Gas Natural 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

or

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

For the transition period from                    to                    

Commission file number 001-34585

GAS NATURAL INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

The number of shares outstanding of the registrant’s common stock as of August 9, 2013 was 10,371,678 shares.

As used in this Form 10-Q, the terms “Company,” “Gas Natural,” “Registrant,” “we,” “us” and “our” mean Gas Natural Inc. and its consolidated subsidiaries as a whole, unless the context indicates otherwise. Except as otherwise stated, the information is this Form 10-Q is as of June 30, 2013.

GLOSSARY OF TERMS

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

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

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

ASU. Accounting Standards Update.

Bangor Gas Company. Bangor Gas Company, LLC.

Brainard. Brainard Gas Corp.

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

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

Citizens.Citizens Bank of Michigan.

Clarion River. Clarion River Gas Company.

CNG. Compressed Natural Gas.

Cut Bank Gas. Cut Bank Gas Company.

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

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

EPA. The United States Environmental Protection Agency.

EWR. Energy West Resources, Inc.

Energy West. Energy West, Incorporated.

Energy West Development.Energy West Development, Inc.

Energy West Montana. Energy West Montana, Inc.

Energy West Wyoming. Energy West Wyoming, Inc.

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

FASB. Financial Accounting Standards Board.

FERC. The Federal Energy Regulatory Commission.

Frontier Natural Gas. Frontier Natural Gas, LLC.

Frontier Utilities. Frontier Utilities of North Carolina, Inc.

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

GCR.Gas cost recovery.

Gas Natural.Gas Natural Inc.

GNR. Gas Natural Resources , LLC.

GNSC. Gas Natural Service Company, LLC.

GPL. Great Plains Land Development Co., Ltd.

Great Plains. Great Plains Natural Gas Company.

Independence. Independence Oil, LLC.

IFRS. International Financial Reporting Standards.

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

KPSC. Kentucky Public Service Commission.

Kykuit. Kykuit Resources, LLC.

LIBOR.London Interbank Offered Rate.

Lightning Pipeline. Lightning Pipeline Company, Inc.

LNG.Liquified Natural Gas.

Lone Wolfe.Lone Wolfe Insurance, LLC.

MHRA.Maine Human Rights Act.

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

MPSC. The Montana Public Service Commission.

MPUC. The Maine Public Utilities Commission.

NCUC. The North Carolina Utilities Commission.

NEO. Northeast Ohio Natural Gas Corp.

NGA. The Natural Gas Act.

OCC.Ohio Consumers’ Counsel.

Orwell. Orwell Natural Gas Company.

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

PaPUC. The Pennsylvania Public Utility Commission.

PGC. Public Gas Company, Inc.

PUCO. The Public Utilities Commission of Ohio.

Penobscot Natural Gas. Penobscot Natural Gas Company, Inc.

SEC. The United States Securities and Exchange Commission.

Spelman.Spelman Pipeline Holdings, LLC.

SunLife.SunLife Assurance Company of Canada.

USPF.United States Power Fund, L.P.

Walker Gas. Walker Gas & Oil Company, Inc.

WPSC. The Wyoming Public Service Commission.

GAS NATURAL INC.

INDEX TO FORM10-Q

	Page No.
Part I- Financial Information
Item 1 – Financial Statements
Condensed Consolidated Balance Sheets June 30, 2013 (Unaudited) and December 31, 2012		F-1
Condensed Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2013 and 2012 (Unaudited)		F-3
Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2013 and 2012 (Unaudited)		F-4
Notes to Unaudited Condensed Consolidated Financial Statements		F-6
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
Item 3 – Quantitative and Qualitative Disclosures About Market Risk		16
Item 4 – Controls and Procedures		16
Part II – Other Information
Item 1 – Legal Proceedings		17
Item 6 – Exhibits		17
Signatures		18

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	June 30, 2013			December 31, 2012
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,783,341		$	3,435,117
Marketable securities		354,375			344,346
Accounts receivable
Trade, less allowance for doubtful accounts of $1,408,043 and $1,389,762, respectively		6,910,050			11,933,201
Related parties		110,478			522,557
Unbilled gas		1,637,002			4,612,258
Note receivable – related parties, current portion		1,785			12,615
Inventory
Natural gas and propane		3,620,164			5,092,240
Materials and supplies		2,742,919			1,835,816
Prepaid income taxes		454,883			498,297
Prepayments and other		463,853			2,224,267
Recoverable cost of gas purchases		3,072,480			2,329,524
Deferred tax asset		828,730			828,730
Total current assets		22,980,060			33,668,968
PROPERTY, PLANT, & EQUIPMENT
Property, plant, and equipment		174,527,428			165,662,163
Less accumulated depreciation, depletion and amortization		(49,835,133	)		(47,034,673	)
PROPERTY, PLANT, & EQUIPMENT, net		124,692,295			118,627,490
OTHER ASSETS
Notes receivable – related parties, less current portion		97,344			122,650
Regulatory assets
Property taxes		166,365			307,732
Income taxes		452,645			452,645
Rate case costs		160,966			176,250
Debt issuance costs, net of amortization		1,593,642			1,798,720
Goodwill		16,516,895			14,891,377
Customer relationships		3,105,083			616,500
Investment in unconsolidated affiliate		352,704			321,731
Restricted cash		2,089,006			3,150,847
Other assets		96,086			328,549
Total other assets		24,630,736			22,167,001
TOTAL ASSETS	$	172,303,091		$	174,463,459

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

F-1

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	June 30, 2013		December 31, 2012
	(unaudited)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Checks in excess of amounts on deposit	$	604,232	$	720,340
Lines of credit		16,200,000		24,260,755
Accounts payable
Trade		7,897,182		9,201,722
Related parties		708,358		51,797
Notes payable, current portion		506,522		633,498
Contingent consideration, current portion		196,000		—
Accrued liabilities
Taxes other than income		2,118,662		2,548,717
Vacation		147,604		115,956
Employee benefit plans		284,596		145,959
Interest		180,426		191,263
Deferred payments received from levelized billing		1,601,969		2,822,926
Customer deposits		721,068		744,974
Related parties		46,783		595,240
Obligation under capital lease – current		167,518		167,518
Over-recovered gas purchases		1,146,878		1,185,034
Other current liabilities		668,093		729,550
Total current liabilities		33,195,891		44,115,249
LONG-TERM LIABILITIES
Deferred investment tax credits		144,786		155,317
Deferred tax liability		7,829,969		5,144,002
Asset retirement obligation		1,936,498		1,850,379
Customer advances for construction		1,019,632		1,009,232
Regulatory liability for income taxes		83,161		83,161
Regulatory liability for gas costs		—		20,745
Long-term obligation under capital lease, less current portion		2,040,508		2,040,508
Contingent consideration, less current portion		1,279,000		—
Total long-term liabilities		14,333,554		10,303,344
NOTES PAYABLE, less current portion		43,448,552		43,700,742
COMMITMENTS AND CONTINGENCIES (see Note 12)
STOCKHOLDERS’ EQUITY
Preferred stock; $0.15 par value, 1,500,000 shares authorized, no shares issued or outstanding		—		—
Common stock; $0.15 par value, 15,000,000 shares authorized, 8,646,678 and 8,369,752 shares issued and outstanding, respectively		1,297,002		1,255,463
Capital in excess of par value		47,017,268		44,256,493
Accumulated other comprehensive income		71,996		65,789
Retained earnings		32,938,828		30,766,379
Total stockholders’ equity		81,325,094		76,344,124
TOTAL CAPITALIZATION		124,773,646		120,044,866
TOTAL LIABILITIES AND CAPITALIZATION	$	172,303,091	$	174,463,459

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

F-2

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
REVENUES
Natural gas operations	$	17,746,297		$	12,801,547		$	57,690,959		$	42,649,632
Marketing and production		2,645,682			1,040,354			6,217,461			2,947,448
Pipeline operations		105,032			102,093			203,319			209,877
Propane operations		658,385			561,552			2,360,959			2,470,710
Total revenues		21,155,396			14,505,546			66,472,698			48,277,667
COST OF SALES
Natural gas purchased		10,049,089			5,447,322			34,165,510			22,684,216
Marketing and production		2,232,922			850,311			5,092,957			2,245,727
Propane purchased		450,702			418,482			1,604,343			1,849,751
Total cost of sales		12,732,713			6,716,115			40,862,810			26,779,694
GROSS MARGIN		8,422,683			7,789,431			25,609,888			21,497,973
OPERATING EXPENSES
Distribution, general, and administrative		5,752,110			5,236,512			11,427,097			10,449,432
Maintenance		309,846			316,722			678,525			612,957
Depreciation and amortization		1,557,037			1,304,472			3,052,870			2,547,816
Accretion		43,512			39,554			86,119			77,634
Taxes other than income		919,844			880,306			1,849,648			1,817,796
Total operating expenses		8,582,349			7,777,566			17,094,259			15,505,635
OPERATING INCOME (LOSS)		(159,666	)		11,865			8,515,629			5,992,338
LOSS FROM UNCONSOLIDATED AFFILIATE		(2,947	)		(2,214	)		(4,027	)		(4,955	)
OTHER INCOME, NET		382,590			264,097			390,459			310,767
ACQUISITION EXPENSE		19,345			(457,624	)		(156,534	)		(576,347	)
STOCK SALE EXPENSE		—			(255,279	)		—			(255,279	)
INTEREST EXPENSE		(774,442	)		(625,797	)		(1,583,998	)		(1,289,866	)
INCOME (LOSS) BEFORE INCOME TAXES		(535,120	)		(1,064,952	)		7,161,529			4,176,658
INCOME TAX BENEFIT (EXPENSE)		208,204			340,762			(2,700,722	)		(1,618,001	)
NET INCOME (LOSS)	$	(326,916	)	$	(724,190	)	$	4,460,807		$	2,558,657
Basic weighted shares outstanding		8,465,983			8,155,867			8,425,647			8,155,300
Dilutive effect of stock options		—			—			847			7,386
Diluted weighted shares outstanding		8,465,983			8,155,867			8,426,494			8,162,686
Basic and diluted earnings (loss) per share	$	(0.04	)	$	(0.09	)	$	0.53		$	0.31
Weighted average dividends declared per common share	$	0.135		$	0.135		$	0.270		$	0.270
COMPREHENSIVE INCOME (LOSS):
NET INCOME (LOSS)	$	(326,916	)	$	(724,190	)	$	4,460,807		$	2,558,657
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available for sale securities, net of tax of $2,209, $(9,273), $4,103, and $(3,794), respectively		3,642			(15,477	)		6,207			(6,331	)
COMPREHENSIVE INCOME (LOSS)	$	(323,274	)	$	(739,667	)	$	4,467,014		$	2,552,326

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

F-3

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

	For the Six Months Ended June 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,460,807		$	2,558,657
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		3,052,870			2,547,816
Accretion		86,119			77,634
Amortization of debt issuance costs		212,569			139,388
Stock based compensation		1,615			29,618
(Gain)/loss on sale of assets		(123,103	)		2,184
Loss from unconsolidated affiliate		4,027			4,955
Investment tax credit		(10,531	)		(10,531	)
Deferred income taxes		2,725,561			1,628,532
Changes in assets and liabilities
Accounts receivable, including related parties		5,435,230			4,441,447
Unbilled gas		2,975,256			3,166,003
Natural gas and propane inventory		1,472,076			3,785,744
Accounts payable, including related parties		(899,739	)		(4,843,189	)
Recoverable/refundable cost of gas purchases		(781,112	)		(952,398	)
Prepayments and other		1,760,414			344,667
Other assets		(916,425	)		209,790
Other liabilities		(2,013,559	)		(897,090	)
Net cash provided by operating activities		17,442,075			12,233,227
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(9,885,601	)		(8,766,629	)
Proceeds from sale of fixed assets		1,023,836			29,302
Proceeds from related party notes receivable		5,217			5,038
Purchase of Public Gas Company, Inc.		—			(1,551,478	)
Cash acquired in acquisition		—			502
Investment in unconsolidated affiliate		(35,000	)		—
Restricted cash – capital expenditures fund		1,060,190			—
Acquisition deposit		—			(2,250,000	)
Customer advances for construction		26,155			142,448
Contributions in aid of construction		273,510			47,402
Net cash used in investing activities		(7,531,693	)		(12,343,415	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lines of credit		8,207,000			7,012,377
Repayments on lines of credit		(16,267,755	)		(11,510,000	)
Repayments of notes payable		(379,166	)		(3,852	)
Debt issuance costs		(7,492	)		(474,723	)
Exercise of stock options		159,500			—
Restricted cash – debt service fund		1,651			(759,397	)
Dividends paid		(2,275,896	)		(2,201,918	)
Net cash used in financing activities		(10,562,158	)		(7,937,513	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(651,776	)		(8,047,701	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,435,117			10,504,845
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,783,341		$	2,457,144

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

F-4

Gas Natural Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

	For the Six Months Ended June 30,
	2013			2012
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	1,382,445		$	1,066,626
Cash paid (refunded) for income taxes, net		(14,310	)		186,600
NONCASH INVESTING AND FINANCING ACTIVITIES
Shares issued to purchase JDOG Marketing	$	2,641,199		$	—
Contingent consideration issued to purchase JDOG Marketing		1,475,000			—
Plant, property and equipment acquired from JDOG purchase		21,600			—
Customer relationships acquired from JDOG purchase		2,500,000			—
Goodwill acquired from JDOG purchase		1,625,518			—
Note payable assumed to purchase JDOG Marketing		30,919			—
Capital expenditures included in accounts payable		881,054			477,339
Capitalized interest		3,796			3,641
Accrued dividends		389,101			367,000
Customer advances for construction moved to contribution in aid of construction		15,755			—

