Gas Natural 10-Q 2010 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

or

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

For the transition period from                    to                    

Commission File number 001-34585

GAS NATURAL INC.

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including area code:(406) 791-7500

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. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yeso Noo

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filero Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares outstanding of the registrant’s common stock as of November 12, 2010 was 6,074,051 shares.

As used in this Form 10-Q, the terms “company”, “Gas Natural”, “Registrant”, “we”, “us”, and “our” mean Gas Natural Inc. and its consolidated subsidiaries as a whole, unless the context indicates otherwise. Except as otherwise stated, the information in this Form 10-Q is as of September 30, 2010.

GAS NATURAL INC.
INDEX TO FORM 10-Q

	Page No.
Part I — Financial Information
Item 1 — Financial Statements		3
Condensed Consolidated Balance Sheets as of September 30, 2010, September 30, 2009 and December 31, 2009		3
Condensed Consolidated Statements of Income — three months ended September 30, 2010 and 2009, and nine months ended September 30, 2010 and 2009		5
Condensed Consolidated Statements of Cash Flows — nine months ended September 30, 2010 and 2009		6
Notes to Condensed Consolidated Financial Statements		7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3 — Quantitative and Qualitative Disclosures about Market Risk		34
Item 4 — Controls and Procedures		35
Part II — Other Information
Item 1 — Legal Proceedings		35
Item 6 — Exhibits		35
Signatures		36
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

2

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS.

GAS NATURAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

	September 30,				December 31,
	2010		2009		2009
ASSETS
Current Assets:
Cash	$	6,383,427	$	965,906	$	2,752,168
Marketable securities		281,350		5,210,658		4,411,171
Accounts and notes receivable less $222,763, $217,052 and $233,332, respectively, allowance for bad debt		3,872,006		2,784,106		7,579,974
Accounts and notes receivable — related parties		504,715		—		—
Unbilled gas		1,469,254		751,427		2,869,826
Natural gas and propane inventories		7,283,180		6,865,775		5,251,942
Materials and supplies		1,502,701		1,228,564		1,018,673
Prepayments and other		1,398,199		735,013		552,641
Income tax receivable		1,443,086		—		—
Recoverable cost of gas purchases		1,482,185		505,823		641,755
Deferred tax asset		515,767		1,549,508		562,936
Total current assets		26,135,870		20,596,780		25,641,086
Property, Plant and Equipment, Net		73,192,358		39,771,223		41,203,668
Deferred Tax Assets — Long-Term		4,344,579		4,955,820		7,550,970
Deferred Charges		1,815,924		2,219,800		2,094,468
Other Investments		814,296		1,389,026		784,363
Goodwill		13,929,745		—		1,056,771
Customer Relationships		667,875		—		—
Note Receivable — Related Party		48,119		—		—
Other Assets		415,551		65,764		294,356
TOTAL ASSETS	$	121,364,317	$	68,998,413	$	78,625,682

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

3

GAS NATURAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS, CONTINUED (unaudited)

	September 30,					December 31,
	2010		2009			2009
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Checks issued in excess of amounts on deposit	$	709,779	$	817,896		$	663,777
Accounts payable		6,187,750		3,746,211			5,530,645
Accounts payable — related parties		1,109,985		—			—
Line of credit		18,200,434		9,950,000			14,651,265
Notes payable		5,041,795		—			—
Notes payable — related parties		1,704,345		—			—
Accrued taxes		—		335,362			534,710
Accrued and other current liabilities		8,133,109		4,731,957			4,594,883
Accrued liabilities — related parties		215,195		—			—
Overrecovered gas purchases		296,545		2,590,218			1,452,580
Total current liabilities		41,598,937		22,171,644			27,427,860
Other Obligations:
Deferred investment tax credits		202,707		223,769			218,503
Other long-term liabilities		3,153,543		2,380,575			2,291,511
Total		3,356,250		2,604,344			2,510,014
Long-Term Debt		22,157,652		13,000,000			13,000,000
Commitments and Contingencies (see note 12)
Stockholders’ Equity:
Preferred stock; $.15 par value, 1,500,000 shares authorized, no shares outstanding		—		—			—
Common stock; $.15 par value, 15,000,000 shares authorized, 6,073,676, 4,303,208, and 4,361,869 shares outstanding at September 30, 2010 and 2009, and December 31, 2009, respectively		911,051		653,494			654,280
Treasury stock		—		(8,012	)		—
Capital in excess of par value		23,393,993		5,999,601			6,514,851
Capital in excess of par value — noncontrolling interest		—		—			100,989
Accumulated other comprehensive income		50,542		(17,049	)		146,701
Retained earnings		29,895,892		24,594,391			28,270,987
Total stockholders’ equity		54,251,478		31,222,425			35,687,808
TOTAL CAPITALIZATION		76,409,130		44,222,425			48,687,808
TOTAL LIABILITIES AND CAPITALIZATION	$	121,364,317	$	68,998,413		$	78,625,682

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

4

GAS NATURAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
REVENUES:
Natural gas operations	$	10,158,766		$	6,134,362		$	56,347,035		$	41,820,238
Gas—wholesale		638,471			2,077,309			5,624,803			9,739,654
Pipeline operations		104,461			114,417			319,418			338,484
Total revenues		10,901,698			8,326,088			62,291,256			51,898,376
COST OF SALES:
Gas purchased		4,803,027			2,398,039			32,343,603			26,862,370
Gas—wholesale		380,934			1,738,394			4,435,153			7,824,121
Total cost of sales		5,183,961			4,136,433			36,778,756			34,686,491
GROSS MARGIN		5,717,737			4,189,655			25,512,500			17,211,885
EXPENSES:
Distribution, general, and administrative		4,202,675			2,707,842			12,492,146			8,128,727
Maintenance		239,152			145,866			775,634			502,456
Depreciation and amortization		1,042,315			553,061			3,045,373			1,598,206
Taxes other than income		789,490			538,377			2,548,725			1,650,643
Total expenses		6,273,632			3,945,146			18,861,878			11,880,032
OPERATING (LOSS) INCOME		(555,895	)		244,509			6,650,622			5,331,853
OTHER INCOME (LOSS)		262,162			(213,612	)		358,975			(323,530	)
INTEREST EXPENSE		(492,378	)		(304,404	)		(1,614,134	)		(902,755	)
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX EXPENSE		(786,111	)		(273,507	)		5,395,463			4,105,568
INCOME TAX BENEFIT (EXPENSE)		741,406			101,034			(1,311,444	)		(1,629,233	)
NET INCOME (LOSS)	$	(44,705	)	$	(172,473	)	$	4,084,019		$	2,476,335
BASIC INCOME (LOSS) PER COMMON SHARE:
Income from operations	$	(0.01	)	$	(0.04	)	$	0.68		$	0.58
DILUTED INCOME (LOSS) PER COMMON SHARE:
Income from operations	$	(0.01	)	$	(0.04	)	$	0.68		$	0.58
DIVIDENDS DECLARED PER COMMON SHARE:	$	0.14		$	0.14		$	0.41		$	0.39
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		6,072,996			4,302,085			6,040,063			4,300,156
Diluted		6,072,996			4,302,085			6,048,332			4,303,018

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

5

GAS NATURAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Nine Months Ended
	September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,084,019		$	2,476,335
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion including deferred charges and financing costs		2,926,560			1,930,612
Stock-based compensation		62,829			74,563
Gain on sale of securities		(159,520	)		—
Investment tax credit		(15,796	)		(15,796	)
Deferred income taxes		1,098,029			249,329
Changes in assets and liabilities:
Accounts and notes receivable		12,736,746			8,734,299
Accounts and notes receivable — related parties		(488,205	)		—
Natural gas and propane inventories		(1,399,660	)		3,026,027
Accounts payable		(6,542,664	)		(1,822,606	)
Accounts payable — related parties		570,495			—
Accrued liabilities — related parties		215,195			—
Recoverable/refundable cost of gas purchases		(2,704,976	)		3,102,822
Prepayments and other		(579,352	)		(312,499	)
Accrued interest — related parties		52,799			—
Other assets		(1,581,330	)		30,142
Other liabilities		(1,424,044	)		67,398
Net cash provided by operating activities		6,851,125			17,540,626
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures		(3,957,184	)		(6,730,849	)
Purchase of marketable securities		(52,948	)		(1,342,911	)
Sale of marketable securities		4,185,867			—
Purchase of Cut Bank shares		(100,989	)		—
Purchase of Kidron investment		(105,078	)		—
Cash acquired in acquisitions		144,203			—
Other investments		(34,882	)		(307,603	)
Customer advances received for construction		138,443			(33,249	)
Change from contributions in aid of construction		(65,689	)		69,800
Net cash provided by (used in) investing activities		151,743			(8,344,812	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt		(679,408	)		—
Proceeds from lines of credit		28,650,000			14,200,000
Proceeds from other notes payable		20,909			—
Repayment of notes payable and lines of credit		(28,700,000	)		(21,799,967	)
Other short-term borrowings		10,407			—
Repayments of other short-term borrowings		(214,605	)		—
Dividends paid		(2,458,912	)		(1,695,470	)
Net cash used in financing activities		(3,371,609	)		(9,295,437	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		3,631,259			(99,623	)
CASH AND CASH EQUIVALENTS:
Beginning of period		2,752,168			1,065,529
End of period	$	6,383,427		$	965,906

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

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Gas Natural Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. Information for the year ended December 31, 2009 has been derived from our audited financial statements.

We follow accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure that we consistently report our 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 theFASB Accounting Standards Codification, sometimes referred to as the Codification or ASC.

Operating results for the nine-month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for future fiscal periods. Events occurring subsequent to September 30, 2010 have been evaluated as to their potential impact to the financial statements through the date of issuance. The 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, 2009.

Gas Natural Inc. is the parent company of Energy West, Incorporated which is a natural gas utility with operations in Montana, Wyoming, North Carolina and Maine, Lightning Pipeline Company, Inc. with utility operations in Ohio and Pennsylvania and Great Plains Natural Gas Company and Brainard Gas Corp, each with utility operations in Ohio. The Company was originally incorporated in Montana in 1909. The Company currently has four reporting segments:

•   Natural Gas Operations	Annually, we distribute approximately 29 billion cubic feet of natural gas to approximately 62,000 customers through regulated utilities operating in Montana, Wyoming, Ohio, Pennsylvania, Maine and North Carolina. We acquired our Maine and North Carolina operations in 2007, while Cut Bank Gas in Montana was added in November 2009. Most recently, we closed the acquisition of our Ohio and Pennsylvania operations on January 5, 2010.
•   Marketing and Production Operations (EWR)	Annually, we market approximately 2.4 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 our subsidiary, Energy West Resources, Inc. (EWR). EWR owns an average 48% gross working interest (an average 41% net revenue interest) in 160 natural gas producing wells and gas gathering assets.
•   Pipeline Operations (EWD)	The Company owns the Shoshone interstate and the Glacier gathering natural gas pipelines located in Montana and Wyoming through our subsidiary Energy West Development, Inc. (EWD). Certain natural gas producing wells owned by the Company’s pipeline operations are being managed and reported under our marketing and production operations.
•   Corporate and Other	Corporate and other encompasses the results of corporate acquisitions and other equity transactions. Reported in Corporate and other for the nine months ended September 30, 2010 and 2009 are costs associated with business development and acquisitions, and dividend income and recognized gains from the sale of marketable securities.

7

On June 30, 2010, our shareholders approved the reincorporation of the Company from Montana to Ohio. The reincorporation was effectuated on July 9, 2010. The reincorporation effected a change in the legal domicile of the Company and other changes of a legal nature, but did not result in any change in our business, our management personnel, our operations or the location of our facilities. As part of the reincorporation, the Company changed its name to “Gas Natural Inc.” Our shares continue to trade on the NYSE Amex under the symbol “EGAS.”

NOTE 1 — ACQUISITIONS

On January 5, 2010 we completed the acquisition of Lightning Pipeline Company, Inc. (“Lightning Pipeline”), Great Plains Natural Gas Company (“Great Plains”), Brainard Gas Corp. (“BGC”) and Great Plains Land Development Co., LTD. (“GPL,” and collectively with Lightning Pipeline, Great Plains and BGC, the “Ohio Companies” and each an “Ohio Company”). Lightning Pipeline is the parent company of Orwell Natural Gas Company (“Orwell”) and Great Plains is the parent company of Northeast Ohio Natural Gas Corp. (“NEO”). Orwell, NEO and BGC are natural gas distribution companies that serve approximately 23,131 customers in Northeastern Ohio and Western Pennsylvania. The acquisition increased the Company’s customers by more than 50%. GPL is a real estate holding company whose primary asset is real estate that is leased to NEO.

Merger Agreements- Energy West, Incorporated, now a wholly-owned subsidiary of the Company (“Energy West”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) on June 29, 2009 with Richard M. Osborne, as Trustee of the Richard M. Osborne Trust (the “RMO Trust”), Rebecca Howell, Stephen M. Rigo, Marty Whelan, and Thomas J. Smith (Messrs. Osborne, Rigo, Whelan and Smith and Ms. Howell are hereinafter collectively referred to as “Shareholders”), Lightning Pipeline, Great Plains, BGC and three to-be-formed wholly-owned Ohio subsidiary corporations of Energy West. On June 29, 2009, Energy West also entered into an Agreement and Plan of Merger (together with the Merger Agreement, the “Merger Agreements”) with GPL, the RMO Trust and a fourth to-be-formed Ohio acquisition subsidiary (each acquisition subsidiary hereinafter referred to as an “Acquisition Sub” and collectively, as the “Acquisition Subs”) of Energy West. Mr. Osborne is our chairman of the board and chief executive officer, Mr. Smith is a director and our chief financial officer, and Ms. Howell is our corporate secretary. We completed on August 3, 2009, a reorganization to implement a holding company structure. The Company, as the new holding company, became the successor issuer to Energy West, and Energy West assigned its rights under the Merger Agreements to the Company. Pursuant to the terms of the Merger Agreements, on January 5, 2010, four separate mergers occurred whereby an Acquisition Sub of Gas Natural merged with and into each Ohio Company. The Ohio Companies survived the mergers, becoming four separate wholly-owned subsidiaries of the Company. The transactions contemplated by the Merger Agreements are referred to herein as the “Merger Transaction.”

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 BGC and the membership units of GPL 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, we issued 1,707,308 Shares in the aggregate. We issued Mr. Osborne, as trustee, 1,565,701 Shares, Mr. Smith 73,244 Shares and Ms. Howell 19,532 Shares. After the closing of the Merger Transaction on January 5, 2010, Mr. Osborne owned 2,487,972 Shares, or 41.0% of the Company, Mr. Smith owned 86,744 Shares, or 1.4% of the Company and Ms. Howell owned 19,532 Shares, or less than 1% of the Company.

8

The acquisition of the Ohio Companies is being 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. For purposes of measuring the estimated fair value of the assets acquired and liabilities assumed, an independent appraisal firm conducted a valuation analysis as of the date of acquisition, January 5, 2010. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

	Total
	Ohio				Lightning
	Companies		Great Plains		Pipeline		Brainard
Current assets	$	12,004,979	$	7,760,134	$	4,098,704	$	146,141
Property and equipment		29,530,636		18,290,612		10,818,923		421,101
Deferred tax assets		212,111		—		172,598		39,513
Other noncurrent assets		152,585		1,000		140,002		11,583
Customer relationships		685,000		640,000		45,000		—
Goodwill		12,756,854		8,844,116		3,855,573		57,165
Total assets acquired		55,342,165		35,535,862		19,130,800		675,503
Current liabilities		13,690,076		7,497,196		5,788,829		404,051
Asset retirement obligation		487,447		—		477,939		9,508
Deferred tax liability		3,295,303		1,723,801		1,495,948		75,554
Total liabilities assumed		17,472,826		9,220,997		7,762,716		489,113
Net assets acquired:	$	37,869,339	$	26,314,865	$	11,368,084	$	186,390

Of the total purchase price, approximately $12.8 million has been allocated to goodwill. Goodwill represents intangible assets that do not qualify for separate recognition. Goodwill is not amortized, rather, the goodwill will be tested for impairment, at least annually, or more frequently if there is an indication of impairment. The goodwill resulting from this acquisition is not deductible for tax purposes.

The following table shows results of operations (in thousands) for the nine months ended September 30, 2010, including the results of the Ohio Companies since the acquisition date of January 5, 2010. The table also shows pro-forma results for the nine months ended September 30, 2009 as if the acquisition had occurred on January 1, 2009. These unaudited pro forma results of operations are based on the historical financial statements and related notes of each of the Company and the Ohio Companies for the nine months ended September 30, 2009, and contain adjustments to depreciation and amortization for the effects of the purchase price allocation, and to income tax expense to record income tax expense for the Ohio Companies. The results of operations for the Ohio companies for the period from January 1, 2010 to January 4, 2010 were not material.

	Nine Months Ended September 30,
	2010		2009
			Pro forma
	(in thousands)
Revenues	$	62,291	$	74,892
Operating income		6,651		7,424
Net income		4,084		3,576
Earnings per share — basic	$	0.68	$	0.60
Earnings per share — diluted	$	0.68	$	0.60

9

There is $16,909,000 of revenue and $242,000 of net income from the Ohio companies included in the consolidated statement of income for the nine months ended September 30, 2010.

The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

NOTE 2 — MARKETABLE SECURITIES

Securities investments are classified as available-for-sale securities. Available-for-sale securities are recorded at fair value in marketable securities on the balance sheet, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of other comprehensive income. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in investment income.

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

	Marketable securities
	Investment		Unrealized			Estimated
	at cost		gains			Fair Value
September 30, 2010	$	199,500	$	81,850		$	281,350
December 31, 2009	$	4,172,899	$	238,272		$	4,411,171
September 30, 2009	$	5,238,387	$	(27,729	)	$	5,210,658

Unrealized gain (loss) on available-for-sale securities of $50,542, $146,701 and ($17,049) (net of $31,308, $91,571, and ($10,681) in taxes), was included in accumulated other comprehensive income in the accompanying unaudited condensed balance sheets at September 30, 2010, December 31, 2009 and September 30, 2009, respectively.

Proceeds from the sales of marketable securities during the three and nine months ended September 30, 2010 were $1,831,989 and $4,185,867, respectively, and gross realized gains were $50,376 and $159,520, respectively. No marketable securities were sold during the three and nine months ended September 30, 2009.

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 the closing share price on the quoted market for those investments. The fair value of Gas Natural’s long-term debt is estimated based on the quoted market prices for the same or similar issues, or the current rates for debt of the same remaining maturities and credit quality. Cost basis is determined by specific identification of securities sold.

NOTE 3 — 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.

10

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 table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of September 30, 2010:

	September 30, 2010
	Level I		Level II		Level III		TOTAL
Available-for-sale securities	$	281,350		—		—	$	281,350
Total	$	281,350	$	—	$	—	$	281,350

NOTE 4 — DEFERRED CHARGES

Deferred Charges consist of the following:

	September 30,					December 31,
	2010			2009		2009
Regulatory asset for property taxes	$	1,018,306		$	1,324,557	$	1,247,993
Regulatory asset for income taxes		452,645			452,645		452,646
Regulatory (liability) asset for deferred environmental remediation costs		(49,611	)		54,176		22,042
Rate case costs		59,095			18,538		15,448
Unamortized debt issue costs		335,489			369,884		356,339
Total	$	1,815,924		$	2,219,800	$	2,094,468

Regulatory assets will be recovered over a period of approximately seven to twenty years.

The property tax asset does not earn a return in the rate base; however the property tax is recovered in rates over a ten-year period that began January 1, 2004. The income taxes and environmental remediation costs earn a return equal to that of the Company’s rate base. No other assets earn a return or are recovered in the rate structure.

NOTE 5 — ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consist of the following:

	September 30,				December 31,
	2010		2009		2009
Property tax settlement—current portion	$	242,120	$	242,120	$	242,120
Payable to employee benefit plans		51,869		32,438		81,045
Accrued vacation		166,438		607,022		55,416
Customer deposits		668,495		453,220		521,535
Accrued interest		226,566		200,200		31,900
Accrued interest — related parties		345,103		—		—
Accrued taxes other than income		2,939,822		772,810		640,801
Deferred payments from levelized billing		2,965,235		1,802,920		2,176,671
Other regulatory liabilities		31,028		—		59,996
Other		496,433		621,227		785,399
Total	$	8,133,109	$	4,731,957	$	4,594,883

11

NOTE 6 — OTHER LONG TERM LIABILITIES

Other long-term liabilities consist of the following:

	September 30,				December 31,
	2010		2009		2009
Asset retirement obligation	$	1,511,409	$	776,700	$	787,233
Customer advances for construction		938,693		791,706		800,250
Regulatory liability for income taxes		83,161		83,161		83,161
Regulatory liability for gas costs		131,443		—		131,443
Long term notes payable		2,829		—		3,416
Property tax settlement		486,008		729,008		486,008
Total	$	3,153,543	$	2,380,575	$	2,291,511

NOTE 7 — LINES OF CREDIT AND LONG-TERM DEBT

The Company funds its 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, Gas Natural has used the working capital line of credit portion of the credit facility with Bank of America, N.A. (“Bank of America”) (fka LaSalle Bank, N.A.). Gas Natural has 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, Gas Natural’s 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.

With the acquisition of the Ohio Companies, Gas Natural now has two additional lines of credit from Citizens Bank and Huntington National Bank, N.A., which are used for working capital needs by NEO and Orwell, respectively.

