Gateway Energy Reports Third Quarter 2010 Results

HOUSTON, Nov. 16, 2010 /PRNewswire-FirstCall/ -- Gateway Energy Corporation (OTC Bulletin Board: GNRG) today announced the financial results for the third quarter ended September 30, 2010. Net loss from continuing operations was $40,711, or ($0.00) per diluted share, for the third quarter 2010 compared to a net loss of $141,728, or ($0.01) for the third quarter 2009 and a net loss of $957,009, or ($0.05) per diluted share, for the immediately preceding second quarter of 2010. Adjusted EBITDA(1) was $105,737 for the third quarter 2010 compared to $60,194 for the third quarter 2009 and $213,308 for the immediately preceding second quarter 2010.

Fred Pevow, President and CEO of Gateway, commented "We made progress implementing our strategic plan in the third quarter of 2010, including: (i) a reduction of our general and administrative expenses, (ii) additions to our asset base, and (iii) an increase in our access to capital. We are pleased with our acquisition of natural gas distribution pipelines from Laser, which fits our objective of increasing assets with stable cash flow on a basis which is immediately accretive to earnings. Unfortunately, we experienced mixed operating results from our legacy assets, consisting of good performance from our Waxahachie and Hickory Creek systems and poor performance from our Madisonville and offshore Gulf of Mexico systems.  In order to become a profitable company, it will be important for us to replicate the Laser acquisition."

Third Quarter 2010 Corporate Highlights

• On September 22, 2010, Gateway entered into a Purchase Sale Agreement with Laser Pipeline Company LP ("Laser") to purchase certain assets.  The Company subsequently closed the purchase on October 18, 2010.
• Gateway increased its borrowing base on its credit facility to $4.0 million in anticipation of payment of the purchase price of the assets to be acquired from Laser.

Third Quarter 2010 Operating Highlights

• General and administrative expenses prior to stock-based compensation ("Cash G&A") of approximately $357,000 decreased by 35% compared to the third quarter 2009 and 10% compared to the second quarter 2010.
• Operating margin contribution of approximately $146,607 from the Waxahachie pipeline system increased by 25% on a year-over-year basis and 11% on a quarter-over-quarter basis.
• Operating margin contribution from the Madisonville pipeline and net profits interest was negligible.

Selected Financial Data:

The following table summarizes selected financial results for the reporting periods:

Results of Operations:

Third Quarter 2010 compared to Third Quarter 2009

Revenues were $1,804,317 for the quarter ended September 30, 2010 compared to $1,573,429 for the quarter ended September 30, 2009. The net increase of $230,888 was due to an increase in sales of natural gas of $356,511 and a decrease in transportation, treating and other revenue of $125,623. Revenues from sales of natural gas from the Waxahachie delivery system increased as natural gas prices were higher than the previous year (volumes are bought and sold pursuant to 'back-to-back" contracts based on monthly index prices, so higher prices do not generally result in increased margins).

Adjusted EBITDA was $105,737 for the quarter ended September 30, 2010 compared to $60,194 for the quarter ended September 30, 2009. The net increase of $45,543 was primarily due to a reduction in Cash G&A expenses of $192,354 or 35% from the comparable period which was partially offset by a decrease in operating margin(2) of $134,041. Lower interest income and other non-operating expenses also resulted in a decrease of $12,770.

Operating margin was $466,512 for the quarter ended September 30, 2010 compared to $600,553 for the quarter ended September 30, 2009. The net decrease in operating margin of $134,041 resulted primarily from lower operating margin of approximately $268,000 from the East Cameron 359 system offset by the addition in operating margin of approximately $149,000 from the Hickory Creek system. The East Cameron 359 system was used as an alternate pipeline for several producers when the Sea Robin pipeline was temporarily out of service. Sea Robin is now active and the East Cameron 359 system is no longer being used as an alternate pipeline.  The Hickory Creek system was acquired in January 2010 and therefore did not contribute to results for the quarter ended September 30, 2009.

Cash G&A expenses were lower by $192,354. The sale of the Shipwreck and Pirate's Beach pipelines and the Crystal Beach terminal contributed to a decrease in insurance costs of approximately $51,000. Personnel costs also decreased by approximately $92,000 as did consulting and investor relations costs.

Interest income and other expense increased by $12,770 compared to the quarter ended September 30, 2009.

Third Quarter 2010 compared to Second Quarter 2010

Revenues were $1,804,317 for the third quarter 2010 compared to $1,795,963 for the preceding second quarter 2010. The net increase of $8,354 was due to an increase in sales of natural gas of $85,440 and a decrease in transportation, treating and other revenue by $77,086. Revenues from sales of natural gas from the Waxahachie delivery system were sequentially higher primarily due to higher natural gas prices (which generally do not result in higher operating margin) and to a lesser extent due to increased volumes (which generally result in higher operating margin). Transportation, treating and other revenues were sequentially lower primarily due to decreases in volumes from the offshore and Hickory Creek systems.

