354,719, respectively		4,360,493		9,593,840
Related parties		501,752		559,384
Unbilled gas		1,245,062		5,724,346
Note receivable - related parties, current portion		10,079		9,565
Inventory
Natural gas and propane		7,856,328		5,876,710
Materials and supplies		2,017,746		1,414,367
Prepaid income taxes		2,369,558		1,601,798
Prepayments and other		1,284,704		912,959
Recoverable cost of gas purchases		2,623,641		2,628,824
Deferred tax asset		106,601		114,362
Total current assets		33,233,567		41,737,690
PROPERTY, PLANT AND EQUIPMENT, net		90,096,562		76,134,401
OTHER ASSETS
Notes receivable - related parties, less current portion		38,040		45,665
Deferred tax assets, less current portion		—		1,804,264
Regulatory assets
Property taxes		661,147		873,197
Income taxes		452,645		452,645
Rate case costs		152,763		64,271
Debt issuance costs, net		841,440		485,244
Goodwill		14,607,952		14,607,952
Customer relationships		645,042		662,167
Investment in unconsolidated affiliate		858,642		640,216
Restricted cash		2,756,857		—
Other assets		297,291		220,224
Total other assets		21,311,819		19,855,845
TOTAL ASSETS	$	144,641,948	$	137,727,936

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

F-1

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

September 30, 2011 and December 31, 2010 (Unaudited)

	September 30, 2011		December 31, 2010
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Checks in excess of amounts on deposit	$	155,407	$	532,145
Line of credit		17,600,000		18,149,999
Accounts payable
Trade		6,333,431		9,200,297
Related parties		66,910		417,543
Notes payable, current portion		7,750		910,917
Notes payable - related parties, current portion		—		49,361
Accrued liabilities
Taxes other than income		2,704,611		2,961,853
Vacation		159,603		86,194
Employee benefit plans		82,585		103,257
Interest		223,880		29,810
Deferred payments received from levelized billing		2,589,624		2,916,408
Customer deposits		702,515		679,237
Property tax settlement, current portion		242,120		242,120
Related parties		23,091		413,399
Other current liabilities		580,457		1,020,733
Overrecovered gas purchases		2,262,295		1,203,191
Total current liabilities		33,734,279		38,916,464
LONG-TERM LIABILITIES
Deferred investment tax credits		181,645		197,441
Deferred tax liability		1,198,780		—
Asset retirement obligation		1,652,129		1,546,867
Customer advances for construction		865,157		949,434
Regulatory liability for income taxes		83,161		83,161
Regulatory liability for gas costs		70,454		131,443
Property tax settlement, less current portion		243,008		243,008
Total long-term liabilities		4,294,334		3,151,354
NOTES PAYABLE, less current portion		31,346,758		21,958,616
COMMITMENTS AND CONTINGENCIES (see Note 11)
STOCKHOLDERS’ EQUITY
Preferred stock; $0.15 par value, 1,500,000 shares authorized, no shares outstanding		—		—
Common stock; $0.15 par value, 15,000,000 shares authorized, 8,153,176 and 8,149,801 shares outstanding, respectively		1,222,976		1,222,470
Capital in excess of par value		41,961,754		41,910,067
Accumulated other comprehensive income		96,287		46,590
Retained earnings		31,985,560		30,522,375
Total stockholders’ equity		75,266,577		73,701,502
TOTAL CAPITALIZATION		106,613,335		95,660,118
TOTAL LIABILITIES AND CAPITALIZATION	$	144,641,948	$	137,727,936

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

F-2

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Income

Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
REVENUES
Natural gas operations	$	10,348,819		$	10,158,766		$	65,663,664		$	56,347,035
Marketing and production		855,715			638,471			4,156,882			5,624,803
Pipeline operations		106,351			104,461			314,736			319,418
Propane operations		1,009,844			—			1,009,844			—
Total revenues		12,320,729			10,901,698			71,145,126			62,291,256
COST OF SALES
Natural gas purchased		4,548,224			4,803,027			38,840,724			32,343,603
Marketing and production		585,810			380,934			3,193,596			4,435,153
Propane purchased		875,305			—			875,305			—
Total cost of sales		6,009,339			5,183,961			42,909,625			36,778,756
GROSS MARGIN		6,311,390			5,717,737			28,235,501			25,512,500
OPERATING EXPENSES
Distribution, general, and administrative		4,635,388			4,192,142			13,922,684			12,459,957
Maintenance		235,635			239,152			792,827			775,634
Depreciation and amortization		1,153,430			1,018,857			3,256,977			2,984,726
Accretion		35,849			33,991			105,262			92,836
Taxes other than income		842,786			789,490			2,589,732			2,548,725
Total operating expenses		6,903,088			6,273,632			20,667,482			18,861,878
OPERATING INCOME (LOSS)		(591,698	)		(555,895	)		7,568,019			6,650,622
LOSS FROM UNCONSOLIDATED AFFILIATE		(2,024	)		(2,760	)		(85,174	)		(34,882	)
OTHER INCOME (EXPENSE), net		(261,625	)		264,922			(29,838	)		393,857
INTEREST EXPENSE		(552,341	)		(492,378	)		(1,458,194	)		(1,614,134	)
GAIN ON BARGAIN PURCHASE		1,054,861			—			1,054,861			—
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES		(352,827	)		(786,111	)		7,049,674			5,395,463
INCOME TAX BENEFIT (EXPENSE)		482,353			741,406			(2,285,056	)		(1,311,444	)
NET INCOME (LOSS)	$	129,526		$	(44,705	)	$	4,764,618		$	4,084,019
EARNINGS (LOSS) PER SHARE - BASIC	$	0.02		$	(0.01	)	$	0.58		$	0.68
EARNINGS (LOSS) PER SHARE - DILUTED	$	0.02		$	(0.01	)	$	0.58		$	0.68
WEIGHTED AVERAGE DIVIDENDS DECLARED PER COMMON SHARE	$	0.135		$	0.135		$	0.405		$	0.410
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC		8,152,487			6,072,996			8,151,370			6,040,063
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED		8,160,048			6,072,996			8,159,326			6,048,332

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

F-3

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended September 30, 2011 and 2010 (Unaudited)

	Common Shares		Common Stock		Capital In Excess Of Par Value		Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Retained Earnings			Total
BALANCE AT DECEMBER 31, 2009		4,361,869	$	654,280	$	6,514,851	$	146,701		$	100,989		$	28,270,987		$	35,687,808
Net income		—		—		—		—			—			4,084,019			4,084,019
Net unrealized loss on available for sale securities		—		—		—		(96,159	)		—			—			(96,159	)
Stock issued for services		4,499		675		48,045		—			—			—			48,720
Stock option expense		—		—		14,109		—			—			—			14,109
Acquisition of Ohio Companies		1,707,308		256,096		16,816,988		—			—			—			17,073,084
Purchase remaining share in Cut Bank Gas Company		—		—		—		—			(100,989	)		—			(100,989	)
Dividends declared		—		—		—		—			—			(2,459,114	)		(2,459,114	)
BALANCE AT SEPTEMBER 30, 2010		6,073,676	$	911,051	$	23,393,993	$	50,542		$	—		$	29,895,892		$	54,251,478
BALANCE AT DECEMBER 31, 2010		8,149,801	$	1,222,470	$	41,910,067	$	46,590		$	—		$	30,522,375		$	73,701,502
Net income		—		—		—		—			—			4,764,618			4,764,618
Net unrealized gain on available for sale securities		—		—		—		49,697			—			—			49,697
Stock issued for services		3,375		506		37,298		—			—			—			37,804
Stock option expense		—		—		14,389		—			—			—			14,389
Dividends declared		—		—		—		—			—			(3,301,433	)		(3,301,433	)
BALANCE AT SEPTEMBER 30, 2011		8,153,176	$	1,222,976	$	41,961,754	$	96,287		$	—		$	31,985,560		$	75,266,577

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

F-4

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2011 and 2010 (Unaudited)

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,764,618		$	4,084,019
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		3,256,977			2,738,441
Accretion		105,262			92,836
Amortization of debt issuance costs		106,748			97,975
Stock based compensation		52,193			62,829
Gain on sale of marketable securities		—			(159,520	)
Loss on sale of assets		30,916			—
Loss from unconsolidated affiliate		85,174			34,882
Gain on bargain purchase		(1,054,861	)		—
Investment tax credit		(15,796	)		(15,796	)
Deferred income taxes		2,981,256			1,098,029
Changes in assets and liabilities
Accounts receivable, including related parties		5,511,774			10,678,613
Unbilled gas		4,479,284			1,569,929
Natural gas and propane inventory		(1,853,006	)		(1,399,660	)
Accounts payable, including related parties		(4,083,198	)		(5,704,175	)
Recoverable/refundable cost of gas purchases		1,064,287			(2,704,976	)
Prepayments and other		(371,745	)		(579,352	)
Other assets		(1,520,188	)		(1,601,287	)
Other current liabilities		(993,626	)		(1,424,044	)
Net cash provided by operating activities		12,546,069			6,868,743
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(14,968,603	)		(3,957,184	)
Proceeds from sale of fixed assets		43,522			—
Proceeds from sale of marketable securities		—			4,185,867
Purchase of marketable securities		(13,304	)		(52,948	)
Proceeds from related party note receivable		7,111			—
Purchase of Cut Bank shares and Kidron Investment		—			(206,067	)
Cash acquired in acquisition		—			144,203
Purchase of Independence Oil & LP Gas, Inc.		(1,275,656	)		—
Restricted cash		(1,807,425	)		—
Investment in unconsolidated affiliate		(303,600	)		(52,500	)
Customer advances for construction		60,720			138,443
Contributions in aid of construction		2,725			(65,689	)
Net cash provided by (used in) investing activities		(18,254,510	)		134,125
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lines of credit		25,200,000			28,650,000
Repayment on lines of credit		(25,749,999	)		(28,700,000	)
Proceeds from notes payable		18,355,215			31,316
Repayments of notes payable		(9,870,240	)		(894,013	)
Repayments of related party notes payable		(49,361	)		—
Debt issuance costs		(462,944	)		—
Restricted cash		(949,432	)		—
Dividends paid		(3,301,280	)		(2,458,912	)
Net cash provided by (used) in financing activities		3,171,959			(3,371,609	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(2,536,482	)		3,631,259
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		13,026,585			2,752,168
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	10,490,103		$	6,383,427

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

F-5

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2011 and 2010 (Unaudited)

	2011		2010
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	1,164,165	$	1,293,779
Cash paid for income taxes		91,303		208,372
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Shares issued to purchase Ohio Companies		—		17,073,084
Capital expenditures included in accounts payable		622,642		191,457
Capitalized interest		6,342		3,372
Accrued dividends		366,893		366,741

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

F-6

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Business and Significant Accounting Policies

Nature of Business

Gas Natural Inc. is the parent company of Energy West, Incorporated (“Energy West”), Lightning Pipeline Company, Inc. (“Lightning Pipeline”), Great Plains Natural Gas Company (“Great Plains”), Brainard Gas Corp. (“Brainard”), Gas Natural Service Company, LLC (the “Service Company”) and Independence Oil, LLC (“Independence Oil”). Energy West is the parent company of multiple entities that are natural gas utility companies with operations in Montana, Wyoming, North Carolina and Maine. Lightning Pipeline is the parent company of multiple entities that are natural gas utility companies with operations in Ohio and Pennsylvania. Great Plains is the parent company of an entity that is a natural gas utility company with operations in Ohio. Brainard is a natural gas utility company with operations in Ohio. The Service Company manages gas procurement, transportation, and storage for Brainard and subsidiaries of Lightning Pipeline and Great Plains. Independence Oil is a non-regulated subsidiary that delivers liquid propane, heating oil, and kerosene to customers in North Carolina and Virginia. The Company was originally incorporated in Montana in 1909. The Company currently has five reporting segments, including the addition of the propane operations segment added during the quarter as a result of the Independence Oil acquisition:

•      Natural Gas Operations	Annually distribute approximately 30 billion cubic feet of natural gas to approximately 63,500 customers through regulated utilities operating in Montana, Wyoming, Maine, North Carolina, Ohio and Pennsylvania. The Maine and North Carolina operations were acquired in 2007, while Cut Bank Gas in Montana was added in November 2009 and the Ohio and Pennsylvania operations were acquired in January 2010.
•      Marketing and Production Operations	Annually market approximately 1.3 billion cubic feet of natural gas to commercial and industrial customers in Montana and Wyoming and manage midstream supply and production assets for transportation customers and utilities through the subsidiary, Energy West Resources, Inc. (“EWR”). EWR owns an average 48% gross working interest (an average 42% net revenue interest) in 160 natural gas producing wells and gas gathering assets. The production holds approximately 20,000 acres of lease rights on state lands in Montana.
•      Pipeline Operations	The Shoshone interstate and Glacier gathering natural gas pipelines located in Montana and Wyoming are owned through the subsidiary Energy West Development, Inc. (“EWD”). Certain natural gas producing wells owned by EWD are being managed and reported under the marketing and production operations.
•      Propane Operations	Delivers liquid propane, heating oil and kerosene to approximately 4,500 residential, commercial and agricultural customers in North Carolina and Virginia through the subsidiary, Independence Oil. The operations were acquired in August 2011.
•      Corporate and Other	Corporate and other encompasses the results of corporate acquisitions and other equity transactions. Included in corporate and other are costs associated with business development and acquisitions, dividend income and recognized gains from the sale of marketable securities.

Basis of Presentation

The accompanying condensed balance sheet as of December 31, 2010, which has been derived from audited financial statements, and the unaudited interim condensed financial statements of Gas Natural Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the

F-7

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature.

The historical financial statements reflect the following reportable business segments: Natural Gas Operations, Marketing and Production Operations, Pipeline Operations and Corporate and Other. In addition, the financial statements now reflect a new segment for Propane Operations as a result of the acquisition of Independence Oil & LP Gas, Inc. on August 1, 2011. Independence Oil & LP Gas, Inc. delivered liquid propane, heating oil and kerosene to approximately 4,500 customers in North Carolina and Virginia. We created a new subsidiary, Independence Oil, LLC, in connection with the acquisition and plan to continue serving current customers with the intention to expand to other customers in each of the regions.