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

F-5

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Business and Basis of Presentation

Nature of Business

Gas Natural Inc. (the “Company”) is the parent company of Brainard, Energy West, GNR, GNSC, Great Plains, Independence, Lightning Pipeline and PGC. Brainard is a natural gas utility company with operations in Ohio. Energy West is the parent company of multiple entities that are natural gas utility companies with regulated operations in Maine, Montana, North Carolina and Wyoming as well as non-regulated operations in Maine, Montana and Wyoming. GNR is a natural gas marketing company that markets gas in Ohio. GNSC manages gas procurement, transportation, and storage for Brainard and subsidiaries of Lightning Pipeline and Great Plains. Great Plains is the parent company of NEO, which is a regulated natural gas distribution company with operations in Ohio. Lightning Pipeline is the parent company of Orwell which is a regulated natural gas distribution company with operations in Ohio. Clarion River and Walker Gas are divisions of Orwell and are regulated natural gas distribution companies with operations in Pennsylvania. Independence is a non-regulated subsidiary that delivers liquid propane, heating oil, and kerosene to customers in North Carolina and Virginia. PGC is a regulated natural gas distribution company in Kentucky. The Company currently has five reporting segments:

•	Natural Gas Operations	Annually distributes approximately 33 billion cubic feet of natural gas to approximately 70,000 customers through regulated utilities operating in Kentucky, Maine, Montana, North Carolina, Ohio, Pennsylvania and Wyoming.
•	Marketing and Production Operations	Annually markets approximately 1.4 billion cubic feet of natural gas to commercial and industrial customers in Montana, Wyoming and Ohio. Manages midstream supply and production assets for transportation customers and utilities through the subsidiary, EWR. EWR owns an average 46% gross working interest (an average 39% net revenue interest) in 160 natural gas producing wells and gas gathering assets in Glacier and Toole Counties in Montana.
•	Pipeline Operations	The Shoshone interstate and Glacier gathering natural gas pipelines located in Montana and Wyoming are owned through the subsidiary, Energy West Development. Certain natural gas producing wells owned by Energy West Development are being managed and reported under the marketing and production operations.
•	Propane Operations	Delivers liquid propane, heating oil and kerosene to approximately 3,400 residential, commercial and agricultural customers in North Carolina and Virginia through the subsidiary, Independence.
•	Corporate and Other	Encompasses the results of corporate acquisitions and other equity transactions. Included in corporate and other are costs associated with business development and acquisitions, dividend income, activity from Lone Wolfe, LLC, and recognized gains or losses from the sale of marketable securities.

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

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2012, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements of Gas Natural Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. In the opinion of the Company, all normal recurring adjustments have been made, that are necessary to fairly present the results of operations for the interim periods. Certain reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported.

F-6

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. A majority of our revenues are derived from our natural gas utility operations making our revenue seasonal in nature. Therefore, the largest portion of our operating revenue is generated during the colder months when our sales volume increases considerably. The interim results on the accompanying condensed consolidated statement of comprehensive income are not indicative of the estimated results for a full fiscal year. Reference should be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

The effect of stock option exercises equivalent to 1,053 and 6,548 shares for the three months ended June 30, 2013 and 2012, respectively, would have been anti-dilutive and therefore, were excluded from the computation of diluted earnings per share. There were no stock option exercise equivalents that would have been anti-dilutive for the six months ended June 30, 2013 and 2012.

There have been no material changes in the Company’s significant accounting policies during the six months ended June 30, 2013 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Recently Adopted Accounting Pronouncements

ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities”

In December 2011, the FASB issued ASU 2011-11, which requires entities to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity’s financial position. The amendment requires enhanced disclosures by requiring improved information about financial instruments and derivative instruments that either offset in accordance with current literature or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. This ASU was effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013; the disclosures are retrospectively applied for comparative periods. The adoption of this ASU did not have a material impact on the accompanying financial statements.

ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”

In July 2012, the FASB issued ASU 2012-02. The update simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. Examples of intangible assets subject to the guidance include indefinite-lived trademarks, licenses, and distribution rights. The standard applies to all public, private, and not-for-profit organizations. The amendments allow an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. ASU 2012-02 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this ASU did not have a material impact on the accompanying financial statements.

ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”

In January 2013, the FASB issued ASU 2013-01, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the FASB determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. ASU 2013-01 became effective for fiscal years beginning on or after January 1, 2013. The adoption of this ASU did not have a material impact on the accompanying financial statements.

F-7

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”

In February 2013, the FASB issued ASU 2013-02 to amend the guidance in the FASB ASC Topic 220, entitled Comprehensive Income. The goal behind development of the ASU 2013-02 amendments is to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income when realized. The amendments to FASB ASC 220 do not change current requirements for reporting net income or other comprehensive income in the financial statements. Essentially, all of the information required to be displayed or disclosed in financial statements already are required to be disclosed in the financial statements. The adoption of this ASU did not have a material impact on the accompanying financial statements, but did require additional disclosure.

Note 2 – Acquisitions

Acquisition of John D. Oil and Gas Marketing

On June 1, 2013, the Company and its wholly-owned Ohio subsidiary, GNR, completed the acquisition of substantially all of the assets and certain liabilities of JDOG Marketing, an Ohio company engaged in the marketing of natural gas. The Osborne Trust, of which Mr. Osborne is the sole trustee, is the majority owner of JDOG Marketing and Mr. Osborne is also the Chairman of the Board and Chief Executive Officer of Gas Natural. The Company believes the natural gas marketing business complements our existing natural gas distribution business in Ohio. In addition, we currently conduct natural gas marketing in Montana and Wyoming, which we believe allows us to integrate the Ohio marketing operations into Gas Natural with minimal increases in staff or overhead. Costs relate to this acquisition totaled $0.6 million and were expensed as incurred.

Pursuant to the terms of the purchase agreement, the consummation of the transaction depended upon the satisfaction or waiver of a number of certain customary closing conditions, the receipt of regulatory approvals and the consent of certain of Gas Natural’s lenders. In addition, the transaction was subject to the approval of Gas Natural’s shareholders, and the receipt of a fairness opinion by an independent investment banking firm. All of these conditions were satisfied and the acquisition was completed on June 1, 2013.

In accordance with U.S. GAAP, the consideration given, assets received and liabilities assumed by the Company have been recorded at their acquisition date fair value. These fair values are the Company’s initial best estimate based on preliminary information and could materially change once final valuations have been completed for the transaction.

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

In addition, the purchase agreement provides for contingent “earn-out” payments for a period of five years after the closing of the transaction if the acquired business achieves an annual EBITDA target in the amount of $810,432, which was JDOG Marketing’s EBITDA for the year ended December 31, 2011. If JDOG Marketing’s actual EBITDA for a certain year is less than the target EBITDA, then no earn-out payment will be due and payable for that particular period. If JDOG Marketing’s actual EBITDA for a certain year meets or exceeds the target EBITDA, then an earn-out payment in an amount equal to actual EBITDA divided by target EBITDA times $575,000 will have been earned for that year. Due to the earn-out structure, the maximum amount that could be earned over the five year period is unlimited. The earn-out payments, if any, will be paid annually in validly issued, fully paid and non-assessable shares of Gas Natural’s common stock. The share price to be used to determine the number of shares to be issued for any earn-out payment will be the average closing price of Gas Natural’s common stock for the 20 trading days preceding issuance of Gas Natural’s common stock for such earn-out payment. At the acquisition date, the Company has recorded an estimated liability of $1,475,000, of which $196,000 has been classified as current, as the fair value of this earn-out provision.

F-8

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company applied the acquisition method to the business combination and valued each of the assets acquired (property, plant and equipment and customer relationships) and liabilities assumed (note payable and the earn-out liability) at fair value as of the acquisition date. The note payable was deemed to be recorded at fair value as of the acquisition date. The Company used the net book value of property, plant and equipment received as this closely approximates the fair value. The Company also recorded the fair value of the earn-out liability as the present value of estimated future earn-out payments as of the acquisition date. SeeNote 5 – Fair Value Measurements for details regarding this valuation. As a result of the purchase, $1,625,518 was allocated to goodwill. The results of JDOG Marketing are included in the marketing and production operations segment. The Company expects none of the goodwill to be deductible for tax purposes.

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

	Fair Value at June 1, 2013
Property, plant and equipment	$	21,600
Customer relationships		2,500,000
Goodwill		1,625,518
Total assets acquired		4,147,118
Current liabilities		207,322
Long-term liabilities		1,279,000
Notes Payable, less current portion		19,597
Total liabilities assumed		1,505,919
Net assets acquired	$	2,641,199

For the three months ended June 30, 2013, JDOG Marketing contributed $207,524 to the Company’s revenues and $30,767 to the Company’s net income.

The following unaudited pro forma information is provided to present a summary of the combined results of the Company’s operations with JDOG Marketing as if the acquisition had been completed as of the beginning of the reporting periods. Adjustments were made to eliminate any inter-company transactions in the pro forma periods.

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013		2012
Revenues	$	21,637,716		$	14,925,223		$	67,964,712	$	49,634,501
Net income (loss)	$	(223,130	)	$	(634,169	)	$	4,871,798	$	2,957,062
Basic and diluted earnings (loss) per share	$	(0.26	)	$	(0.78	)	$	0.58	$	0.36

Historically, the Company has been a party to transactions with JDOG Marketing for the purchase of natural gas and other transactions for immaterial amounts. In addition to these transactions, the Company also had a note receivable outstanding from JDOG Marketing included in the Notes receivable – related parties line items on the balance sheet and an operating lease agreement the cost of which was included in the Distribution, general, and administrative line of the statement of comprehensive income. Both of these relationships were effectively settled with the completion of the transaction. SeeNote 9 – Related Party Transactions for more information regarding these transactions.

F-9

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Acquisition of 8500 Station Street

On March 5, 2013, the Company purchased the Matchworks Building in Mentor, Ohio from McKay Real Estate Corporation, Matchworks, LLC, and Nathan Properties, LLC (collectively, the “Sellers”) by and through Mark E. Dottore as Receiver in the United States District Court. The Company’s Ohio headquarters are located in the Matchworks Building and the Receiver gave the Company an opportunity to purchase the building. The Sellers are entities owned or controlled by Richard M. Osborne, the Company’s chairman and chief executive officer. The acquisition of the Matchworks Building was approved by the independent members of the Company’s board of directors. 8500 Station Street, a new subsidiary of Gas Natural, has been formed to operate the property. At March 31, 2013, the Company had not been able to gather the necessary information to determine the appropriate accounting treatment for the transaction. Therefore at that time, the Company had recorded the assets acquired under Other assets on its condensed consolidated balance sheet. Since then, the Company has gathered the necessary information regarding the transaction and has classified the transaction as an asset purchase. As such, the Company has recorded the land and building purchased as Property, plant and equipment on its condensed consolidated balance sheet at June 30, 2013 in the amounts of $244,859 and $1,607,915, respectively. These amounts were allocated based on the assets’ relative fair values.

Acquisition of Loring Pipeline lease and related property

On April 17, 2012, the Company entered into an agreement with United States Power Fund, L.P. (“USPF”) to place a bid at a public auction on certain assets that were being foreclosed upon by USPF (the “Agreement”). Those assets included various parcels of land as well as a leasehold interest in a pipeline corridor easement running from Searsport to Limestone, Maine. The assets were owned by Loring BioEnergy, LLC (“LBE”) and were being foreclosed upon by USPF due to LBE’s default on a loan that it had obtained from USPF. On June 4, 2012 the Company attended the public foreclosure auction and was the successful bidder with a bid of $4,500,000. The transaction closed on September 25, 2012. At that time, the Company issued 210,951 shares of common stock in addition to transferring the $2,250,000 of cash it had placed into escrow prior to the auction, to USPF. The lease agreement calls for lease payments of $300,000 per year for the next ten years, an annual service fee of $120,000 and a charge of $0.0125 per Mcf moved on the pipeline.

In accordance with U.S. GAAP, the assets acquired do not constitute a business and the Company has accounted for the transaction as a group of assets which included both fixed assets and leased fixed assets. The purchase price was allocated to the assets purchased based on the relative fair value of each asset (including the leased assets) to the total fair value of all the assets. Land, buildings, generators and equipment purchased totaled $605,352. Leased pipeline and leased pipeline easements acquired totaled $6,320,000. The Company has determined that the fixed asset lease is a capital lease because the present value of the lease payments, discounted at an appropriate discount rate, exceeded 90% of the fair market value of the assets. The lease obligation for the $300,000 per year was recorded at the present value of the minimum lease payments of $2,208,026.

Acquisition of Public Gas Company, Inc.

On April 1, 2012 the Company purchased 100% of the stock of PGC from Kentucky Energy Development, LLC for the original price of $1.6 million. PGC is a regulated natural gas distribution company serving approximately 1,600 customers in the State of Kentucky in the counties of Breathitt, Jackson, Johnson, Lawrence, Lee, Magoffin, Morgan and Wolf. The costs related to the transaction were $51,187 and were expensed during 2012. The Company completed the transaction as it provided the opportunity to expand its presence into Kentucky.

The Company applied the acquisition method to the business combination and valued each of the assets acquired (cash, accounts receivable, and property, plant and equipment) and liabilities assumed (accounts payable) at fair value as of the acquisition date. The cash, accounts receivable and accounts payable were deemed to be recorded at fair value as of the acquisition date. The Company determined the fair value of property, plant and equipment to be historical book value which is the rate base as PGC is a regulated natural gas distribution company and is required to report to the KPSC. The Company also recorded deferred taxes based on the timing difference related to depreciation. As a result of the purchase, $142,971 was allocated to goodwill. During 2012, this amount was adjusted to $283,425 resulting from adjustments to deferred income taxes and deferred gas cost existing at the time of acquisition. This is reported in the natural gas operations segment. The Company expects none of the goodwill to be deductible for tax purposes.

F-10

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

	Fair Value at April 1, 2012
Current assets	$	69,634
Property, plant and equipment		1,577,592
Goodwill		283,425
Total assets acquired		1,930,651
Current liabilities		184,770
Long-term liabilities		194,403
Total liabilities assumed		379,173
Net assets acquired	$	1,551,478

Note 3 – Goodwill

The following table shows the change in Company’s goodwill balance for the three and six months ended June 30, 2013.

	Three months ended June 30, 2013		Six months ended June 30, 2013
Beginning balance	$	14,891,377	$	14,891,377
Additions: JDOG Marketing acquisition		1,625,518		1,625,518
Ending balance	$	16,516,895	$	16,516,895

Note 4 – Marketable Securities

The Company’s marketable securities as of June 30, 2013 and December 31, 2012 consisted entirely of available-for-sale securities. These available-for-sale securities are comprised entirely of common stock. The Company did not sell any available-for-sale securities during the six months ended June 30, 2013 and 2012.

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

	June 30, 2013
	Investment at cost		Unrealized gains		Unrealized losses		Estimated fair value
Common stock	$	238,504	$	115,871	$	—	$	354,375

	December 31, 2012
	Investment at cost		Unrealized gains		Unrealized losses		Estimated fair value
Common stock	$	238,504	$	105,842	$	—	$	344,346

The Company did not hold any held-to-maturity or trading securities as of June 30, 2013 or December 31, 2012.

F-11

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Fair Value Measurements

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

Level 1 inputs -	observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs -	other inputs that are directly or indirectly observable in the marketplace.
Level 3 inputs -	unobservable inputs which are supported by little or no market activity.

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

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

	June 30, 2013
	Level 1		Level 2		Level 3		Total
ASSETS:
Common stock	$	354,375	$	—	$	—	$	354,375
LIABILITIES:
Contingent consideration	$	—	$	—	$	1,475,000	$	1,475,000

	December 31, 2012
	Level 1		Level 2		Level 3		Total
ASSETS:
Common stock	$	344,346	$	—	$	—	$	344,346

The fair value of financial instruments including cash and cash equivalents, notes and accounts receivable and notes and accounts payable are not materially different from their carrying amounts. The fair values of marketable securities are estimated based on closing share price on the quoted market price for those investments. Cost basis is determined by specific identification of securities sold. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of notes payable are classified as Level 2 measurements.

The contingent consideration liability categorized in level 3 of the fair value hierarchy arose as a result of the JDOG Marketing acquisition. SeeNote 2 – Acquisitions for more information regarding that transaction. Any adjustments to the liability’s fair value between the acquisition date and the financial statement date would be immaterial.

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

F-12

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table reconciles the beginning and ending balance for liabilities categorized under level 3 of the fair value hierarchy.

	Fair value Measurements Using Significant Unobservable Inputs (Level 3)
	Contingent Consideration		Total
Opening balance December 31, 2012	$	—	$	—
Transfers into level 3		—		—
Transfers out of level 3		—		—
Total gains or losses for period:
Included in net income		—		—
Included in other comprehensive income		—		—
Purchases		—		—
Sales		—		—
Settlements		—		—
Issuances		1,475,000		1,475,000
Closing balance June 30, 2013	$	1,475,000	$	1,475,000

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

	Quantitative Information about Level 3 Fair Value Measures
	Fair Value at June 30, 2013		Valuation Technique(s)	Unobservable Input	Range
Contingent Consideration	$	1,475,000	Monte Carlo analysis	Forecasted annual EBITDA	$0.8 - $1.3 million
				Weighted avg cost of capital	19.0% - 19.0%
				U.S. Treasury yields	0.1% - 3.0%
				Projection risk adjustment	(5.0)% - (3.0)%
			Discounted cash flow	U.S. Treasury yields	0.1% - 0.9%
				Credit spread	1.8% - 3.4%

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

Note 6 – Credit Facilities and Long-Term Debt

Lines of Credit

The Company has a revolving credit facility with the Bank of America with a maximum borrowing capacity of $30.0 million due April 1, 2017. This revolving credit facility includes an annual commitment fee ranging from 25 to 45 basis points of the unused portion of the facility and interest on the amounts outstanding at the LIBOR plus 175 to 225 basis points. The Company had outstanding borrowings under this facility of $16.0 million and $23.9 million at June 30, 2013 and December 31, 2012, respectively. For the three months ended June 30, 2013 and 2012, the weighted average interest rate on the revolving credit facility was 3.3% and 3.2%, respectively. For the six months ended June 30, 2013 and 2012, the weighted average interest rate on the existing and renewed revolving credit facility was 3.3%.

F-13

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On February 13, 2013, the Company’s $500,000 revolving credit facility with Yadkin Valley Bank with an interest rate based on the prime rate, with a floor of 4.5% per annum and a maximum of 16% per annum expired. On April 12, 2013, Yadkin Valley Bank extended the $500,000 commercial line of credit beginning May 12, 2013. The debt is secured by a blanket lien on all assets owned or acquired by Independence. The Company had outstanding borrowings under this facility of $0.2 million and $0.4 million at June 30, 2013 and December 31, 2012, respectively. For the three and six months ended June 30, 2013 and 2012, the weighted average interest rate on the facility was 4.5%.

Notes Payable

The following table details the Company’s outstanding long-term debt balances at June 30, 2013 and December 31, 2012.

	June 30, 2013		December 31, 2012
LIBOR plus 1.75 to 2.25%, Bank of America amortizing term loan, due April 1, 2017	$	9,625,000	$	10,000,000
6.16%, Senior unsecured notes, due June 29, 2017		13,000,000		13,000,000
5.38%, Sun Life fixed rate note, due June 1, 2017		15,334,000		15,334,000
LIBOR plus 3.85%, Sun Life floating rate note, due May 3, 2014		3,000,000		3,000,000
4.15% Sun Life senior secured guaranteed note, due June 1, 2017		2,989,552		2,989,552
Vehicle loan		6,522		10,688
Total notes payable		43,955,074		44,334,240
Less: current portion		506,522		633,498
Notes payable, long-term portion	$	43,448,552	$	43,700,742

Debt Covenants

The Bank of America revolving credit agreement and term loan contain various covenants, which include, among others, limitations on total dividends and distributions made in the immediately preceding 60-month period to 80% of Energy West’s aggregate consolidated net income for such period, restrictions on certain indebtedness, limitations on asset sales, and maintenance of certain debt-to-capital and interest coverage ratios.

The senior unsecured notes contain various covenants, including a limitation on Energy West’s total dividends and distributions made in the immediately preceding 60-month period to 100% of aggregate consolidated net income for such period. The notes restrict Energy West from incurring additional senior indebtedness in excess of 60% of capitalization at any time and require Energy West to maintain an interest coverage ratio of not more than 150% of the pro forma annual interest charges on a consolidated basis in two of the three preceding fiscal years

The Sun Life fixed rate notes, floating rate notes, and senior secured guaranteed note contain various covenants, which include, among others, limitations on total dividends and distributions if in aggregate these limitations for the fiscal year do not exceed 70% of net income of NEO, Orwell, Brainard, Lightning Pipeline, GNR, and Great Plains (the “Obligors”) for the four fiscal quarters then ending. The agreements also contain restrictions on certain indebtedness, limitations on asset sales, maintenance of certain debt-to-capital and interest coverage ratios. Due to the covenants, the Obligors are unable to pay a dividend to the holding company, which may impact the Company’s ability to pay a dividend to shareholders.

Additionally, Sun Life restricted certain cash balances and required two main types of debt service reserve accounts to be created to cover approximately one year of interest payments. The balance in both debt service reserve accounts was $1,079,000 and $1,078,000 at June 30, 2013 and December 31, 2012, respectively, and is included in restricted cash. The debt service reserve accounts cannot be used for operating cash needs. In addition, the Company deposited $750,000 into a reserve account where Sun Life is the beneficiary. The terms allow the Company to withdraw that money if a letter of credit is received to replace the restricted cash.

F-14

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Yadkin Valley Bank revolving credit facility contains various restrictions, which include, among others, limitations on total dividends and distributions, restrictions on certain indebtedness, and limitations on asset sales.

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

Note 7 – Stock Compensation

2012 Incentive and Equity Award Plan

The 2012 Incentive and Equity Award Plan provides for the grant of options, restricted stock, performance awards, other stock-based awards and cash awards to certain eligible employees. The number of shares authorized for issuance under the plan is 500,000. As of June 30, 2013, no options or awards had been granted under the plan.

2012 Non-Employee Director Stock Award Plan

The 2012 Non-Employee Director Stock Award Plan allows each non-employee director to receive his or her fees in shares of the Company’s common stock by providing written notice to the Company. The number of shares authorized for issuance under the plan is 250,000. As of June 30, 2013, no shares had been issued under the plan.

2002 Stock Option Plan

The Energy West Incorporated 2002 Stock Option Plan (the “Option Plan”) expired on October 4, 2012 and provided for the issuance of up to 300,000 options to purchase the Company’s common stock to be issued to certain key employees. As of June 30, 2013 and December 31, 2012, there were 15,000 and 35,000 options outstanding, respectively. Pursuant to the Option Plan, the options vest over four to five years and are exercisable over a five to ten-year period from date of issuance.

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. No options were granted under this plan during the six month period ended June 30, 2013 and 2012. As of June 30, 2013 and December 31, 2012, there was $1,616 and $3,231 of total unrecognized compensation cost related to stock-based compensation, respectively. This cost is expected to be fully recognized within the current year.

During the six months ended June 30, 2013, 20,000 stock options were exercised in the amount of $159,500.

A summary of the status of options stock option is as follows:

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding December 31, 2012		35,000		$	8.66	$	31,550
Granted		—		$	—
Exercised		(20,000	)	$	7.98
Expired		—		$	—
Outstanding June 30, 2013		15,000		$	9.58	$	9,300
Exercisable June 30, 2013		12,500		$	9.47	$	9,300

F-15

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following additional information applies to options outstanding at June 30, 2013:

Grant Date	Exercise Price		Number Outstanding		Weighted Average Exercise Price		Weighted average Remaining Contractual Life (Years)		Number Exercisable		Weighted Average Exercise Price
6/3/2009	$	8.44		5,000	$	8.44		0.92		5,000	$	8.44
12/1/2010	$	10.15		10,000	$	10.15		7.42		7,500	$	10.15
				15,000						12,500

Note 8 – Employee Benefit Plans

The Company has a defined contribution plan (the “401k Plan”) which covers substantially all of its employees. The plan provides for an annual contribution of 3% of salaries, with a discretionary contribution of up to an additional 3%. The expense related to the 401k Plan for the three and six months ended June 30, 2013 was $104,269 and $197,517, respectively. The expense related to the 401k Plan for the three and six months ended June 30, 2012 was $115,090 and $236,760, respectively.

The Company makes matching contributions in the form of Company common stock equal to 10% of each participant’s elective deferrals in the 401k Plan. For the three and six months ending June 30, 2013, the Company contributed shares of common stock valued at $13,418 and $27,437, respectively. For the three and six months ending June 30, 2012, the Company contributed shares of common stock valued at $11,598 and $20,873, respectively. In addition, a portion of the 401k Plan consists of an Employee Stock Ownership Plan (“ESOP”) that covers most employees. The ESOP receives contributions of common stock from the Company each year as determined by the Board of Directors. The contribution is recorded based on the current market price of the Company’s common stock. For the six months ending June 30, 2013 and 2012 , the Company made no contributions.

The Company has sponsored a defined postretirement health plan (the “Retiree Health Plan”) providing health and life insurance benefits to eligible retirees. The Retiree Health Plan pays eligible retirees (post-65 years of age) up to $125 per month in lieu of contracting for health and life insurance benefits. The amount of this payment is fixed and will not increase with medical trends or inflation. In addition, the Retiree Health Plan allows retirees between the ages of 60 and 65 and their spouses to remain on the same medical plan as active employees by contributing 125% of the current COBRA rate to retain this coverage. The amounts paid in excess of the current COBRA rate is held in a VEBA trust account, and benefits for this plan are paid from assets held in the VEBA Trust account. The Company discontinued contributions in 2006 and is no longer required to fund the Retiree Health Plan. As of June 30, 2013 and December 31, 2012, the value of plan assets was $156,945 and $163,313, respectively. The assets remaining in the trust will be used to fund the plan until these assets are exhausted.

