Gateway Energy Reports Third Quarter 2011 Results

Nov 14, 2011, 09:48 ET from Gateway Energy Corporation

HOUSTON, Nov. 14, 2011 /PRNewswire/ -- Gateway Energy Corporation (OTCBB: GNRG) today announced the financial results for the third quarter ended September 30, 2011. Adjusted EBITDA, net loss from continuing operations, and loss per share were $178,105, $2,278,625 and $0.10, respectively, for the third quarter 2011 compared to Adjusted EBITDA, net loss and loss per share of $109,198, $40,711 and $0.00, respectively, for the third quarter 2010.

Selected Financial Data:

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




For the Three Months Ended Sep. 30,


For the Six Months Ended Sep. 30,



2011


2010


2011


2010

Operating Statement Data









  Revenue


$1,806,602


$1,804,316


$5,450,867


$5,558,779

  Adjusted EBITDA


178,105


109,198


472,541


302,639

  Net Loss


(2,278,625)


(40,711)


(2,415,578)


(1,232,115)

  Loss per Share


(0.10)


(0.00)


(0.10)


(0.06)













Fred Pevow, President and CEO of Gateway, commented "We are successfully implementing our business strategy of increasing stable cash flow by expanding our natural gas distribution and transmission activities and reducing general and administrative expenses. Adjusted EBITDA generated in the third quarter of 2011 was the highest since the second quarter of 2008. We completed the acquisition of a pipeline in Delmar, New York (the 'Delmar Pipeline'), which serves Owens Corning pursuant to a new long-term contract at a fixed fee. Assets like the Delmar Pipeline now contribute the majority of Adjusted EBITDA for the first time in the Company's history.

"Since I arrived at the Company, we have been monitoring the underperformance of our legacy gathering systems. We found it necessary to recognize a non-cash impairment of our non-core Madisonville and offshore gathering systems, which have been inside the Company since 2003 and 2007, respectively. In addition, we established an asset retirement obligation for the future abandonments of our offshore systems through 2020."

Results of Operations

Revenues

Our total revenues were $1,806,602 for the three months ended September 30, 2011, which were relatively flat with the $1,804,316 of total revenues we recognized for the three months ended September 30, 2010.  During the three months ended September 30, 2011, sales revenues on our Waxahachie distribution system increased by $24,022 compared to the three months ended September 30, 2010. Sales volumes at Waxahachie increased slightly to 2,903 MMBtu/d while sales prices averaged $4.86 per MMBtu in each period. During the three months ended September 30, 2011, our transportation revenues decreased by $42,117 as compared to the same period of the prior year.  Revenues of $67,884 from our newly acquired Laser operations for the three months ended September 30, 2011, were offset by net decreases of $110,001 attributable to production declines on natural gas wells connected to our gathering systems.  We believe that transportation revenues will eventually increase on some of our gathering systems due to new drilling and workover activities, but doubt meaningful activities will occur during the remainder of 2011.  Revenues from reimbursable costs and other revenue increased by $20,380 for the three months ended September 30, 2011, compared to the three months ended September 30, 2010.

Our total revenues were $5,450,867 for the nine months ended September 30, 2011, which represented a decrease of $107,912 from the $5,558,779 of total revenues we recognized for the nine months ended September 30, 2010.  During the nine months ended September 30, 2011, revenues from sales of gas on our Waxahachie distribution system were relatively flat as compared to the same period for the prior year. An approximate 8% increase in sales volumes to 2,958 MMBtu/d at Waxahachie was offset by a decline in the gas sales price. The decrease in revenues due to lower gas prices from our Waxahachie system, however, was largely offset by reductions in the cost of purchased gas, as volumes are bought and sold pursuant to "back-to-back" contracts based on monthly price indices.  During the nine months ended September 30, 2011, our transportation revenues decreased by approximately $173,207 as compared to the same period of the prior year.  Revenues of $223,237 from our newly acquired Laser operations were offset by net decreases of $396,444 attributable to production declines on natural gas wells connected to our gathering systems.  Revenues from reimbursable costs and other revenue increased by $51,087 for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010.

Operating Margin

Operating margin, which we define as fee revenues from the transportation of natural gas, plus revenues from the sale of natural gas net of the cost of purchased gas, less operating and maintenance expenses and reimbursable costs generated by our pipeline systems, was $475,868 for the three months ended September 30, 2011, which represented an increase of $14,532 from the $461,336 of operating margin we recognized for the three months ended September 30, 2010.  Our newly acquired natural gas distribution operations from Laser contributed $46,085 to operating margin for the current period.  In addition, the Waxahachie distribution system generated a quarter-over-quarter increase of $7,258 in operating margin contribution to $154,116 for the current period.  