The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets generally accepted accounting principles (“GAAP”) to ensure the consistent reporting of the Company’s financial condition, results of operations and cash flows. Over the years, the FASB and other designated GAAP-setting bodies, have issued standards in the form of FASB Statements, Interpretations, FASB Staff Positions, EITF consensuses, AICPA Statements of Position, etc. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC.

Operating results for the nine month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for future fiscal periods. Events occurring subsequent to September 30, 2011 have been evaluated as to their potential impact to the financial statements through the date of issuance. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2010.

Effects of Regulation

The Company follows the provisions of ASC 980, Regulated Operations, and the accompanying financial statements reflect the effects of the different rate-making principles followed by the various jurisdictions regulating the Company. The economic effects of regulation can result in regulated companies recording costs that have been, or are expected to be, allowed in the rate-making process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses in the periods when those same amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for amounts that are expected to be refunded to customers which are recorded as liabilities in the balance sheet (regulatory liabilities).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The Company has used estimates in measuring certain deferred charges and deferred credits related to items subject to approval of the various public service commissions with jurisdiction over the Company. Estimates are also used in development of the allowances for doubtful accounts, unbilled gas, asset retirement obligations, and determination of depreciable lives of utility plant. The deferred tax asset and valuation allowance require a significant amount of judgment and are significant estimates. The estimates are based on projected future tax deductions, future taxable income, estimated limitations under the Internal Revenue Code, and other assumptions.

Such estimates could change in the near term and could significantly impact the Company’s results of operations and financial position.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less, at the date of acquisition, to be cash equivalents. The Company maintains, at various financial institutions, cash and cash equivalents which may exceed federally insurable limits and which may, at times, significantly exceed balance sheet amounts.

Receivables

The accounts receivable are generated from sales and delivery of natural gas as measured by inputs from meter reading devices. Trade accounts receivable are carried at the expected net realizable value. There is credit risk associated with the collection of these receivables. As such, a provision is recorded for the receivables considered to be uncollectible. The provision is based on management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable and historical write-off amounts. The underlying assumptions used for the provision can change from period to period and the provision could potentially cause a negative material impact to the income statement and working capital.

F-8

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Two of the Company’s utilities in Ohio, Orwell Natural Gas Company (“Orwell”) and Northeast Ohio Natural Gas Corp. (“NEO”) collect from their customers, through rates, an amount to provide an allowance for doubtful accounts. As accounts are identified as uncollectible, they are written off against this allowance for doubtful accounts with no income statement impact. In effect, all bad debt expense is funded by the customer base. The total amount collected from customers and the amounts written off are reviewed annually by the Public Utility Commission of Ohio (“PUCO”) and the rate per Mcf is adjusted as necessary.

The Company’s bad debt expense for the three and nine months ended September 30, 2011 was $10,079 and $89,256, respectively. Bad debt expense for the three and nine months ended September 30, 2010 was $19,266 and $98,607, respectively.

Recoverable/Refundable Costs of Gas Purchases

The Company accounts for purchased gas costs in accordance with procedures authorized by the Montana Public Service Commission (“MPSC”), the Wyoming Public Service Commission (“WPSC”), the North Carolina Utilities Commission (“NCUC”), the Maine Public Utilities Commission (“MPUC”), the PUCO and the Pennsylvania Public Utility Commission (“PaPUC”). Purchased gas costs that are different from those provided for in present rates, and approved by the respective commission, are accumulated and recovered or credited through future rate changes. The gas cost recoveries are monitored closely by the regulatory commissions in all of the states in which the Company operates and are subject to periodic audits or other review processes.

During the year ended December 31, 2010, the PUCO conducted audits of NEO and Orwell’s rates as filed from September 2007 through August 2009 and January 2008 through June 2010, respectively. The PUCO provided the primary audit findings during the fourth quarter of 2010, taking the position that NEO had not included approximately $1,050,000 of costs and Orwell included an excess of approximately $1,100,000 of costs in the filings under audit. In accordance with ASC 980, Regulated Operations, the Company recorded an adjustment of $1,050,000 and ($1,100,000) during the year ended December 31, 2010 for NEO and Orwell, respectively. On October 26, 2011, the PUCO adopted and approved a Joint Stipulation that finalizes the adjustments for NEO and Orwell to approximately $1,100,000 and ($964,000), respectively. However, the Joint Stipulation modified the refund period for Orwell to one year as compared to two years as originally identified. The Company considers the modification to be material and is attempting to have the PUCO change the payback period. The Company recorded the difference between the original estimates and the amounts approved in the Joint Stipulation during the three months ended September 30, 2011.

During the three months ended September 30, 2011, the PUCO conducted an audit of Brainard’s rates as filed from July 2009 through June 2011. The PUCO provided findings that Brainard collected excess gas costs of approximately $104,000. The Company agrees that excess gas costs were collected, but only in the amount of approximately $48,000. The Company and the PUCO plan to schedule a hearing to review the difference.

Regulatory Assets

The regulatory asset for property tax is recovered in rates over a ten-year period starting January 1, 2004. The income taxes earn a return equal to that of the Company’s rate base. The rate case costs do not earn a return. Regulatory assets will be recovered over a period of approximately three to twenty years.

Debt Issuance Costs

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing and are recognized as assets and are amortized as interest expense over the term of the related debt. The unamortized balance of debt issuance costs was $841,440 and $485,244 as of September 30, 2011 and December 31, 2010, respectively, including the costs related to refinancing the debt in Ohio. Amortization expense was $38,081 and $106,748 for the three and nine months ended September 30, 2011, respectively. Amortization expense was $34,579 and $97,975 for the three and nine months ended September 30, 2010, respectively.

Asset Retirement Obligations

The Company records the fair value of a liability for an asset retirement obligation (“ARO”) in the period in which it was incurred or acquired. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an asset retirement cost is included in “Property, plant and equipment, net” in the accompanying balance sheets. The Company amortizes the amount added to property, plant, and equipment,

F-9

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

net. The accretion of the asset retirement liability is allocated to operating expense using a systematic and rational method. As of September 30, 2011 and December 31, 2010, the Company has recorded a net asset of $244,817 and $297,617, and a related liability of $1,652,129 and $1,546,867, respectively.

The Company, excluding Orwell and Brainard, has identified but not recognized ARO liabilities related to gas transmission and distribution assets resulting from easements over property not owned by the Company. These easements are generally perpetual and only require retirement action upon abandonment or cessation of use of the property for the specified purpose. The ARO liability is not estimable for such easements as the Company intends to utilize these properties indefinitely. In the event the Company decides to abandon or cease the use of a particular easement, an ARO liability would be recorded at that time.

As a result of regulatory action by the PUCO related to prior audits, Orwell and Brainard accrue an estimated liability for removing gas mains, meter and regulator station equipment and service lines at the end of their useful lives. The liability is equal to a percent of the asset cost according to the following table:

	Percent of Asset Cost
	Orwell			Brainard
Mains		15	%		20	%
Meter/regulator stations		10	%		10	%
Service lines		75	%		75	%

The Company has no assets legally restricted for purposes of settling its asset retirement obligations. The schedule below is a reconciliation of the Company’s liability for the nine months ended September 30:

	2011		2010
Balance, beginning of period	$	1,546,867	$	787,233
Liabilities incurred or acquired		—		631,340
Liabilities settled		—		—
Accretion expense		105,262		92,836
Balance, end of period	$	1,652,129	$	1,511,409

Revenue Recognition

Revenues are recognized in the period that services are provided or products are delivered. The Company records gas distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the accounting period. The Company periodically collects revenues subject to possible refunds pending final orders from regulatory agencies. When this occurs, appropriate liabilities for such revenues collected subject to refund are established.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income and other comprehensive income (loss), which for the Company is primarily comprised of unrealized holding gains or losses on available-for-sale securities that are excluded from the statement of operations in computing net loss and reported separately in shareholders’ equity. Comprehensive income (loss) and its components are as follows:

	Three months ended September 30,					Nine months ended September 30,
	2011		2010			2011		2010
Net Income (Loss)	$	129,526	$	(44,705	)	$	4,764,618	$	4,084,019
Other comprehensive income
Change in unrealized gain/(loss) on available-for-sale securities, net of tax		30,076		(12,164	)		49,697		(96,159	)
Comprehensive Income (Loss)	$	159,602	$	(56,869	)	$	4,814,315	$	3,987,860

F-10

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other comprehensive income (loss) for the three and nine months ended September 30, 2011 is reported net of tax of $17,884 and $29,549, respectively. Other comprehensive income (loss) for the three and nine months ended September 30, 2010 is reported net of tax of ($7,626) and ($60,160), respectively.

Earnings Per Share

Net income (loss) per common share is computed by both the basic method, which uses the weighted average number of common shares outstanding, and the diluted method, which includes the dilutive common shares from stock options and other dilutive securities, as calculated using the treasury stock method.

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Weighted average number of common shares outstanding used in the basic earnings per common share calculations		8,152,487		6,072,996		8,151,370		6,040,063
Dilutive effect of stock options		7,561		—		7,956		8,269
Weighted average number of common shares outstanding adjusted for dilutive effect of stock options		8,160,048		6,072,996		8,159,326		6,048,332

Reclassifications

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

Recently Adopted Accounting Pronouncements

ASU No. 2010-28, “Intangibles – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”

In January 2011, the Company adopted new authoritative guidance under this ASU, which modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The adoption of this guidance did not have a material impact on the accompanying financial statements.

ASU No. 2010-29, “Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations”

In January 2011, the Company adopted new authoritative guidance under this ASU, which provides clarification regarding the acquisition date that should be used for reporting pro forma financial information disclosures required by Topic 805 when

F-11

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

comparative financial statements are presented. This ASU also requires entities to provide a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. The adoption of this guidance did not have a material impact on the accompanying financial statements.

Recently Issued Accounting Pronouncements

ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRSs”

In May 2011, the FASB issued ASU 2011-04, which changes the wording used to describe many of the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. Currently, the guidance is anticipated to be effective for interim and annual periods beginning after December 15, 2011; early application is not permitted. This ASU is not expected to have a material impact on the accompanying financial statements.

ASU No. 2011-05, “Presentation of Comprehensive Income”

In June 2011, the FASB issued ASU 2011-05, which is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of US GAAP and IFRS, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The ASU requires all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU is expected to change the presentation of other comprehensive income in the accompanying financial statements. However, this ASU does not change the calculation of the other comprehensive income. Currently, the guidance is anticipated to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011; early adoption is permitted. The Company does not expect to implement this ASU prior to the required date.

Note 2 – Acquisitions

On January 5, 2010, the Company completed the acquisition of Lightning Pipeline, Great Plains, Brainard and collectively with Lightning Pipeline, Great Plains and Brainard, the “Ohio Companies” and each an “Ohio Company”. Lightning Pipeline is the parent company of Orwell and Great Plains is the parent company of NEO. Orwell, NEO and Brainard are natural gas distribution companies that serve approximately 24,000 customers in Northeastern Ohio and Western Pennsylvania. The acquisition increased the Company’s customers by more than 50%.

Merger Consideration-Issuance of Shares

The final aggregate purchase price for the Ohio Companies was $37.9 million, which consisted of approximately $20.8 million in debt of the Ohio Companies with the remainder of the purchase price paid in unregistered shares of common stock of the Company. In accordance with the Merger Agreements, on January 5, 2010, the shares of common stock of Lightning Pipeline, Great Plains and Brainard were converted into the right to receive unregistered shares of common stock of the Company (the “Shares”) in accordance with the following calculation:

The total number of Shares the Shareholders received equaled the total of $34,304,000 plus $3,565,339, which was the number of additional active customers of the Ohio Companies in excess of 20,900 at closing (23,131 - 20,900 = 2,231 multiplied by $1,598.09), less $20,796,254 (which was the debt of the Ohio Companies at closing), divided by $10.

Based on this calculation, the Company issued 1,707,308 Shares in the aggregate. The Company issued Richard M. Osborne (“Mr. Osborne”), as trustee, 1,565,701 Shares, Thomas J. Smith (“Mr. Smith”) 73,244 Shares and Rebecca Howell (“Ms. Howell”) 19,532 Shares. Mr. Osborne is chairman of the board and chief executive officer, Mr. Smith is a director and the chief financial officer, and Ms. Howell is the corporate secretary of the Company.

The acquisition of the Ohio Companies was accounted for under the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The estimated fair value of the assets acquired and liabilities assumed is reflected in the following table at the date of acquisition.

F-12

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Total Ohio Companies		Great Plains		Lightning Pipeline		Brainard
Current assets	$	11,475,898	$	7,343,434	$	4,012,842	$	119,625
Property and equipment		29,530,634		18,290,609		10,818,924		421,101
Deferred Tax Assets		76,772		—		11,535		65,237
Other Noncurrent assets		152,585		1,000		140,002		11,583
Customer Relationships		685,000		640,000		45,000		—
Goodwill		13,551,181		9,112,901		4,312,007		126,273
Total assets acquired		55,472,070		35,387,944		19,340,310		743,819
Current liabilities		13,836,120		7,589,554		5,842,518		404,051
Asset Retirement Obligation		487,447		—		477,939		9,508
Deferred Tax Liability		3,279,164		1,483,525		1,651,769		143,870
Total liabilities assumed		17,602,731		9,073,079		7,972,226		557,429
Net assets acquired	$	37,869,339	$	26,314,865	$	11,368,084	$	186,390

Approximately $13.6 million of the total purchase price was allocated to goodwill. None of the goodwill is expected to be deductible for tax purposes. Transaction costs related to the mergers totaled $0 and $136,346 for the three and nine months ended September 30, 2010, respectively, and are recorded in the accompanying statements of income within the other income (expense).

The results of operations for the Ohio Companies for the period from January 1, 2010 to January 4, 2010 were not material.

