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

Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of us from time to time, including statements contained in filings with the Securities and Exchange Commission ("SEC") and our reports to shareholders, involve known and unknown risks and other factors that may cause our company's actual results in future periods to differ materially from those expressed in any forward-looking statements. See "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC. Any such forward looking statement is qualified by reference to these risk factors. We caution that these risk factors are not exclusive. We do not undertake to update any forward looking statements that may be made from time to time by or on behalf of us except as required by law.

OVERVIEW

Gas Natural is a natural gas company, primarily operating local distribution companies in seven states and serving approximately 70,000 customers. Our natural gas utility subsidiaries are Bangor Gas Company (Maine), Brainard Gas Corp. (Ohio), Cut Bank Gas Company (Montana), Energy West, Incorporated (Montana and Wyoming), Frontier Natural Gas (North Carolina), Northeast Ohio Natural Gas Corporation (Ohio), Orwell Natural Gas Company (Ohio and Pennsylvania) and Public Gas Company (Kentucky). Our operations also include production and marketing of natural gas, gas pipeline transmission and gathering and propane operations. Approximately 81% and 87% of our revenues in the three and nine months ended September 30, 2012 respectively were derived from our natural gas utility operations.

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

• Customer growth in our Maine and North Carolina markets and in our marketing and production operation caused revenues and gross margin to increase as compared to the comparable period for the prior year.

• Our propane operations returned a net loss for the current quarter.

• The 2011 period included the pre-tax gain of $1,055,000 on the bargain purchase of the assets of Independence Oil & LP Gas, Inc.

• The average balance on our Bank of America line of credit was higher during the current period, causing an increase in interest expense.

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

The following summarizes the critical events that impacted our results of operations during the nine months ended September 30, 2012:

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

• Our propane operations returned a net loss for the current nine month period.

• The 2011 period included the pre-tax gain of $1,055,000 on the bargain purchase of the assets of Independence Oil & LP Gas, Inc.

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

Our historical financial statements reflect the following reportable business segments: Natural Gas Operations, Marketing and Production Operations, Pipeline Operations, 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, 2011. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of September 30, 2012 and for the three and nine month periods ended September 30, 2012. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.

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

Net Income (Loss) - Net loss for the three months ended September 30, 2012 was $671,000, or $.08 per diluted share, compared to a net income of $130,000, or $0.02 per diluted share for the three months ended September 30, 2011, a decrease of $801,000. Net loss from our natural gas operations increased by $119,000. Net income from our gas marketing and production operations increased by $278,000. Net income from our pipeline operations increased by $52,000. Net income from our propane operations decreased by $779,000 to a loss of $217,000 in the 2012 period from net income of $562,000 in the 2011 period. The 2011 period included the pre-tax gain on the bargain purchase of the assets of Independence Oil & LP Gas, Inc. of $1,055,000. Net loss from our corporate and other segment increased by $233,000 to a loss of $298,000.

Revenues - Revenues increased by $647,000 to $12,968,000 for the three months ended September 30, 2012 compared to $12,321,000 for the same period in 2011. The increase was primarily attributable to a natural gas revenue increase of $109,000 due to increased sales volumes in our Maine and North Carolina markets, partially offset by lower natural gas prices passed through to customers in all of our service territories, an increase of $954,000 in the revenue from our marketing and production operation primarily due to sales from our newly formed liquefied natural gas (LNG) line of business, offset by a decrease in revenue from our propane operations segment of $405,000.

Gross Margin - Gross margin increased by $484,000 to $6,795,000 for the three months ended September 30, 2012 compared to $6,311,000 for the same period in 2011. Our natural gas operation's margins increased $493,000, due primarily to customer growth in our Maine and North Carolina markets. Gross margin from our marketing and production operations decreased $21,000. Gross margin from our propane operations increased by $22,000.