Operating margin contribution from the Hickory Creek, Madisonville, and all Gulf of Mexico gathering systems was $275,667 for the three months ended September 30, 2011, which represented a decrease of $38,811 from the prior period.  The decreases in operating margin on these gathering systems were attributable to the aforementioned production declines from gas wells connected to these systems.  Sizable production declines from the wells connected to our Hickory Creek gathering system are typical of newly fractured horizontal wells located in the Barnett Shale.  However, the rate of decline from wells connected to our Hickory Creek gathering system is decreasing over time.  The Madisonville pipeline is currently dormant due to lack of production from the Madisonville Field.  We are evaluating alternative uses for the Madisonville pipeline in the event the Madisonville Field does not resume production.  Production volumes connected to our Gulf of Mexico gathering systems are expected to continue to decline for the remainder of 2011. Customers of some of our gathering systems have also informed us of preliminary plans to drill at least two development wells and perform workovers in 2012.

Operating margin was $1,488,229 for the nine months ended September 30, 2011, which represented a decrease of $4,305 from the $1,492,534 of operating margin we recognized for the nine months ended September 30, 2010.  Our newly acquired natural gas distribution operations from Laser contributed $167,511 to operating margin for this period.  In addition, the Waxahachie distribution system generated a period-over-period increase of $83,667 in operating margin contribution to $487,864 for this period.  We expect a similar operating margin on the Laser and Waxahachie distribution systems for the fourth quarter of 2011 as for the quarterly average of the first nine months of 2011.  Operating margin contribution from the Hickory Creek, Madisonville and all Gulf of Mexico gathering systems was $832,854 for the nine months ended September 30, 2011, which represented a decrease of $255,483 from the prior period.  The decreases in operating margin on these gathering systems were attributable to the aforementioned production declines from gas wells connected to these systems.  

Asset Impairments

During the third quarter of 2011, we were notified by the operator of a platform utilizing one of our offshore systems of its intent to abandon its lease in 2012.  As a result of this notification and continuing conversations with our customers, we determined that it was more likely than not that the useful lives of all our offshore systems were one and one-half to ten years shorter than last evaluated, and that we had a legal obligation to pay for the abandonment of certain of our systems.  As a result, we performed an impairment review of our capitalized costs on these systems, including their future abandonment costs and associated intangible assets.  

Furthermore, in connection with the aforementioned impairment analysis conducted with our offshore systems, we determined that further impairment analysis was necessary for our Madisonville pipeline system due to the lack of production from the wells connected to the system since May 2011 and no materialization of potential alternative uses for the pipeline. In the fourth quarter of 2010, we had determined that an impairment was necessary for our Madisonville pipeline system at that time due to the continual depletion of reserves in 2010, the near breakeven to below operating margin in the fourth quarter of 2010 and the lack of activity by the producer to recomplete or perform previously announced workovers to increase volume output.

To determine the fair value of these assets, we estimated the future cash flows from these systems based on the likelihood of various outcomes using a probability weighted approach. As a result, it was determined that impairments totaling $3,365,168 were required.  These impairments were apportioned as $3,236,156 to the carrying value of our property and equipment and $129,012 to the carrying value of our intangible assets.

General and Administrative Costs

General and administrative expenses were $329,544 for the three months ended September 30, 2011, which represented a decrease of $43,363 from the $372,907 in such expenses we recognized for the three months ended September 30, 2010.  This decrease was primarily related to lower legal and investor relations expenses.

General and administrative expenses were $1,072,202 for the nine months ended September 30, 2011, which represented a decrease of $108,462 from the $1,180,664 in such expenses we recognized for the nine months ended September 30, 2010.  Across the board decreases were partially offset by a $65,745 increase in stock compensation as a $52,290 reversal was recognized in the second quarter of 2010 due to the forfeiture of unvested options by prior management. We expect general and administrative expenses to remain lower in 2011, relative to the comparable 2010 periods, as we continue to manage our overall level of fixed costs.

Acquisition Costs

We incurred acquisition related costs of $19,490 and $67,357, respectively, during the three and nine months ended September 30, 2011, primarily related to the acquisition of a pipeline located in Delmar, New York from American Midstream completed on September 24, 2011.

We incurred acquisition related costs of $3,570 and $47,023 during the three and nine months ended September 30, 2010, related to our Hickory Creek acquisition in January 2010.  

Consent Solicitation and Severance Costs

Consent solicitation and severance costs of $7,669 and $1,550,631 for the three and nine months ended September 30, 2010, respectively, were for legal and proxy preparation costs we incurred related to the consent solicitation initiated by our current CEO in 2010 and severance costs associated with the termination of the prior management of the Company at the conclusion of the consent solicitation.

Other Income (Expense)

Our interest income fluctuates directly with the average amount of cash on deposit.  Our interest expense fluctuates directly with the amount of outstanding insurance notes payable and the amount of borrowings under the Company's bank revolving credit agreement, and remained relatively constant between the three and nine month periods ended September 30, 2011 and 2010.

Other income, net, for the three and nine months ended September 30, 2011, consisted primarily of reimbursement of prior year base cost plus fees from customers in the Gulf of Mexico.  Other income, net, for the three and nine months ended September 30, 2010 primarily consisted of a true-up of over accrued prior period operating costs and the refund of insurance premiums paid during prior periods.

Liquidity and Capital Resources

Our strategy is to maximize the potential of currently owned properties, to construct new pipeline systems, and to acquire properties that meet our economic performance hurdles.  We are actively exploring our capital needs to allow us to accelerate the implementation of our growth strategy, and any new capital may take several forms.  There is no guarantee that we will be able to raise outside capital.  Without a significant infusion of new capital, we believe we can finance the construction of new facilities and generate new cash flows to the Company, but only at a pace that can be supported by cash flows and existing financing agreements.

We had available cash of $630,284 at September 30, 2011.

Net cash provided by operating activities totaled $604,232 for the nine months ended September 30, 2011, resulting primarily from our net loss, after adding back our non-cash charges, including asset impairments, depreciation, depletion and amortization and stock based compensation and deducting its non-cash tax benefit, and the receipt of a $250,000 returned deposit.  We used $919,362 of cash in operations in 2010, resulting primarily from our net loss, partially offset by non-cash charges and changes in working capital during the year.

We used $108,179 of cash in investing activities during the nine months ended September 30, 2011, including $50,000 to acquire a natural gas pipeline from American Midstream Partners, L.P. ("American Midstream"). We funded the cost of the acquisition from cash on hand. We also spent $58,179 primarily to install a cathodic protection system at our Waxahachie system, which will lengthen the expected life of the system.  During 2010, we used $3,795,233 million of cash in investing activities, primarily for the purchase of our Hickory Creek Gathering System.

On December 7, 2009, the Company entered into a Credit Agreement (the "Agreement") with Meridian Bank, Texas ("Meridian"), regarding a revolving credit facility provided by Meridian to the Company.  The original borrowing base under the Agreement had been established at $3.0 million, which may be increased at the discretion of Meridian to an amount not to exceed $6.0 million.   The credit facility is secured by all of the Company's assets and had an original term of 39 months maturing on April 30, 2012.  The term was reset to a maturity date of November 30, 2011, in consideration of Meridian refraining to institute a minimum commitment reduction. Meridian and the Company are currently in conversations to extend the maturity back to the original maturity on April 30, 2012. We currently expect the Agreement to be extended but cannot assure such extension. The credit facility contains financial covenants defining various financial measures and levels of these measures with which the Company is in compliance.  Interest on outstanding balances accrues at The Wall Street Journal prime rate, plus one and a half percent, with a minimum rate of 5.50% payable monthly.  The principal is due upon maturity.  Unused borrowing base fees are 0.50% per year of the average for the period of calculation of an amount determined daily equal to the difference between the borrowing base and the aggregate outstanding principal balance of the facility.  This amount is paid quarterly.  As of September 30, 2011, there was a $2,550,000 balance on the facility.

Financial Statements

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS






September 30,


December 31,


2011


2010

ASSETS

(Unaudited)



Current Assets




    Cash and cash equivalents

$630,284


$238,547

    Cash deposits

-


250,000

    Accounts receivable trade

815,552


815,178

    Prepaid expenses and other assets

200,004


224,606

          Total current assets

1,645,840


1,528,331





Property and Equipment, at cost




    Gas distribution, transmission and gathering

12,426,875


11,310,810

    Office furniture and other equipment

163,422


158,029


12,590,297


11,468,839

    Less accumulated depreciation, depletion and amortization

(6,865,706)


(3,262,877)


5,724,591


8,205,962





Other Assets




    Deferred tax assets, net

3,922,507


2,658,204

    Intangible assets, net of accumulated




       amortization of $743,211 and $479,373 as of




       September 30, 2011 and December 31, 2010, respectively

1,257,389


1,521,227

    Other

64,478


156,474


5,244,374


4,335,905

          Total assets

$12,614,805


$14,070,198





LIABILITIES AND STOCKHOLDERS' EQUITY




Current Liabilities




    Accounts payable

$552,814


$600,403

    Accrued expenses and other liabilities

338,906


296,609

    Notes payable - insurance

79,711


159,882

    Asset retirement obligation

285,018


-





    Revolving credit facility

2,550,000


-

          Total current liabilities

3,806,449


1,056,894





    Asset retirement obligation

728,261


-

    Long term notes payable - insurance, less current maturities

-


24,145

    Revolving credit facility

-


2,550,000

          Total liabilities

4,534,710


3,631,039





Commitments and Contingencies








Stockholders' Equity




Preferred stock – $1.00 par value; 10,000 shares authorized;




       no shares issued and outstanding

-


-

Common stock – $0.01 par value; 150,000,000 shares authorized;




       23,674,602 and 23,480,853 shares issued and outstanding  




       at September 30, 2011 and December 31, 2010, respectively

236,746


234,809

Additional paid-in capital

23,077,727


23,023,150

Accumulated deficit

(15,234,378)


(12,818,800)

          Total stockholders' equity

8,080,095


10,439,159

          Total liabilities and stockholders' equity

$12,614,805


$14,070,198



GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



For the Three Months Ended
September 30,


For the Nine Months Ended
September 30,



2011


2010


2011


2010









Operating revenues








Sales of natural gas

$  1,298,490


$  1,274,468


$  3,885,192


$  3,870,984

Transportation of natural gas and liquids

348,181


390,298


1,113,838


1,287,045

Reimbursable  and other

159,931


139,551


451,837


400,750


1,806,602


1,804,317


5,450,867


5,558,779

Operating costs and expenses








Cost of natural gas purchased

1,125,535


1,108,398


3,343,310


3,409,588

Operation and maintenance

103,399


128,071


306,768


341,208

Reimbursable costs

101,800


106,512


312,560


315,449

General and administrative

329,544


372,907


1,072,202


1,180,664

Acquisition costs

19,490


3,570


67,357


47,023

Consent solicitation and severance costs

-


7,669


-


1,550,631

Asset impairments

3,365,168


-


3,365,168


-

Depreciation, depletion and amortization

163,431


181,188


501,497


547,477


5,208,367


1,908,315


8,968,862


7,392,040









Operating loss

(3,401,765)


(103,998)


(3,517,995)


(1,833,261)









Other income (expense)








Interest income

356


564


1,391


11,056

Interest expense

(44,035)


(42,764)


(129,051)


(126,025)

Other, net

(856)


(4,027)


4,199


37,287

        Other expense, net

(44,535)


(46,227)


(123,461)


(77,682)









Loss before income taxes

(3,446,300)


(150,225)


(3,641,456)


(1,910,943)









Income tax benefit

1,167,675


109,514


1,225,878


678,828









Net loss

$  (2,278,625)


$  (40,711)


$ (2,415,578)


$  (1,232,115)









Basic and diluted loss per share

$               (0.10)


$                     -


$          (0.10)


$            (0.06)









Weighted average number of basic and








diluted common shares outstanding

23,577,840


19,402,853


23,513,538


19,402,140




GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


Nine Months Ended


September 30,


2011


2010

Cash flows from operating activities




Net loss

$(2,415,578)


$(1,232,115)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:




   Depreciation, depletion and amortization

501,497


547,477

   Loss on disposal of property and equipment

-


3,668

   Asset impairments

3,365,168


-

   Deferred tax benefit

(1,243,651)


(725,873)

   Stock based compensation expense, net of forfeitures

56,514


(9,231)

   Amortization of deferred loan costs

15,172


17,206

   Net change in operating assets and liabilities, resulting from changes in:




       Accounts receivable trade

(374)


456,062

       Prepaid expenses, deposits and other assets

330,775


154,648

       Accounts payable

(47,588)


(123,832)

       Accrued expenses and other liabilities

42,297


(7,372)

           Net cash provided by (used in) operating activities

604,232


(919,362)





Cash flows from investing activities




   Capital expenditures

(58,179)


(7,528)

   Acquisitions

(50,000)


(3,787,705)

           Net cash used in investing activities

(108,179)


(3,795,233)





Cash flows from financing activities




   Proceeds from borrowings

-


2,500,000

   Payments on borrowings

(104,316)


(192,374)

   Restricted cash for credit facility

-


650,000

   Deferred financing costs

-


(26,611)

           Net cash provided by (used in) financing activities

(104,316)


2,931,015





Net increase (decrease) in cash and cash equivalents

391,737


(1,783,580)

Cash and cash equivalents at beginning of period

238,547


2,086,787

Cash and cash equivalents at end of period

$630,284


$303,207





Supplemental disclosures of cash flow information:




   Cash paid for interest

$119,005


$98,756





   Cash paid for taxes

$34,437


$50,118



About Gateway Energy

Gateway is engaged in the midstream energy business. We own and operate natural gas distribution, gathering and transmission pipeline systems located onshore the continental United States and offshore in federal and state waters of the Gulf of Mexico. For the nine months ended September 30, 2011, all of our revenue was generated under long-term contracts with either fee-based rates or with back to back purchases and sales based on the same published monthly index price. Our natural gas distribution activities do not require additional capital expenditures to hook up new wells nor do they require new drilling by our customers in order to replace revenues.