Acquisition of Spelman Pipeline

On April 8, 2011 the Company’s indirect subsidiary, Spelman Pipeline Holdings, LLC (“Spelman”), a subsidiary of Lightning Pipeline, completed the acquisition of dormant refined products pipeline assets from Marathon Petroleum Company LP. The cash purchase price for the assets was $3.34 million.

The acquired assets include pipelines and rights-of-way located in Ohio and Kentucky. In Ohio, the assets include more than 140 miles of pipeline spanning almost a third of the state from Marion to Youngstown. Other Ohio assets are located in metropolitan and south suburban Cleveland. The Kentucky assets include more than 60 miles of right-of-way to the south of Louisville.

Spelman intends to recondition and convert the Ohio pipelines to transport natural gas to new markets where natural gas service is currently not available, as well as to connect to markets served by the Ohio Companies. The Company expects to fund capital expenditures in 2011 to convert the existing facilities to natural gas. The expenditures include reestablishment and clearing of rights-of-way, “pigging” and pressure test of the line, replacement of some existing pipe, connect to supply sources and establishment of interconnections to customers. The current assets are cathodically protected and reside in a protective nitrogen bath.

Future plans include extending the lines to participate in the transportation of Utica and Marcellus Shale production. The Company does not currently have definitive plans for the Kentucky assets.

Spelman has filed an application known as a “First Filing” to establish intrastate transportation rates with the PUCO. Should the Commission find that the rates proposed by the Company are not unjust and unreasonable, it may approve the rates without a hearing. On October 12, 2011, the PUCO authorized Spelman to commence operations as an intrastate pipeline company and approving its proposed tariff including its proposed transportation rates and charges. Spelman expects to begin transportation service by December 31, 2011.

Acquisition of Independence Oil & LP Gas, Inc.

On August 1, 2011 the Company purchased certain assets and assumed certain liabilities of Independence Oil & LP Gas, Inc. for the original price of $1.6 million, of which $200,000 was held back for 90 days. Independence Oil & LP Gas, Inc. delivered liquid propane, heating oil, and kerosene to approximately 4,500 customers from its offices in West Jefferson, North Carolina and

F-13

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Independence, Virginia. The Company created a new subsidiary named Independence Oil, LLC and is continuing to service the current customers with the intention to expand to other customers in each of the regions. The costs related to the transaction were $13,526 and were expensed during the three months ended September 30, 2011.

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

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

Current assets	$	429,576
Property and equipment		1,958,717
Total assets acquired		2,388,293
Current liabilities		57,777
Total liabilities assumed		57,777
Net assets acquired	$	2,330,516

The asset purchase agreement included a settlement date 90 days after the acquisition date, determined to be October 31, 2011 by both parties. As a result of this settlement, the Company paid $125,000 of the $200,000 that was held back at the acquisition date on November 1, 2011. The seller is still completing environmental remediation that was agreed upon at the time of closing, of which, the Company is liable only for costs up to $75,000 and is holding this money until completion and approval of the remediation. Due to the timing of the settlement, the Company did not include these adjustments in the amounts recorded for the three and nine months ended September 30, 2011. In accordance with GAAP, the Company will adjust the amounts in the subsequent filing.

Note 3 – Marketable Securities

Securities investments that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and recorded at amortized cost. Securities investments bought expressly for the purpose of selling in the near term are classified as trading securities and are measured at fair value with unrealized gains and losses reported in earnings. Securities investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities. Available-for-sale securities are recorded at fair value in marketable securities in the accompanying balance sheets, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of other comprehensive income. Realized gains and losses, and declines in value judged to be other than temporary, are in the accompanying statements of income. The Company did not hold any held-to-maturity or trading securities as of September 30, 2011 or December 31, 2010.

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

		00000000		00000000		00000000
	September 30, 2011
	Investment at cost		Unrealized Gains		Estimated Fair Value
Common stock	$	212,804	$	154,696	$	367,500

		00000000		00000000		00000000
	December 31, 2010
	Investment at cost		Unrealized Gains		Estimated Fair Value
Common stock	$	199,500	$	75,450	$	274,950

F-14

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unrealized gains on available-for-sale securities of $96,287 and $46,590, respectively (net of $58,409 and $28,860 in taxes) was included in accumulated other comprehensive income in the accompanying balance sheets at September 30, 2011 and December 31, 2010, respectively.

The gross realized gains are summarized below:

Three Months Ended September 30,	Sales Proceeds		Cost		Gross   Realized   Gains
2011	$	—	$	—	$	—
2010	$	1,831,989	$	1,781,613	$	50,376

Nine Months Ended  September 30,	Sales Proceeds		Cost		Gross Realized Gains
2011	$	—	$	—	$	—
2010	$	4,185,867	$	4,026,347	$	159,520

As of September 30, 2011 and December 31, 2010, the Company did not hold any securities in an unrealized loss position.

The fair value of cash and cash equivalents, notes and accounts receivable and notes and accounts payable are not materially different from their carrying amounts. The fair values of marketable securities are estimated based on closing share price on the quoted market price for those investments. Cost basis is determined by specific identification of securities sold.

Note 4 – Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Measuring fair value requires the use of market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, corroborated by market data, or generally unobservable. Valuation techniques are required to maximize the use of observable inputs and minimize the use of unobservable inputs.

Valuation Hierarchy

A fair value hierarchy that prioritizes the inputs used to measure fair value, and requires fair value measurements to be categorized based on the observability of those inputs has been established by the applicable accounting guidance. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

The following tables represent the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of:

	September 30, 2011
	Level 1		Level 2		Level 3		TOTAL
Available-for-sale securities	$	367,500		—		—	$	367,500

	December 31, 2010
	Level 1		Level 2		Level 3		TOTAL
Available-for-sale securities	$	274,950		—		—	$	274,950

F-15

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Credit Facilities and Long-Term Debt

Bank of America

At September 30, 2011, Energy West had a $20 million revolving credit facility with the Bank of America that includes an annual commitment fee equal to 0.20% of the unused portion of the facility and interest on amounts outstanding at the monthly London Interbank Offered Rate (“LIBOR”) plus 120 to 145 basis points for interest periods selected by Energy West (the “Bank of America Credit Facility”). For the three months ended September 30, 2011 and 2010, the weighted average interest rate on the facility was 1.56% and 1.80%, respectively, resulting in $55,355 and $53,848 of interest expense, respectively. For the nine months ended September 30, 2011 and 2010, the weighted average interest rate on the facility was 1.67% and 2.34%, respectively, resulting in $156,602 and $172,785 of interest expense, respectively. The balance on the revolving credit facility was $17,600,000 and $18,149,999 at September 30, 2011 and December 31, 2010, respectively.

The $17.6 million of borrowings as of September 30, 2011, leaves the remaining borrowing capacity on the line of credit at $2.4 million.

On November 2, 2011, the Company exercised the $10 million accordion feature on the revolving credit facility with Bank of America to increase the capacity from $20 million to $30 million. The expanded credit facility changes the annual commitment fee equal to a range of 0.25% to 0.45% of the unused portion of the facility and interest on amounts outstanding at the monthly LIBOR plus 175 to 225 basis points. The other terms of the agreement remain the same, including the expiration of the facility on June 29, 2012.

Senior Unsecured Notes

On June 29, 2007, Energy West authorized the sale of $13,000,000 aggregate principal amount of its 6.16% Senior Unsecured Notes, due June 29, 2017 (the “Senior Unsecured Notes”). The proceeds of these notes were used to refinance existing notes. Approximately $463,000 was incurred related to the debt issuance which was capitalized and are being amortized over the life of the notes.

Interest expense was $200,200 and $600,600 for the three and nine months ended September 30, 2011 and 2010, respectively.

Citizens Bank

In connection with the acquisition of the Ohio Companies, NEO and Great Plains each entered modifications/amendments to its credit facility with Citizens Bank (the “Citizens Credit Facility”). The Citizens Credit Facility consisted of a revolving line of credit and term loan to NEO, and two other term loans to Great Plains respectively. Each amendment/modification was initially effective as of December 1, 2009, but was later modified to be effective as of January 5, 2010. Gas Natural guaranteed each loan. Mr. Osborne guaranteed each loan both individually and as trustee of the Richard M. Osborne Trust, and Great Plains guaranteed NEO’s revolving line of credit and term loans.

The Ohio Companies had term loans with Citizens Bank in the aggregate amount of $11.3 million. Each term note had a maturity date of July 1, 2013 and bore interest at an annual rate of 30-day LIBOR plus 400 basis points with an interest rate floor of 5.00% per annum. For the three and nine months ended September 30, 2011 the weighted average interest rate on the term loans was 5.00%, resulting in $0 and $156,022 of interest expense, respectively. For the three and nine months ended September 30, 2010 the weighted average interest rate on the term loans was 5.00%, resulting in $123,601 and $357,281 of interest expense, respectively.

NEO’s revolving credit line with Citizens Bank matured on November 29, 2010 and was repaid and extinguished at that time. For the three and nine months ended September 30, 2010, the weighted average interest rate on the revolving credit line was 5.00%, resulting in $26,833 and $80,070 of interest expense, respectively.

The term loans were paid off on May 3, 2011 resulting in no outstanding balance at September 30, 2011. At December 31, 2010, $9.6 million had been borrowed under the term loans.

Huntington Bank

On December 31, 2009, Orwell entered into an amended and restated short-term credit facility with The Huntington National Bank, N.A. (the “Huntington Credit Facility”). The Huntington Line of Credit and Term Loan both had a maturity date of November 28, 2010. Orwell repaid and extinguished these debt obligations at that time.

F-16

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2010, the weighted average interest rate on the term note was 4.00% resulting in $42,541 and $130,749 of interest expense, respectively. The weighted average interest rate on the credit line was 4.00% resulting in $15,325 and $46,598 of interest expense, respectively.

SunLife Assurance Company of Canada

On May 2, 2011, the Company and its Ohio subsidiaries, NEO, Orwell and Brainard (together “the Issuers”), issued $15.3 million of 5.38% Senior Secured Guaranteed Fixed Rate Notes due June 1, 2017 (“Fixed Rate Note”). Additionally, Great Plains issued $3.0 million of Senior Secured Guaranteed Floating Rate Notes due May 3, 2014 (“Floating Rate Note”). Both notes were placed with SunLife Assurance Company of Canada (“SunLife”). Approximately $615,000 was incurred related to the debt issuance which was capitalized and are being amortized over the life of the notes.

The Fixed Rate Note, in the amount of $15.3 million, is a joint obligation of the Issuers, and is guaranteed by the Company, Lightning Pipeline and Great Plains (together with the Issuers, “the Fixed Rate Obligors”). This note received approval from the PUCO on March 30, 2011. The note is governed by a Note Purchase Agreement (“NPA”). Concurrent with the funding and closing of this transaction, which occurred on May 3, 2011, the Fixed Rate Obligors signed an amended NPA that is substantially the same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is subject to a 50 basis point make-whole premium.

The Floating Rate Note, in the amount of $3.0 million, is an obligation of Great Plains and is guaranteed by the Company (together, “the Floating Rate Obligors”). The note is priced at a fixed spread of 385 basis points over three month Libor. Pricing for this note will reset on a quarterly basis to the then current yield of three month Libor. The note is governed by a NPA. Concurrent with the funding of this transaction, which occurred on May 3, 2011, the Floating Rate Obligors signed an amended NPA that is substantially the same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is at par.

The use of proceeds for both notes extinguished existing amortizing bank debt and other existing indebtedness, funded $3.4 million for the 2011 capital program for Orwell and NEO, established two debt service reserve accounts, and replenished the Company’s treasuries for the previously announced repayment of maturing bank debt and transaction expenses. The capital program funds and debt service reserve accounts are in interest bearing accounts and included in restricted cash.

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

For the three and nine months ended September 30, 2011, the weighted average interest rate on the Fixed Rate Note was 5.38% resulting in $206,242 and $343,737 of interest expense, respectively. For the three and nine months ended September 30, 2011, the weighted average interest rate on the Floating Rate Note was 4.11% resulting in $51,450 of interest expense.

Debt Covenants

The Company’s Bank of America Credit Facility and the Senior Unsecured Notes contain various covenants, which include, among others, limitations on total dividends and distributions made in the immediately preceding 60-month period to 75% of aggregate consolidated net income for such period, restrictions on certain indebtedness, limitations on asset sales, and maintenance of certain debt-to-capital and interest coverage ratios.

The Citizens Credit Facility, which was paid off on May 3, 2011 required a minimum debt service coverage ratio of at least 1.25 to 1.0 measured quarterly on a rolling four quarter basis. The Citizens Credit Facility also required a minimum tangible net worth equal to the sum of $1,815,000 plus 100% of net income less the pro-rata share of any dividend paid to Gas Natural, measured on a quarterly basis beginning with the quarter ended December 31, 2009. The Citizens Credit Facility allowed the payment of dividends to Gas Natural Inc. if the net worth (as defined in the Citizens loan documents) after payment of any dividends was not less than $1,815,000 as positively increased by 100% of net income as of the end of each fiscal quarter and fiscal year.

The Fixed Rate Note and the Floating Rate Note carry a 60% debt-to-capitalization financial covenant on a consolidated basis for Ohio, as well as, a 2.0x interest coverage test based on a trailing twelve-month basis. Additional covenants customary for asset sales and purchases, additional indebtedness, dividends, change of control and other matters are also included.