Note 9 – Income Taxes

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Income tax from continuing operations
Tax expense (benefit) at statutory rate of 34%	$	(181,941	)	$	(362,084	)	$	2,434,919		$	1,420,063
State income tax, net of Federal tax exp (benefit)		(20,014	)		14,225			267,844			197,938
Amortization of deferred investment tax credits		(5,265	)		(5,266	)		(10,531	)		(10,531	)
Other		(984	)		12,363			8,490			10,531
Total income tax expense (benefit)	$	(208,204	)	$	(340,762	)	$	2,700,722		$	1,618,001

F-16

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Tax positions must meet a more-likely-than-not recognition threshold to be recognized. The Company has no unrecognized tax benefits that would have a material impact to the Company’s financial statements for any open tax years. No adjustments were recognized for uncertain tax positions for the three and six months ended June 30, 2013 and 2012.

The Company recognizes interest and penalties related to unrecognized tax benefits in operating expense. As of June 30, 2013 and December 31, 2012, there were no unrecognized tax benefits nor interest or penalties accrued related to unrecognized tax benefits. For the three and six months ended June 30, 2013 and 2012, the Company did not recognize interest or penalties.

The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The tax years after 2008 for federal and state returns remain open to examination by the major taxing jurisdictions in which the Company operates.

Note 10 – Related Party Transactions

Acquisition of John D. Oil and Gas Marketing

On June 1, 2013, the Company and its wholly-owned Ohio subsidiary, GNR, completed the acquisition of substantially all of the assets and certain liabilities of JDOG Marketing, an Ohio company engaged in the marketing of natural gas. The Osborne Trust, of which Mr. Osborne is the sole trustee, is the majority owner of JDOG Marketing and Mr. Osborne is also the Chairman of the Board and Chief Executive Officer of Gas Natural. The acquisition of JDOG Marketing was approved by the independent members of the Company’s board of directors. SeeNote 2 – Acquisitions for details regarding this transaction.

Acquisition of 8500 Station Street

On March 5, 2013, the Company purchased the Matchworks building in Mentor, Ohio from McKay Real Estate Corporation, Matchworks, LLC, and Nathan Properties, LLC (collectively, the “Sellers”) by and through Mark E. Dottore as Receiver in the United States District Court. The Sellers are entities owned or controlled by Richard M. Osborne, the Company’s chairman and chief executive officer. The acquisition of the Matchworks Building was approved by the independent members of the Company’s board of directors. SeeNote 2 - Acquisitions for details regarding this transaction.

Notes Receivable

The Company had a note receivable due from John D. Marketing, a company controlled by Mr. Osborne. In connection to the acquisition of JDOG Marketing, the Company assumed the corresponding liability of this note, effectively settling the note at the close of the acquisition. The note had a maturity date of December 31, 2016 and an annual interest rate of 7.0% relating to funds loaned to John D. Marketing to finance the acquisition of a gas pipeline. The balance due from John D. Marketing was $0 and $35,409 (of which, $0 and $10,998 was due within one year) as of June 30, 2013 and December 31, 2012, respectively. The Company had a corresponding agreement to lease the pipeline from John D. Marketing through December 31, 2016. This pipeline and corresponding lease were also acquired by the Company in the acquisition of JDOG Marketing. Lease expense resulting from this agreement was $2,200 and $5,500 for the three and six months ended June 30, 2013, respectively, and $3,300 and $6,600 for the three and six months ended June 30, 2012, respectively. These amounts are included in the Natural Gas Purchased column below. There was no balance due at June 30, 2013 or December 31, 2012 to John D. Marketing related to these lease payments. SeeNote 2 – Acquisitions for details regarding the JDOG Marketing acquisition.

F-17

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company also has a note receivable from one of its employees with an annual interest rate of 4%. Monthly payments are based on a 30 year amortization schedule with a balloon payment no later than December 1, 2017. The principal balance due was $99,129 and $99,856 (of which $1,785 and $1,617 is due within one year) as of June 30, 2013 and December 31, 2012, respectively.

Accounts Receivable and Accounts Payable

The table below details amounts due from and due to related parties, including companies owned or controlled by Mr. Osborne, at June 30, 2013 and December 31, 2012. These amounts are presented on the balance sheet as Related parties under Accounts receivable and Accounts payable.

	Accounts Receivable				Accounts Payable
	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
John D. Oil and Gas Marketing	$	—	$	3,282	$	81,542	$	40,518
Cobra Pipeline		48,324		21,698		21,788		—
Orwell Trumbell Pipeline		10,583		90,385		5,582		—
Great Plains Exploration		9,715		142,740		31,166		9
Big Oats Oil Field Supply		113		769		416,264		11,270
Kykuit Resources		—		98,037		—		—
John D. Oil and Gas Company		—		—		128,021
Sleepy Hollow Oil & Gas		15,128		143,697		—		—
Other		26,615		21,949		23,995		—
Total	$	110,478	$	522,557	$	708,358	$	51,797

The tables below detail transactions with related parties, including companies owned or controlled by Mr. Osborne, for the three months ended June 30, 2013 and 2012.

	Three Months Ended June 30. 2013
	Natural Gas Purchases		Pipeline Construction Purchases		Rent, Supplies, Consulting and Other Purchases		Natural Gas Sales		Rental Income and Other Sales
John D. Oil and Gas Marketing	$	376,445	$	—	$	3,186	$	2,188	$	—
Cobra Pipeline		176,102		—		—		26,626		—
Orwell Trumbell Pipeline		105,505		—		—		221		—
Great Plains Exploration		187,289		854		—		2,133		25,587
Big Oats Oil Field Supply		—		1,140,133		138,459		806		125
John D. Oil and Gas Company		284,184		5,976		—		143		14,590
Sleepy Hollow Oil & Gas		—		—		—		—		438
Kykuit Resources		—		—		—		—		1,050
OsAir		72,691		—		62,223		623		31,468
Other		24,288		854		2,322		2,972		29,743
Total	$	1,226,504	$	1,147,817	$	206,190	$	35,712	$	103,001

F-18

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Three Months Ended June 30. 2012
	Natural Gas Purchases		Pipeline Construction Purchases		Rent, Supplies, Consulting and Other Purchases		Natural Gas Sales		Management and Other Sales
John D. Oil and Gas Marketing	$	402,461	$	—	$	2,132	$	—	$	3,282
Cobra Pipeline		81,159		—		491		—		19,454
Orwell Trumbell Pipeline		86,191		—		19,429		219		2,747
Great Plains Exploration		57,112		—		—		835		2,117
Big Oats Oil Field Supply		—		307,980		34,631		178		6,765
Sleepy Hollow Oil & Gas		—		—		—		—		1,326
Other		226,567		—		40,581		4,339		—
Total	$	853,490	$	307,980	$	97,264	$	5,571	$	35,691

The tables below detail transactions with related parties, including companies owned or controlled by Mr. Osborne, for the six months ended June 30, 2013 and 2012.

	Six Months Ended June 30. 2013
	Natural Gas Purchases		Pipeline Construction Purchases		Rent, Supplies, Consulting and Other Purchases		Natural Gas Sales		Rental Income and Other Sales
John D. Oil and Gas Marketing	$	952,899	$	—	$	7,271	$	5,470	$	—
Cobra Pipeline		509,871		—		—		44,481		25
Orwell Trumbell Pipeline		418,040		—		—		10,768		301
Great Plains Exploration		316,725		854		—		12,679		30,309
Big Oats Oil Field Supply		—		1,477,683		298,170		2,746		125
John D. Oil and Gas Company		367,545		5,976		—		143		14,590
Sleepy Hollow Oil & Gas		—		—		—		—		438
Kykuit Resources		—		—		—		—		1,050
OsAir		130,980		—		80,473		623		31,468
Other		34,399		854		30,011		18,423		44,527
Total	$	2,730,459	$	1,485,367	$	415,925	$	95,333	$	122,833

	Six Months Ended June 30. 2012
	Natural Gas Purchases		Pipeline Construction Purchases		Rent, Supplies, Consulting and Other Purchases		Natural Gas Sales		Management and Other Sales
John D. Oil and Gas Marketing	$	1,409,395	$	9,870	$	2,132	$	—	$	6,564
Cobra Pipeline		282,518		890		491		—		19,454
Orwell Trumbell Pipeline		297,656		—		19,429		934		2,898
Great Plains Exploration		254,036		—		—		4,886		7,370
Big Oats Oil Field Supply		—		471,463		125,031		1,425		6,765
Sleepy Hollow Oil & Gas		—		—		—		—		5,113
Other		600,569		—		81,352		22,454		671
Total	$	2,844,174	$	482,223	$	228,435	$	29,699	$	48,835

The Company also accrued a liability of $46,783 and $595,240 due to companies controlled by Mr. Osborne for natural gas used through June 30, 2013 and December 31, 2012, respectively, that were not yet invoiced. The related expense is included in the gas purchased line item in the accompanying statements of comprehensive income. These amounts will be trued up to the actual invoices when received in future periods.

F-19

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 11 – Segments of Operations

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

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

Three Months Ended June 30, 2013	Natural Gas Operations			Marketing and Production			Pipeline Operations		Propane Operations			Corporate and Other			Consolidated
OPERATING REVENUES	$	17,825,910		$	4,227,929		$	105,032	$	658,385		$	—		$	22,817,256
Intersegment elimination		(79,613	)		(1,582,247	)		—		—			—			(1,661,860	)
Total operating revenue		17,746,297			2,645,682			105,032		658,385			—			21,155,396
COST OF SALES		10,128,702			3,815,169			—		450,702			—			14,394,573
Intersegment elimination		(79,613	)		(1,582,247	)		—		—			—			(1,661,860	)
Total cost of sales		10,049,089			2,232,922			—		450,702			—			12,732,713
GROSS MARGIN	$	7,697,208		$	412,760		$	105,032	$	207,683		$	—		$	8,422,683
OPERATING EXPENSES		7,645,708			243,838			43,457		466,122			229,453			8,628,578
Intersegment elimination		(12,569	)		—			—		—			(33,660	)		(46,229	)
Total operating expenses		7,633,139			243,838			43,457		466,122			195,793			8,582,349
OPERATING INCOME (LOSS)	$	64,069		$	168,922		$	61,575	$	(258,439	)	$	(195,793	)	$	(159,666	)
NET INCOME (LOSS)	$	(235,899	)	$	178,872		$	33,978	$	(162,089	)	$	(141,778	)	$	(326,916	)

Three Months Ended June 30, 2012	Natural Gas Operations			Marketing and Production			Pipeline Operations		Propane Operations			Corporate and Other			Consolidated
OPERATING REVENUES	$	12,880,690		$	2,151,601		$	102,093	$	561,552		$	—		$	15,695,936
Intersegment elimination		(79,143	)		(1,111,247	)		—		—			—			(1,190,390	)
Total operating revenue		12,801,547			1,040,354			102,093		561,552			—			14,505,546
COST OF SALES		5,526,465			1,961,558			—		418,482			—			7,906,505
Intersegment elimination		(79,143	)		(1,111,247	)		—		—			—			(1,190,390	)
Total cost of sales		5,447,322			850,311			—		418,482			—			6,716,115
GROSS MARGIN	$	7,354,225		$	190,043		$	102,093	$	143,070		$	—		$	7,789,431
OPERATING EXPENSES		6,991,710			220,317			61,882		431,539			72,118			7,777,566
OPERATING INCOME (LOSS)	$	362,515		$	(30,274	)	$	40,211	$	(288,469	)	$	(72,118	)	$	11,865
NET INCOME (LOSS)	$	(40,947	)	$	(35,575	)	$	23,035	$	(156,236	)	$	(514,467	)	$	(724,190	)

F-20

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2013	Natural Gas Operations			Marketing and Production			Pipeline Operations		Propane Operations			Corporate and Other			Consolidated
OPERATING REVENUES	$	57,856,318		$	9,816,141		$	203,319	$	2,360,959		$	—		$	70,236,737
Intersegment elimination		(165,359	)		(3,598,680	)		—		—			—			(3,764,039	)
Total operating revenue		57,690,959			6,217,461			203,319		2,360,959			—			66,472,698
COST OF SALES		34,330,869			8,691,637			—		1,604,343			—			44,626,849
Intersegment elimination		(165,359	)		(3,598,680	)		—		—			—			(3,764,039	)
Total cost of sales		34,165,510			5,092,957			—		1,604,343			—			40,862,810
GROSS MARGIN	$	23,525,449		$	1,124,504		$	203,319	$	756,616		$	—		$	25,609,888
OPERATING EXPENSES		15,222,579			505,089			91,135		1,010,537			311,148			17,140,488
Intersegment elimination		(12,569	)		—			—		—			(33,660	)		(46,229	)
Total operating expenses		15,210,010			505,089			91,135		1,010,537			277,488			17,094,259
OPERATING INCOME (LOSS)	$	8,315,439		$	619,415		$	112,184	$	(253,921	)	$	(277,488	)	$	8,515,629
NET INCOME (LOSS)	$	4,475,307		$	427,333		$	61,092	$	(181,077	)	$	(321,848	)	$	4,460,807