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 operating margin, reductions in general and administrative expense, future increases in transportation revenues and future production from wells connected to our gathering systems, the entry into a new long-term contract with Owens Corning in respect of our pending acquisition of the Delmar pipeline and the consummation of such transaction), 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.

Non-GAAP Financial Measures

To supplement our financial information presented in accordance with GAAP, we use additional measures that are known as "non-GAAP financial measures" in our evaluation of financial and operating performance. These measures include Adjusted EBITDA and Operating Margin.

We believe that the presentation of such additional financial measures provides useful information regarding our performance and results of operations because these measures, when used in conjunction with related GAAP financial measures, (i) provide additional information about our core operating performance, (ii) provide investors with the financial analytical framework upon which management bases financial, operational, compensation and planning decisions and (iii) present measurements that investors and debt holders have indicated are useful in assessing us and our results of operations.

These measures may exclude, for example, charges for obligations that are expected to be settled with the issuance of equity instruments,  items that are not indicative of our core operating results and business outlook, and/or other items that we believe should be excluded in understanding our core operating performance. Such measures may affect direct comparability between periods or the statement of prior periods. These additional financial measures are reconciled from the most directly comparable measures as reported in accordance with GAAP, and should be viewed in addition to, and not in lieu of, our consolidated financial statements and footnotes.

Operating Margin

We define operating margin as revenues less cost of purchased gas, operating and maintenance expenses and reimbursable costs.  Such amounts are before general and administrative expense, depreciation, depletion and amortization expense, interest income or expense, other income or expense, or income taxes.  A reconciliation of operating margin to net loss, which is its nearest comparable GAAP financial measure, is included in the table below.



For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,


2011

2010

2011

2010






Operating revenues





Sales of natural gas

$  1,298,490

$  1,274,468

$  3,885,192

$  3,870,984

Transportation of natural gas and liquids

348,181

390,298

1,113,838

1,287,045

Reimbursable  and other

159,931

139,551

451,837

400,750


1,806,602

1,804,317

5,450,867

5,558,779

Operating costs and expenses





Cost of natural gas purchased

1,125,535

1,108,398

3,343,310

3,409,588

Operation and maintenance

103,399

128,071

306,768

341,208

Reimbursable costs

101,800

106,512

312,560

315,449

General and administrative

329,544

372,907

1,072,202

1,180,664

Acquisition costs

19,490

3,570

67,357

47,023

Consent solicitation and severance costs

-

7,669

-

1,550,631

Asset impairments

3,365,168

-

3,365,168

-

Depreciation, depletion and amortization

163,431

181,188

501,497

547,477


5,208,367

1,908,315

8,968,862

7,392,040






Operating loss

(3,401,765)

(103,998)

(3,517,995)

(1,833,261)






Other income (expense)





Interest income

356

564

1,391

11,056

Interest expense

(44,035)

(42,764)

(129,051)

(126,025)

Other, net

(856)

(4,027)

4,199

37,287

        Other expense, net

(44,535)

(46,227)

(123,461)

(77,682)






Loss before income taxes

(3,446,300)

(150,225)

(3,641,456)

(1,910,943)




Adjusted EBITDA

We define adjusted EBITDA as operating margin less certain general and administrative expenses. Such amounts are before general and administrative expense not considered in the preceding sentence, including charges for obligations that are expected to be settled with the issuance of equity instruments, depreciation, depletion and amortization expense, interest income or expense, other income or expense, or income taxes.  A reconciliation of adjusted EBITDA to operating margin is included in the table below.




For the Three Months Ended Sep. 30,


For the Nine Months Ended Sep. 30,



2011


2010


2011


2010

Operating Margin


$475,868


$461,336


$1,488,229


$1,492,534

Less: General and
administrative expenses


329,544


372,907


1,072,202


1,180,664

Plus: Stock based
compensation expense


31,781


20,769


56,514


(9,231)

Adjusted  EBITDA


$178,105


$109,198


$472,541


$ 302,639




SOURCE Gateway Energy Corporation



RELATED LINKS

http://www.gatewayenergy.com