Adjusted EBITDA was $105,737 for the quarter ended September 30, 2010 compared to $213,308 for the preceding quarter ended June 30, 2010. The net decrease of $107,571 was primarily due to a combination of a decrease in operating margin of $87,510 and a decrease in other and interest income of $61,934, partially offset by a reduction in Cash G&A expenses of $41,873.

Operating margin was $466,512 for the third quarter 2010 compared to $554,022 for the preceding second quarter 2010.  The net decrease in operating margin of $87,510 was due to the decline of volumes at all system locations, partially offset by higher volumes from Waxahachie. Decreased volumes from the Hickory Creek system were expected and consistent with type decline curves found in the Barnett Shale, where the Hickory Creek system is located. However, the offshore Gulf of Mexico systems experienced larger and more unexpected decreases in volumes. The Company is attempting to identify the sources of ongoing declines from the offshore systems.

Cash G&A expenses were lower by $41,873 compared to the second quarter 2010 due to reductions in investor relations costs, lower salary and benefits, and other miscellaneous costs. Other and interest income decreased by $61,934 primarily due to a true-up of operating expenses recorded in the second quarter 2010 that were over-expensed in 2009.

Liquidity and Capital Resources

As of September 30, 2010, the Company had available cash of $303,207 and borrowing availability of $1,500,000 pursuant to a $4.0 million credit facility. Subsequent to September 30, 2010, the borrowing base was increased to $4.0 million in anticipation of the payment of the purchase price for the acquisition of certain assets from Laser Pipeline Company, LP.  Absent significant acquisitions or development projects, the Company will continue to fund its operations and small growth opportunities through internally-generated funds and available cash and bank borrowings as needed. The Company is exploring financing alternatives to allow it to accelerate the implementation of its strategic plan, and such new capital may take several forms.  There is no guarantee that the Company will be able to obtain additional financing.

About Gateway Energy

Gateway Energy Corporation owns and operates natural gas gathering, transportation and distribution systems in Texas, Texas state waters and in federal waters of the Gulf of Mexico off the Texas and Louisiana coasts. Gateway gathers offshore wellhead natural gas production and liquid hydrocarbons from producers, and then aggregates this production for processing and transportation to other pipelines. Gateway also transports gas through its onshore systems for non-affiliated shippers and through its affiliated distribution system and makes sales of natural gas to end users.

Safe Harbor Statement

Certain of the statements included in this press release, which express a belief, expectation or intention, as well as those regarding future financial performance or results (including future reductions in general and administrative expense), or which are not historical facts, are "forward-looking" statements as that term is defined in the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The words "expect", "plan", "believe", "anticipate", "project", "estimate", and similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance or events and such statements involve a number of risks, uncertainties and assumptions, including but not limited to industry conditions, prices of crude oil and natural gas, regulatory changes, general economic conditions, interest rates, competition, and other factors. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual results and outcomes may differ materially from those indicated in the forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

Non-GAAP Financial Measures

Operating Margin

The following table presents a reconciliation of the non-GAAP financial measures of total segment operating margin (which consists of the sum of individual segment operating margin and corporate) to the nearest comparable GAAP financial measure of operating income.

Adjusted EBITDA

Adjusted EBITDA is defined as pre-tax net income plus:

• interest expense;  
• depreciation, depletion and amortization expense;  
• non-recurring gain (loss) on sale of assets;  
• non-controlling interest;  
• accretion expense; and
• non-cash compensation expense.  

Adjusted EBITDA is a significant performance metric used by Company management, and by external users of the Company's financial statements, such as investors, commercial banks, research analysts and others, including our principal lender.

Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance, liquidity or ability to service debt obligations. Adjusted EBITDA does not include interest expense, income taxes, depreciation, depletion and amortization expense, non-recurring gain (loss) on sale of assets, minority interest, accretion expense or non-cash compensation expense. Because the Company has borrowed, and intends to borrow, money to finance their operations, interest expense is a necessary element of the Company's overall costs. Because the Company uses capital assets, depreciation and amortization are also necessary elements of the Company's overall costs. Because the Company has used, and intends to use, non-cash equity awards as part of their overall compensation package for executive officers and employees, non-cash compensation expense is a necessary element of the Company's overall costs.  Therefore, any measures that exclude these elements have material limitations. To compensate for these limitations, Company management believes that it is important to consider net income determined under GAAP, as well as Adjusted EBITDA, to evaluate the Company's financial performance.

Management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into management's decision-making processes.

(1) Adjusted EBITDA is a non-GAAP financial measure.  Please see the note at the end of this press release regarding this non-GAAP financial measure.

(2) Operating margin is a non-GAAP financial.  Please see the note at the end of this press release regarding this non-GAAP financial measure.

SOURCE Gateway Energy Corporation