Six Months Ended June 30, 2012	Natural Gas Operations			Marketing and Production			Pipeline Operations		Propane Operations			Corporate and Other			Consolidated
OPERATING REVENUES	$	42,813,840		$	5,777,390		$	209,877	$	2,470,710		$	—		$	51,271,817
Intersegment elimination		(164,208	)		(2,829,942	)		—		—			—			(2,994,150	)
Total operating revenue		42,649,632			2,947,448			209,877		2,470,710			—			48,277,667
COST OF SALES		22,848,424			5,075,669			—		1,849,751			—			29,773,844
Intersegment elimination		(164,208	)		(2,829,942	)		—		—			—			(2,994,150	)
Total cost of sales		22,684,216			2,245,727			—		1,849,751			—			26,779,694
GROSS MARGIN	$	19,965,416		$	701,721		$	209,877	$	620,959			—		$	21,497,973
OPERATING EXPENSES		13,720,982			551,402			100,388		997,952			134,911			15,505,635
OPERATING INCOME (LOSS)	$	6,244,434		$	150,319		$	109,489	$	(376,993	)	$	(134,911	)	$	5,992,338
NET INCOME (LOSS)	$	3,311,587		$	59,740		$	61,258	$	(251,077	)	$	(622,851	)	$	2,558,657

The following table presents the Company’s assets by reportable segments:

	Natural Gas Operations			Marketing and Production			Pipeline Operations			Propane Operations			Corporate and Other			Consolidated
As of June 30, 2013
Goodwill	$	14,891,377		$	1,625,518		$	—		$	—		$	—		$	16,516,895
Investment in unconsolidated affiliate		—			352,704			—			—			—			352,704
Total assets	$	160,794,648		$	10,376,976		$	520,907		$	3,023,255		$	56,682,342		$	231,398,128
Intersegment eliminations		(40,451,628	)		(3,003,672	)		68,869			(2,095,655	)		(13,612,951	)		(59,095,037	)
Total assets	$	120,343,020		$	7,373,304		$	589,776		$	927,600		$	43,069,391		$	172,303,091
As of December 31, 2012
Goodwill	$	14,891,377		$	—		$	—		$	—		$	—		$	14,891,377
Investment in unconsolidated affiliate		—			321,731			—			—			—			321,731
Total assets	$	169,616,395		$	8,786,247		$	632,466		$	3,556,432		$	64,887,276		$	247,478,816
Intersegment eliminations		(46,338,335	)		(447,549	)		(16,073	)		(2,096,143	)		(24,117,257	)		(73,015,357	)
Total assets	$	123,278,060		$	8,338,698		$	616,393		$	1,460,289		$	40,770,019		$	174,463,459

F-21

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 12 – Commitments and Contingencies

Legal Proceedings

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

On February 25, 2013, one of the Company’s former officers, Jonathan Harrington, filed a lawsuit captioned “Jonathan Harrington v. Energy West, Inc. and Does 1-4,” Case No. DDV-13-159 in the Montana Eighth Judicial District Court, Cascade County. Mr. Harrington claims that he was terminated in violation of Montana statute requiring just cause for termination. In addition, he alleges claims for negligent infliction of emotional distress and negligent slander. Mr. Harrington is seeking relief for economic loss, including lost wages and fringe benefits for a period of at least four years from the date of discharge, together with interest. Mr. Harrington is an Ohio resident and was employed in the Company’s Ohio corporate offices. On March 20, 2013, the Company filed a motion to dismiss the lawsuit on the basis that Mr. Harrington was an Ohio employee, not a Montana employee, and therefore the statute does not apply. The motion has been fully briefed but has not been ruled on by the Court. Likewise, Mr. Harrington has requested oral argument but the Court has not indicated whether such request will be granted. The Company believes his claims under Montana law are without merit, and intends to vigorously defend this case on all grounds.

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

PUCO Audits

The Company accounts for purchased gas costs in accordance with procedures authorized by the utility commissions in the states in which it operates. Purchased gas costs that are different from those provided for in present rates, and approved by the respective commission, are accumulated and recovered or credited through future rate changes. The GCRs are monitored closely by the regulatory commissions in all of the states in which the Company operates and are subject to periodic audits or other review processes.

During the year ended December 31, 2010, the PUCO conducted audits of NEO and Orwell’s rates as filed from September 2007 through August 2009 and January 2008 through June 2010, respectively. The PUCO provided the primary audit findings during the fourth quarter of 2010, taking the position that NEO had not included approximately $1,100,000 of costs and Orwell included an excess of approximately $1,050,000 of costs in the filings under audit. On October 26, 2011, the PUCO adopted and approved a Joint Stipulation that finalizes the adjustments for NEO and Orwell to approximately $1,100,000 and ($964,000), respectively. However, the Joint Stipulation modified the refund period for Orwell to one year as compared to two years as originally identified. The Company considered the modification to be material and sought rehearing. On December 22, 2011, the PUCO affirmed its Finding and Order requiring Orwell’s refund to be completed over twelve months. The collection and repayment of the under-recovery and over-recovery for NEO and Orwell began in February, 2012, respectively. These adjustments appeared on the accompanying consolidated balance sheets as part of “recoverable cost of gas purchases” and “over-recovered gas purchases.” The remaining balance in NEO’s recovered cost of gas purchases are $163,633 and $707,002 at June 30, 2013 and December 31, 2012, respectively. The remaining balance in Orwell’s over-recovered gas purchases are $0 and $237,175 at June 30, 2013 and December 31, 2012, respectively.

During the year ended December 31, 2011, the PUCO conducted an audit of Brainard’s rates as filed from July 2009 through June 2011. The Staff of the PUCO recommended a finding that Brainard collected excess gas costs of

F-22

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

approximately $104,000. The Company agreed that excess gas costs were collected, but only in the amount of approximately $48,000. An evidentiary hearing was convened on November 3, 2011, resumed on March 27, 2012 and concluded on April 12, 2012. On August 8, 2012 the PUCO issued its order requiring that Brainard refund approximately $104,000 with interest over twelve months. The Company filed an application for rehearing on September 26, 2012 which was denied by entry on rehearing issued on September 26, 2012. The Company initiated the refund commencing in October 2012. These adjustments appear on the accompanying consolidated balance sheets as part of “over-recovered gas purchases.” The remaining balance in Brainard’s over-recovered gas purchases are $9,082 and $99,479 at June 30, 2013 and December 31, 2012, respectively.

On January 23, 2013, the Commission directed the Commission Staff to examine the compliance of NEO and Orwell under the GCR mechanism. NEO’s GCR audit covered the period from September 2009 through May 2012, and Orwell’s GCR was audited from July 2010 through June 2012. Commission Staff has requested in its report and testimony adjustments to the GCR calculations that would result in a liability for NEO to its customers. The Company determined that it was probable that the proposed NEO GCR adjustment will ultimately be made and as a result, the Company has recorded a $943,550 liability as its best estimate of the GCR adjustment. This amount represents the amount the PUCO calculated related to its audit of the Company’s GCR rate. At this time the final outcome of this matter cannot be determined and may be materially different. The Commission Staff also suggested an adjustment that would result in a liability for Orwell to its customers of $251,081. This amount is not materially different from the liability Orwell currently has recorded to its customers. As a result, no amount has been recorded in connection with the proposed Orwell GCR adjustment.

Trade Receivables

Included in the accounts receivable, trade line item on the accompanying condensed consolidated balance sheet are $1,179,368 and $1,139,778, net of allowance for doubtful accounts of $774,000 at June 30, 2013 and December 31, 2012 respectively, for amounts due to the Company by a large industrial customer that is currently under Chapter 11 bankruptcy protection. All but $185,786 of the amounts were incurred after the customer’s petition for bankruptcy was filed and the Company believes it will ultimately receive payment as the customer emerges from bankruptcy protection.

Note 13 – Financial Instruments and Risk Management

Management of Risks Related to Fixed Contracts

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

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

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

F-23

GAS NATURAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At June 30, 2013 and December 31, 2012, all of the Company’s fixed contracts for purchase or sale at fixed prices and volumes qualified for treatment as a “normal purchase or normal sale.”

Note 14 – Subsequent Events

The Company declared a dividend of $0.045 per share on June 26, 2013 that is payable to shareholders of record on July 15, 2013. There were 8,646,678 shares outstanding on July 15, 2013 resulting in a total dividend of $389,101 which was paid to shareholders on July 31, 2013.

On July 16, 2013, the Company closed an underwritten public offering of 1,500,000 shares of its common stock at a price of $10.00 per share, less an underwriting discount of 5.75%. Janney Montgomery Scott LLC served as the managing underwriter for the offering. The Company also granted to the underwriters a 30-day option to purchase up to an additional 225,000 shares of common stock to cover over-allotments, which was exercised in full on July 23, 2013. The Company received a total of $16,158,125 in proceeds from the offering, net of the underwriting discount and various fees. The Company expects to use the net proceeds for capital expenditures, working capital and other general corporate purposes. The offering was made pursuant to the Company’s effective shelf Registration Statement on Form S-3.

F-24

ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF OPERATIONS

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

Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of us from time to time, including statements contained in filings with the Securities and Exchange Commission (“SEC”) and our reports to shareholders, involve known and unknown risks and other factors that may cause our company’s actual results in future periods to differ materially from those expressed in any forward-looking statements. See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC. Any such forward looking statement is qualified by reference to these risk factors. We caution that these risk factors are not exclusive. We do not undertake to update any forward looking statements that may be made from time to time by or on behalf of us except as required by law.

OVERVIEW

Gas Natural is a natural gas company, primarily operating local distribution companies in seven states and serving approximately 73,000 customers. Our natural gas utility subsidiaries are Bangor Gas Company (Maine), Brainard Gas Corp. (Ohio), Cut Bank Gas Company (Montana), Energy West Montana (Montana), Energy West Wyoming (Wyoming), Frontier Natural Gas (North Carolina), Northeast Ohio Natural Gas Corporation (Ohio), Orwell Natural Gas Company (Ohio and Pennsylvania) and Public Gas Company (Kentucky). Our operations also include production and marketing of natural gas, gas pipeline transmission and gathering and propane operations. Approximately 84% and 87% of our revenues in the three and six months ended June 30, 2013 were derived from our natural gas utility operations. Our revenue is seasonal in nature; therefore, the largest portion of our operating revenue is generated during the colder months when our sales volumes increase considerably. The interim results on the accompanying condensed consolidated statement of comprehensive income are not indicative of the estimated results for a full fiscal year.

The following summarizes the critical events that impacted our results of operations during the three and six months ended June 30, 2013:

• Colder weather throughout our service territories and continued customer growth in our Maine and North Carolina markets in the three and six months ended June 30, 2013 fueled a large increase in gross margin for our natural gas operations as compared to the 2012 period. Partially offsetting this increase is a charge of $944,000 for the likely disallowance of gas costs resulting from the gas cost recovery audit by the PUCO in Ohio.

• Our recently formed LNG business continued its strong contribution to gross margin.

• The amortizing term loan with Bank of America and the $2.989 million Senior Secured Guaranteed Note with Sun Life that were procured in the last half of 2012, caused an increase in interest expense for the three and six months ended June 30, 2013 compared to the 2012 period.

• Acquisition costs decreased significantly in both the three and six months ended June 30, 2013 compared to same periods in 2012.

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

RESULTS OF CONSOLIDATED OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the period ended December 31, 2012. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of June 30, 2013 and for the three and six month periods ended June 30, 2013. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.

1

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

Net Loss — Net loss for the three months ended June 30, 2013 was $327,000, or $0.04 per share, compared to a net loss of $724,000 or $0.09 per share for the three months ended June 30, 2012, an improvement of $397,000. Net loss from our natural gas operations increased by $195,000. Net loss from our propane operations increased by $6,000, net loss from our corporate and other segment decreased by $372,000 to a loss of $142,000, net income from our gas marketing and production operations increased by $215,000, and net income from our pipeline operations increased by $11,000.

Revenues — Revenues increased by $6,649,000 to $21,155,000 for the three months ended June 30, 2013 compared to $14,506,000 for the same period in 2012. The increase was primarily attributable to; (1) a natural gas revenue increase of $4,945,000 due to increased sales volumes in all of our markets and an increase in the price of natural gas in our Maine market; and (2) an increase of $1,606,000 in the revenue from our marketing and production operation primarily due to sales from our recently formed LNG line of business and our newly acquired marketing company.

Gross Margin — Gross margin increased by $634,000 to $8,423,000 for the three months ended June 30, 2013 compared to $7,789,000 for the same period in 2012. Our natural gas operation’s margins increased $343,000, due to colder weather in all of our service territories leading to increased sales, continued customer growth in our Maine and North Carolina markets, and offset by the $944,000 charge related to the gas cost recovery audit by the PUCO in Ohio. Gross margin from our marketing and production operations increased $223,000 primarily from our LNG business and our newly acquired marketing company. Gross margin from our propane operations increased by $64,000.

Operating Expenses — Operating expenses, other than cost of sales, increased by $804,000 to $8,582,000 for the three months ended June 30, 2013 compared to $7,778,000 for the same period in 2012. Operating expenses from our natural gas operations increased by $641,000 due to the following: (1) distribution, general and administrative expenses increased by $347,000 due to increases in salaries and professional services; and (2) depreciation expense increased by $252,000 due to increased capital expenditures. Operating expenses in our corporate and other segment increased by $124,000 due to increases in payroll costs.

Other Income, net — Other income, net increased by $119,000 to income of $383,000 for the three months ended June 30, 2013 compared to income of $264,000 for the same period in 2012. Our marketing and production segment recorded a gain on the sale of compressed natural gas equipment of $154,000. This is offset by lower income from service sales in natural gas operations.

Acquisition Expense — Acquisition expense decreased by $477,000 to a benefit of $19,000 for the three months ended June 30, 2013 compared to $458,000 of expense for the same period in 2012. The 2013 period included acquisition costs of $20,000 offset by the adjustment to acquisition costs of $39,000 from the final accounting related to the Matchworks Building asset acquisition. Included in the acquisition costs in the 2012 period is $155,000 related to the acquisition of the assets of JDOG Marketing.

Interest Expense — Interest expense increased by $148,000 to $774,000 for the three months ended June 30, 2013 compared to $626,000 for the same period in 2012. The 2013 period includes interest on the amortizing million term loan with Bank of America of $53,718 and interest on the Sun Life Senior Secured Guaranteed Note with Sun Life of $30,752. The remaining difference is primarily due to increases in amortization of debt issuance costs related to the procurement of these two loans.

Income Tax Benefit (Expense) — Income tax benefit (expense) decreased by $133,000 to a benefit of $208,000 for the three months ended June 30, 2013 compared to a benefit of $341,000 for the same period in 2012. The decrease is primarily due to a decrease in pre-tax loss. The Company’s effective tax rate increased to 38.9% for the three months ended June 30, 2013 compared to 32.0% in the 2012 period. The 2012 period included an adjustment related to expenses for our CEO’s stock sale. These expenses are not deductible for income tax purposes.

Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

Net Income — Net income for the six months ended June 30, 2013 was $4,461,000 or $0.53 per diluted share, compared to a net income of $2,559,000 or $0.31 per diluted share for the six months ended June 30, 2012, an increase of $1,902,000. Net income from our natural gas operations increased by $1,163,000 due primarily to colder weather and customer growth. Net income from our gas marketing and production operations increased by $367,000. Net income from our pipeline operations was flat. Earnings from our propane operations increased by $70,000 to a net loss of $181,000 in the 2013 period from a net loss of $251,000 in the 2012 period. Net loss from our corporate and other segment decreased by $302,000 to a loss of $321,000.

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Revenues — Revenues increased by $18,195,000 to $66,473,000 for the six months ended June 30, 2013 compared to $48,278,000 for the same period in 2012. The increase was primarily attributable to; (1) a natural gas revenue increase of $15,042,000 due to increased sales volumes in our Ohio, Maine and North Carolina markets and an increase in the price of natural gas in our Maine market; and (2) an increase of $3,270,000 in the revenue from our marketing and production operation primarily due to sales from our recently formed LNG line of business.

Gross Margin — Gross margin increased by $4,112,000 to $25,610,000 for the six months ended June 30, 2013 compared to $21,498,000 for the same period in 2012. Our natural gas operation’s margins increased $3,560,000, due to colder weather in all of our service territories leading to increased sales, continued customer growth in our Maine and North Carolina markets, and offset by the $944,000 charge related to the gas cost recovery audit by the PUCO in Ohio. Gross margin from our marketing and production operations increased $422,000 primarily from our LNG business and our newly acquired marketing company. Gross margin from our propane operations increased by $136,000.

Operating Expenses — Operating expenses, other than cost of sales, increased by $1,588,000 to $17,094,000 for the six months ended June 30, 2013 compared to $15,506,000 for the same period in 2012. Operating expenses from our natural gas operations increased by $1,489,000 due to the following: (1) distribution, general and administrative expenses increased by $750,000 due to increases in salaries, professional services and natural gas used in operations; (2) depreciation expense increased by $462,000 due to increased capital expenditures; and (3) the newly acquired PGC accounted for $215,000 of this increase. Operating expenses in our corporate and other segment increased by $142,000.

Other Income, net — Other income, net increased by $79,000 to income of $390,000 for the six months ended June 30, 2013 compared to income of $311,000 for the same period in 2012. Our marketing and production segment recorded a gain on the sale of compressed natural gas equipment of $154,000. This is offset by lower income from service sales in natural gas operations.

Acquisition Expense — Acquisition expense decreased by $419,000 to $157,000 for the six months ended June 30, 2013 compared to $576,000 for the same period in 2012 due to less acquisition due diligence activity in the 2013 period. The 2013 period includes costs related to the acquisition of the assets of JDOG Marketing of $185,000 compared to $227,000 of costs in the 2012 period. The 2012 period included $191,000 related to the potential expansion of natural gas into another state.

Interest Expense — Interest expense increased by $294,000 to $1,584,000 for the six months ended June 30, 2013 compared to $1,290,000 for the same period in 2012. The 2013 period includes interest on the amortizing term loan with Bank of America of $108,752 and interest on the Sun Life Senior Secured Guaranteed Note with Sun Life of $61,504. The remaining difference is primarily due to increases in amortization of debt issuance costs related to the procurement of these two loans.

Income Tax Expense — Income tax expense increased by $1,083,000 to $2,701,000 for the six months ended June 30, 2013 compared to $1,618,000 for the same period in 2012. The increase is primarily due to an increase in pre-tax income. The Company’s effective tax rate decreased to 37.8% for the six months ended June 30, 2013 compared to 38.7% in the 2012 period.

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Net Income (Loss) by Segment and Service Area

The components of net income for the three and six months ended June 30, 2013 and 2012 are:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2013			2012			2013			2012
Natural Gas Operations
Energy West Montana (MT)	$	105		$	(22	)	$	912		$	658
Energy West Wyoming (WY)		(32	)		(78	)		248			160
Frontier Natural Gas (NC)		469			297			1,503			872
Bangor Gas (ME)		186			245			1,284			1,110
Ohio Companies (OH)		(919	)		(450	)		548			545
Public Gas (PGC)		(45	)		(33	)		(20	)		(33	)
Total Natural Gas Operations	$	(236	)	$	(41	)	$	4,475		$	3,312
Marketing & Production Operations		179			(36	)		427			60
Pipeline Operations		34			23			61			61
Propane Operations		(162	)		(156	)		(181	)		(251	)
		(185	)		(210	)		4,782			3,182
Corporate & Other		(142	)		(514	)		(321	)		(623	)
Consolidated Net Income (Loss)	$	(327	)	$	(724	)	$	4,461		$	2,559

The following highlights our results by operating segments:

NATURAL GAS OPERATIONS

Income Statement

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2013			2012			2013			2012
Natural Gas Operations
Operating revenues	$	17,746		$	12,801		$	57,691		$	42,649
Gas Purchased		10,049			5,447			34,166			22,684
Gross Margin		7,697			7,354			23,525			19,965
Operating expenses		7,633			6,992			15,210			13,721
Operating income		64			362			8,315			6,244
Other income (expense)		259			295			298			409
Income before interest and taxes		323			657			8,613			6,653
Interest (expense)		(698	)		(593	)		(1,416	)		(1,230	)
Income (loss) before income taxes		(375	)		64			7,197			5,423
Income tax benefit (expense)		139			(105	)		(2,722	)		(2,111	)
Net Income (Loss)	$	(236	)	$	(41	)	$	4,475		$	3,312

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Operating Revenues

	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)	2013		2012		2013		2012
Full Service Distribution Revenues
Residential	$	6,894	$	4,786	$	24,534	$	18,534
Commercial		7,642		5,389		25,931		17,966
Industrial		228		136		442		398
Other		20		47		46		70
Total full service distribution		14,784		10,358		50,953		36,968
Transportation		2,674		2,155		6,163		5,106
Bucksport		288		288		575		575
Total operating revenues	$	17,746	$	12,801	$	57,691	$	42,649

Utility Throughput

	Three Months Ended June 30,				Six Months Ended June 30,
(in million cubic feet (MMcf))	2013		2012		2013		2012
Full Service Distribution
Residential		704		567		2,948		2,377
Commercial		926		738		2,897		2,375
Industrial		42		31		91		84
Total full service		1,672		1,336		5,936		4,836
Transportation		2,733		2,380		5,902		5,332
Bucksport		3,110		3,253		6,873		6,914
Total Volumes		7,515		6,969		18,711		17,082

Heating Degree Days

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

			Three Months Ended June 30,				Percent (Warmer) Colder 2013 Compared to
	Normal		2013		2012		Normal			2012
Great Falls, MT		1,213		1,310		1,090		8.00	%		20.18	%
Cody, WY		1,072		1,155		905		7.74	%		27.62	%
Bangor, ME		1,072		1,171		952		9.24	%		23.00	%
Elkin, NC		337		451		361		33.83	%		24.93	%
Youngstown, OH		825		740		669		(10.30	%)		10.61	%
Jackson, KY		411		446		378		8.52	%		17.99	%

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			Six Months Ended June 30,				Percent (Warmer) Colder 2013 Compared to
	Normal		2013		2012		Normal			2012
Great Falls, MT		4,398		4,192		4,004		(4.68	%)		4.70	%
Cody, WY		4,102		4,130		3,643		0.68	%		13.37	%
Bangor, ME		4,807		4,757		4,225		(1.04	%)		12.59	%
Elkin, NC		2,454		2,683		1,977		9.33	%		35.71	%
Youngstown, OH		3,943		3,893		3,082		(1.27	%)		26.31	%
Jackson, KY		2,695		2,906		2,136		7.83	%		36.05	%

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

Revenues and Gross Margin

Revenues increased by $4,945,000 to $17,746,000 for the three months ended June 30, 2013 compared to $12,801,000 for the same period in 2012. This increase is the result of the following factors:

1) Revenue from our Maine and North Carolina markets increased by $1,312,000 on a volume increase from full service and transportation customers of 280 MMcf in the three months ended June 30, 2013 compared to the same period in 2012. Continued customer growth in both markets and an increase in the price paid for natural gas passed on to our customers in our Maine market account for the increase.

2) Revenues from our Ohio market increased $1,858,000. Revenue to full service customers increased $1,815,000 on a volume increase of 159 MMcf in the three months ended June 30, 2013 compared to the same period in 2012, due to colder weather in 2013 than in 2012.

3) Revenue from our Montana and Wyoming markets increased $1,661,000 on a volume increase of 201 MMcf in the three months ended June 30, 2013 compared to the same period in 2012, due to colder weather in 2013 than in 2012.

4) Revenue our Kentucky market, PGC, increased by $114,000 in the three months ended June 30, 2013 compared to the same period in 2012.

Gas purchased increased by $4,602,000 to $10,049,000 for the three months ended June 30, 2013 compared to $5,447,000 for the same period in 2012. The increase is due primarily to the increased sales volumes in the 2013 period compared to the 2012 period and the increase in the price paid for natural gas in our Maine market. Included in the 2013 results is a charge of $944,000 for the likely disallowance of gas costs resulting from the gas cost recovery audit by the PUCO in Ohio. Our gas costs are passed on dollar for dollar to our customers under tariffs regulated by the various commissions in the jurisdictions in which we operate. Our gas costs are subject to periodic audits and prudency reviews in all of these jurisdictions.

Gross margin increased by $343,000 to $7,697,000 for the three months ended June 30, 2013 compared to $7,354,000 for the same period in 2012. Increased customer growth in our Maine and North Carolina markets resulted in a $624,000 increase in gross margin. Our Montana and Wyoming increased by $118,000, and PGC’s margin increased by $59,000. Gross margin in our Ohio market decreased by $458,000, as a result of the gas cost charge described above.

Earnings

The Natural Gas Operations segment’s net loss for the three months ended June 30, 2013 was $236,000 or $0.03 per share, compared to a loss of $41,000, or $0.01 per share for the three months ended June 30, 2012.

Operating expenses increased by $641,000 to $7,633,000 for the three months ended June 30, 2013 compared to $6,992,000 for the same period in 2012. Distribution, general and administrative expenses increased by $347,000 due to increases in salaries and professional services. Depreciation increased by $252,000 due to increased capital expenditures.

Other income decreased by $36,000 to income of $259,000 for the three months ended June 30, 2013 compared to income of $295,000 for the same period in 2012. Income from service sales decreased in the 2013 period, offset by a decrease in acquisition costs of $39,000 as a result of the final accounting on the purchase in 2013 of the Matchworks building asset.

Interest expense increased by $105,000 to $698,000 for the three months ended June 30, 2013 compared to $593,000 for the same period in 2012. The 2013 period includes interest on the amortizing term loan with Bank of America of $53,718, interest on the Senior Secured Guaranteed Note with Sun Life of $30,752 and amortization of associated debt issue costs, offset by lower interest on the line of credit.

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Income tax benefit (expense) increased by $244,000 to a benefit of $139,000 for the three months ended June 30, 2013 compared to an expense of $105,000 for the same period in 2012, due primarily to the decrease in pre-tax income in 2013 compared to the 2012 period. The 2012 period included an adjustment related to expenses for our CEO’s stock sale. These expenses are not deductible for income tax purposes.

Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

Revenues and Gross Margin

Revenues increased by $15,042,000 to $57,691,000 for the six months ended June 30, 2013 compared to $42,649,000 for the same period in 2012. This increase is the result of the following factors:

1) Revenue from our Maine and North Carolina markets increased by $7,641,000 on a volume increase from full service and transportation customers of 724 MMcf in the six months ended June 30, 2013 compared to the same period in 2012. Continued customer growth in both markets and an increase in the price paid for natural gas passed on to our customers in our Maine market account for the increase.

2) Revenues from our Ohio market increased $5,855,000. Revenue to full service customers increased $5,717,000 on a volume increase of 567 MMcf in the six months ended June 30, 2013 compared to the same period in 2012 due to significantly colder weather in 2013 than in 2012.