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

F-17

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

2012	$	7,750
2013		8,356
2014		3,004,402
2015		—
2016		—
Thereafter		28,334,000
Total	$	31,354,508

Note 6 – Stockholders’ Equity

2002 Stock Option Plan

The Energy West Incorporated 2002 Stock Option Plan (the “Option Plan”) provides for the issuance of up to 300,000 options to purchase the Company’s common stock to be issued to certain key employees. As of September 30, 2011 and December 31, 2010, there are 35,000 and 39,500 options outstanding, respectively. The maximum number of shares available for future grants under this plan is 58,000 shares. Under the Option Plan, the option price may not be less than 100% of the common stock fair market value on the date of grant (in the event of incentive stock options, 110% of the fair market value if the employee owns more than 10% of the outstanding common stock). Pursuant to the Option Plan, the options vest over four to five years and are exercisable over a five to ten-year period from date of issuance.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

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

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding December 31, 2009		44,500		$	8.52
Granted		—		$	—
Exercised		—		$	—
Expired		(15,000	)	$	9.93
Outstanding September 30, 2010		29,500		$	7.81	$	97,780
Exerciseable September 30, 2010		10,000		$	7.87	$	32,475

F-18

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding December 31, 2010		39,500		$	8.40
Granted		—		$	—
Exercised		—		$	—
Expired		(4,500	)	$	6.35
Outstanding September 30, 2011		35,000		$	8.66	$	51,538
Exerciseable September 30, 2011		18,750		$	8.24	$	81,450

As of September 30, 2011 and December 31, 2010, there was $17,434 and $31,824 of total unrecognized compensation cost related to stock-based compensation, respectively. That cost is expected to be recognized over a period of three years.

The following information applies to options outstanding at September 30, 2011:

Grant Date		Exercise Price		Number Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Number Exercisable		Weighted Average Exercise Price
	12/1/2008	$	7.10		10,000	$	7.10		7.17		7,500	$	7.10
	6/3/2009	$	8.44		5,000	$	8.44		2.67		3,750	$	8.44
	12/1/2009	$	8.85		10,000	$	8.85		8.17		5,000	$	8.85
	12/1/2010	$	10.15		10,000	$	10.15		9.17		2,500	$	10.15
					35,000						18,750

During the three and nine months ended September 30, 2011, the Company recorded $4,796 and $14,389, respectively ($2,998 and $8,995, respectively, net of related tax effects), of compensation expense for stock options granted after July 1, 2005, and for the unvested portion of previously granted stock options that remained outstanding as of July 1, 2005. During the three and nine months ended September 30, 2010, the Company recorded $4,703 and $14,109, respectively ($2,916 and $8,748, respectively, net of related tax effects), of compensation expense for stock options granted after July 1, 2005, and for the unvested portion of previously granted stock options that remained outstanding as of July 1, 2005.

Note 7 – Employee Benefit Plans

The Company has a defined contribution plan (the “401k Plan”) which covers substantially all of its employees. The plan provides for an annual contribution of 3% of salaries, with a discretionary contribution of up to an additional 3%. The expense related to the 401k Plan for the three and nine months ended September 30, 2011, was $70,420 and $281,861, respectively. The expense related to the 401k Plan for the three and nine months ended September 30, 2010, was $71,595 and $236,834, respectively.

The Company makes matching contributions in the form of Company common stock equal to 10% of each participant’s elective deferrals in the 401k Plan. The Company contributed shares of common stock valued at $3,133 and $26,338 for the three and nine months ended September 30, 2011, respectively. The Company contributed shares of common stock valued at $8,762 and $29,444 for the three and nine months ended September 30, 2010, respectively. In addition, a portion of the 401k Plan consists of an Employee Stock Ownership Plan (“ESOP”) that covers most employees. The ESOP receives contributions of common stock from the Company each year as determined by the Board of Directors. The contribution is recorded based on the current market price of the Company’s common stock. The Company made no contributions for the three and nine months ended September 30, 2011 and 2010.

F-19

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has sponsored a defined postretirement health benefit plan (the “Retiree Health Plan”) providing health and life insurance benefits to eligible retirees. The Plan pays eligible retirees (post-65 years of age) up to $125 per month in lieu of contracting for health and life insurance benefits. The amount of this payment is fixed and will not increase with medical trends or inflation. In addition, the Retiree Health Plan allows retirees between the ages of 60 and 65 and their spouses to remain on the same medical plan as active employees by contributing 125% of the current COBRA rate to retain this coverage. The amounts paid in excess of the current COBRA rate is held in a VEBA trust account, and benefits for this plan are paid from assets held in the VEBA Trust account. The Company discontinued contributions in 2006 and is no longer required to fund the Retiree Health Plan. As of September 30, 2011 and December 31, 2010, the value of plan assets was $184,444 and $212,678, respectively. The assets remaining in the trust will be used to fund the plan until these assets are exhausted.

Note 8 – Income Taxes

Income tax position differs from the amount computed by applying the federal statutory rate to pre-tax income or loss as demonstrated in the table below:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Income tax from continuing operations:
Tax expense at statutory rate of 34%	$	(119,961	)	$	(267,278	)	$	2,396,889		$	1,834,457
State income tax, net of federal tax expense		(12,089	)		1,780			241,543			(12,215	)
Amortization of deferred investment tax credits		(5,266	)		(5,266	)		(15,798	)		(15,797	)
Adjustment to tax return filed		(319,784	)		(506,232	)		(319,784	)		(506,232	)
Other		(25,253	)		35,590			(17,794	)		11,231
Total income tax (benefit) expense	$	(482,353	)	$	(741,406	)	$	2,285,056		$	1,311,444

The Company recognizes interest accrued related to unrecognized tax positions in interest expense and penalties in operating expense. No interest and penalties related to unrecognized tax positions were accrued at September 30, 2011 and December 31, 2010.

The tax years after 2005 remain open to examination by the major taxing jurisdictions in which the Company operates, although no material changes to unrecognized tax positions are expected within the next twelve months.

Note 9 – Related Party Transactions

The Company is party to certain agreements and transactions with Mr. Osborne, or companies owned or controlled by Mr. Osborne.

Notes Payable

The Company had two notes payable to Mr. Osborne. The first note was payable on demand and bore interest at a rate equal to the prime rate as published by Key Bank. On December 1, 2010, the Company repaid the first note in full, including all interest accrued to date. The second note had a maturity date of January 3, 2014 and bore interest at 6.0% annually. On May 3, 2011, the Company repaid the second note in full, including all interest accrued to date, using the SunLife proceeds. As of September 30, 2011 and December 31, 2010, the second note had a balance of $0 and $52,578, which included $0 and $3,217 of accrued interest, respectively. Interest expense incurred related to both loans was $0 and $529, respectively, for the three and nine months ended September 30, 2011. Interest expense incurred related to both loans was $25,782 and $91,527, respectively, for the three and nine months ended September 30, 2010.

F-20

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note Receivable

The Company has a note receivable from John D. Oil and Gas Marketing, a company controlled by Mr. Osborne, with a maturity date of December 31, 2016 and an annual interest rate of 7.0% relating to funds loaned to John D. Oil and Gas Marketing to finance the acquisition of a gas pipeline. The balance due from John D. Oil and Gas Marketing was $48,119 and $55,230 (of which, $10,079 and $9,565 is due within one year) as of September 30, 2011 and December 31, 2010, respectively. The Company has a corresponding agreement to lease the pipeline from John D. Oil and Gas Marketing through December 31, 2016. Lease expense resulting from this agreement was $3,300 and $9,900 for the three and nine months ended September 30, 2011, respectively, which is included in the Natural Gas Purchased column below. Lease expense resulting from this agreement was $3,300 and $11,127 for the three and nine months ended September 30, 2010, respectively, which is included in the Natural Gas Purchased column below. There was no balance due at September 30, 2011 or December 31, 2010 to John D. Oil and Gas Marketing related to these lease payments.

Accounts Receivable and Accounts Payable

The table below details amounts due from and due to related parties, including companies owned or controlled by Mr. Osborne, at September 30, 2011 and December 31, 2010, respectively:

	Accounts Receivable				Accounts Payable
	September 30, 2011		December 31, 2010		September 30, 2011			December 31, 2010
John D. Oil and Gas Marketing	$	2,188	$	42,938	$	38,623		$	247,430
Cobra Pipeline		5,254		22,071		—			84,597
Orwell Trumbell Pipeline		127,597		120,975		—			77,325
Great Plains Exploration		131,688		148,252		(10	)		—
Big Oats Pipeline Supply		23		863		28,297			4,723
Kykuit Resources		97,264		97,154		—			—
Sleepy Hollow		123,237		100,640		—			—
Other		14,501		26,491		—			3,468
Total	$	501,752	$	559,384	$	66,910		$	417,543

The table below details transactions with related parties, including companies owned or controlled by Mr. Osborne, for the three months ended September 30, 2011:

	Three Months Ended September 30, 2011
	Natural Gas Purchases		Pipeline and Construction Purchases		Rent, Supplies, Consulting,  and Other Purchases		Natural Gas Sales		Management and Other Sales
John D. Oil and Gas Marketing	$	763,371	$	45,450	$	5,340	$	—	$	3,282
Cobra Pipeline		17,873		1,282		319		—		6,090
Orwell Trumbell Pipeline		26,270		10,677		49,019		148		1,914
Great Plains Exploration		380,260		229,916		455		96		7,678
Big Oats Pipeline Supply		—		249,663		70,217		29		—
Kykuit Resources		—		—		—		—		—
Sleepy Hollow		—		—		—		—		11,074
Other		—		—		48,170		2,066		384
Total	$	1,187,774	$	536,988	$	173,520	$	2,339	$	30,422

F-21

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The table below details transactions with related parties, including companies owned or controlled by Mr. Osborne, for the three months ended September 30, 2010:

	Three Months Ended September 30, 2010
	Natural Gas Purchases		Pipeline and Construction Purchases		Rent, Supplies, Consulting, and Other Purchases		Natural Gas Sales		Management and Other Sales
John D. Oil and Gas Marketing	$	692,198	$	—	$	—	$	—	$	—
Cobra Pipeline		4,147		—		—		—		—
Orwell Trumbell Pipeline		23,653		—		—		167		—
Great Plains Exploration		1,726		—		—		—		2,058
Big Oats Pipeline Supply		—		417,613		42,337		28		1,183
Kykuit Resources		—		—		—		—		—
Sleepy Hollow		—		—		—		—		15,128
Other		—		—		48,678		3,404		11,826
Total	$	721,724	$	417,613	$	91,015	$	3,599	$	30,195

The table below details transactions with related parties, including companies owned or controlled by Mr. Osborne, for the nine months ended September 30, 2011:

	Nine Months Ended September 30, 2011
	Natural Gas Purchases		Pipeline and Construction Purchases		Rent, Supplies, Consulting,  and Other Purchases		Natural Gas Sales		Management and Other Sales
John D. Oil and Gas Marketing	$	3,190,095	$	45,450	$	7,112	$	—	$	9,846
Cobra Pipeline		261,652		70,048		771		—		7,146
Orwell Trumbell Pipeline		302,443		10,677		98,737		1,905		7,479
Great Plains Exploration		954,131		427,346		605		2,580		20,514
Big Oats Pipeline Supply		—		506,330		479,229		2,740		1,000
Kykuit Resources		—		—		39,600		—		110
Sleepy Hollow		—		—		—		—		22,597
Other		—		—		146,043		52,379		3,441
Total	$	4,708,321	$	1,059,851	$	772,097	$	59,604	$	72,133

F-22

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The table below details transactions with related parties, including companies owned or controlled by Mr. Osborne, for the nine months ended September 30, 2010:

	Nine Months Ended September 30, 2010
	Natural Gas Purchases		Pipeline and Construction Purchases		Rent, Supplies, Consulting,  and Other Purchases		Natural Gas Sales		Management and Other Sales
John D. Oil and Gas Marketing	$	3,096,955	$	—	$	127	$	49,824	$	—
Cobra Pipeline		241,598		83,010		107,447		—		21,044
Orwell Trumbell Pipeline		327,180		—		430		1,816		171
Great Plains Exploration		22,375		—		—		1,953,052		4,403
Big Oats Pipeline Supply		—		504,837		263,759		2,295		4,010
Kykuit Resources		—		—		—		—		10,559
Sleepy Hollow		—		—		—		—		69,633
Other		—		42,600		295,027		60,122		126,876
Total	$	3,688,108	$	630,447	$	666,790	$	2,067,109	$	236,696

The Company also accrued a liability of $23,091 and $413,399, respectively, due to companies controlled by Mr. Osborne for natural gas used through September 30, 2011 and December 31, 2010 that is not yet invoiced. The related expense is included in the gas purchased line item in the accompanying statements of income. These amounts will be trued up to the actual invoices when received in future periods.

F-23

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 – Segments of Operations

The following tables set forth summarized financial information for the Company’s natural gas, marketing and production, pipeline, propane, and corporate and other operations. The Company classifies its segments to provide investors with a view of the business through management’s eyes. The Company primarily separates its state regulated utility businesses from the non-regulated marketing and production business and from the federally regulated pipeline business. The Company has regulated utility businesses in the states of Montana, Wyoming, North Carolina, Maine, Ohio, and Pennsylvania and these businesses are aggregated together to form the natural gas operations. Transactions between reportable segments are accounted for on the accrual basis, and eliminated prior to external financial reporting. Inter-company eliminations between segments consist primarily of gas sales from the marketing and production operations to the natural gas operations, inter-company accounts receivable, accounts payable, equity, and subsidiary investment:

Three Months Ended September 30, 2011

	Natural Gas Operations			Marketing and Production		Pipeline Operations		Propane Operations			Corporate and Other			Eliminations			Consolidated
OPERATING REVENUES
Natural gas operations	$	11,717,686		$	—	$	—	$	—		$	—		$	(1,368,867	)	$	10,348,819
Marketing and production		—			2,407,303		—		—			—			(1,551,588	)		855,715
Pipeline operations		—			—		106,351		—			—			—			106,351
Propane operations		—			—		—		1,009,844			—			—			1,009,844
Total operating revenue		11,717,686			2,407,303		106,351		1,009,844			—			(2,920,455	)		12,320,729
COST OF SALES
Natural gas purchased		5,917,091			—		—		—			—			(1,368,867	)		4,548,224
Marketing and production		—			2,137,398		—		—			—			(1,551,588	)		585,810
Propane purchased		—			—		—		875,305			—			—			875,305
Total cost of sales		5,917,091			2,137,398		—		875,305			—			(2,920,455	)		6,009,339
GROSS MARGIN	$	5,800,595		$	269,905	$	106,351	$	134,539		$	—		$	—		$	6,311,390
OPERATING INCOME (LOSS)	$	(534,116	)	$	82,182	$	76,593	$	(154,927	)	$	(61,430	)	$	—		$	(591,698	)
NET INCOME (LOSS)	$	(463,484	)	$	48,712	$	47,540	$	561,986		$	(65,228	)	$	—		$	129,526

Three Months Ended September 30, 2010

	Natural Gas Operations			Marketing and Production		Pipeline Operations		Propane Operations		Corporate and Other			Eliminations			Consolidated
OPERATING REVENUES
Natural gas operations	$	10,235,666		$	—	$	—	$	—	$	—		$	(76,900	)	$	10,158,766
Marketing and production		—			2,137,068		—		—		—			(1,498,597	)		638,471
Pipeline operations		—			—		104,461		—		—			—			104,461
Propane operations		—			—		—		—		—			—			—
Total operating revenue		10,235,666			2,137,068		104,461		—		—			(1,575,497	)		10,901,698
COST OF SALES
Natural gas purchased		4,879,927			—		—		—		—			(76,900	)		4,803,027
Marketing and production		—			1,879,531		—		—		—			(1,498,597	)		380,934
Propane purchased		—			—		—		—		—			—			—
Total cost of sales		4,879,927			1,879,531		—		—		—			(1,575,497	)		5,183,961
GROSS MARGIN	$	5,355,739		$	257,537	$	104,461	$	—	$	—		$	—		$	5,717,737
OPERATING INCOME (LOSS)	$	(678,894	)	$	52,455	$	70,544	$	—	$	—		$	—		$	(555,895	)
NET INCOME (LOSS)	$	(325,729	)	$	274,534	$	82,563	$	—	$	(76,073	)	$	—		$	(44,705	)

F-24

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2011

	Natural Gas Operations		Marketing and Production		Pipeline Operations		Propane Operations			Corporate and Other			Eliminations			Consolidated
OPERATING REVENUES
Natural gas operations	$	68,019,655	$	—	$	—	$	—		$	—		$	(2,355,991	)	$	65,663,664
Marketing and production		—		9,957,521		—		—			—			(5,800,639	)		4,156,882
Pipeline operations		—		—		314,736		—			—			—			314,736
Propane operations		—		—		—		1,009,844			—			—			1,009,844
Total operating revenue		68,019,655		9,957,521		314,736		1,009,844			—			(8,156,630	)		71,145,126
COST OF SALES
Natural gas purchased		41,196,715		—		—		—			—			(2,355,991	)		38,840,724
Marketing and production		—		8,994,235		—		—			—			(5,800,639	)		3,193,596
Propane purchased		—		—		—		875,305			—			—			875,305
Total cost of sales		41,196,715		8,994,235		—		875,305			—			(8,156,630	)		42,909,625
GROSS MARGIN	$	26,822,940	$	963,286	$	314,736	$	134,539		$	—		$	—		$	28,235,501
OPERATING INCOME (LOSS)	$	7,254,934	$	388,407	$	188,989	$	(154,927	)	$	(109,384	)	$	—		$	7,568,019
NET INCOME (LOSS)	$	4,155,383	$	158,119	$	112,094	$	561,986		$	(222,964	)	$	—		$	4,764,618
Total assets	$	124,288,531	$	4,666,306	$	578,135	$	2,957,575		$	72,261,411		$	(60,110,010	)	$	144,641,948
Goodwill	$	14,607,952	$	—	$	—	$	—		$	—		$	—		$	14,607,952

Nine Months Ended September 30, 2010

	Natural Gas Operations		Marketing and Production		Pipeline Operations		Propane Operations		Corporate and Other			Eliminations			Consolidated
OPERATING REVENUES
Natural gas operations	$	56,581,131	$	—	$	—	$	—	$	—		$	(234,096	)	$	56,347,035
Marketing and production		—		11,325,249		—		—		—			(5,700,446	)		5,624,803
Pipeline operations		—		—		319,418		—		—			—			319,418
Propane operations		—		—		—		—		—			—			—
Total operating revenue		56,581,131		11,325,249		319,418		—		—			(5,934,542	)		62,291,256
COST OF SALES
Natural gas purchased		32,577,699		—		—		—		—			(234,096	)		32,343,603
Marketing and production		—		10,135,599		—		—		—			(5,700,446	)		4,435,153
Propane purchased		—		—		—		—		—			—			—
Total cost of sales		32,577,699		10,135,599		—		—		—			(5,934,542	)		36,778,756
GROSS MARGIN	$	24,003,432	$	1,189,650	$	319,418	$	—	$	—		$	—		$	25,512,500
OPERATING INCOME (LOSS)	$	5,882,195	$	609,916	$	169,875	$	—	$	(11,364	)	$	—		$	6,650,622
NET INCOME (LOSS)	$	3,653,545	$	308,729	$	143,283	$	—	$	(21,538	)	$	—		$	4,084,019
Total assets	$	110,032,010	$	5,463,177	$	726,574	$	—	$	57,041,165		$	(51,898,609	)	$	121,364,317
Goodwill	$	13,929,745	$	—	$	—	$	—	$	—		$	—		$	13,929,745

F-25

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 11 – Commitments and Contingencies

Legal Proceedings

In 2010, the Company’s Maine utility asserted a claim against H.Q. Energy Services (US), Inc. (“HQ”) for a breach of a firm gas transportation service agreement between the parties. HQ filed a counterclaim against the Company for reimbursement of certain transportation charges that HQ paid to the Company. The parties agreed to arbitration and the arbitrators awarded HQ the sum of approximately $280,000 for past transportation charges that HQ paid to the Company. The arbitrators also ordered the Company to pay future transportation charges that will be incurred during the remaining term of the agreement while HQ was ordered to pay the Company for future fuel reimbursements for the remaining term of the agreement. The Company recorded an accrual in the amount of $300,000 for the liability and resulting expense in connection with the arbitration in the three months ended September 30, 2011.

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

Corning and the directors of Corning filed a motion to dismiss the lawsuit. The court has stayed discovery in the lawsuit until it rules on the motion to dismiss. In the Company’s opinion, the outcome of these legal actions will not have a material adverse effect on its financial condition, cash flows or results of operations.

From time to time, the Company is involved in lawsuits that have arisen in the ordinary course of business. The Company is contesting each of these lawsuits vigorously and believes it has defenses to the allegations that have been made.

Note 12 – Financial Instruments and Risk Management

Management of Risks Related to Fixed Contracts

The Company and its subsidiaries are subject to certain risks related to changes in certain commodity prices and risks of counterparty performance. The Company has established policies and procedures to manage such risks. The Company has a Risk Management Committee comprised of Company officers and management to oversee our risk management program as defined in its risk management policy. The purpose of the risk management program is to minimize adverse impacts on earnings resulting from volatility of energy prices, counterparty credit risks, and other risks related to the energy commodity business.

In order to mitigate the risk of natural gas market price volatility related to firm commitments to purchase or sell natural gas, from time to time the Company and its subsidiaries have entered into fixed contracts. Such arrangements may be used to protect profit margins on future obligations to deliver gas at a fixed price, or to protect against adverse effects of potential market price declines on future obligations to purchase gas at fixed prices.

The Company accounts for these contracts in accordance with ASC 815, Derivatives and Hedging. In accordance with ASC 815, such contracts are reflected in the balance sheet as assets or liabilities and valued at “fair value,” determined as of the balance sheet date. Fair value accounting treatment is also referred to as “mark-to-market” accounting. Mark-to-market accounting results in disparities between reported earnings and realized cash flow. The changes in the derivative values are reported in the income statement as an increase or (decrease) in revenues without regard to whether any cash payments have been made between the parties to the contract. ASC 815 specifies that contracts for purchase or sale at fixed prices and volumes must be valued at fair value (under mark-to-market accounting) unless the contracts qualify for treatment as a “normal purchase or normal sale.”

At September 30, 2011 and December 31, 2010, all of the Company’s fixed contracts for purchase or sale at fixed prices and volumes qualified for treatment as a “normal purchase or normal sale.”

F-26

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 13 – Subsequent Events

The Company declared a dividend of $0.045 per share on September 28, 2011 that is payable to shareholders of record on October 14, 2011. There were 8,153,176 shares outstanding on October 14, 2011 resulting in a total dividend of $366,893 which was paid to shareholders on October 31, 2011.

The unconsolidated affiliate requested a cash call from its members on October 3, 2011. The Company’s portion amounted to $132,000 which was paid on October 4, 2011.

F-27

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

This quarterly report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which represent our expectations or beliefs concerning future events. Forward-looking statements generally include words such as “anticipates,” “believes,” “expects,” “planned,” “scheduled” or similar expressions and statements concerning our operating capital requirements, utilization of tax benefits, recovery of property tax payments, our environmental remediation plans, and similar statements that are not historical are forward-looking statements that involve risks and uncertainties. Although we believe these forward-looking statements are based on reasonable assumptions, statements made regarding future results are subject to a number of assumptions, uncertainties and risks that could cause future results to be materially different from the results stated or implied in this document.

Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of us from time to time, including statements contained in filings with the Securities and Exchange Commission (“SEC”) and our reports to shareholders, involve known and unknown risks and other factors that may cause our company’s actual results in future periods to differ materially from those expressed in any forward-looking statements. See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC. Any such forward looking statement is qualified by reference to these risk factors. We caution that these risk factors are not exclusive. We do not undertake to update any forward looking statements that may be made from time to time by or on behalf of us except as required by law.

OVERVIEW

Gas Natural is a natural gas company, primarily operating local distribution companies in six states and serving approximately 63,500 customers. Our natural gas utility subsidiaries are Energy West, Incorporated (Montana and Wyoming), Cut Bank Gas Company (Montana), Northeast Ohio Natural Gas Corporation (Ohio), Brainard Gas Corp. (Ohio), Orwell Natural Gas Company (Ohio and Pennsylvania), Bangor Gas Company (Maine) and Frontier Natural Gas (North Carolina). Our operations also include production and marketing of natural gas, gas pipeline transmission and gathering and propane operations. Approximately 95% and 91% of our revenues in the three and nine months ended September 30, 2011 were derived from our natural gas utility operations.

Our historical financial statements reflect the following reportable business segments: Natural Gas Operations, Marketing and Production Operations, Pipeline Operations and Corporate and Other. In addition, our financial statements now reflect a new segment for Propane Operations as a result of our acquisition of Independence Oil & LP Gas, Inc. on August 1, 2011. Independence Oil & LP Gas, Inc. delivered liquid propane, heating oil and kerosene to approximately 4,500 customers in North Carolina and Virginia. We created a new subsidiary, Independence Oil, LLC, in connection with the acquisition and plan to continue serving current customers with the intention to expand to other customers in each of the regions.

In 2010, our Maine utility asserted a claim against H.Q. Energy Services (US), Inc. (“HQ”) for a breach of a firm gas transportation service agreement between the parties. HQ filed a counterclaim against us for reimbursement of certain transportation charges that HQ paid to us. The parties agreed to arbitration and the arbitrators awarded HQ the sum of approximately $280,000 for past transportation charges that HQ paid to us. The arbitrators also ordered us to pay future transportation charges that will be incurred during the remaining term of the agreement while HQ was ordered to pay us for future fuel reimbursements for the remaining term of the agreement. We have recorded an accrual in the amount of $300,000 for the liability and resulting expense in connection with the arbitration.

During the year ended December 31, 2010, the PUCO conducted audits of NEO and Orwell’s rates as filed from September 2007 through August 2009 and January 2008 through June 2010, respectively. The PUCO provided the primary audit findings during the fourth quarter of 2010, taking the position that NEO had not included approximately $1,050,000 of costs and Orwell included an excess of approximately $1,100,000 of costs in the filings under audit. In accordance with ASC 980, Regulated Operations, the Company recorded an adjustment of $1,050,000 and ($1,100,000) during the year ended December 31, 2010 for NEO and Orwell, respectively. On October 26, 2011, the PUCO adopted and approved a Joint Stipulation that finalizes the adjustments for NEO and Orwell to approximately $1,100,000 and ($964,000), respectively. However, the Joint Stipulation modified the refund period for Orwell to one year as compared to two years as originally identified. The Company considers the modification to be material and is attempting to have the PUCO change the payback period. The Company recorded the difference between the original estimates and the amounts approved in the Joint Stipulation during the three months ended September 30, 2011.

During the three months ended September 30, 2011, the PUCO conducted an audit of Brainard’s rates as filed from July 2009 through June 2011. The PUCO provided findings that Brainard collected excess gas costs of approximately $104,000. The Company agrees that excess gas costs were collected, but only in the amount of approximately $48,000. The Company and the PUCO plan to schedule a hearing to review the difference.

Net income for the three months ended September 30, 2011 was $130,000 compared with a net loss of $45,000 for the same period in 2010, an increase of $175,000. Net income for the nine months ended September 30, 2011 was $4,765,000 compared with $4,084,000 for the same period in 2010, an increase of $681,000 or 17%.

The natural gas segment net loss for the three months ended September 30, 2011 was $463,000 compared with $326,000 for the same period in 2010, an increase of $137,000 or 42%. The increased loss was due primarily to the accrual of the liability and resulting expense of $300,000 related to the conclusion of the arbitration case in a contract dispute with a large customer in our Maine operation. Net income for the nine months ended September 30, 2011 was $4,155,000 compared with $3,654,000 for the same period in 2010, an increase of $501,000 or 14%. Increased sales volumes driven by continued customer growth and colder weather in the majority of our service areas led to the results for the nine months ended September 30, 2011.