Operating Expenses - Operating expenses, other than cost of sales, increased by $605,000 to $7,508,000 for the three months ended September 30, 2012 compared to $6,903,000 for the same period in 2011. Expenses related to the propane operations segment increased by $160,000 and the newly acquired PGC accounted for $105,000 of the increase. Increases in depreciation due to increased capital expenditures in the natural gas segment totaled $129,000. The remainder is primarily the result of increases in maintenance expenses, taxes other than income taxes and professional services.

Other Income (Expense), net - Other income (expense) increased by $382,000 to income of $152,000 for the three months ended September 30, 2012 compared to a loss of $230,000 for the same period in 2011. The 2011 period included $300,000 of expense related to conclusion of an arbitration case in a contract dispute.

Acquisition Expense - Acquisition expense increased by $177,000 to $209,000 for the three months ended September 30, 2012 compared to $32,000 for the same period in 2011. The increase is primarily the result of the cost related to various growth opportunities including $109,000 for potential expansion of natural gas into a new state and $48,000 related to the proposed acquisition of John D. Oil and Gas Marketing.

Stock Sale Expense - Stock sale expense increased by $19,000 to $19,000 for the three months ended September 30, 2012 compared to $0 for the same period in 2011. The increase is due to the expenses paid in connection with our CEO's stock sale which was mainly completed during the three months ended June 30, 2012.

Interest Expense - Interest expense increased by $85,000 to $637,000 for the three months ended September 30, 2012 compared to $552,000 for the same period in 2011. The balance on our Bank of America line of credit averaged $22,899,000 during the three months ended September 30, 2012, compared to $14,238,000 during the 2011 period, causing additional interest expense.

Gain on Bargain Purchase - The gain on bargain purchase in 2011 is the result of the pre-tax gain of $1,055,000 due to the purchase of the assets of Independence Oil & LP Gas, Inc.

Income Tax Benefit (Expense) - Income tax benefit increased by $278,000 to a benefit of $760,000 for the three months ended September 30, 2012 compared to a benefit of $482,000 for the same period in 2011. The 2012 and 2011 periods each included a tax benefit from the true-up to the prior year's tax return of $193,000 and $326,000 for an increase in expense of $133,000. This is offset by the income tax benefit due to the increase in the pre-tax loss in 2012 compared to 2011.

Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

Net Income - Net income for the nine months ended September 30, 2012 was $1,887,000, or $0.23 per diluted share, compared to a net income of $4,765,000, or $0.58 per diluted share for the nine months ended September 30, 2011, a decrease of $2,878,000. Net income from our natural gas operations decreased by $1,425,000 due primarily to warm weather in our weather sensitive service territories. Net income from our gas marketing and production operations increased by $228,000. Net income from our pipeline operations increased by $48,000. Our propane operations incurred a net loss of $469,000 in the 2012 period, compared to income of $562,000 in the 2011 period, a decrease of $1,031,000. The 2011 period included the pre-tax gain on the bargain purchase of the assets of Independence Oil & LP Gas, Inc. of $1,055,000. Net loss from our corporate and other segment increased by $698,000.

Revenues - Revenues decreased by $9,899,000 to $61,246,000 for the nine months ended September 30, 2012 compared to $71,145,000 for the same period in 2011. The decrease was primarily attributable to a natural gas revenue decrease of $12,556,000 due to warm weather in all of our weather sensitive service territories, offset by an increase of $600,000 in the revenue from our marketing and production operation primarily due to sales from our newly formed LNG business, and an increase in revenue from our propane operations segment of $2,066,000. Propane operations commenced August 1, 2011 and thus the 2011 period includes two months of results.

Gross Margin - Gross margin increased by $57,000 to $28,293,000 for the nine months ended September 30, 2012 compared to $28,236,000 for the same period in 2011. Our natural gas operation's margins decreased $564,000 due to the warm weather and offset somewhat by increased margin from customer growth in our Maine and North Carolina markets. Gross margin from our propane operations increased by $643,000 as the 2011 period included only two months of results. Margin from our marketing and production operations decreased by $12,000.