Long Term Debt and Bank of America Line of Credit

Long-term Debt—$13.0 million 6.16% Senior Unsecured Notes— On June 29, 2007, Energy West, Incorporated authorized the sale of $13.0 million aggregate principal amount of its 6.16% Senior Unsecured Notes, due June 29, 2017. The proceeds of these notes were used to refinance Energy West’s existing notes. With this refinancing, the Company expensed the remaining debt issue costs of $991,000 in fiscal 2007, and incurred approximately $496,000 in new debt issue costs to be amortized over the life of the new notes.

Bank of America Line of Credit— On June 29, 2007, Energy West established its five-year unsecured credit facility with Bank of America, replacing a previous $20 million one-year facility with Bank of America which was scheduled to expire in November 2007. The credit facility includes an annual commitment fee equal to 0.20% of the unused portion of the facility and interest on amounts outstanding at the London Interbank Offered Rate, plus 120 to 145 basis points, for interest periods selected by Energy West. At September 30, 2010, Energy West had $14.6 million in borrowings on the line of credit.

Debt Covenants— Energy West’s 6.16% Senior Unsecured Notes and the 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.

12

Citizens Bank Credit Facility

In connection with our acquisition of our Ohio operations, NEO, Great Plains and GPL each entered modifications/amendments to its credit facility with Citizens Bank (the “Citizens Credit Facility”). The Citizens Credit Facility consists of a revolving line of credit and term loan to NEO, and two other term loans to Great Plains and GPL 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 guarantees each loan. Our chairman and chief executive officer, Richard M. Osborne, guarantees each loan both individually and as trustee of the RMO Trust, and Great Plains guarantees NEO’s revolving line of credit and term loan as well as GPL’s term note.

Long-term Debt — $10.3 million 5.00% Senior Secured Notes—NEO’s, Great Plains’ and GPL’s term loans with Citizens Bank are in the amounts of $6.8 million, $2.3 million and $783,000 respectively. Each term note has a maturity date of July 1, 2013 and bears interest at an annual rate of 30-day LIBOR (Eurodollar) plus 400 basis points with an interest rate floor of 5.00% per annum. Currently, the interest rate is 5.00% per annum. The term notes require monthly payments of approximately $102,000 in the aggregate.

Line of Credit—NEO’s revolving credit line with Citizens Bank has a maximum credit commitment of $2.1 million. The revolving line bears interest at an annual rate of 30-day LIBOR (Eurodollar) plus 400 basis points with an interest rate floor of 5.00% per annum. Currently, the interest rate is 5.00% per annum. The revolving line requires monthly interest payments with the principal due at maturity, November 29, 2010.

The Citizens Credit Facility requires Great Plains, GPL and NEO to maintain a 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 requires NEO, Great Plains and GPL to maintain a minimum net worth, on a combined basis, 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 allows NEO, Great Plains and GPL to pay dividends to Gas Natural if those entities’ combined net worth (as defined in the Citizens loan documents) after payment of any dividends would not be less than $1,815,000 on a consolidated basis as positively increased by 100% of net income as of the end of each fiscal quarter and fiscal year.

At September 30, 2010, $2.1 million has been borrowed under the revolving line of credit, $6.7 million under the NEO term loan, $2.3 million under the Great Plains term loan and $768,000 under the GPL term loan.

Huntington Credit Facility

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 Credit Facility amends and restates the previous credit facility that matured on November 30, 2009. The loan is secured by all of the assets of Orwell. The Huntington Credit Facility is guaranteed by Gas Natural, Lightning Pipeline, Mr. Osborne individually and as Trustee of the RMO Trust, and certain entities owned and controlled by Mr. Osborne.

Long-term Debt— $4.6 Million Senior Secured Note— The Huntington Credit Facility includes a $4.6 million term note that bears interest at an annual rate of 30-day LIBOR (Eurodollar) plus 300 basis points with LIBOR floor of 1% per annum. Currently, the interest rate is 4.00% per annum. The term note requires monthly payments of approximately $33,000 and matures on November 28, 2010.

Line of Credit— The Huntington Credit Facility also includes a $1.5 million line of credit. The credit line bears interest at an annual rate of 30-day LIBOR (Eurodollar) plus 300 basis points with LIBOR floor of 1% per annum. Currently, the interest rate is 4.00% per annum. The credit line requires monthly interest payments with the principal due at maturity, November 28, 2010.

The Huntington Credit Facility requires Orwell to maintain a fixed charge coverage ratio of at least 1 to 1 of EBITDA to the sum of (i) scheduled principal payments on debt and capital leases, plus (ii) interest expense, plus (iii) federal, state and local income tax expense, plus (iv) dividends and distributions, measured on a rolling four quarter basis. The Huntington Credit Facility allows Orwell to pay dividends to Gas Natural as long as the aggregate amount of all dividends, distributions, redemptions and repurchases in any fiscal year do not exceed 60% of net income (as defined in the Huntington Credit Facility) of Orwell for each fiscal year. At September 30, 2010, $1.5 million has been borrowed under the credit line and $4.1 million under the term note. The Huntington Credit Facility is also secured by a pledge of 300,000 shares of Gas Natural common stock (or the proceeds from the sale of these shares) by the RMO Trust.

13

Combined Term Loans and Credit Facilities

At September 30, 2010, the Company had approximately $6.4 million in cash ($5.7 million net of bank overdrafts). In addition, at September 30, 2010, Gas Natural had $18.2 million in borrowings under its lines of credit and net available borrowing capacity at September 30, 2010 of $5.4 million.

The total amount outstanding under all Gas Natural’s long-term debt obligations was $27.2 million and $13.0 million at September 30, 2010 and 2009 respectively. The portion of such obligations due within one year was $5.0 million and $0 at September 30, 2010 and 2009, respectively.

At September 30, 2010, the Company believes it was in compliance with the financial convenants under its debt agreements.

NOTE 8 — INCOME TAX EXPENSE (BENEFIT)

Income tax expense (benefit) differs from the amount computed by applying the federal statutory rate to pre-tax income or loss as demonstrated in the following table:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Income tax from continuing operations:
Tax expense at statutory rate of 34%	$	(267,278	)	$	(92,991	)	$	1,834,457		$	1,395,894
State income tax, net of federal tax expense		1,780			(6,246	)		(12,215	)		93,755
Amortization of deferred investment tax credits		(5,266	)		(5,265	)		(15,797	)		(15,796	)
True-up amounts accrued to 2009 tax return		(506,232	)		—			(506,232	)		—
Other		35,590			3,468			11,231			155,380
Total income tax expense (benefit)	$	(741,406	)	$	(101,034	)	$	1,311,444		$	1,629,233

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

The tax years 2004 through 2009 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.

14

NOTE 9 — SEGMENT INFORMATION

Three Months Ended September 30, 2010

				Marketing
	Natural Gas			and		Pipeline		Corporate
	Operations			Production		Operations		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
Total operating revenue		10,235,666			2,137,068		104,461		—			(1,575,497	)		10,901,698
COST OF SALES:
Gas purchased		4,879,927			—		—		—			(76,900	)		4,803,027
Gas — wholesale		—			1,879,531		—		—			(1,498,597	)		380,934
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:	$	(678,894	)	$	52,455	$	70,544	$	—		$	—		$	(555,895	)
NET INCOME	$	(325,729	)	$	274,534	$	82,563	$	(76,073	)	$	—		$	(44,705	)
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

Three Months Ended September 30, 2009

			Marketing
	Natural Gas		and			Pipeline		Corporate
	Operations		Production			Operations		and Other			Eliminations			Consolidated
OPERATING REVENUES:
Natural gas operations	$	6,216,254	$	—		$	—	$	—		$	(81,892	)	$	6,134,362
Marketing and Production		—		3,525,079			—		—			(1,447,770	)		2,077,309
Pipeline operations		—		—			114,417		—			—			114,417
Total operating revenue		6,216,254		3,525,079			114,417		—			(1,529,662	)		8,326,088
COST OF SALES:
Gas purchased		2,479,931		—			—		—			(81,892	)		2,398,039
Gas — wholesale		—		3,186,164			—		—			(1,447,770	)		1,738,394
Total Cost of Sales		2,479,931		3,186,164			—		—			(1,529,662	)		4,136,433
GROSS MARGIN	$	3,736,323	$	338,915		$	114,417	$	—		$	—		$	4,189,655
OPERATING INCOME:	$	179,036	$	(2,186	)	$	73,488	$	(5,829	)	$	—		$	244,509
NET INCOME	$	9,883	$	(12,028	)	$	73,787	$	(244,115	)	$	—		$	(172,473	)
Total Assets		55,539,568		5,965,017			765,827		38,365,563			(31,637,562	)	$	68,998,413
Goodwill		—		—			—		—			—		$	—

15

Nine Months Ended September 30, 2010

			Marketing
	Natural Gas		and		Pipeline		Corporate
	Operations		Production		Operations		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
Total operating revenue		56,581,131		11,325,249		319,418		—			(5,934,542	)		62,291,256
COST OF SALES:
Gas purchased		32,577,699		—		—		—			(234,096	)		32,343,603
Gas — wholesale		—		10,135,599		—		—			(5,700,446	)		4,435,153
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:	$	5,882,195	$	609,916	$	169,875	$	(11,364	)	$	—		$	6,650,622
NET INCOME	$	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

Nine Months Ended September 30, 2009

			Marketing
	Natural Gas		and		Pipeline		Corporate
	Operations		Production		Operations		and Other			Eliminations			Consolidated
OPERATING REVENUES:
Natural gas operations	$	42,273,153	$	—	$	—	$	—		$	(452,915	)	$	41,820,238
Marketing and Production		—		14,678,662		—		—			(4,939,008	)		9,739,654
Pipeline operations		—		—		338,484		—			—			338,484
Total operating revenue		42,273,153		14,678,662		338,484		—			(5,391,923	)		51,898,376
COST OF SALES:
Gas purchased		27,315,285		—		—		—			(452,915	)		26,862,370
Gas — wholesale		—		12,763,129		—		—			(4,939,008	)		7,824,121
Total Cost of Sales		27,315,285		12,763,129		—		—			(5,391,923	)		34,686,491
GROSS MARGIN	$	14,957,868	$	1,915,533	$	338,484	$	—		$	—		$	17,211,885
OPERATING INCOME:	$	3,955,605	$	1,184,487	$	197,590	$	(5,829	)	$	—		$	5,331,853
NET INCOME	$	2,107,360	$	677,152	$	146,513	$	(454,690	)	$	—		$	2,476,335
Total Assets		55,539,568		5,965,017		765,827		38,365,563			(31,637,562	)	$	68,998,413
Goodwill		—		—		—		—			—		$	—

16

NOTE 10 — STOCK OPTIONS AND SHAREHOLDER RIGHTS PLANS

2002 Stock Option Plan— The Gas Natural Inc. 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, 2010, there were 29,500 options outstanding, and the maximum number of shares available for future grants under this plan is 63,500 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 Company’s 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.

Stock Option Disclosures— The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. In the quarters ended September 30, 2010 and 2009, no options were granted. At September 30, 2010 and 2009, a total of 29,500 and 34,500 options were outstanding, respectively.

A summary of the status of the Company’s stock option plans as of September 30, 2010 and December 31, 2009 and changes during the periods ended on these dates is presented below.

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

The following information applies to options outstanding at September 30, 2010:

					Weighted
					Average
			Weighted		Remaining
			Average		Contractual
Grant	Number		Exercise		Life		Number
Date	Outstanding		Price		(Years)		Exercisable
1/6/2006		4,500	$	6.35		0.27		0
12/1/2008		10,000	$	7.10		8.17		5,000
6/3/2009		5,000	$	8.44		3.67		2,500
12/1/2009		10,000	$	8.85		9.17		2,500
		29,500						10,000

17

NOTE 11 — COMPREHENSIVE INCOME

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Net income (loss)	$	(44,705	)	$	(172,473	)	$	4,084,019		$	2,476,335
Other comprehensive income
��
Change in unrealized gain/loss on available-for-sale securities, net of tax		(12,203	)		(471,540	)		(96,262	)		302,097
Comprehensive income	$	(56,908	)	$	(644,013	)	$	3,987,757		$	2,778,432

Other comprehensive income is reported net of tax of ($7,626) and ($294,718) for the three months ended September 30, 2010 and 2009, and ($60,160) and $188,774 for the nine months ended September 30, 2010 and 2009.

NOTE 12 — CONTINGENCIES

Derivative Contingencies— Among the risks involved in natural gas marketing is the risk of nonperformance by counterparties to contracts for purchase and sale of natural gas. The Company’s marketing operation is party to certain contracts for purchase or sale of natural gas at fixed prices for fixed time periods. The Company determined that these contracts qualify for treatment as a “normal purchase or normal sale” scope exception under current accounting standards.

Legal Proceedings—We are party to certain legal proceedings in the normal course of our business that, in the opinion of management, are not material to our business or financial condition.

18

NOTE 13 — RELATED PARTY TRANSACTIONS

As a result of our purchase of the Ohio Companies, we are party to certain agreements and transactions with our chairman and chief executive officer, Richard M. Osborne, or companies owned or controlled by Mr. Osborne. These transactions can be generally grouped into three categories as follows:

Note Payable to Mr. Osborne

We have two notes payable to Mr. Osborne. The first carries an annual interest rate of 6.0% with a maturity date of January 3, 2014 and has a balance at September 30, 2010 of $1,654,985, plus accrued interest of $342,292. The second note carries an annual interest rate equal to the prime rate as published by Key Bank, NA, is payable on demand, and has a balance at September 30, 2010 of $49,361, plus accrued interest of $2,812. Interest expense related to these two notes of $25,782 and $91,527 was accrued during the three and nine months ended September 30, 2010, respectively.

Gas Supply, Pipeline Transport and Gas Sales

The table below details gas supply and transport related balances and transactions with companies owned or controlled by Mr. Osborne:

			Amounts for Natural Gas Purchased
			and Imbalance Activity
	Accounts		Three Months		Nine Months
	Payable		Ended		Ended
	9/30/2010		September 30, 2010		September 30, 2010
John D. Oil and Gas Marketing	$	637,998	$	814,955	$	3,181,156
Cobra Pipeline		2,755		28,185		314,041
Orwell Trumbell Pipeline		8,031		23,653		(562,163	)
Great Plains Exploration		884		1,726		22,375

We have also accrued a liability of $215,195 due to companies controlled by Mr. Osborne for natural gas used through September 30, 2010, but not yet invoiced to us. The related expense appears as part of the Gas Purchased line item on our income statements for the three and nine months ended September 30, 2010. These amounts will be trued up to the actual invoices when received in future periods.

The table below details gas sales transactions and balances with companies owned or controlled by Mr. Osborne:

			Amounts for Natural Gas Sold
	Accounts		Three Months		Nine Months
	Receivable		Ended		Ended
	9/30/2010		September 30, 2010		September 30, 2010
John D. Oil and Gas Marketing	$	40,750	$	—	$	49,824
Great Plains Exploration		162,159		—		1,953,052

19

Administrative and Other

We have a note receivable from ONG Marketing, Inc., 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 ONG Marketing, Inc. to finance the acquisition of a gas pipeline. At September 30, 2010 the balance was $57,518 with $9,399 due within one year. We have a corresponding agreement to lease the pipeline from ONG Marketing, Inc. through December 31, 2016. During the three and nine months ended September 30, 2010, we made rental and related payments of $3,300 and $11,127, respectively, and the balance due at September 30, 2010 to ONG Marketing, Inc. was $2,200.

We purchased pipe and other construction supplies from Big Oats Pipeline Supply, a company controlled by Mr. Osborne, during the three months and nine months ended September 30, 2010 of $557,886 and $897,693, respectively. The balance due at September 30, 2010 was $442,467. We also sold supplies and incurred other expenses on behalf of Big Oats of $1,183 and $4,010 during the three months and nine months ended September 30, 2010, respectively. The balance receivable from Big Oats at September 30, 2010 is $192.

During the three months and nine months ended September 30, 2010, we incurred expense of $47,702 and $326,952, respectively for rent, supplies, and consulting services received from various companies controlled by Mr. Osborne. The balance payable for these services totaled $15,651at September 30, 2010.

We also provided management and other services to various companies controlled by Mr. Osborne during the three months and nine months ended September 30, 2010 of $33,129 and $222,200, respectively. The balance receivable for these services totaled $292,215 at September 30, 2010.

NOTE 14 — NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted

Consolidation of Variable Interest Entities-In June 2009, the FASB issued new guidance on consolidation of variable interest entities. The guidance will significantly affect various elements of consolidation under existing accounting standards, including the determination of whether an entity is a variable interest entity and whether an enterprise is a variable interest entity’s primary beneficiary. This new guidance is effective for interim and annual periods beginning after November 15, 2009. We implemented the guidance on January 1, 2010 and the implementation did not have a material impact on our consolidated financial statements.

Fair Value Measurement Disclosures-In January 2010, the FASB issuedFair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements (ASU No. 2010-06), which will update the Codification to require new disclosures for assets and liabilities measured at fair value. The requirements include expanded disclosure of valuation methodologies for Level 2 and Level 3 fair value measurements, transfers in and out of Levels 1 and 2, and gross rather than net presentation of certain changes in Level 3 fair value measurements. The updates to the Codification contained in ASU No. 2010-06 are effective for interim and annual periods beginning after December 15, 2009, except for requirements related to gross presentation of certain changes in Level 3 fair value measurements, which are effective for interim and annual periods beginning after December 15, 2010. We implemented the portions of the guidance required on January 1, 2010 and the implementation did not have a material impact on our consolidated financial statements.

NOTE 15 — SUBSEQUENT EVENTS

Note Purchase Agreement

On November 1, 2010, we entered into a note purchase agreement with Sun Life Assurance Company of Canada (the “Sun Life”) to refinance the existing debt of our Ohio subsidiaries. Under the note purchase agreement, Gas Natural’s Ohio utilities, Orwell, NEO, and BGC, agreed to issue and sell to Sun Life a $17.7 million senior secured guaranteed promissory note on or before November 28, 2010 (the “ONB Note”) in a private placement (the “ONB Note Purchase Agreement”). The proceeds will be used to retire $5.8 million of debt incurred by Orwell under its $4.3 million term loan and $1.5 million line of credit with The Huntington National Bank, N.A., and $9.5 million of debt incurred by NEO and its affiliate, GPL, under a credit facility with Citizens Bank, N.A. (“Citizens”).

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The ONB Note will be guaranteed by Gas Natural’s wholly-owned subsidiaries, Great Plains and Lightning Pipeline, which serve as intermediate holding companies for NEO and Orwell respectively. The ONB Note will also be guaranteed by Gas Natural and by Richard M. Osborne, individually and as Trustee of the Richard M. Osborne Trust under Restated Trust Agreement dated January 13, 1995 (the “RMO Trust,” and together with Gas Natural, Great Plains and Lightning, the “Guarantors”). Mr. Osborne is Gas Natural’s Chairman, Chief Executive Officer and largest shareholder. Each of the Guarantors is party to the ONB Note Purchase Agreement.

The ONB Note will bear interest at an annual rate equal to 303 basis points over the yield to maturity of the U.S. Treasury Security with a maturity of June 1, 2017 as announced by Bloomberg Financial Markets, using its ICUR function, four days prior to closing of the ONB Note Purchase Agreement. Interest will compound semi-annually. The ONB Note will mature on June 1, 2017 and requires monthly interest payments with the principal due at maturity.

The ONB Note Purchase Agreement requires that Gas Natural and its subsidiaries maintain, on a consolidated basis, an interest coverage ratio of at least 2.0 to 1.0, measured quarterly on a trailing four quarter basis. The ONB Note Purchase Agreement also requires that Gas Natural and its subsidiaries not permit indebtedness to exceed 60% of capitalization at any time.

Additionally, cash dividends may be paid by the Ohio subsidiaries to their respective parent companies only if (i) the aggregate amount of all such dividends and any distributions, redemptions and repurchases for the fiscal year do not exceed sixty percent (60%) of net income of the Ohio subsidiaries (determined on a consolidated basis and in accordance with GAAP), and (ii) there exists no other event of default at the time the dividend is paid. The ONB Note Purchase Agreement also contains other customary loan covenants and default provisions.

Great Plains is indebted to Citizens in the amount of approximately $2.3 million and has entered a separate note purchase agreement with Sun Life to refinance that debt (the “Great Plains Note Purchase Agreement,” and together with the ONB Note Purchase Agreement, the “Note Purchase Agreements”). Under the Great Plains Note Purchase Agreement, Great Plains will issue and sell to Sun Life a promissory note in the amount of $2.3 million (the “Great Plains Note,” and together with the ONB Note, the “Notes”). Closing must occur no later than November 28, 2010. The Great Plains Note will bear interest at the annual rate of 3-month LIBOR plus 3.85% and require quarterly interest payments with the principal due at maturity, three years after closing. Gas Natural and Lightning will be party to the Great Plains Note Purchase Agreement as guarantors. The Great Plains Note will also be guaranteed by Mr. Osborne, as Trustee of the RMO Trust. The Great Plains Note Purchase Agreement also contains other customary loan covenants and default provisions.

The Notes will be collateralized by a security interest in the assets of the Ohio subsidiaries. The Notes will also be collateralized by Gas Natural’s pledge of all of the shares of capital stock of Lightning, Great Plains and Brainard, and pledges by Lightning and Great Plains of all of the shares of capital stock of Orwell and NEO respectively. Closing of the transactions contemplated by the Note Purchase Agreements is subject to utility regulatory approval.