The marketing and production segment net income for the three months ended September 30, 2011 was $49,000 compared with $275,000 for the same period in 2010, a decrease of $226,000 or 82%. The 2011 and 2010 periods each included a tax benefit from

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the true-up to the prior year’s tax return of $9,000 and $254,000, respectively, causing the decrease in net income for the 2011 period. Net income for the nine months ended September 30, 2011 was $158,000 compared with $309,000 for the same period in 2010, a decrease of $151,000 or 49%. Lower sales volumes, due to the widening of the unfavorable differential between the AECO and CIG Rockies natural gas indices, and lower production from our natural gas wells caused lower gross margin for the nine months ended September 30, 2011. In addition, the difference in tax benefits related to true-ups of prior year’s tax returns discussed above contributed to the decrease in net income. These decreases were offset by an expense of $440,000 included in the nine months ended September 30, 2010 related to the conclusion of the lawsuit with Shelby Gas Association.

The pipeline operations segment net income for the three months ended September 30, 2011 was $47,000 compared with $83,000 for the same period in 2010, a decrease of $36,000 or 43%. Net income for the nine months ended September 30, 2011 was $112,000 compared with $143,000 for the same period in 2010, a decrease of $31,000 or 22%.

The propane operations segment net income for the three and nine months ended September 30, 2011 was $562,000 compared with $0 for the same periods in 2010 due to the propane operations starting during the three months ended September 30, 2011.

The corporate and other segment net loss for the three months ended September 30, 2011 was $65,000 compared with $76,000 for the same period in 2010, a decrease of $11,000 or 14%. Net loss for the nine months ended September 30, 2011 was $222,000 compared with $22,000 for the same period in 2010, an increase of $200,000 or 909%. The 2010 periods included dividends and gains on the sale of marketable securities that did not occur in the 2011 periods.

RESULTS OF CONSOLIDATED OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the period ended December 31, 2010. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of September 30, 2011 and for the three and nine month periods ended September 30, 2011. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Net Income — Net income for the three months ended September 30, 2011 was $130,000 or $0.02 per diluted share, compared to a net loss of $45,000 or $0.01 per diluted share for the three months ended September 30, 2010, an increase of $175,000. Net loss from our natural gas operations increased by $137,000, due primarily to the liability and resulting expense of $300,000 recorded as the result of the conclusion of the arbitration case in a contract dispute with a large customer in our Maine operation. Net income from our gas marketing and production operations decreased by $226,000. The 2011 and 2010 periods each included a tax benefit from the true-up to the prior year’s tax return of $9,000 and $254,000, respectively, causing the decrease in net income for the 2011 period. Net income from our pipeline operations decreased by $36,000. Net income from our recently acquired propane operations was by $562,000. The income is primarily the result of the pre-tax gain of $1,055,000 on the net assets purchased. Net loss from our corporate and other operations decreased by $11,000 as the 2010 period included dividends and gains on the sale of marketable securities that did not occur in 2011. Our secondary public offering in November 2010 resulted in 2.075 million additional shares outstanding and leads to the dilutive effect on the per share amounts in 2011 compared to 2010.

Revenues — Revenues increased by $1.4 million to $12,321,000 for the three months ended September 30, 2011 compared to $10,902,000 for the same period in 2010. The increase was primarily attributable to a natural gas revenue increase of $190,000 due to increased customers in our Maine and North Carolina markets, an increase of $218,000 in the revenue from our marketing and production operation due to increased customers, and revenue for the first time from our propane operations segment of $1,010,000.

Gross Margin — Gross margin increased by $593,000 to $6,311,000 for the three months ended September 30, 2011 compared to $5,718,000 for the same period in 2010. Our natural gas operation’s margins increased $445,000, due to the increased customers. Gross margin from our marketing and production operations increased $13,000, and our propane operations returned gross margin of $135,000.

Operating Expenses — Operating expenses, other than cost of sales, increased by $629,000 to $6,903,000 for the three months ended September 30, 2011 compared to $6,274,000 for the same period in 2010. The newly formed propane operations segment attributed $290,000 while the remainder is a result of increases in administrative expenses including salaries and professional services, and increases in depreciation due to the increases in capital expenditures make up the remaining difference.

Other Income, net — Other income decreased by $527,000 to a loss of $262,000 for the three months ended September 30, 2011 compared to income of $265,000 for the same period in 2010. The decrease is a result of the following: (1) other income from our

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natural gas operations decreased by $457,000 primarily due the accrual of the liability and resulting expense of $300,000 as the result of the conclusion of the arbitration case related to a contract dispute with a large customer in our Maine operation; and (2) our corporate and other segment posted other expense of $33,000 in 2011 compared to other income in 2010 of $39,000, resulting in an increase in costs of $72,000.

Interest Expense — Interest expense increased by $60,000 to $552,000 for the three months ended September 30, 2011 compared to $492,000 for the same period in 2010.

Gain on Bargain Purchase — The gain on bargain purchase is the result of the pre-tax gain of $1,055,000 due to the purchase of Independence Oil & LP Gas, Inc.

Income Tax Benefit (Expense) — Income tax benefit decreased by $259,000 to $482,000 for the three months ended September 30, 2011 compared to $741,000 for the same period in 2010. The 2011 and 2010 periods each included a tax benefit from the true-up to the prior year’s tax return of $326,000 and $506,000, respectively, accounting for $180,000 of the decrease. The remainder is due to the decrease in the pre-tax loss in the three months ended September 30, 2011 as compared to the same period in 2010.

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Net Income — Net income for the nine months ended September 30, 2011 was $4,765,000 or $0.58 per diluted share, compared to $4,084,000 million or $0.68 per diluted share for the nine months ended September 30, 2010, an increase of $681,000. Net income from our natural gas operations increased by $501,000, due primarily to customer growth and colder weather in most of our service territories, which led to increased revenues and gross margin. Net income from our gas marketing and production operations decreased by $151,000 as a result of lower revenues and gross margin and the difference in tax benefits related to true-ups of the prior years’ tax returns, all discussed below. These decreases were offset by an expense of $440,000 included in the nine months ended September 30, 2010 related to the conclusion of the lawsuit with Shelby Gas Association. Net income from our pipeline operations decreased by $31,000. Our propane operations were acquired during the three months ended September 30, 2011 and returned net income of $562,000, primarily the result of the pre-tax gain of $1,055,000 on the net assets purchased. Net loss from our corporate and other operations increased by $200,000 as the 2010 period included dividends and gains on the sale of marketable securities that did not occur in 2011. Our secondary public offering in November 2010 resulted in 2.075 million additional shares outstanding and leads to the dilutive effect on the per share amounts in 2011 compared to 2010.

Revenues — Revenues increased by $8.9 million to $71,145,000 for the nine months ended September 30, 2011 compared to $62,291,000 for the same period in 2010. The increase was primarily attributable to a natural gas revenue increase of approximately $9,317,000 due to increased customers and colder weather in the majority of the markets we serve and revenue for the first time from our propane operations segment of $1,010,000, partly offset by a decrease in our marketing and production operation’s revenue of $1,468,000 caused by a reduction in sales due to the widening of the unfavorable differential between the AECO and CIG Rockies natural gas indices and lower production volumes from our natural gas wells.

Gross Margin — Gross margin increased by $2.7 million to $28,236,000 for the nine months ended September 30, 2011 compared to $25,513,000 for the same period in 2010. Our natural gas operation’s margins increased $2,820,000, due to the increased customers and colder weather and our propane operations returned gross margin of $135,000. Gross margin from our marketing and production operations decreased $227,000, due to the reduced sales and the lower prices received and lower volumes produced from our natural gas wells.

Operating Expenses — Operating expenses, other than cost of sales, increased by $1.8 million to $20,667,000 for the nine months ended September 30, 2011 compared to $18,862,000 for the same period in 2010. Operating expenses in natural gas operations increased by $1,448,000 due primarily to increases in corporate expenses not included in the corporate and other segment of $384,000, professional outside services of $317,000, depreciation due to the increases in capital expenditures of $229,000, payroll of $121,000 and expenses associated with the operation of the Spelman Pipeline of $108,000. Propane operations incurred operating expenses of $290,000 and the corporate and other segment increased by $98,000.

Other Income, net — Other income decreased by $424,000 to a loss of $30,000 for the nine months ended September 30, 2011 compared to income of $394,000 for the same period in 2010. The decrease is a result of the following: (1) other income from natural gas operations decreased by $607,000 due primarily to decreased revenue from service sales and the accrual of liability and expense of $300,000 related to the conclusion of the arbitration case in a contract dispute with a large customer in our Maine operation; (2) the 2010 period included expense from the conclusion of the lawsuit with Shelby Gas Association of $440,000; and (3) our corporate and other segment posted other expense of $128,000 in 2011 compared to other income in 2010 of $132,000, resulting in an increase in costs of $260,000.

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Interest Expense — Interest expense decreased by $156,000 to $1,458,000 for the nine months ended September 30, 2011 compared to $1,614,000 for the same period in 2010. The Ohio Companies repaid a portion of their debt in November 2010 and did not enter into new financing arrangements until May 2011 resulting in less average debt outstanding in the nine months ended September 30, 2011 which resulted in lower interest expense.

Gain on Bargain Purchase — The gain on bargain purchase is the result of the pre-tax gain of $1,055,000 due to the purchase of Independence Oil & LP Gas, Inc.

Income Tax Expense — Income tax expense increased by $974,000 to $2,285,000 for the nine months ended September 30, 2011 compared to $1,311,000 for the same period in 2010. The 2011 and 2010 periods each included a tax benefit from the true-up to the prior year’s tax return of $326,000 and $506,000, respectively, accounting for $180,000 of the increase. The nine months ended September 30, 2010 included an income tax benefit of $131,000 due to a change in the effective state tax rate for 2010 related to the acquisition of the Ohio Companies. The remaining increase is due primarily to the increase in pre-tax income in 2011 compared to 2010.

Net Income by Segment and Service Area

The components of net income (loss) for 2011 and 2010 are:

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2011			2010			2011			2010
Natural Gas Operations
Energy West Montana (MT)	$	(79	)	$	(408	)	$	1,067		$	644
Energy West Wyoming (WY)		(79	)		(83	)		234			161
Frontier Natural Gas (NC)		306			888			1,231			1,864
Bangor Gas (ME)		(153	)		(28	)		989			743
Ohio Companies (OH)		(458	)		(695	)		634			242
Total Natural Gas Operations	$	(463	)	$	(326	)	$	4,155		$	3,654
Marketing & Production Operations		49			274			158			309
Pipeline Operations		47			83			112			143
Propane Operations		562			—			562			—
		195			31			4,987			4,106
Corporate & Other		(65	)		(76	)		(222	)		(22	)
Consolidated Net Income (Loss)	$	130		$	(45	)	$	4,765		$	4,084

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The following highlights our results by operating segments:

NATURAL GAS OPERATIONS

Income Statement

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2011			2010			2011			2010
Natural Gas Operations
Operating revenues	$	10,349		$	10,159		$	65,664		$	56,347
Gas Purchased		4,548			4,803			38,841			32,344
Gross Margin		5,801			5,356			26,823			24,003
Operating expenses		6,335			6,035			19,569			18,121
Operating income (loss)		(534	)		(679	)		7,254			5,882
Other income (loss)		(230	)		228			97			704
Income before interest and taxes		(764	)		(451	)		7,351			6,586
Interest expense		(526	)		(468	)		(1,379	)		(1,545	)
Income before income taxes		(1,290	)		(919	)		5,972			5,041
Income tax benefit (expense)		827			593			(1,817	)		(1,387	)
Net Income (Loss)	$	(463	)	$	(326	)	$	4,155		$	3,654

Operating Revenues

	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2011		2010		2011		2010
Full Service Distribution Revenues
Residential	$	3,487	$	4,029	$	29,300	$	25,955
Commercial		4,602		4,076		27,913		22,517
Industrial		231		199		718		609
Other		43		9		122		225
Total full service distribution		8,363		8,313		58,053		49,306
Transportation		1,698		1,558		6,748		6,178
Bucksport		288		288		863		863
Total operating revenues	$	10,349	$	10,159	$	65,664	$	56,347

Utility Throughput

	Three Months Ended September 30,				Nine Months Ended September 30,
(in million cubic feet (MMcf))	2011		2010		2011		2010
Full Service Distribution
Residential		281		326		3,184		2,816
Commercial		555		432		3,384		2,699
Industrial		37		31		121		113
Total full service		873		789		6,689		5,628
Transportation		1,884		1,468		6,452		5,199
Bucksport		3,604		3,636		10,393		10,726
Total Volumes		6,361		5,893		23,534		21,553

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Degree Days

			Three Months Ended September 30,				Percent (Warmer) Colder 2011 Compared to
	Normal		2011		2010		Normal			2010
Great Falls, MT		375		176		437		(53.07	%)		(59.73	%)
Cody, WY		257		112		229		(56.42	%)		(51.09	%)
Bangor, ME		239		134		153		(43.93	%)		(12.42	%)
Elkin, NC		30		60		22		100.00	%		172.73	%
Youngstown, OH		178		121		137		(32.02	%)		(11.68	%)

			Nine Months Ended      September  30,				Percent (Warmer) Colder   2011 Compared to
	Normal		2011		2010		Normal			2010
Great Falls, MT		4,824		5,336		4,772		10.61	%		11.82	%
Cody, WY		4,359		4,797		4,577		10.05	%		4.81	%
Bangor, ME		5,046		4,994		4,058		(1.03	%)		23.07	%
Elkin, NC		2,484		2,474		2,298		(0.40	%)		7.66	%
Youngstown, OH		4,299		4,140		3,611		(3.70	%)		14.65	%

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Revenues and Gross Margin

Revenues increased by $190,000 to $10,349,000 for the three months ended September 30, 2011 compared to $10,159,000 for the same period in 2010. This increase is the result of the following factors:

1) Revenue from our Montana and Wyoming markets decreased $216,000 on a volume decrease of 5 MMcf in the three months ended September 30, 2011 compared to the three months ended September 30, 2010.

2) Revenue from our Maine and North Carolina markets increased by approximately $451,000 on a volume increase from full service and transportation customers of 5 MMcf in 2011 compared to 2010.

3) Revenues from our Ohio market decreased $46,000 on a volume increase of 76 MMcf to full service and transportation customers compared to 2010.