3) Revenue from our Montana and Wyoming markets increased $961,000 on a volume increase of 356 MMcf in the six months ended June 30, 2013 compared to the same period in 2012, due to colder weather in the 2013 period than in the 2012 period.

4) Our recently acquired subsidiary PGC, accounted for $585,000 of additional revenue in 2013 as the purchase of PGC occurred on April 1, 2012.

Gas purchased increased by $11,482,000 to $34,166,000 for the six months ended June 30, 2013 compared to $22,684,000 for the same period in 2012. The increase is due primarily to the increased sales volumes in the 2013 period compared to the 2012 period and the increase in the price paid for natural gas in our Maine market. Included in the 2013 results is a charge of $944,000 for the likely disallowance of gas costs resulting from the gas cost recovery audit by the PUCO in Ohio. Our gas costs are passed on dollar for dollar to our customers under tariffs regulated by the various commissions in the jurisdictions in which we operate. Our gas costs are subject to periodic audits and prudency reviews in all of these jurisdictions.

Gross margin increased by $3,560,000 to $23,525,000 for the six months ended June 30, 2013 compared to $19,965,000 for the same period in 2012. Gross margin in our Ohio market increased by $883,000, due primarily to the cold weather in 2013. Increased customer growth in our Maine and North Carolina markets resulted in a $2,154,000 increase in gross margin. Our Montana and Wyoming markets increased by $287,000, and PGC increased margin by $236,000.

Earnings

The Natural Gas Operations segment’s net income for the six months ended June 30, 2013 was $4,475,000 or $0.53 per diluted share, compared to $3,312,000, or $0.41 per diluted share for the six months ended June 30, 2012.

Operating expenses increased by $1,489,000 to $15,210,000 for the six months ended June 30, 2013 compared to $13,721,000 for the same period in 2012. Distribution, general and administrative expenses increased by $750,000 due to increases in salaries and professional services. Depreciation increased by $462,000 due to increased capital expenditures. Operating expenses from the newly-acquired PGC accounted for $215,000 of additional expenses.

Other income decreased by $111,000 to income of $298,000 for the six months ended June 30, 2013 compared to income of $409,000 for the same period in 2012. Acquisition costs related to the purchase of the Matchworks building asset in 2013 totaled $47,000 after a final accounting adjustment in recording the purchase of the asset. The remaining decrease is due to lower income from service sales in the 2013 period.

Interest expense increased by $186,000 to $1,416,000 for the six months ended June 30, 2013 compared to $1,230,000 for the same period in 2012. The 2013 period includes interest on the amortizing term loan with Bank of America of $108,752, interest on the Senior Secured Guaranteed Note with Sun Life of $61,504 and amortization of associated debt issue costs, offset by lower interest on the line of credit.

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Income tax expense increased by $611,000 to $2,722,000 for the six months ended June 30, 2013 compared to $2,111,000 for the same period in 2012, due primarily to the increase in pre-tax income in 2013 compared to the 2012 period.

MARKETING AND PRODUCTION OPERATIONS

Income Statement

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2013			2012			2013			2012
Marketing and Production Operations
Operating revenues	$	2,646		$	1,040		$	6,217		$	2,947
Gas Purchased		2,233			850			5,093			2,245
Gross Margin		413			190			1,124			702
Operating expenses		244			220			505			552
Operating income (loss)		169			(30	)		619			150
Other income (expense)		152			(2	)		151			(3	)
Income before interest and taxes		321			(32	)		770			147
Interest expense		(34	)		(26	)		(83	)		(47	)
Income (loss) before income taxes		287			(58	)		687			100
Income tax benefit (expense)		(108	)		22			(260	)		(40	)
Net Income (Loss)	$	179		$	(36	)	$	427		$	60

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

Revenues and Gross Margin

Revenues increased by $1,606,000 to $2,646,000 for the three months ended June 30, 2013 compared to $1,040,000 for the same period in 2012. Revenue from our LNG business accounted for $1,373,000 of the increase. Revenue from our production operation increased by $71,000 due to higher prices received for volumes produced. Our newly formed Gas Natural Resources subsidiary containing the assets of JDOG Marketing, contributed revenue of $208,000. Revenues from our existing gas marketing operation decreased by $46,000 due primarily to lower sales volumes.

Gross margin increased by $223,000 to $413,000 for the three months ended June 30, 2013 compared to $190,000 for the same period in 2012. Gross margin from our LNG business was $43,000 in the 2013 period compared to zero in the 2012 period. Gross margin from our production operation increased by $115,000 due to the higher prices received, Gas Natural Resources returned margin of $60,000.

Earnings

The Marketing and Production segment’s income for the three months ended June 30, 2013 was $179,000, or $0.02 per diluted share, compared to a loss of $36,000, or $0.01 per share, for the three months ended June 30, 2012.

Operating expenses increased by $24,000 to $244,000 for the three months ended June 30, 2013 compared to $220,000 for the same period in 2012.

Other income increased by $154,000 to income of $152,000 for the three months ended June 30, 2013 from a loss of $2,000 for the same period in 2012 due to the gain on the sale of compressed natural gas equipment of $155,000.

Income tax expense increased by $130,000 to expense of $108,000 for the three months ended June 30, 2013 compared to a tax benefit of $22,000 for the same period in 2012 and is due primarily to the increase in pre-tax income in 2013 compared to the 2012 period.

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Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

Revenues and Gross Margin

Revenues increased by $3,270,000 to $6,217,000 for the six months ended June 30, 2013 compared to $2,947,000 for the same period in 2012. Revenue from our LNG business accounted for $3,435,000 of the increase. Revenue from our production operation increased by $70,000 due to higher prices received for volumes produced. Our newly formed Gas Natural Resources subsidiary containing the assets of JDOG Marketing, contributed revenue of $208,000. Revenues from our existing gas marketing operation decreased by $443,000 due primarily to lower sales volumes.

Gross margin increased by $422,000 to $1,124,000 for the six months ended June 30, 2013 compared to $702,000 for the same period in 2012. Our LNG business returned gross margin of $332,000 in the 2013 period compared to zero in the 2012 period. Gross margin from our production operation increased by $108,000 due to the higher prices received, Gas Natural Resources returned margin of $60,000, offset by a decrease in gross margin from our existing gas marketing operation of $78,000.

Earnings

The Marketing and Production segment’s income for the six months ended June 30, 2013 was $427,000, or $0.05 per diluted share, compared to $60,000, or $0.01 per diluted share, for the six months ended June 30, 2012.

Operating expenses decreased by $47,000 to $505,000 for the six months ended June 30, 2013 compared to $552,000 for the same period in 2012. The 2012 period included expense related to increasing the allowance for doubtful accounts for amounts on a specific customer account.

Other income increased by $154,000 to income of $151,000 for the six months ended June 30, 2013 from a loss of $3,000 for the same period in 2012 due to the gain on the sale of compressed natural gas equipment of $155,000.

Interest expense increased by $36,000 to $83,000 for the six months ended June 30, 2013 compared to $47,000 for the same period in 2012.

Income tax expense increased by $220,000 to expense of $260,000 for the six months ended June 30, 2013 compared to $40,000 for the same period in 2012, due primarily to the increase in pre-tax income in 2013 compared to the 2012 period.

PIPELINE OPERATIONS

Income Statement

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2013			2012			2013			2012
Pipeline Operations
Operating revenues	$	105		$	102		$	203		$	209
Gas Purchased		—			—			—			—
Gross Margin		105			102			203			209
Operating expenses		43			62			91			100
Operating income		62			40			112			109
Other income (expense)		—			—			—			—
Income before interest and taxes		62			40			112			109
Interest expense		(7	)		—			(14	)		(6	)
Income before income taxes		55			40			98			103
Income tax expense		(21	)		(17	)		(37	)		(42	)
Net Income	$	34		$	23		$	61		$	61

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

Net income increased by $11,000 to $34,000 for the three months ended June 30, 2013 compared to $23,000 for the same period in 2012. The overall impact of the results of our pipeline operations was not material to the results of our consolidated operations.

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Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

Net income stayed flat at $61,000 for the six months ended June 30, 2013 and $61,000 for the same period in 2012. The overall impact of the results of our pipeline operations was not material to the results of our consolidated operations.

PROPANE OPERATIONS

Income Statement

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2013			2012			2013			2012
Propane Operations
Operating revenues	$	658		$	561		$	2,361		$	2,471
Gas Purchased		451			418			1,604			1,850
Gross Margin		207			143			757			621
Operating expenses		466			432			1,011			998
Operating income (loss)		(259	)		(289	)		(254	)		(377	)
Other income (expense)		5			50			(22	)		(22	)
Income before interest and taxes		(254	)		(239	)		(276	)		(399	)
Interest expense		(7	)		(6	)		(15	)		(6	)
Income before income taxes		(261	)		(245	)		(291	)		(405	)
Income tax benefit		99			89			110			154
Net Income (Loss)	$	(162	)	$	(156	)	$	(181	)	$	(251	)

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

Revenues and Gross Margin

Revenues increased by $97,000 to $658,000 for the three months ended June 30, 2013 compared to $561,000 for the same period in 2012. Sales of propane increased by $116,000 on a volume increase of 69,000 gallons due primarily to colder weather in the 2013 period compared to the 2012 period. This is offset by a slight decrease in diesel fuel sales.

Gross margin increased by $64,000 to $207,000 for the three months ended June 30, 2013 compared to $143,000 for the same period in 2012. Gross margin from propane sales increased by $44,000, accounting for the majority of the decrease.

Earnings

The Propane Operations segment’s loss for the three months ended June 30, 2013 was $162,000, or $0.02 per share, compared to a loss of $156,000, or $0.02 per share for the three months ended June 30, 2012.

Operating expenses increased by $34,000 to $466,000 for the three months ended June 30, 2013 compared to $432,000 for the same period in 2012 due to increases in expense for professional services and property insurance.

Other income decreased by $45,000 to $5,000 for the three months ended June 30, 2013 compared to $50,000 for the same period in 2012 due to a decrease in income from service installations and conversions.

Income tax benefit (expense) increased by $10,000 to a benefit of $99,000 for the three months ended June 30, 2013 compared to a benefit of $89,000 for the same period in 2012.

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Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

Revenues and Gross Margin

Revenues decreased by $110,000 to $2,361,000 for the six months ended June 30, 2013 compared to $2,471,000 for the same period in 2012. Revenue from diesel fuel sales decreased by $337,000 due to the loss of a large customer in the third quarter of 2012, offset by an increase in propane sales of $229,000 on a volume increase of 204,000 gallons due to colder weather in the 2013 period.

Gross margin increased by $136,000 to $757,000 for the six months ended June 30, 2013 compared to $621,000 for the same period in 2012. Gross margin from propane sales increased by $175,000 due to the increased sales volumes, while margin from diesel fuel sales decreased by $37,000.

Earnings

The Propane Operations segment’s loss for the six months ended June 30, 2013 was $181,000, or $0.02 per share, compared to a loss of $251,000, or $0.03 per share, for the six months ended June 30, 2012.

Operating expenses increased by $13,000 to $1,011,000 for the six months ended June 30, 2013 compared to $998,000 for the same period in 2012.

Income tax benefit (expense) decreased by $44,000 to a benefit of $110,000 for the six months ended June 30, 2013 compared to a benefit of $154,000 for the same period in 2012.

CORPORATE AND OTHER OPERATIONS

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

Income Statement

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2013			2012			2013			2012
Corporate and Other
Operating revenues	$	—		$	—		$	—		$	—
Gas Purchased		—			—			—			—
Gross Margin		—			—			—			—
Operating expenses		196			72			277			135
Operating (loss)		(196	)		(72	)		(277	)		(135	)
Other income (expense)		(16	)		(794	)		(196	)		(909	)
Income before interest and taxes		(212	)		(866	)		(473	)		(1,044	)
Interest expense		(29	)		—			(56	)		—
Income before income taxes		(241	)		(866	)		(529	)		(1,044	)
Income tax benefit		99			352			208			421
Net Loss	$	(142	)	$	(514	)	$	(321	)	$	(623	)

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

Results of corporate and other operations for the three months ended June 30, 2013 include administrative costs of $196,000, acquisition related costs of $20,000, interest expense of $29,000, offset by an income tax benefit of $99,000, and interest and other income of $4,000, for a net loss of $142,000.

Results of corporate and other operations for the three months ended June 30, 2012 include administrative costs of $72,000, acquisition activities of $458,000, costs related to expenses for our CEO’s stock sale of $255,000, corporate expenses of $84,000, offset by income tax benefit of $352,000 and interest income of $3,000, for a net loss of $514,000.

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Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

Results of corporate and other operations for the six months ended June 30, 2013 include administrative costs of $277,000, acquisition related costs of $109,000, corporate expenses of $93,000, interest expense of $56,000, offset by an income tax benefit of $208,000, and interest income of $6,000, for a net loss of $321,000.

Results of corporate and other operations for the six months ended June 30, 2012 include administrative costs of $135,000, acquisition activities of $576,000, costs related to expenses for our CEO’s stock sale of $255,000, corporate expenses of $84,000, offset by income tax benefits of $421,000 and interest income of $6,000, for a net loss of $623,000.

Sources and Uses of Cash

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

Our ability to maintain liquidity depends upon our credit facilities with Bank of America and Yadkin Valley Bank, shown as lines of credit on the accompanying balance sheets. Our use of the revolving lines of credit was $16.2 million and $24.3 million at June 30, 2013 and December 31, 2012, respectively.