Equity Offering

On November 15, 2010 Gas Natural Inc. completed an underwritten public offering of 2,100,000 shares of its common stock, of which 1,760,000 shares were sold by the Company and 340,000 shares were sold by certain selling shareholders, at a price of $10.00 per share. Net proceeds to the Company, after deducting underwriting discounts and commissions, were approximately $16.0 million. The Company did not receive any proceeds from the sale of shares by the selling shareholders.

The Company intends to use the net proceeds from the shares sold by the Company to expand its distribution systems as well as for working capital and general corporate purposes. Additionally, the Company’s Ohio utilities have $7.7 million of debt that will mature November 28, 2010. As discussed above, the Company has entered into a note purchase agreement with Sun Life to refinance this debt, which is subject to regulatory approvals. If it is unable to obtain regulatory approval, the Company may use a portion of the proceeds of the offering to retire all or a portion of the debt.

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

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

Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of us from time to time, including statements contained in filings with the SEC and our reports to shareholders, involve known and unknown risks and other factors that may cause our company’s actual results in future periods to differ materially from those expressed in any forward-looking statements. See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 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

We are a natural gas utility holding company with utility operations in Montana, Wyoming, Ohio, Pennsylvania, Maine and North Carolina. We distribute 29 billion cubic feet (bcf) of natural gas annually to approximately 62,000 residential, commercial and industrial customers. In addition to our core natural gas distribution business, we market approximately 2.4 bcf of natural gas annually to commercial and industrial customers in Montana and Wyoming. We also have an average 48% gross working interest (average 41% net revenue interest) in 160 natural gas producing wells and gas gathering assets that provide our marketing and production operation with a partial hedge when gas prices are greater than the cost of production. In addition, we own the Shoshone interstate and the Glacier gathering pipelines located in Montana and Wyoming. We have four reporting segments. Our primary segments are natural gas operations, marketing and production operations and pipeline operations. Our other segment is corporate and other.

Summary of Operating Results

For the quarter, our net loss was $45,000 as compared to a net loss of $172,000 in the same quarter of 2009, an increase in income of $127,000 or 74%. Net income for the nine months ended September 30, 2010 was $4.1 million, compared with $2.5 million for the same period in 2009, an increase of $1.6 million or 64%. Contributing to the results for the third quarter of 2010 was an income tax benefit totaling $506,000 relating to the true-up of amounts estimated and accrued to actual amounts from our recently filed 2009 federal and state income tax returns. The differences relate primarily to additional depreciation deductions allowed on the tax returns.

For the quarter, the natural gas segment incurred a net loss of $326,000 compared to net income of $10,000 for the same period last year, a decrease of $336,000 or 336%. The Ohio Companies are traditional utility operations with revenue streams heavily dependent on residential heating load and returned a net loss of $695,000 in this non-heating quarter. This was partially offset by an increase of $360,000 in net income from our existing operations, where we continue to add new customers and are expanding our facilities to meet strong demand. In addition the effect of the true-up related to our 2009 income tax return added $311,000 to the net income from existing operations. For the nine months ended September 30, 2010, natural gas operations contributed net income of $3.7 million compared to $2.1 million for the same period in 2009, an increase of 76%. Net income from the Ohio Companies accounted for $242,000 of the $1.6 million increase, with continued growth in our North Carolina and Maine operations accounting for the majority of the $1.3 million increase from existing operations.

In our marketing and production segment, we experienced decreased sales in our gas marketing operation in 2010 compared with 2009. A favorable differential between the AECO and CIG Rockies natural gas indexes led to increased sales in 2009 that were not available in 2010. This is offset by a $254,000 income tax benefit from the true-up of income tax expense to our filed 2009 income tax return. The result is an increase in earnings for the quarter of $287,000 to net income of $275,000 from a net loss of $12,000 for the same period in 2009. The trial in our lawsuit with Shelby Gas Association (“Shelby”) concluded on April 27, 2010 with the jury awarding Shelby damages in the amount of $522,000. After taking into account the existing liability of $82,000, we recorded the remaining liability and associated expense of $440,000 in the first quarter of 2010. This event, combined with the decreased sales in our gas marketing operation and the income tax benefit resulted in net income of $309,000 for the nine months ended September 30, 2010, compared with $677,000 for the same period in 2009, a decrease of $368,000 or 54%.

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Our pipeline operations segment generated net income of $83,000 for the three months ended September 30, 2010 compared to $74,000 for 2009, and net income of $143,000 for the nine months ended September 30, 2010, compared with $147,000 for the same period in 2009.

Corporate and other operations, for the fiscal third quarter returned a net loss of $76,000 compared with a net loss of $244,000 for the same period in 2009. For the nine months ended September 30, 2010, corporate and other operations returned a net loss of $22,000 compared with a net loss of $455,000 for the same period in 2009. A significant decrease in expenses related to acquisition activities, and a gain on the sale of marketable securities accounted for the positive effect on earnings. This is partially offset by $101,000 of income tax expense from the true-up of income tax expense to our filed 2009 income tax return.

Ohio Acquisitions

On January 5, 2010, we completed the acquisition of Lightning Pipeline Company, Inc. (“Lightning Pipeline”), Great Plains Natural Gas Company (“Great Plains”), Brainard Gas Corp. (“BGC”) and Great Plains Land Development Co., LTD. (“GPL,” and collectively with Lightning Pipeline, Great Plains and BGC, the “Ohio Companies”). Lightning Pipeline is the parent company of Orwell Natural Gas Company (“Orwell”) and Great Plains is the parent company of Northeast Ohio Natural Gas Corp. (“NEO”). Orwell, NEO and BGC are natural gas distribution companies that serve 23,131 customers in Northeastern Ohio and Western Pennsylvania. GPL is a real estate holding company whose primary asset is real estate that is leased to NEO. The 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 1,707,308 unregistered shares of our common stock. The issuance of shares as merger consideration was approved by the holders of our common stock at our annual meeting of stockholders on November 13, 2009. Our acquisition of the Ohio Companies was a substantial step in our growth, providing us with presence in the Midwestern United States and increasing our customers by more than 50%.

Where we refer to existing operations, we are including all operations in existence prior to the acquisition of the Ohio Companies. Generally, the contribution of the Cut Bank Gas Company, acquired in November 2009, to our financial results was immaterial given its small size, and its results are included in existing operations, unless otherwise noted.

Company Structure

On June 30, 2010, our shareholders approved the reincorporation of the Company from Montana to Ohio. Our directors unanimously recommended the reincorporation because they believe Ohio’s corporate law provides a more efficient, flexible and sophisticated platform from which to operate, which is appropriate given the financial growth and geographic expansion the Company has experienced over the past several years.

The reincorporation was effectuated on July 9, 2010. The reincorporation effected a change in the legal domicile of the Company and other changes of a legal nature, but did not result in any change in our business, our management personnel, our operations or the location of our facilities. The effect of the reincorporation is described in greater detail in our proxy statement for the June 30, 2010 annual meeting of shareholders.

As part of the reincorporation, the Company changed its name to “Gas Natural Inc.” The name Gas Natural Inc. better reflects our focus on natural gas distribution, which is important in light of the Company’s shift to the NYSE Amex stock exchange and our expansion into eastern and midwestern states where investors, the business community and the general public may be unfamiliar with the Company’s history, operations and recent growth. Our shares continue to trade on the NYSE Amex under the symbol “EGAS.”

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QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

The following discussion of our financial condition and results of operations should be read in conjunction with the 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, 2009. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of September 30, 2010 and for the three month period ended September 30, 2010. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.

Net Income (Loss)— Our net loss for the three months ended September 30, 2010 was approximately $45,000 compared with net loss of approximately $172,000 for the three months ended September 30, 2009, an increase in net income of $127,000 or 74%. The three months ended September 30, 2010 included a net loss of approximately $695,000 from the operations of the Ohio Companies, acquired on January 5, 2010. The revenue streams from these traditional utility operations are heavily dependent on residential heating load. This was partially offset by an increase in net income from existing natural gas operations of $360,000. Our gas marketing and production operations returned an increase in net income of $287,000. Net income from pipeline operations increased by $9,000. Our corporate and other segment reported an increase in earnings of $168,000 to a net loss of $76,000 in the three months ended September 30, 2010 from a net loss of $244,000 related primarily to acquisition related expenses in the same period of 2009.

Revenues— Our revenues for the three months ended September 30, 2010 were approximately $10.9 million compared with approximately $8.3 million for the three months ended September 30, 2009, an increase of $2.6 million. The increase was primarily attributable to: (1) natural gas operations revenue increased $4.1 million, due to incremental revenue gained from our recently acquired Ohio Companies of $2.6 million and an increase in revenues from our existing operations of $1.4 million, reflecting sales growth in our North Carolina and Maine markets and (2) a decrease in our marketing and production operation���s revenue of $1.4 million caused primarily by lower sales volumes in our Wyoming market, partially offset by an increase in production revenue.

Gross Margin— Gross margin increased $1.5 million, to approximately $5.7 million in the three months ended September 30, 2010 from approximately $4.2 million in the three months ended September 30, 2009. Our natural gas operation’s margins increased $1.7 million with $1.2 million coming from the recently acquired Ohio Companies, $355,000 from sales growth in our North Carolina and Maine markets and $100,000 from our recently acquired Cut Bank operation. Our marketing and production operation’s margin decreased by $81,000 due to lower sales in our marketing operation, offset by increased margin from higher prices and higher volumes produced in our production operation.

Expenses Other Than Cost of Goods Sold— Expenses other than cost of sales increased by $2.4 million to $6.3 million in the three months ended September 30, 2010 as compared with $3.9 million in the three months ended September 30, 2009. Expenses from the recently acquired Ohio Companies totaled $2.1 million and expenses from Cut Bank totaled $125,000. The remaining difference was caused by increases in distribution, general and administrative expenses in our existing operations.

Other Income (Loss)— Other income increased by $476,000 to income of $262,000 in the three months ended September 30, 2010 from a loss of $214,000 in the three months ended September 30, 2009. This increase was caused primarily by (1) other income from the Ohio Companies of $119,000, and (2) a $302,000 increase in other income in our corporate and other segment to income of $39,000 in the three months ended September 30, 2010, from a loss of $263,000 in the same period of 2009, caused by a significant decrease in expenses related to acquisition activities and gains on the sales of marketable securities.

Interest Expense— Interest expense increased by $188,000 to approximately $492,000 in the three months ended September 30, 2010 from approximately $304,000 in the three months ended September 30, 2009. Interest expense from the recently acquired Ohio Companies totaled $215,000, with the offsetting decrease coming from existing operations.