Gas purchased decreased by $255,000 to $4,548,000 for the three months ended September 30, 2011 compared to $4,803,000 for the same period in 2010. The decrease is due primarily to adjustments related to the conclusion of the PUCO gas cost recovery audits of NEO and Orwell. The adjustments were decreases of $50,000 and $136,000, respectively. Our gas costs are passed on dollar for dollar to our customers under tariffs regulated by the various public utility commissions in the jurisdictions in which we operate. Our gas costs are subject to periodic audits and prudency reviews in all of these jurisdictions.

Gross margin increased by $445,000 to $5,801,000 for the three months ended September 30, 2011 compared to $5,356,000 for the same period in 2010. The increase is primary the result of additional customers. Maine and North Carolina accounted for $244,000 of the increase and Ohio for $358,000, offset by a decrease in Montana and Wyoming of $157,000.

Earnings

The Natural Gas Operations segment’s loss for the three months ended September 30, 2011 was $463,000, or $0.057 per diluted share, compared to $326,000 or $0.054 per diluted share for the three months ended September 30, 2010.

Operating expenses increased by $300,000 to $6,335,000 for the three months ended September 30, 2011 compared to $6,035,000 for the same period in 2010. The increase is due to increases in administrative expenses including salaries and professional services, and increases in depreciation due to the increases in capital expenditures.

Other Income (Loss) decreased by $458,000 to a loss of $230,000 for the three months ended September 30, 2011 compared to income of $228,000 for the same period in 2010. The conclusion of the arbitration case related to a contract dispute with a large customer in our Maine operation resulted in the accrual of a $300,000 liability and the resulting expense.

Interest expense increased by $58,000 to $526,000 for the three months ended September 30, 2011 compared to $468,000 for the same period in 2010.

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Income tax benefit (expense) increased by $234,000 to $827,000 for the three months ended September 30, 2011 compared to $593,000 for the same period in 2010. The increase is due primarily to the increase in the pre-tax loss in 2011 compared to 2010. In addition, the 2011 and 2010 periods included a tax benefit from the true-up to the prior year’s tax return of $333,000 and $311,000, respectively.

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Revenues and Gross Margin

Revenues increased by $9.3 million to $65,664,000 for the nine months ended September 30, 2011 compared to $56,347,000 for the same period in 2010. This increase is the result of the following factors:

1) Revenue from our Montana and Wyoming markets increased $3,106,000 on a volume increase of 443 MMcf in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, due to colder weather in 2011 than in 2010.

2) Revenue from our Maine and North Carolina markets increased by $2,634,000 on a volume increase from full service and transportation customers of 407 MMcf in 2011 compared to 2010, caused by increased customer count in both markets and colder weather in our Maine market in the 2011 period.

3) Revenues from our Ohio markets increased $3,576,000 on a volume increase of 1,464 MMcf, due to colder weather in 2011 than in 2010.

Gas purchased increased by $6.5 million to $38,841,000 for the nine months ended September 30, 2011 compared to $32,344,000 for the same period in 2010. The increase is due primarily to the increase in sales volumes discussed above. Our gas costs are passed on dollar for dollar to our customers under tariffs regulated by the various public utility commissions in the jurisdictions in which we operate. Our gas costs are subject to periodic audits and prudency reviews in all of these jurisdictions.

Gross margin increased by $2.8 million to $26,823,000 for the nine months ended September 30, 2011 compared to $24,003,000 for the same period in 2010. The increased customer count and cold weather discussed above are the primary drivers of the increase. Maine and North Carolina accounted for $1,292,000 of the increase, Ohio for $1,165,000 and Montana and Wyoming for $362,000.

Earnings

The Natural Gas Operations segment’s earnings for the nine months ended September 30, 2011 were $4,155,000, or $0.509 per diluted share, compared to earnings of $3,654,000 or $0.60 per diluted share for the nine months ended September 30, 2010.

Operating expenses increased by $1.4 million to $19,569,000 for the nine months ended September 30, 2011 compared to $18,121,000 for the same period in 2010. The increase is primarily due to increases in corporate expenses not included in the corporate and other segment of $384,000, professional outside services of $317,000, depreciation due to the increases in capital expenditures of $229,000, and payroll of $121,000. In addition, expenses associated with the operation of the Spelman Pipeline totaled $108,000.

Other Income decreased by $607,000 to $97,000 for the nine months ended September 30, 2011 compared to $704,000 for the same period in 2010. The conclusion of the arbitration case related to a contract dispute with a large customer in our Maine operation resulted in the accrual of a $300,000 liability and the resulting expense. The remaining decrease is due to decreased revenue from service sales in our Montana and Ohio markets.

Interest expense decreased by $166,000 to $1,379,000 for the nine months ended September 30, 2011 compared to $1,545,000 for the same period in 2010. The Ohio Companies had less average debt outstanding in the nine months ended September 30, 2011 because the debt that was repaid in November 2010 was not refinanced until May 2, 2011, resulting in lower interest expense.

Income tax expense increased by $430,000 to $1,817,000 for the nine months ended September 30, 2011 compared to $1,387,000 for the same period in 2010. The increase is due primarily to the increase in pre-tax income in 2011 compared to 2010 and the change in the effective state tax rate for 2010 related to the acquisition of the Ohio Companies, offset by a increase in the tax benefit received from the true-up to the prior year’s tax return as the 2011 and 2010 periods each included a tax benefit from the true-up to the prior year’s tax return of $333,000 and $311,000, respectively.

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MARKETING AND PRODUCTION OPERATIONS

Income Statement

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2011			2010			2011			2010
Marketing and Production Operations
Operating revenues	$	856		$	638		$	4,157		$	5,625
Gas Purchased		586			381			3,194			4,435
Gross Margin		270			257			963			1,190
Operating expenses		188			205			575			580
Operating income		82			52			388			610
Other expense		(2	)		(4	)		(85	)		(476	)
Income before interest and taxes		80			48			303			134
Interest expense		(23	)		(17	)		(68	)		(52	)
Income before income taxes		57			31			235			82
Income tax benefit (expense)		(8	)		243			(77	)		227
Net Income	$	49		$	274		$	158		$	309

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Revenues and Gross Margin

Revenues increased by approximately $218,000 to $856,000 for the three months ended September 30, 2011 compared to $638,000 for the same period in 2010. $199,000 of this increase is due to increased customers in our marketing operation, leading to higher sales volumes and revenue. Production revenues increased by $19,000 due to a higher price received for volumes produced.

Gross margin increased by $13,000 to $270,000 for the three months ended September 30, 2011 compared to $257,000 for the same period in 2010. Gross margin from gas production increased by $55,000, offset by a decrease from our marketing operation of $43,000.

Earnings

The Marketing and Production segment’s earnings for the three months ended September 30, 2011 were $49,000, or $0.006 per diluted share, compared to earnings of $275,000 or $0.045 per diluted share for the three months ended September 30, 2010.

Operating expenses decreased by $17,000 to $188,000 for the three months ended September 30, 2011 compared to $205,000 for the same period in 2010.

Other expense decreased by $2,000 to $2,000 for the three months ended September 30, 2011 compared to $4,000 for the same period in 2010. The loss from unconsolidated affiliate decreased by $1,000 for the three months ended September 30, 2011 compared to the same period in 2010.

Income tax benefit (expense) decreased by $251,000 to $8,000 for the three months ended September 30, 2011 compared to a benefit of $243,000 for the same period in 2010. The 2011 and 2010 periods each included a tax benefit from the true-up to the prior year’s tax return of $9,000 and $254,000, respectively.

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Revenues and Gross Margin

Revenues decreased by $1.5 million to $4,157,000 for the nine months ended September 30, 2011 compared to $5,625,000 for the same period in 2010. $1,339,000 is caused by the widening of the unfavorable differential between the AECO and CIG Rockies natural gas indexes, leading to lower sales in our marketing operation in the first half of 2011. Production revenues decreased by $129,000 due to lower volumes produced and a lower price received for these volumes.

Gross margin decreased by $227,000 to $963,000 for the nine months ended September 30, 2011 compared to $1,190,000 for the same period in 2010. Gross margin from our marketing operation decreased $195,000 due to lower sales volumes in our marketing operation and gross margin from gas production decreased by $31,000.

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Earnings

The Marketing and Production segment’s earnings for the nine months ended September 30, 2011 were $158,000, or $0.019 per diluted share, compared to earnings of $309,000 or $0.05 per diluted share for the nine months ended September 30, 2010.

Operating expenses decreased by $5,000 to $575,000 for the nine months ended September 30, 2011 compared to $580,000 for the same period in 2010.

Other expenses decreased by $391,000 to $85,000 for the nine months ended September 30, 2011 compared to $476,000 for the same period in 2010. The loss from unconsolidated affiliate increased by $50,000 for the nine months ended September 30, 2011 compared to the same period in 2010. The nine months ended September 30, 2010 included an expense of $440,000 related to the conclusion of the lawsuit with Shelby Gas Association.

Income tax benefit (expense) increased by $304,000 to $77,000 for the nine months ended September 30, 2011 compared to $227,000 for the same period in 2010. The 2011 and 2010 periods each included a tax benefit from the true-up to the prior year’s tax return of $9,000 and $254,000, respectively.

PIPELINE OPERATIONS

Income Statement

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2011			2010			2011			2010
Pipeline Operations
Operating revenues	$	106		$	104		$	315		$	319
Gas Purchased		—			—			—			—
Gross Margin		106			104			315			319
Operating expenses		30			33			126			150
Operating income		76			71			189			169
Other income		—			—			—			—
Income before interest and taxes		76			71			189			169
Interest (expense)		(2	)		(8	)		(9	)		(17	)
Income before income taxes		74			63			180			152
Income tax (expense)		(27	)		20			(68	)		(9	)
Net Income	$	47		$	83		$	112		$	143

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Net income decreased by $36,000 to $47,000 for the three months ended September 30, 2011 compared to $83,000 for the same period in 2010. The overall impact of the results of our pipeline operations was not material to our results of consolidated operations.

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Net income decreased by $31,000 to $112,000 for the nine months ended September 30, 2011 compared to $143,000 for the same period in 2010. The overall impact of the results of our pipeline operations was not material to our results of consolidated operations.

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PROPANE OPERATIONS

Income Statement

	Three Months Ended September 30,					Nine Months Ended September 30,
($ in thousands)	2011			2010		2011			2010
Propane Operations
Operating revenues	$	1,010		$	—	$	1,010		$	—
Propane Purchased		875			—		875			—
Gross Margin		135			—		135			—
Operating expenses		290			—		290			—
Operating income		(155	)		—		(155	)		—
Other income		1,056			—		1,056			—
Income before interest and taxes		901			—		901			—
Interest (expense)		—			—		—			—
Income before income taxes		901			—		901			—
Income tax (expense)		(339	)		—		(339	)		—
Net Income	$	562		$	—	$	562		$	—

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Net income is $562,000, or $0.07 per diluted share for the three months ended September 30, 2011. The propane operations were acquired on August 1, 2011 and there are no comparative amounts for 2010. Included in the 2011 results in other income is a pre-tax gain on the bargain purchase of the assets of Independence Oil & LP Gas, Inc. of $1,055,000.

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Net income is approximately $562,000, or $0.07 per diluted share for the nine months ended September 30, 2011. The propane operations were acquired on August 1, 2011 and there are no comparative amounts for 2010. Included in the 2011 results in other income is a pre-tax gain on the bargain purchase of the assets of Independence Oil & LP Gas, Inc. of $1,055,000.

CORPORATE AND OTHER OPERATIONS

Our Corporate and Other reporting segment is intended primarily to encompass the results of corporate acquisitions and other equity transactions, as well as certain other income and expense items associated with Gas Natural’s holding company functions. Therefore, it does not have standard revenues, gas purchase costs, or gross margin.

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Income Statement

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2011			2010			2011			2010
Corporate and Other
Operating revenues	$	—		$	—		$	—		$	—
Gas Purchased		—			—			—			—
Gross Margin		—			—			—			—
Operating expenses		61			—			109			11
Operating loss		(61	)		—			(109	)		(11	)
Other (expense) income		(33	)		39			(128	)		131
Income before interest and taxes		(94	)		39			(237	)		120
Interest expense		(1	)		—			(1	)		—
Income (Loss) before income taxes		(95	)		39			(238	)		120
Income tax benefit (expense)		30			(115	)		16			(142	)
Net Loss	$	(65	)	$	(76	)	$	(222	)	$	(22	)

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Results of corporate and other operations for the three months ended September 30, 2011 include administrative costs of $61,000, costs related to acquisition activities of $35,000, interest expense of $1,000, offset by interest income of $2,000 and income tax benefit of $30,000, for a net loss of $65,000.

Results of corporate and other operations for the three months ended September 30, 2010 include dividends from marketable securities of $14,000, interest income of $11,000, and gains on the sale of marketable equity securities of $77,000 offset by costs related to acquisition activities of $63,000. The related income tax expense combined with the income tax expense resulting from the true-up of income tax expense to our filed 2009 income tax return totals $115,000. The end result is a net loss of $76,000.

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Results of corporate and other operations for the nine months ended September 30, 2011 include administrative costs of $109,000, costs related to acquisition activities of $136,000, and interest expense of $1,000, offset by interest income of $8,000 and income tax benefit of $16,000, for a net loss of $222,000.

Results of corporate and other operations for the nine months ended September 30, 2010 included dividends from marketable securities of $133,000, interest income of $15,000, and gains on the sale of marketable equity securities of $159,000, offset by administrative costs of $11,000, and costs related to acquisition activities of $175,000. The related income tax expense combined with income tax expense of $101,000 resulting from the true-up of income tax expense to our filed 2009 income tax return totals $142,000. A net loss of $22,000 is the result.

Sources and Uses of Cash

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

Our ability to maintain liquidity depends upon our credit facility with Bank of America, shown as line of credit on the accompanying balance sheets. Our use of the Bank of America revolving line of credit was $17.6 million and $18.1 million at September 30, 2011 and December 31, 2010, respectively.

We made capital expenditures for continuing operations of $15.0 million and $4.0 million for the nine months ended September 30, 2011 and 2010, respectively, including $3.3 million related to the Spelman Pipeline acquisition in April 2011. We finance our capital expenditures on an interim basis by the use of our operating cash flow and use of the Bank of America revolving line of credit.

We periodically repay our short-term borrowings under the Bank of America revolving line of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $31.4 million and $22.9 million at September 30, 2011 and December 31, 2010, respectively, including the amount due within one year.

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Cash, excluding restricted cash, decreased to $10.5 million at September 30, 2011, compared to $13.0 million at December 31, 2010.

	For the Nine Months Ended September 30,
	2011			2010
Cash provided by operating activities	$	12,546,069		$	6,868,743
Cash provided by (used in) investing activities		(18,254,510	)		134,125
Cash provided by (used in) financing activities		3,171,959			(3,371,609	)
Increase (decrease) in cash	$	(2,536,482	)	$	3,631,259

OPERATING CASH FLOW

For the nine months ended September 30, 2011, cash provided by operating activities increased by $5.7 million as compared to the nine months ended September 30, 2010. Major items affecting operating cash included a decrease in accounts receivable collections of $5.2 million, a $3.8 million increase in collections of recoverable costs of gas, a $2.9 million increase in unbilled revenue, a $1.9 million increase in net deferred tax assets, and a $1.6 million decrease in payments on accounts payable.

INVESTING CASH FLOW

For the nine months ended September 30, 2011, cash used in investing activities increased by $18.4 million as compared to the nine months ended September 30, 2010, primarily due to increased construction expenditures of $11.0 million, including expenditures of $3.3 million in 2011 for the acquisition of Spelman Pipeline. Other major changes include $1.3 million related to acquisition of the net assets of Independence Oil & LP Gas, Inc. in August 2011, expenditures in 2011 related to restricted cash funds of $1.8 million, and a decrease in the proceeds from sale of marketable securities of $4.2 million. The restricted cash funds were created at the direction of the PUCO and are set aside for capital expenditures by the Ohio Companies in 2011.

Capital Expenditures

Our capital expenditures for continuing operations totaled $15.0 million and $4.0 million for the nine months ended September 30, 2011 and 2010, respectively, including $3.3 million related to the Spelman Pipeline acquisition in April 2011. We finance our capital expenditures on an interim basis by the use of our operating cash flow and use of the Bank of America revolving line of credit.

The majority of our capital spending is focused on the growth of our Natural Gas Operations segment. We conduct ongoing construction activities in all of our utility service areas in order to support expansion, maintenance, and enhancement of our gas pipeline systems. We are actively expanding our systems in North Carolina and Maine to meet the high customer interest in natural gas service in those two service areas.

Estimated Capital Expenditures

The table below details our capital expenditures for the nine months ended September 30, 2011 and 2010 and provides an estimate of future cash requirements for capital expenditures:

					Remaining Cash
	Nine Months ended September 30,				Requirements through
($ in thousands)	2011		2010		December 31, 2011
Natural Gas Operations	$	14,961	$	3,920	$	3,715
Marketing and Production		—		—		—
Pipeline Operations		—		37		114
Corporate and Other		7		—		86
Total Capital Expenditures	$	14,968	$	3,957	$	3,915

FINANCING CASH FLOW

For the nine months ended September 30, 2011, cash provided by financing activities increased by $6.5 million as compared with the nine months ended September 30, 2010. The closing of the SunLife transaction increased proceeds from long term debt by $18.3 million, along with a corresponding increase in repayments of notes payable to pay off existing debt of $8.9 million. The SunLife transaction required debt service reserve accounts to be created in the amount of $950,000 to cover one year of interest payments.

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Other items include an increase of $463,000 in debt issuance costs, a $842,000 increase in dividends paid as a result of the secondary offering in November 2010 and a decrease in the net line of credit proceeds of $500,000.

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 balance sheets. Our use of the Bank of America revolving line of credit was $17.6 million and $18.1 million at September 30, 2011 and December 31, 2010, respectively. We periodically repay our short-term borrowings under the Bank of America revolving line of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $31.4 million and $22.9 million at September 30, 2011, and December 31, 2010, respectively, including the amount due within one year.

Secondary Public Offering

In November 2010, Gas Natural completed a 2.415 million share secondary public offering. Of these shares, 340,000 were selling shareholder shares and 2.075 million were primary shares. The primary shares sold by Gas Natural include a full exercise of the over-allotment option. Gas Natural did not receive any of the proceeds from the selling shareholder shares. Net proceeds to Gas Natural were approximately $19.0 million after sales concessions, underwriting expenses, and deal expenses. The primary uses of proceeds are for investment in utility operations as we continue to expand our organic footprint. Additionally, proceeds were used to repay debt of our Ohio Companies.

In November 2010, NEO repaid upon maturity the Citizens Bank Line of Credit in the amount of $2.1 million and Orwell repaid upon maturity the Huntington Bank Line of Credit in the amount of $1.5 million and the Huntington Bank Term Loan in the amount of $4.1 million. These notes were secured by all assets of the Ohio Companies, as well as a personal guarantee from our chairman and CEO. These three instruments matured at the end of November 2010. These notes were repaid and extinguished with no ability to redraw at this time. In addition to these notes that had a pending maturity date, a related party demand note was also repaid in November 2010. Lightning Pipeline Company, the intermediate holding company for Orwell, had a $2.0 million unsecured demand note payable with our chairman, which was repaid in November of 2010, including accrued interest.

Citizens Bank Term Loans

In connection with the acquisition of the Ohio Companies, NEO and Great Plains each entered modifications/amendments to its credit facility with Citizens Bank (the “Citizens Credit Facility”). The Citizens Credit Facility consisted of a revolving line of credit and term loan to NEO, and two other term loans to Great Plains respectively. Each amendment/modification was initially effective as of December 1, 2009, but was later modified to be effective as of January 5, 2010. Gas Natural guaranteed each loan. Mr. Osborne guaranteed each loan both individually and as trustee of the Richard M. Osborne Trust, and Great Plains guaranteed NEO’s revolving line of credit and term loans.

The Ohio Companies had term loans with Citizens Bank in the aggregate amount of $11.3 million. Each term note had a maturity date of July 1, 2013 and bore interest at an annual rate of 30-day LIBOR plus 400 basis points with an interest rate floor of 5.00% per annum. For the three and nine months ended September 30, 2011 the weighted average interest rate on the term loans was 5%, resulting in $0 and $156,022 of interest expense, respectively. For the three and nine months ended September 30, 2010 the weighted average interest rate on the term loans was 5%, resulting in $123,601 and $357,281 of interest expense, respectively.

The term loans were paid off on May 3, 2011.

The following discussion describes our credit facilities as of September 30, 2011.

SunLife Assurance Company of Canada

On May 2, 2011, the Company and its Ohio subsidiaries, NEO, Orwell and Brainard (together the “Issuers”), issued $15.334 million of 5.38% Senior Secured Guaranteed Fixed Rate Notes due June 1, 2017 (“Fixed Rate Note”). Additionally, Great Plains issued $3.0 million of Senior Secured Guaranteed Floating Rate Notes due May 3, 2014 (“Floating Rate Note”). Both notes were placed with SunLife Assurance Company of Canada (“SunLife”). Approximately $636,000 was incurred related to the debt issuance which was capitalized and are being amortized over the life of the note.

The Fixed Rate Note, in the amount of $15.334 million, is a joint obligation of the Issuers, and is guaranteed by the Company, Lightning Pipeline and Great Plains (together with the Issuers, “the Fixed Rate Obligors”). This note received approval from the

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PUCO on March 30, 2011. The note is governed by a Note Purchase Agreement (“NPA”). Concurrent with the funding and closing of this transaction, which occurred on May 3, 2011, the Fixed Rate Obligors signed an amended NPA that is substantially the same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is subject to a 50 basis point make-whole premium.

The Floating Rate Note, in the amount of $3.0 million, is an obligation of Great Plains and is guaranteed by the Company (together, “the Floating Rate Obligors”). The note is priced at a fixed spread of 385 basis points over three month LIBOR. Pricing for this note will reset on a quarterly basis to the then current yield of three month Libor. The note is governed by a NPA. Concurrent with the funding of this transaction, which occurred on May 3, 2011, the Floating Rate Obligors signed an amended NPA that is substantially the same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is at par.

The use of proceeds for both notes extinguished existing amortizing bank debt and other existing indebtedness, funded $3.4 million for the 2011 capital program for Orwell and NEO, established two debt service reserve accounts, and replenished the Company’s treasuries for the previously announced repayment of maturing bank debt and transaction expenses. The capital program funds and debt service reserve accounts are in interest bearing accounts and included in restricted cash.

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

For the three and nine months ended September 30, 2011, the weighted average interest rate on the Fixed Rate Note was 5.38% resulting in $206,242 and $343,737 of interest expense, respectively. For the three and nine months ended September 30, 2011, the weighted average interest rate on the Floating Rate Note was 4.11% resulting in $51,450 of interest expense.

The notes carry a 60% debt-to-capitalization financial covenant on a consolidated basis for Ohio, as well as, a 2.0x interest coverage test based on a trailing twelve-month basis. Additional covenants customary for asset sales and purchases, additional indebtedness, dividends, change of control and other matters are also included.

Bank of America

Energy West has a revolving credit facility that includes an annual commitment fee equal to 0.20% of the unused portion of the facility and interest on amounts outstanding at the monthly London Interbank Offered Rate (“LIBOR”) plus 120 to 145 basis points for interest periods selected by us.

On November 2, 2011, the Company exercised the $10 million accordion feature on the revolving credit facility with Bank of America to increase the capacity from $20 million to $30 million. The expanded credit facility changes the annual commitment fee equal to a range of 0.25% to 0.45% of the unused portion of the facility and interest on amounts outstanding at the monthly LIBOR plus 175 to 225 basis points. The other terms of the agreement remain the same, including the expiration of the facility on June 29, 2012.

The following tables represent borrowings under the Bank of America revolving line of credit for each of the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Minimum borrowing	$	10,140,000	$	9,900,000	$	8,390,000	$	3,000,000
Maximum borrowing	$	17,600,000	$	17,100,000	$	18,400,000	$	17,100,000
Average borrowing	$	14,238,000	$	12,530,000	$	12,752,000	$	9,791,000

At September 30, 2011 and December 31, 2010, we had $17.6 million and $18.1 million of borrowings under the Bank of America revolving line of credit. For the three months ended September 30, 2011 and 2010, the weighted average interest rate on the facility was 1.56% and 1.80%, respectively, resulting in $55,355 and $53,848 of interest expense, respectively. For the nine months ended September 30, 2011 and 2010, the weighted average interest rate on the facility was 1.67% and 2.34%, respectively, resulting in $156,602 and $172,785 of interest expense, respectively

Senior Unsecured Notes

On June 29, 2007, Energy West authorized the sale of $13,000,000 aggregate principal amount of its 6.16% Senior Unsecured Notes, due June 29, 2017 (the “Senior Unsecured Notes”). The proceeds of these notes were used to refinance existing notes. Approximately $463,000 was incurred related to the debt issuance which was capitalized and are being amortized over the life of the notes.

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Our 6.16% Senior Unsecured Note and Bank of America credit facility agreements contain various covenants, which include, among others, limitations on total dividends and distributions made in the immediately preceding 60-month period to 75% of aggregate consolidated net income for such period, restrictions on certain indebtedness, limitations on asset sales, and maintenance of certain debt-to-capital and interest coverage ratios.

The cash flow from our business is seasonal and the line of credit balance in December normally represents the high point of borrowings in our annual cash flow cycle. Our cash flow increases and our borrowings decrease, beginning in January, as monthly heating bills are paid and the gas we paid for and placed in storage in the summer months is used to supply our customers. The total amount outstanding under all of our long term debt obligations was approximately $31.4 million at September 30, 2011, with $7,750 being due within one year.

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

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance-sheet arrangements, other than those currently disclosed that have or are reasonably likely to have a current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are subject to certain market risks, including commodity price risk (i.e., natural gas prices) and interest rate risk. The adverse effects of potential changes in these market risks are discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions management may take to mitigate our exposure to such changes. Actual results may differ. See the Notes to our Condensed Consolidated Financial Statements for a description of our accounting policies and other information related to these financial instruments.

Commodity Price Risk

We seek to protect against natural gas price fluctuations by limiting the aggregate level of net open positions that are exposed to market price changes. We manage such open positions with policies that are designed to limit the exposure to market risk, with regular reporting to management of potential financial exposure. Our risk management committee has limited the types of contracts we will consider to those related to physical natural gas deliveries. Therefore, management believes that although revenues and cost of sales are impacted by changes in natural gas prices, our margin is not significantly impacted by these changes.

Credit Risk

Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties of their contractual obligations under the various instruments with us. Credit risk may be concentrated to the extent that one or more groups of counterparties have similar economic, industry or other characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in market or other conditions. In addition, credit risk includes not only the risk that a counter-party may default due to circumstances relating directly to it, but also the risk that a counterparty may default due to circumstances that relate to other market participants that have a direct or indirect relationship with such counterparty. We seek to mitigate credit risk by evaluating the financial strength of potential counterparties. However, despite mitigation efforts, defaults by counterparties may occur from time to time. To date, no such default has occurred.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2011, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. The evaluation was carried out under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer. Based upon this evaluation, our chief executive officer and chief financial officer each concluded that our disclosure controls and procedures were effective as of September 30, 2011.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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.

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

Corning and the directors of Corning filed a motion to dismiss the lawsuit. The court has stayed discovery in the lawsuit until it rules on the motion to dismiss.

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

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ITEM 6. EXHIBITS

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

* Filed or furnished herewith.

** Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2011 and 2010, (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2011 and 2010, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 and (v) notes to Condensed Consolidated Financial Statements.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Gas Natural Inc.
	/s/ Thomas J. Smith
	Thomas J. Smith
November 14, 2011	Chief Financial Officer
	(principal financial officer and principal accounting officer)