We periodically repay our short-term borrowings under the revolving lines of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $44.0 and $44.3 million at June 30, 2013 and December 31, 2012, respectively, including the amount due within one year.

Cash, excluding restricted cash, decreased to $2.8 million at June 30, 2013, compared to $3.4 million at December 31, 2012.

	Six Months Ended June 30,
	2013			2012
Cash provided by operating activities	$	17,442,000		$	12,233,000
Cash used in investing activities		(7,532,000	)		(12,343,000	)
Cash used in financing activities		(10,562,000	)		(7,938,000	)
Decrease in cash	$	(652,000	)	$	(8,048,000	)

OPERATING CASH FLOW

For the six months ended June 30, 2013, cash provided by operating activities increased by $5.2 million as compared to the six months ended June 30, 2012. Major items affecting operating cash included a $3.9 million decrease in payments on accounts payable, a $2.3 million increase in natural gas and propane inventory purchases, a $1.9 million increase in net income, a $1.4 million decrease in prepayments a $1.1 million increase in deferred tax expense and a $1.0 million increase in accounts receivable collections.

INVESTING CASH FLOW

For the six months ended June 30, 2013, cash used in investing activities decreased by $4.8 million as compared to the six months ended June 30, 2012. The decrease is primarily attributable to an acquisition deposit paid in 2012 for the purchase of the Loring pipeline of $2.3 million, $1.5 million paid for the purchase of Public Gas Company in 2012, a net increase in capital expenditures comprised of $1.6 million paid for the purchase of 8500 Station Street in 2013 offset by a $500,000 decrease in other capital expenditures, a $1.1 million release of restricted cash related to capital expenditures, and a $1.0 million increase in proceeds from sales of fixed assets.

Capital Expenditures

Our capital expenditures for continuing operations totaled $9.9 million and $8.8 million for the six months ended June 30, 2013 and 2012, respectively. Included in capital expenditures for 2013 is $1.6 million for the acquisition of the Matchworks Building in Mentor Ohio. We finance our capital expenditures on an interim basis by the use of our operating cash flow and use of the Bank of America and Yadkin Valley Bank revolving lines of credit.

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

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Estimated Capital Expenditures

The table below details our capital expenditures for the three and six months ended June 30, 2013 and 2012 and provides an estimate of future cash requirements for capital expenditures:

	Six Months Ended June 30,				Remaining Cash Requirements through December 31, 2013
($ in thousands)	2013		2012
Natural Gas Operations	$	9,102	$	5,764	$	1,111
Marketing and Production Operations		217		1,548		33
Pipeline Operations		2		23		67
Propane Operations		12		77		288
Corporate and Other Operations		553		1,355		190
Total Capital Expenditures	$	9,886	$	8,767	$	1,689

We expect to fund our future cash requirements for capital expenditures through December 31, 2013 from cash provided by operating activities and the proceeds from the equity offering in July 2013.

FINANCING CASH FLOW

For the six months ended June 30, 2013, cash used in financing activities increased by $2.6 million as compared with the six months ended June 30, 2012. The change is due primarily to $3.6 million in additional net payments on our lines of credit offset by a decrease in debt issuance cost of $467,000 and a $757,000 release of restricted cash related to our debt service fund.

We fund our operating cash needs, as well as dividend payments and capital expenditures, primarily through cash flow from operating activities and short-term borrowing. Historically, to the extent cash flow has not been sufficient to fund these expenditures, we have used our working capital line of credit. We have greater need for short-term borrowing during periods when internally generated funds are not sufficient to cover all capital and operating requirements, including costs of gas purchased and capital expenditures. In general, our short-term borrowing needs for purchases of gas inventory and capital expenditures are greatest during the summer and fall months and our short-term borrowing needs for financing customer accounts receivable are greatest during the winter months. Our ability to maintain liquidity depends upon our credit facilities with Bank of America and Yadkin Valley Bank, shown as lines of credit on the accompanying balance sheets. Our use of the revolving lines of credit was $16.2 million and $24.3 million at June 30, 2013 and December 31, 2012, respectively. We periodically repay our short-term borrowings under the revolving lines of credit by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $44.0 and $44.3 million at June 30, 2013, and December 31, 2012, respectively, including the amount due within one year.

The following discussion describes our credit facilities as of June 30, 2013.

Bank of America Credit Agreement and Line of Credit

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

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

For the three months ended June 30, 2013 and 2012, the weighted average interest rate on the existing and renewed revolving credit facility was 3.3% and 3.2%, respectively, resulting in $103,163 and $105,461 of interest expense, respectively. For the six months ended June 30, 2013 and 2012, the weighted average interest rate on the existing and renewed revolving credit facility was 3.3% and 3.3%, respectively, resulting in $234,657 and $231,133 of interest expense, respectively. The balance on the revolving credit facility was $16.0 million and $23.9 million at June 30, 2013 and December 31, 2012, respectively. The $16.0 million of borrowings as of June 30, 2013, leaves the remaining borrowing capacity on the line of credit at $14.0 million.

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Bank of America Term Loan

The Term Loan portion of the Bank of America credit agreement has an interest rate of LIBOR plus 175 to 225 basis points with an interest rate swap provision that allows for the interest rate to be fixed in the future. The Term Loan is amortized at a rate of $125,000 per quarter. As of June 30, 2013, the Company had not exercised the interest rate swap provision for the fixed interest rate.

For the three months ended June 30, 2013 and 2012, the weighted average interest rate was 3.3% and 3.3%, respectively, resulting in interest expense of $53,718 and $105,461, respectively. For the six months ended June 30, 2013 and 2012, the weighted average interest rate on the term loan was 3.3% and 3.2%, respectively, resulting in interest expense of $108,752 and $231,133, respectively. The balance outstanding on the Term Loan at June 30, 2013 was $9,625,000.

Yadkin Valley Bank Credit Facility

On February 13, 2012, Independence entered into a one year, $500,000 revolving credit facility with Yadkin Valley Bank with an interest rate based on the prime rate, with a floor of 4.5% per annum and a maximum of 16% per annum. The revolving credit facility expired February 13, 2013. On April 12, 2013, Yadkin Valley Bank extended the $500,000 commercial line of credit beginning May 12, 2013. The debt is secured by a blanket lien on all assets owned or acquired by Independence. Independence had outstanding borrowings of $200,000 and $400,000 at June 30, 2013 and December 31, 2012, respectively.

For the three months ended June 30, 2013 and 2012, the weighted average interest rate on the facility was 4.5%, resulting in $3,116 and $3,674 of interest expense, respectively. For the six months ended June 30, 2013 and 2012, the weighted average interest rate on the facility was 4.5%, resulting in $8,043 and $3,682 of interest expense, respectively. The $200,000 of borrowings as of June 30, 2013, leaves the remaining borrowing capacity on the line of credit at $300,000.

Senior Unsecured Notes

On June 29, 2007, Energy West authorized the sale of $13,000,000 aggregate principal amount of its 6.16% Senior Unsecured Notes, due June 29, 2017 (the “Senior Unsecured Notes”). The proceeds of these notes were used to refinance existing notes.

Interest expense was $200,200 and $400,400 for the three and six months ended June 30, 2013 and 2012, respectively.

Sun Life Assurance Company of Canada

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

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

The Fixed Rate Note, in the amount of $15.3 million, is a joint obligation of the Issuers, and is guaranteed by the Company, Lightning Pipeline and Great Plains (together with the Issuers, “the Fixed Rate Obligors”). This note received approval from the PUCO on March 30, 2011. Prepayment of this note prior to maturity is subject to a 50 basis point make-whole premium.

The Floating Rate Note, in the amount of $3.0 million, is an obligation of Great Plains and is guaranteed by the Company (together, “the Floating Rate Obligors”). The note is priced at a fixed spread of 385 basis points over three month LIBOR. Pricing for this note will reset on a quarterly basis to the then current yield of three month LIBOR. Prepayment of this note prior to maturity is at par.

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

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

For the three and six months ended June 30, 2013 and 2012, the weighted average interest rate on the Fixed Rate Note was 5.38%, resulting in $206,242 and $412,485 of interest expense, respectively. For the three and six months ended June 30, 2013, the

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weighted average interest rate on the Floating Rate Note was 4.14% and 4.13% resulting in $30,975 and $62,125 of interest expense, respectively. For the three and six months ended June 30, 2012, the weighted average interest rate on the Floating Rate Note was 4.35% and 4.36% resulting in $32,625 and $65,350 of interest expense, respectively.

On October 24, 2012, Orwell, NEO, and Brainard issued a Senior Secured Guaranteed Note in the amount of $2.989 million. The Senior Note was placed with Sun Life, pursuant to a third amendment to the original Note Purchase Agreement dated as of November 2, 2010, by and among Orwell, NEO, and Brainard, and Great Plains Natural Gas Company, Lightning Pipeline Company, Inc., Gas Natural and Sun Life. The Senior Note bears an interest rate of 4.15%, compounded semi-annually, and it matures on June 1, 2017. The Senior Note is a joint obligation of the Ohio subsidiaries and is guaranteed by Gas Natural’s non-regulated Ohio and North Carolina subsidiaries.

For the three and six months ended June 30, 2013, the weighted average interest rate on the Sun Life Senior Secured Guaranteed Note was 4.15% resulting in $30,752 and $61,504 of interest expense, respectively.

Debt Covenants

The Bank of America revolving credit agreement and term loan contain various covenants, which include, among others, limitations on total dividends and distributions made in the immediately preceding 60-month period to 80% of Energy West’s aggregate consolidated net income for such period, restrictions on certain indebtedness, limitations on asset sales, and maintenance of certain debt-to-capital and interest coverage ratios.

The Yadkin Valley Bank revolving credit facility contains various restrictions, which include, among others, limitations on total dividends and distributions, restrictions on certain indebtedness, and limitations on asset sales.

The Senior Unsecured Notes contain various covenants, including a limitation on Energy West’s total dividends and distributions made in the immediately preceding 60-month period to 100% of aggregate consolidated net income for such period. The notes restrict Energy West from incurring additional senior indebtedness in excess of 60% of capitalization at any time and require Energy West to maintain an interest coverage ratio of not more than 150% of the pro forma annual interest charges on a consolidated basis in two of the three preceding fiscal years

The Sun Life Fixed Rate Note, Floating Rate Note, and Senior Note contain various covenants, which include, among others, limitations on total dividends and distributions if in aggregate these limitations for the fiscal year do not exceed 70% of net income of NEO, Orwell, Brainard, Lightning Pipeline, and Great Plaines (the “Obligors”) for the four fiscal quarters then ending. The agreements also contain restrictions on certain indebtedness, limitations on asset sales, maintenance of certain debt-to-capital and interest coverage ratios. Due to the covenants, the Obligors are unable to pay a dividend to the holding company, which may impact the Company’s ability to pay a dividend to shareholders.

Additionally, Sun Life restricted certain cash balances and required two main types of debt service reserve accounts to be created to cover approximately one year of interest payments. The balance in both debt service reserve accounts was $1,079,000 and $1,078,000 at June 30, 2013 and December 31, 2012, respectively, and is included in restricted cash. The debt service reserve accounts cannot be used for operating cash needs. In addition, the Company deposited $750,000 into a reserve account where Sun Life is the beneficiary. The terms allow the Company to withdraw that money if a letter of credit is received to replace the restricted cash.

The provisions in our debt agreements limit the amount of indebtedness we can obtain or issue, which could impact our ability to finance our operations and fund growth. The provisions in our debt agreements also limit the amount of dividends our subsidiaries can pay to the holding company and may impact the Company’s ability to pay a dividend to shareholders.

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

OFF-BALANCE SHEET ARRANGEMENTS

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Commodity Price Risk

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

Credit Risk

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

ITEM��4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30, 2013, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. The evaluation was carried out under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer. Based upon this evaluation, our chief executive officer and chief financial officer each concluded that our disclosure controls and procedures were effective as of June 30, 2013.

Changes in Internal Control over Financial Reporting

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

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in lawsuits that have arisen in the ordinary course of business. We are contesting each of these lawsuits vigorously and believe we have defenses to the allegations that have been made.

On February 25, 2013, one of the Company’s former officers, Jonathan Harrington, filed a lawsuit captioned “Jonathan Harrington v. Energy West, Inc. and Does 1-4,” Case No. DDV-13-159 in the Montana Eighth Judicial District Court, Cascade County. Mr. Harrington claims that he was terminated in violation of Montana statute requiring just cause for termination. In addition, he alleges claims for negligent infliction of emotional distress and negligent slander. Mr. Harrington is seeking relief for economic loss, including lost wages and fringe benefits for a period of at least four years from the date of discharge, together with interest. Mr. Harrington is an Ohio resident and was employed in the Company’s Ohio corporate offices. On March 20, 2013, the Company filed a motion to dismiss the lawsuit on the basis that Mr. Harrington was an Ohio employee, not a Montana employee, and therefore the statute does not apply. The motion has been fully briefed but has not been ruled on by the Court. Likewise, Mr. Harrington has requested oral argument but the Court has not indicated whether such request will be granted. The Company believes his claims under Montana law are without merit, and intends to vigorously defend this case on all grounds.

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

ITEM 6. EXHIBITS

Exhibit Number	Description
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase

* 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.
August 14, 2013	/s/ Thomas J. Smith
	Thomas J. Smith, Chief Financial Officer
	(principal financial officer)

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