Income Tax Benefit— Income tax benefit increased by $640,000 to $741,000 in the three months ended September 30, 2010 as compared with $101,000 in the three months ended September 30, 2009. The income tax benefit from the Ohio Companies totaled $358,000 and was related to the pre-tax loss. Income tax benefit from existing operations increased by $282,000. This change reflects a $506,000 income tax benefit from the true-up of income tax expense to our filed 2009 income tax return, partially offset by an increase in income tax expense due to increased pre-tax income.

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Nine months ended September 30, 2010 Compared with Nine months ended September 30, 2009

The following gives effect to the unaudited Condensed Consolidated Financial Statements as of September 30, 2010 and for the nine month period ended September 30, 2010. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.

Net Income (Loss)— Our net income for the nine months ended September 30, 2010 was approximately $4.1 million compared to net income of approximately $2.5 million for the nine months ended September 30, 2009, an increase of approximately $1.6 million, or 64%. The nine months ended September 30, 2010 include net income of approximately $242,000 from the operations of the Ohio Companies, acquired on January 5, 2010. Net income from existing natural gas operations increased by $1.3 million. Our corporate and other segment reported an increase in earnings of $433,000 to a net loss of $22,000 in the nine months ended September 30, 2010, from a net loss of $455,000 in the same period of 2009. Net income from our gas marketing and production operations decreased by $368,000 and net income from our pipeline operations decreased by $4,000.

Revenues— Our revenues for the nine months ended September 30, 2010 were approximately $62.3 million compared with approximately $51.9 million for the nine months ended September 30, 2009, an increase of $10.4 million. The increase was primarily attributable to: (1) natural gas operations revenue increased $14.5 million, caused by revenue from our recently acquired Ohio Companies of $16.9 million and a decrease in revenues from our existing natural gas operations of $2.4 million due to lower commodity gas costs passed through to our customers, partially offset by increased sales in our North Carolina and Maine markets and (2) a decrease in our marketing and production operation’s revenue of $4.1 million caused primarily by lower sales volumes in our Wyoming market.

Gross Margin— Gross margin increased $8.3 million to approximately $25.5 million in the nine months ended September 30, 2010 from approximately $17.2 million in nine months ended September 30, 2009. Our natural gas operation’s margins increased $9.0 million with $6.9 million coming from the recently acquired Ohio Companies, $1.8 million from sales growth in our North Carolina and Maine markets and $500,000 from our recently acquired Cut Bank operation. Our marketing and production operation’s margin decreased by $726,000 due to lower sales in our marketing operation.

Expenses Other Than Cost of Goods Sold— Expenses other than cost of sales increased by $7.0 million to $18.9 million in the nine months ended September 30, 2010 compared with $11.9 million in the nine months ended September 30, 2009. Expenses from the recently acquired Ohio Companies totaled $6.2 million, and expenses from Cut Bank totaled $445,000. In our remaining operations, depreciation expense in our North Carolina and Maine operations was higher by $147,000 due to the system expansion to reach new customers in those service areas. The remaining increase was due to increases in other taxes and distribution, general and administrative expenses.

Other Income (Loss)— Other income increased by $683,000 to income of $359,000 in the nine months ended September 30, 2010 from a loss of $324,000 in the nine months ended September 30, 2009. This increase was caused primarily by (1) other income from the Ohio Companies of $468,000, (2) a $654,000 increase in other income in our corporate and other segment to income of $132,000 in the nine months ended September 30, 2010, from a loss of $522,000 in the same period of 2009, caused by a significant decrease in expenses related to acquisition activities, increased dividend income from marketable securities, and gains on the sale of marketable securities and (3) expense of $440,000 in marketing and production related to the conclusion of the lawsuit with Shelby Gas Association and an increase in expense of $19,000 from losses on our equity investment in Kykuit.

Interest Expense— Interest expense increased by $711,000 to approximately $1.6 million in the nine months ended September 30, 2010 from approximately $903,000 in the nine months ended September 30, 2009. Interest expense from the recently acquired Ohio Companies totaled $751,000 and was partially offset by a small decrease from existing operations.

Income Tax Expense— Income tax expense decreased by $318,000 to approximately $1.3 million in the nine months ended September 30, 2010 compared with approximately $1.6 million in the nine months ended September 30, 2009. Income tax expense from the Ohio Companies totaled $124,000. Offsetting this was a decrease in income tax expense from existing operations of $442,000, reflecting a $506,000 income tax benefit from the true-up of income tax expense to our filed 2009 income tax return and a $247,000 income tax benefit due to a change in the effective state tax rate for 2010. This was partially offset by an increase in income tax expense of $311,000 due to increased pre-tax income.

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Operating Results of our Natural Gas Operations

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Natural Gas Operations
Operating revenues	$	10,158,766		$	6,134,362		$	56,347,035		$	41,820,238
Gas purchased		4,803,027			2,398,039			32,343,603			26,862,370
Gross margin		5,355,739			3,736,323			24,003,432			14,957,868
Operating expenses		6,034,633			3,557,287			18,121,237			11,002,263
Operating income (loss)		(678,894	)		179,036			5,882,195			3,955,605
Other income		227,452			52,818			703,649			214,639
Income (loss) before interest and taxes		(451,442	)		231,854			6,585,844			4,170,244
Interest (expense)		(467,555	)		(282,582	)		(1,545,184	)		(822,753	)
Income (loss) before income taxes		(918,997	)		(50,728	)		5,040,660			3,347,491
Income tax benefit (expense)		593,268			60,611			(1,387,115	)		(1,240,131	)
Net income (loss)	$	(325,729	)	$	9,883		$	3,653,545		$	2,107,360

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

Natural Gas Revenues and Gross Margins— Our operating revenues in the three months ended September 30, 2010 increased by $4.1 million to approximately $10.2 million from approximately $6.1 million in the three months ended September 30, 2009. Revenues from our recently acquired Ohio Companies caused a $2.6 million increase in revenue. Revenues in our existing natural gas operations increased by $1.4 million. Increased revenues in our North Carolina and Maine markets account for $634,000, $175,000 comes from our recently acquired Cut Bank operation and the remainder is caused by increases in gas costs passed on to our customers.

Gas purchases in our natural gas operations increased by $2.4 million to approximately $4.8 million in the three months ended September 30, 2010 from approximately $2.4 million in the three months ended September 30, 2009. Gas purchases from our recently acquired Ohio Companies were $1.4 million. Gas purchases in our existing natural gas operations increased by approximately $1.0 million Increased sales in our North Carolina and Maine markets account for $279,000, $64,000 comes from our recently acquired Cut Bank operation and the remainder is caused by increases in the price of natural gas compared to the 2009 quarter.

Gross margin was approximately $5.4 million for the three months ended September 30, 2010, compared with approximately $3.7 million for the three months ended September 30, 2009. Of this increase of $1.7 million, the recently acquired Ohio Companies accounted for $1.2 million. Sales growth in our North Carolina and Maine markets accounted for $355,000 of the increase and $100,000 was earned from our recently acquired Cut Bank operation.

Natural Gas Operating Expenses— Our operating expenses were approximately $6.0 million for the three months ended September 30, 2010, compared with approximately $3.6 million for the three months ended September 30, 2009. The $2.4 million increase was due primarily to operating expenses from our recently acquired Ohio Companies of $2.1 million, and Cut Bank of $125,000, with the remaining increase due to increases in distribution general and administrative expenses in our existing operations.

Natural Gas Other Income— Other income increased by $174,000 to $227,000 in the three months ended September 30, 2010 from $53,000 in the three months ended September 30, 2009. Other income from the recently acquired Ohio Companies was $119,000, with the remaining income contributed by existing operations.

Natural Gas Interest Expense— Interest expense increased by $185,000 to $468,000 in the three months ended September 30, 2010 from $283,000 in the three months ended September 30, 2009. Interest expense from the recently acquired Ohio Companies was $215,000. This was partially offset by a decrease in interest expense from existing operations of $30,000.

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Natural Gas Income Tax Benefit —Income tax benefit increased by $532,000 to $593,000 in the three months ended September 30, 2010 from $61,000 in the three months ended September 30, 2009. The income tax benefit from the recently acquired Ohio Companies totaled $358,000 and was related to the pre-tax loss. Income tax benefit from existing operations increased by $174,000 and reflects a $311,000 income tax benefit from the true-up of income tax expense to our filed 2009 income tax return, partially offset by an increase in income tax expense due to increased pre-tax income.

Nine months ended September 30, 2010 Compared with Nine months ended September 30, 2009

Natural Gas Revenues and Gross Margins— Our operating revenues in the nine months ended September 30, 2010 increased by $14.5 million to approximately $56.3 million from approximately $41.8 million in the nine months ended September 30, 2009. Revenue from our recently acquired Ohio Companies was $16.9 million. Revenues in our existing natural gas operations decreased by $2.4 million. Our cost of gas passed through to customers in the first nine months of 2010 was significantly lower than our cost for the same period in 2009. This decrease was partially offset by increased sales in our North Carolina and Maine markets throughout the nine months of 2010.

Gas purchases in our natural gas operations increased by $5.4 million to approximately $32.3 million in the nine months ended September 30, 2010 from approximately $26.9 million in the nine months ended September 30, 2009. Gas purchases from our recently acquired Ohio Companies were $10.0 million. Gas purchases in our existing natural gas operations decreased by approximately $4.5 million. Due to pricing, our gas costs in the first nine months of 2010 were significantly lower than our costs for the same period in 2009. This decrease was partially offset by gas costs related to increased sales in our North Carolina and Maine markets throughout the nine months of 2010.

Gross margin was approximately $24.0 million for the nine months ended September 30, 2010, compared with approximately $15.0 million for the nine months ended September 30, 2009. Of this increase of $9.0 million, the recently acquired Ohio Companies accounted for $6.9 million. Sales growth in our North Carolina and Maine markets accounted for $1.8 million of the increase and $500,000 was earned from our recently acquired Cut Bank operation. These were offset by a slight decrease from our remaining operations.

Natural Gas Operating Expenses— Our operating expenses were approximately $18.1 million for the nine months ended September 30, 2010, compared with approximately $11.0 million for the nine months ended September 30, 2009. The $7.1 million increase was due primarily to operating expenses from our recently acquired Ohio Companies of $6.2 million, and Cut Bank of $445,000. In our existing operations, depreciation expense increased $147,000 due to investments in the expansion of the distribution systems of our North Carolina and Bangor operations. The remaining amount is due to increases in other taxes and distribution, general and administrative expenses.

Natural Gas Other Income— Other income increased by $489,000 to $704,000 in the nine months ended September 30, 2010 from $215,000 in the nine months ended September 30, 2009. Other income from the recently acquired Ohio Companies was $468,000, with a slight offsetting reduction in other income from existing operations.

Natural Gas Interest Expense— Interest expense increased by $722,000 to approximately $1.5 million in the nine months ended September 30, 2010 from $823,000 in the nine months ended September 30, 2009. Interest expense from the recently acquired Ohio Companies was $751,000, with the remaining difference coming from existing operations.