Operating Expenses - Operating expenses, other than cost of sales, increased by $2,347,000 to $23,014,000 for the nine months ended September 30, 2012 compared to $20,667,000 for the same period in 2011. The propane operations segment contributed $1,158,000 of the increase as the 2011 period included only two months of results and the newly acquired PGC accounted for $212,000. Increases in depreciation due to increased capital expenditures in the natural gas segment totaled $380,000. The remainder is due to increases in maintenance expense, taxes other than income taxes, professional services and expense due to the additional estimate for uncollectible accounts.

Other Income (Expense), net - Other income (expense) increased by $399,000 to $503,000 for the nine months ended September 30, 2012 compared to $104,000 for the same period in 2011. The 2011 period included $300,000 of expense related to conclusion of an arbitration case in a contract dispute. The remaining increase is primarily due to increased service sales in our natural gas operations.

Acquisition Expense - Acquisition expense increased by $738,000 to $826,000 for the three months ended September 30, 2012 compared to $88,000 for the same period in 2011. The increase is primarily the result of the cost related to various growth opportunities including $337,000 for potential expansion of natural gas into a new states and $306,000 related to the proposed acquisition of John D. Oil and Gas Marketing.

Stock Sale Expense - Stock sale expense increased by $228,000 to $274,000 for the three months ended September 30, 2012 compared to $46,000 for the same period in 2011. The increase is due to the expenses paid in connection with our CEO's stock sale which was mainly completed during the three months ended June 30, 2012.

Interest Expense - Interest expense increased by $469,000 to $1,927,000 for the nine months ended September 30, 2012 compared to $1,458,000 for the same period in 2011. The increase is primarily the result of our Ohio subsidiaries refinancing their

debt in May 2011. There were loans paid off in preparation of the refinancing and therefore a lower amount of average debt was outstanding during the nine months ended September 30, 2011. In addition, the balance on our Bank of America line of credit averaged $19,991,000 during the nine months ended September 30, 2012, compared to $12,752,000 during the 2011 period, causing additional interest expense.

Gain on Bargain Purchase - The gain on bargain purchase in 2011 is the result of the pre-tax gain of $1,055,000 due to the purchase of Independence Oil & LP Gas, Inc.

Income Tax Expense - Income tax expense decreased by $1,427,000 to $858,000 for the nine months ended September 30, 2012 compared to $2,285,000 for the same period in 2011. The decrease is primarily due to the reduction in pre-tax income. In addition, the 2012 and 2011 periods each included a tax benefit from the true-up to the prior year's tax return of $193,000 and $326,000, respectively, causing an offsetting increase in expense of $133,000.

Net Income (Loss) by Segment and Service Area

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



                                         Three Months Ended           Nine Months Ended
                                            September 30,               September 30,
   ($ in thousands)                       2012           2011         2012          2011
   Natural Gas Operations
   Energy West Montana (MT)            $       345      $  (79 )    $   1,003      $ 1,067
   Energy West Wyoming (WY)                    (70 )       (79 )           90          234
   Frontier Natural Gas (NC)                   167         306          1,039        1,231
   Bangor Gas (ME)                             329        (153 )        1,439          989
   Ohio Companies (OH)                      (1,313 )      (458 )         (768 )        634
   Public Gas Company (KY)                     (40 )        -             (73 )         -

   Total Natural Gas Operations        $      (582 )    $ (463 )    $   2,730      $ 4,155
   Marketing & Production Operations           327          49            386          158
   Pipeline Operations                          99          47            161          112
   Propane Operations                         (217 )       562           (469 )        562

                                              (373 )       195          2,808        4,987
   Corporate & Other                          (298 )       (65 )         (921 )       (222 )

   Consolidated Net Income (Loss)      $      (671 )    $  130      $   1,887      $ 4,765

The following highlights our results by operating segments: