Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

Basis of Presentation

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

Principles of Consolidation

Principles of Consolidation

The Company consolidates the financial statements of its majority-owned and wholly-owned subsidiaries.  All significant intercompany transactions have been eliminated in consolidation.   

The accompanying consolidated financial statements have been prepared by the Company.  In the opinion of management, such financial statements reflect all adjustments necessary for a fair presentation of the financial position and results of operations in accordance with U.S. generally accepted accounting principles.

Reclassifications

Reclassifications

Certain reclassifications have been made to the December 31, 2011 financial statements to conform to the current period presentation.  These reclassifications had no effect on the total assets, liabilities, stockholders' equity or net loss for the year ended December 31, 2011.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Management's significant estimates include depreciation of long-lived assets, estimates and timing of asset retirement obligations, amortization of deferred loan costs, deferred tax valuation allowance, valuation of assumed liabilities, intangible lives, impairment and valuation of the fair value of our long-lived assets, purchase price allocations and valuation of stock based transactions.  Actual results could differ from those estimates.

Revenue Recognition Policy

Revenue Recognition Policy

Revenues from the sales of natural gas are generated under purchase and sales contracts that are priced at the beginning of the month based upon established gas indices.  We purchase and sell the gas using the same index to minimize commodity price risk.  Revenues from the sales of natural gas are recognized at the redelivery point, which is the point at which title to the natural gas transfers to the purchaser.  Transportation revenues are generated under contracts which have a stated fee per unit of production (Mcf, MMBtu, or Bbl) gathered or transported.  Onshore transportation revenues are recognized at the redelivery point, which is the point at which another party takes physical custody of the natural gas or liquid hydrocarbons.  Offshore transportation revenues are recognized at the receipt point.

Cash Equivalents

Cash Equivalents

For purposes of the consolidated statements of cash flows, we consider all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.

Concentrations of Credit Risk

Concentrations of Credit Risk

                The Company maintains all cash in deposit accounts, which at times may exceed federally insured limits. Additionally, the Company maintains credit on account for customers. The Company has not experienced material losses in such accounts and believes its accounts are fully collectable.  Accordingly, no allowance for doubtful accounts has been provided.

During the year ended December 31, 2012, three companies, ETC Marketing, Ltd, Hydrocarbon Exchange Corp. and Cokinos Energy Corporation supplied 53.5%, 38.3% and 8.2%, respectively, of the Company's total natural gas purchases.  During the year ended December 31, 2011, three companies, Cokinos Energy Corporation, ETC Marketing, Ltd., and Shell Energy North America supplied 35.3%, 32.4% and 32.3%, respectively, of the Company's total natural gas purchases.  Gross sales to customers representing 10% or more of total revenue for the years ended December 31, 2012 and 2011 were as follows:

Concentration of Risk

	Year Ended December 31,
	2012	2011
Dart Container Corporation	43.0%	47.3%
Owens Corning	25.4%	23.4%
McMoran Exploration	12.8%	2.9%

The loss of the Company's contract with Dart Container Corporation, McMoran Exploration or either of its contracts with Owens Corning could have a material adverse effect on its business, results of operations and financial condition.  Our accounts receivable are not collateralized.

Property and Equipment

Property and equipment is stated at cost, plus capitalized interest costs on major projects during their construction period.  Additions and improvements that add to the productive capacity or extend the useful life of an asset are capitalized.  Expenditures for maintenance and repairs are charged to expense as incurred.  Depreciation and amortization is calculated using the straight-line method over estimated useful lives ranging from 10 to 20 years for its gas distribution, transmission and gathering systems and from two to ten years for office furniture and other equipment.  Upon disposition or retirement of any gas distribution, transmission or gathering system components, any gain or loss is charged or credited to accumulated depreciation.  When entire gas distribution, transmission and gathering systems or other property and equipment are retired or sold, any resulting gain or loss is credited to or charged against operations.  For the year ended December 31, 2012, depreciation and amortization expense was $421,063, as compared to $572,738 for the year ended December 31, 2011. 

Property, plant and equipment and identifiable intangible assets are reviewed for impairment, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, “Property, Plant, and Equipment,” whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets.  Impairments of long-lived assets recorded during the years ended December 31, 2012 and 2011 was $3,075,803 and $3,365,168, respectively.  

The following tables represent gross intangible assets, accumulated amortization and amortization expense for the year ended December 31, 2012:

		As of December 31, 2012
		Gross				Net
		Carrying		Accumulated		Carrying
		Amount		Amortization		Value
Amortized intangible assets
Contracts	$	2,000,600	$	(2,000,600)	$	-
Aggregate amortization expense:
For the year ended 12/31/2012	$	1,229,020

Asset Retirement Obligations

Asset Retirement Obligations

 The Company recognizes asset retirement obligations associated with the retirement of tangible long-lived assets that result from their acquisition, construction, development and operation, when laws or regulations require the Company to pay for their abandonment, in accordance with ASC Topic 410, “Asset Retirement and Environmental Obligations”.  The Company records the fair value of an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying value of the related long-lived asset.  The obligation is subsequently allocated to expense using a systematic and rational method.  The Company has recorded an asset retirement obligation to reflect its legal obligations related to future abandonment of its pipelines and gas gathering systems, even though the timing and realized allocation of the cost between the Company and its customers may be subject to change. The Company estimates the expected cash flows associated with the legal obligation and discounts the amount using a credit-adjusted, risk-free interest rate. At least annually, the Company reassesses the obligation to determine whether a change in the estimated obligation is necessary. The Company also evaluates whether there are indicators that suggest the estimated cash flows underlying the obligation have materially changed. Should those indicators suggest the estimated obligation may have materially changed on an interim basis (quarterly), the Company will accordingly update its assessment.  