Natural Gas Income Tax Expense —Income tax expense increased by $147,000 to approximately $1.4 million in the nine months ended September 30, 2010 from approximately $1.2 million in the nine months ended September 30, 2009. Income tax expense from the recently acquired Ohio companies was $124,000. The remaining increase of $23,000 was caused by income tax expense of $447,000 on higher pre-tax income in our existing operations, offset by a $311,000 income tax benefit from the true-up of income tax expense to our filed 2009 income tax return and a $113,000 income tax benefit due to a change in the effective state tax rate for 2010.

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Operating Results of our Marketing and Production Operations

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Energy West Resources
Operating revenues	$	638,471		$	2,077,309		$	5,624,803		$	9,739,654
Gas purchased		380,934			1,738,394			4,435,153			7,824,121
Gross margin		257,537			338,915			1,189,650			1,915,533
Operating expenses		205,082			341,101			579,734			731,046
Operating income (loss)		52,455			(2,186	)		609,916			1,184,487
Other income (expense)		(4,199	)		(3,703	)		(476,259	)		(15,793	)
Income (loss) before interest and taxes		48,256			(5,889	)		133,657			1,168,694
Interest (expense)		(17,196	)		(17,605	)		(51,634	)		(69,512	)
Income (loss) before income taxes		31,060			(23,494	)		82,023			1,099,182
Income tax benefit (expense)		243,474			11,466			226,706			(422,030	)
Net income (loss)	$	274,534		$	(12,028	)	$	308,729		$	677,152

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

Marketing and Production Revenues and Gross Margins— Our revenues decreased approximately $1.4 million to $638,000 in the three months ended September 30, 2010 from approximately $2.1 million in the three months ended September 30, 2009. Retail gas revenues decreased by $1.5 million due to lower sales volumes in our Wyoming market. The three months ended September 30, 2009 included sales volumes caused by a favorable differential between the AECO and CIG Rockies natural gas indexes. This differential reversed and had a negative effect in the three months ended September 30, 2010. This decrease was partially offset by an increase in production revenues of $110,000 due to higher volumes produced and higher prices received.

The gross margin in our marketing and production operations decreased $81,000 to approximately $258,000 in the three months ended September 30, 2010 from approximately $339,000 in the three months ended September 30, 2009. Gross margin from retail gas decreased by $165,000. This was due to the lower sales volumes, offset by an increase in gross margin from gas production of $84,000 due to the higher revenue from volumes produced.

Marketing and Production Operating Expenses— Our operating expenses decreased approximately $136,000, to $205,000 in the three months ended September 30, 2010 from $341,000 in the three months ended September 30, 2009. The three months ended September 30, 2009 included a one-time payment of approximately $139,000 made to the pipeline company that delivers much of our gas supply for facilities improvements.

Marketing and Production Other Income (loss)— Losses on our equity investment in Kykuit resulted in losses of $2,800 in the three months ended September 30, 2010 and $3,700 in the three months ended September 30, 2009.

Marketing and Production Interest Expense— Interest expense stayed flat at $17,100 in the three months ended September 30, 2010 and $17,600 in the three months ended September 30, 2009.

Marketing and Production Income Tax Benefit— Income tax benefit increased approximately $232,000 to $243,000 in the three months ended September 30, 2010 from $11,000 in the three months ended September 30, 2009, due to a $254,000 income tax benefit from the true-up of income tax expense to our filed 2009 income tax return and slightly offset by an increase in income tax expense due to increased pre-tax income.

Nine months ended September 30, 2010 Compared with Nine months ended September 30, 2009

Marketing and Production Revenues and Gross Margins— Our revenues decreased $4.1 million to approximately $5.6 million in the nine months ended September 30, 2010 from approximately $9.7 million in the nine months ended September 30, 2009. This decrease is due primarily to lower sales volumes in our Wyoming market. The nine months ended September 30, 2009 included sales volumes caused by a favorable differential between the AECO and CIG Rockies indexes. This differential turned the other direction and was unfavorable in the nine months ended September 30, 2010. Production revenues stayed flat from the 2009 period to the 2010 period.

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The gross margin in our marketing and production operations decreased $726,000 to approximately $1.2 million in the nine months ended September 30, 2010 from approximately $1.9 million in the nine months ended September 30, 2009. Gross margin from retail gas decreased by $745,000 due to the lower sales volumes and gross margin from gas production increased by $19,000.

Marketing and Production Operating Expenses— Our operating expenses decreased approximately $151,000, to $580,000 in the nine months ended September 30, 2010 from $731,000 in the nine months ended September 30, 2009. The nine months ended September 30, 2009 included a one-time payment of approximately $139,000 made to the pipeline company that delivers much of our gas supply for facilities improvements.

Marketing and Production Other Income (loss)— We incurred a loss of $476,000 in the nine months ended September 30, 2010. The trial in our lawsuit with Shelby Gas Association (“Shelby”) concluded on April 27, 2010 with the jury awarding Shelby damages in the amount of $522,000. We had an existing liability recorded of $82,000 and recorded the remaining liability and associated expense of $440,000 in the first quarter of 2010. In 2010 we also incurred a loss of $35,000 on our equity investment in Kykuit. For the nine months ended September 30, 2009, we incurred a loss of $16,000, which is attributable to our equity investment in Kykuit.

Marketing and Production Interest Expense— Interest expense decreased approximately $18,000 to $52,000 in the nine months ended September 30, 2010 from $70,000 in the nine months ended September 30, 2009.

Marketing and Production Income Tax Expense— Income tax expense decreased approximately $649,000 to a benefit of $227,000 in the nine months ended September 30, 2010 from an expense of $422,000 in the nine months ended September 30, 2009, due to the tax benefit of $343,000 on the decrease in pre-tax income, the tax benefit of $254,000 related to the true-up of income tax expense to our filed 2009 income tax return and the tax benefit of $52,000 due to a change in the effective state tax rate for 2010.

Operating Results of our Pipeline Operations

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Pipeline Operations
Operating revenues	$	104,461		$	114,417		$	319,418		$	338,484
Gas purchased		—			—			—			—
Gross margin		104,461			114,417			319,418			338,484
Operating expenses		33,917			40,929			149,543			140,894
Operating income		70,544			73,488			169,875			197,590
Other income		—			—			—			—
Income before interest and taxes		70,544			73,488			169,875			197,590
Interest (expense)		(7,627	)		(4,217	)		(17,316	)		(10,151	)
Income before income taxes		62,917			69,271			152,559			187,439
Income tax benefit (expense)		19,646			4,516			(9,276	)		(40,926	)
Net income	$	82,563		$	73,787		$	143,283		$	146,513

Net income increased $9,000 to approximately $83,000 in the three months ended September 30, 2010 from approximately $74,000 in the three months ended September 30, 2009. The overall impact of the results of our pipeline operations was not material to our results of consolidated operations.

Net income decreased $4,000 to approximately $143,000 in the nine months ended September 30, 2010 from approximately $147,000 in the nine months ended September 30, 2009. The overall impact of the results of our pipeline operations was not material to our results of consolidated operations.

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Results of our Corporate and Other Operations

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Corporate and Other
Operating revenues	$	—		$	—		$	—		$	—
Gas purchased		—			—			—			—
Gross margin		—			—			—			—
Operating expenses		—			5,829			11,364			5,829
Operating loss		—			(5,829	)		(11,364	)		(5,829	)
Other income (expense)		38,909			(262,727	)		131,585			(522,376	)
Income (loss) before interest and taxes		38,909			(268,556	)		120,221			(528,205	)
Interest expense		—			—			—			(339	)
Income (loss) before income taxes		38,909			(268,556	)		120,221			(528,544	)
Income tax benefit (expense)		(114,982	)		24,441			(141,759	)		73,854
Net income (loss)	$	(76,073	)	$	(244,115	)	$	(21,538	)	$	(454,690	)

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 Inc.’s holding company functions. Therefore, it does not have standard revenues, gas purchase costs, or gross margin.

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

Results of corporate and other operations for the three months ended September 30, 2010 include dividends from marketable securities of approximately $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 approximately $76,000.

Results of corporate and other operations for the three months ended September 30, 2009 include administrative and general costs of $6,000, costs related to acquisition activities of $315,000, offset by dividends from marketable securities of approximately $52,000 and income tax benefit of approximately $24,000, for a net loss of approximately $244,000.

Nine months ended September 30, 2010 Compared to Nine months ended September 30, 2009

Results of corporate and other operations for the nine months ended September 30, 2010 included dividends from marketable securities of approximately $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, 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 approximately $22,000 is the result.

Results of corporate and other operations for the nine months ended September 30, 2009 included administrative and general costs of $6,000, costs related to acquisition activities of $662,000, offset by dividends from marketable securities of approximately $139,000 and the applicable income tax benefit of approximately $74,000, for a net loss of approximately $455,000.

Sources and Uses of Cash

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

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Our ability to maintain liquidity depends upon our $20.0 million credit facility with Bank of America, our $2.1 million credit facility with Citizens Bank, and our $1.5 million credit facility with Huntington National Bank N.A., shown in total as line of credit on the accompanying balance sheets. Our use of revolving lines of credit totaled $18.2 million at September 30, 2010 and consisted of $14.6 million at the Bank of America, $2.1 million at Citizens Bank, and $1.5 million at Huntington National Bank, N.A. This was an increase of $8.2 million from our $10.0 million line of credit balance at September 30, 2009 and was caused primarily by the purchase of the Ohio Companies and their existing liabilities, and capital expenditures in our Maine and North Carolina operations.

Long-term and current debt was $27.2 million at September 30, 2010, and $13.0 million at September 30, 2009. $15.1 million of total debt was purchased as part of the Ohio Companies acquisition, and $895,000 in payments were made since the purchase date.

Cash increased by $3.6 million from December 31, 2009 to September 30, 2010, compared with the $100,000 decrease in cash for the nine months ended September 30, 2009, as shown in the following table:

	September 30,
	2010			2009
Cash provided by operating activities	$	6,851,125		$	17,540,626
Cash used in investing activities		151,743			(8,344,812	)
Cash used in financing activities		(3,371,609	)		(9,295,437	)
Increase (decrease) in cash	$	3,631,259		$	(99,623	)

Cash provided by operating activities was approximately $10.7 million lower in the nine months ended September 30, 2010 than the nine months ended September 30, 2009. The use of cash for gas inventory increased by $4.4 million and is a combination of an increase in amounts paid in 2010 of $1.4 million, compared to a decrease of $3.0 million in 2009, all due to pricing. Other items affecting the use of cash include a $5.8 million increase in refunds of refundable costs of gas, and a $4.7 million increase in payments of accounts payable. These are partially offset by a $4.0 million increase in accounts receivable collections.

