Summary of Significant Accounting Policies and Estimates

9 Months Ended

Sep. 30, 2013

Summary of Significant Accounting Policies and Estimates [Abstract]

Summary of Significant Accounting Policies and Estimates

Note 3. Summary of Significant Accounting Policies and Estimates

Basis of Presentation

The Company has prepared the accompanying unaudited consolidated condensed financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and Item 310(b) of Regulation S-K. These financial statements should be read together with the financial statements and notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on April 8, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance U.S. GAAP have been condensed or omitted. The accompanying financial statements reflect all adjustments and disclosures, which, in the Company's opinion, are necessary for fair presentation. All such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of the entire year. Certain reclassifications have been made to the prior period financial statements to conform to the current period's presentation.

All of the Company's operations are onshore in the continental United States and offshore in federal and state waters of the Gulf of Mexico. Management separately reviews and evaluates the operations of each of its gas distribution, transmission and gathering systems individually, however, these operations are aggregated into one reportable segment due to the fact that all of the Company's operations are subject to similar economic and regulatory conditions and operate in the same industry group such that they are likely to have similar long-term prospects for financial performance.

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.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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, 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.

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's accounts receivable are not collateralized. 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 three months ended September 30, 2013, one company, Hydrocarbon Exchange Corp. supplied 100% of the Company's natural gas purchases, and during the nine months ended September 30, 2013, two companies, Hydrocarbon Exchange Corp. and ETC Marketing, Ltd. supplied 79.4% and 20.6%, respectively, of the Company's total natural gas purchases.

Due to the nature of the Company's operations and location of its gas distribution, transmission and gathering systems, the Company is subject to concentration of its sources of revenue from a few significant customers. Revenues from customers representing 10% or more of total revenue for the three and nine months ended September 30, 2013 and 2012 are as follows:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012

Dart Container Corporation	52.3%	42.7%	53.8%	41.8%
Owens Corning	17.0%	26.1%	20.0%	25.3%
McMoran Exploration	8.0%	13.5%	8.1%	13.0%

The loss of the Company's contracts with Dart Container Corporation or Owens Corning could have a material adverse effect on its business, results of operations and financial condition. The Company's revenue from McMoran Exploration was primarily comprised of reimbursement of expenses incurred on behalf of McMoran Exploration and will fluctuate with the level of expenses incurred.

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.

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.

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 the ASC Topic 410, “Asset Retirement and Environmental Obligations”. The Company records the fair value of an asset retirement obligation, and a corresponding increase in the carrying value of the related long-lived asset, in the period in which it is incurred. 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 during the nine months ended September 30, 2013:

Asset retirement obligation, beginning of period	$	1,402,860
Revisions in estimated liabilities		250,000
Asset retirement obligation accretion		60,596
Liabilities settled		(393,319)
Asset retirement obligation, end of period		1,320,137
Less current portion		(842,890)
Asset retirement obligation, long term	$	477,247

Since June 30, 2012, several of the Company's offshore and onshore assets have been negatively affected by the loss of future revenues as customers have chosen to delay or abandon natural gas production due to depressed natural gas prices. Based on those events and then current natural gas market conditions, management performed an impairment review of its capitalized costs on these systems as of September 30, 2012, including their future abandonment costs and associated intangible assets, in accordance with ASC Topic 360 and determined an impairment of those assets was required. During the nine months ended September 30, 2013, the Company determined that a revision in its estimated abandonment obligation was necessary and accrued an additional $250,000. As a result of the Company's continued belief in the lack of further recovery from these assets, the accrual necessary to increase the abandonment obligation was reflected as additional asset impairment expense on the Company's consolidated Statement of Operations for the nine months ended September 30, 2013.

Income Taxes

The Company computes 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.

The Company recognizes the impact from an uncertain tax position only if that position is more likely than not of being sustained upon examination by the taxing authority based on the technical merits of the position. Interest and/or penalties related to income tax matters are to be recognized in current income tax expense. The Company's tax years from 2002 forward are subject to examination.

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. During the three and nine months ended September 30, 2013 and 2012, 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.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

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GATEWAY ENERGY CORP/NE 10-Q