The following table describes changes to the Company's asset retirement obligation liability for the year ended December 31, 2012:

Asset retirement obligation liability

Asset retirement obligation, beginning of year	$	1,036,553
Revisions in estimated liabilities		320,381
Asset retirement obligation accretion		105,040
Liabilities sold		(49,687)
Liabilities settled		(9,427)
Asset retirement obligation, end of year		1,402,860
Less current portion		(595,534)
Asset retirement obligation, long term	$	807,326

Income Taxes

We compute income taxes using the asset and liability method whereby deferred tax assets are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is established against such assets where management is unable to conclude more likely than not that such asset will be realized.

Stock-Based Compensation

Stock-Based Compensation

The Company's 2007 Equity Incentive Plan (“2007 Plan”) provided for stock-based compensation for officers, employees and non-employee directors.  In December 2012, the Company's 2007 Plan was frozen. As a result, no further grants or awards will be made under the 2007 Plan. 

The Company accounts for stock-based compensation under the provisions of ASC Topic 718, “Compensation - Stock Compensation” (“ASC Topic 718”).  The options generally vest ratably over three years and expire between five and ten years.  The restricted stock generally vests ratably between three months and three years.

Compensation expense related to non-qualified stock options and restricted stock was $83,998 for the year ended December 31, 2012, as compared to compensation expense of $73,695 for the year ended December 31, 2011.  We view all awards of stock-based compensation as a single award with an expected life equal to the average expected life of component awards and amortize the fair value of the award over the requisite service period.

Compensation expense related solely to stock options was $19,760 for the year ended December 31, 2012, compared to $15,759 and $(2,364) in compensation expense and forfeiture adjustments, respectively, for the year ended December 31, 2011.  The Company had no forfeiture adjustments during 2012.  At December 31, 2012, there was $18,393 of total unrecognized compensation expense related to unvested stock option awards which is expected to be recognized over a remaining weighted-average period of approximately one year. 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. We use the Black-Scholes option pricing model to compute the fair value of stock options, which requires us to make the following assumptions:

·   The risk-free interest rate is based on the five-year Treasury bond at date of grant.

·   The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to do so in the future.

·   The market price volatility of our common stock is based on daily, historical prices for the last three years.

·   The term of the grants is based on the simplified method as described in ASC Topic 718.

In addition, we estimate a forfeiture rate at the inception of the option grant based on historical data and adjusts this prospectively as new information regarding forfeitures becomes available.

We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the value of the stock over the strike price received on the date of exercise.  In addition, we receive an additional tax deduction when restricted stock vests at a higher value than the value used to recognize compensation expense at the date of grant.  We record these deductions as a tax asset with a corresponding amount recorded as additional paid-in capital when we can receive a tax cash savings from these awards.  Due to Gateway having significant unused net operating-loss carry forwards, we are deferring the recording of this tax benefit until such tax savings is realized.

Compensation expense for restricted stock is recognized on a straight-line basis over the vesting period.  We recognized $64,238 and $60,300 in net compensation expense related to restricted stock grants for the years ended December 31, 2012 and December 31, 2011, respectively.  Compensation expense related to restricted stock grants is based upon the market value of the shares on the date of the grant.  As of December 31, 2012, unrecognized compensation cost related to restricted stock awards was $42,984, which is expected to be recognized over the remaining weighted average period of approximately one and one-half years.

Financial Instruments

Financial Instruments

The carrying amount of cash and cash equivalents, trade receivables, trade payables and short-term borrowings, approximate fair value because of the short maturity of those instruments.  The carrying amount of the term note approximates fair value because of its variable interest rate.  The fair value of the Company's financial instruments is based upon current borrowing rates available for financings with similar terms and maturities, and is not representative of the amount that could be settled, nor does the fair value amount consider the tax consequences, if any, of settlement.

Earnings Per Share

Earnings Per Share

Basic earnings per share is computed by dividing net earnings or net loss by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing net earnings or net loss by the weighted average number of shares outstanding, after giving effect to potentially dilutive common share equivalents outstanding during the period.  Potentially dilutive common share equivalents are not included in the computation of diluted earnings per share if they are anti-dilutive.  For the years ended December 31, 2012 and 2011 all potentially dilutive common shares arising from outstanding stock options and restricted stock have been excluded from diluted earnings per share as their effects were anti-dilutive.

Accounting Pronouncements and Recent Regulatory Developments

Accounting Pronouncements and Recent Regulatory Developments

None of the Accounting Standards Updates (ASU) that the Company adopted and that became effective January 1, 2012, had a material impact on its consolidated financial statements.

In December 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-11, which increases disclosures about offsetting assets and liabilities.  New disclosures are required to enable users of financial statements to understand significant quantitative differences in balance sheets prepared under U.S. GAAP and International Financial Reporting Standards (IFRS) related to the offsetting of financial instruments.  The existing U.S. GAAP guidance allowing balance sheet offsetting, including industry-specific guidance, remains unchanged.  ASU No. 2013-01, released in January 2013, offers clarification on the scope of ASU No. 2011-11 as it applies to derivatives accounted for in accordance with Topic 815.  The guidance in ASU No. 2011-11 and No. 2013-01 is effective for annual and interim reporting periods beginning on or after January 1, 2013.  The disclosures should be applied retrospectively for all prior periods presented.  The Company does not expect the adoption of this amendment to impact its consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, which requires preparers to report, in one place, information about reclassifications out of accumulated other comprehensive income (AOCI). The ASU also requires companies to report changes in AOCI balances.  The guidance in ASU No. 2013-02 is effective for annual and interim periods beginning after December 15, 2012.  The Company does not expect the adoption of this amendment to impact its consolidated financial statements.