Cash provided by investing activities was approximately $8.5 million higher in the nine months ended September 30, 2010, than the nine months ended September 30, 2009. This was primarily due to a $5.5 million increase from marketable securities transactions. Other changes included a $2.8 million decrease in construction expenditures, a $200,000 increase in cash paid for acquired companies, a $300,000 decrease in cash paid for other investments, and a $100,000 increase in cash purchased in acquisitions.

Cash used in financing activities in the nine months ended September 30, 2010 was $3.4 million. This was $5.9 million less than the cash used of $9.3 million in the nine months ended September 30, 2009 and was due to increased net borrowings on the credit lines of $7.5 million, increased payments of $800,000 on long and short-term borrowings, and an $800,000 increase in dividends paid as compared to the nine months ended September 30, 2009.

Liquidity and Capital Resources

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 working capital lines 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.

With the acquisition of the Ohio Companies, we now have two additional lines of credit from Citizens Bank and Huntington National Bank, N.A., which are used for working capital needs by NEO and Orwell, respectively.

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Long Term Debt and Bank of America Line of Credit

Long-term Debt—$13.0 million 6.16% Senior Unsecured Notes— On June 29, 2007, we issued $13.0 million aggregate principal amount of our 6.16% Senior Unsecured Notes, due June 29, 2017. The proceeds of these notes were used to refinance our existing notes. With this refinancing, we expensed the remaining debt issue costs of $991,000 in fiscal 2007, and incurred approximately $496,000 in new debt issue costs to be amortized over the life of the new note.

Bank of America Line of Credit— On June 29, 2007, we established our five-year unsecured credit facility with Bank of America, replacing a previous $20.0 million one-year facility with Bank of America which was scheduled to expire in November 2007. The credit facility includes an annual commitment fee equal to 0.20% of the unused portion of the facility and interest on amounts outstanding at the London Interbank Offered Rate, plus 120 to 145 basis points, for interest periods selected by us. At September 30, 2010, the Company had $14.6 million in borrowings on the line of credit.

The following table represents borrowings under the Bank of America revolving line of credit for the quarter ended September 30, 2010.

Minimum borrowing	$	9,900,000
Maximum borrowing	$	3,598,000
Average borrowing	$	4,372,000

Our 6.16% Senior Unsecured Notes 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.

Citizens Bank Credit Facility

In connection with our acquisition of our Ohio operations, NEO, Great Plains and GPL each entered modifications/amendments to its credit facility with Citizens Bank (the “Citizens Credit Facility”). The Citizens Credit Facility consists of a revolving line of credit and term loan to NEO, and two other term loans to Great Plains and GPL 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 guarantees each loan. Our chairman and chief executive officer, Richard M. Osborne, guarantees each loan both individually and as trustee of the RMO Trust, and Great Plains guarantees NEO’s revolving line of credit and term loan as well as GPL’s term note.

Long-term Debt — $10.3 million 5.00% Senior Secured Notes—NEO’s, Great Plains’ and GPL’s term loans with Citizens Bank are in the amounts of $6.8 million, $2.3 million and $783,000 respectively. Each term note has a maturity date of July 1, 2013 and bears interest at an annual rate of 30-day LIBOR (Eurodollar) plus 400 basis points with an interest rate floor of 5.00% per annum. Currently, the interest rate is 5.00% per annum. The term notes require monthly payments of approximately $102,000 in the aggregate.

Line of Credit—NEO’s revolving credit line with Citizens Bank has a maximum credit commitment of $2.1 million. The revolving line bears interest at an annual rate of 30-day LIBOR (Eurodollar) plus 400 basis points with an interest rate floor of 5.00% per annum. Currently, the interest rate is 5.00% per annum. The revolving line requires monthly interest payments with the principal due at maturity, November 29, 2010.

The Citizens Credit Facility requires Great Plains, GPL and NEO to maintain a 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 requires NEO, Great Plains and GPL to maintain a minimum net worth, on a combined basis, 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 allows NEO, Great Plains and GPL to pay dividends to Gas Natural if those entities’ combined net worth (as defined in the Citizens loan documents) after payment of any dividends would not be less than $1,815,000 on a consolidated basis as positively increased by 100% of net income as of the end of each fiscal quarter and fiscal year.

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At September 30, 2010, $2.1 million has been borrowed under the revolving line of credit, $6.7 million under the NEO term loan, $2.3 million under the Great Plains term loan and $768,000 under the GPL term loan.

Huntington Credit Facility

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 Credit Facility amends and restates the previous credit facility that matured on November 30, 2009. The loan is secured by all of the assets of Orwell. The Huntington Credit Facility is guaranteed by Gas Natural, Lightning Pipeline, Mr. Osborne individually and as Trustee of the RMO Trust, and certain entities owned and controlled by Mr. Osborne.

Long-term Debt— $4.6 Million Senior Secured Note— The Huntington Credit Facility includes a $4.6 million term note that bears interest at an annual rate of 30-day LIBOR (Eurodollar) plus 300 basis points with LIBOR floor of 1% per annum. Currently, the interest rate is 4.00% per annum. The term note requires monthly payments of approximately $33,000 and matures on November 28, 2010.

Line of Credit— The Huntington Credit Facility also includes a $1.5 million line of credit. The credit line bears interest at an annual rate of 30-day LIBOR (Eurodollar) plus 300 basis points with LIBOR floor of 1% per annum. Currently, the interest rate is 4.00% per annum. The credit line requires monthly interest payments with the principal due at maturity, November 28, 2010.

The Huntington Credit Facility requires Orwell to maintain a fixed charge coverage ratio of at least 1 to 1 of EBITDA to the sum of (i) scheduled principal payments on debt and capital leases, plus (ii) interest expense, plus (iii) federal, state and local income tax expense, plus (iv)dividends and distributions, measured on a rolling four quarter basis. The Huntington Credit Facility allows Orwell to pay dividends to Gas Natural as long as the aggregate amount of all dividends, distributions, redemptions and repurchases in any fiscal year do not exceed 60% of net income (as defined in the Huntington Credit Facility) of Orwell for each fiscal year. At September 30, 2010, $1.5 million has been borrowed under the credit line and $4.1 million under the term note. The Huntington Credit Facility is also secured by a pledge of 300,000 shares of Gas Natural stock by the RMO Trust.

Combined Term Loans and Credit Facilities

At September 30, 2010, the Company had approximately $6.4 million in cash ($5.7 million net of bank overdrafts). In addition, at September 30, 2010, Gas Natural had $18.2 million in borrowings under its lines of credit and our net available borrowing capacity at September 30 was $5.4 million.

The total amount outstanding under all Gas Natural’s long-term debt obligations was $27.2 million and $13.0 million at September 30, 2010 and 2009 respectively. The portion of such obligations due within one year was $5.0 million and $0 at September 30, 2010, and 2009, respectively.

At September 30, 2010 and 2009, we believe we were in compliance with the financial convenants under our debt agreements.

Our debt service requirements have increased significantly as a result of acquiring the Ohio Companies, making us more leveraged on a consolidated basis. As stated above, our debts under the Huntington Credit Facility and the Citizens revolving credit line, which totaled approximately $7.7 million as of September 30, 2010, will mature in November 2010.

On November 1, 2010, we entered into a note purchase agreement with Sun Life to refinance the existing debt of our Ohio subsidiaries. Under the note purchase agreement, our Ohio utilities, Orwell, NEO, and BGC, agreed to issue and sell to Sun Life a $17.7 million senior secured guaranteed promissory note on or before November 28, 2010 in a private placement . The proceeds will be used to retire $5.8 million of debt incurred by Orwell under its $4.3 million term loan and $1.5 million line of credit with The Huntington National Bank, N.A., and $9.5 million of debt incurred by NEO and its affiliate, GPL, under a credit facility with Citizens Bank, N.A. Closing of these transactions is subject to utility regulatory approval. We cannot guarantee that we will be able to obtain the requisite regulatory approvals before the Huntington and Citizens debt matures at the end of November. Please refer to Note 15 in the Notes to Condensed Consolidated Financial Statements for a complete discussion of the Sun Life agreements.

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Capital Expenditures

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 Ohio, North Carolina and Maine to meet the high customer interest in natural gas service in those three service areas. For the twelve months ended December 31, 2009, our total capital expenditures were approximately $8.9 million. During the nine months ended September 30, 2010 and 2009 capital expenditures were $4.0 million and $6.7 million, respectively. We estimate future cash requirements for capital expenditures will be as follows:

	Estimated
	Future Cash
	Requirements
	through 12/31/10
	(In thousands)
Natural Gas Operations	$	7,957
Energy West Resources		—
Pipeline Operations		104
Total capital expenditures	$	8,061

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 DISCLOSURES ABOUT MARKET RISK

We are subject to certain market risks, including commodity price risk (i.e., natural gas and propane 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 the financial statements for a description of our accounting policies and other information related to these financial instruments.

Commodity Price Risk

We seek to protect ourselves against natural gas price fluctuations by limiting the aggregate level of net open positions that are exposed to market price changes. We manage open positions with policies 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 our results of operations are not significantly exposed to changes in natural gas prices.

Interest Rate Risk

Our results of operations are affected by fluctuations in interest rates (e.g. interest expense on debt). We mitigate this risk by entering into long-term debt agreements with fixed interest rates. Some of our notes payable, however, may be subject to variable interest rates that we may mitigate by entering into interest rate swaps. A hypothetical 100 basis point change in market rates applied to the balance of the notes payable would change our interest expense by approximately $249,000 annually.

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 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 counterparty may default due to circumstances relating directly to it, but also the risk that a counterparty may default due to circumstances which relate to other market participants that have a direct or indirect relationship with such counterparty. We seek to mitigate credit risk by evaluating the financial strength of potential counterparties. However, despite mitigation efforts, defaults by counterparties may occur from time to time. To date, no such default has occurred.

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Equity Price Risk

Equity securities are subject to equity price risk, which is defined as the potential for loss in market value due to a decline in equity prices. The value of common stock equity investments is dependent upon the general conditions in the securities markets and the business and financial performance of the individual companies in the portfolio. Values are typically based on future economic prospects as perceived by investors in the equity markets. We regularly review the carrying value of our investments and identify and record losses when events and circumstances indicate that such declines in the fair value of such assets below our accounting basis are other-than-temporary. For additional discussion of our equity securities, see Note 2 to the unaudited financial statements included herein.

ITEM 4 — CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2010, 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, 2010.

Changes in Internal Control over Financial Reporting

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

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS.

Legal Proceedings—We are party to certain legal proceedings in the normal course of our business that, in the opinion of management, are not material to our business or financial condition.

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.
	32.1	*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed or furnished herewith.

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SIGNATURES

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

	Gas Natural Inc.
	/s/Thomas J. SmithThomas J. Smith
November 15, 2010	Chief Financial Officer (principal financial officer and principal accounting officer)

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