**U. S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM 10-QSB**

 

**ý****  QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (D)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2002**

 

**o****  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

 

**For thetransition period from            to           **

 

**CommissionFile No   1-4766**

 

**GATEWAY ENERGY CORPORATION**

(Exact name of smallbusiness issuer as specified in its charter)

 

| **Delaware**                                                      |   | **44-0651207**                            |
|-------------------------------------------------------------------|--------|-------------------------------------------|
| (State or other  jurisdiction of   incorporation or organization) |   | (I.R.S. Employer  Identification  Number) |
|                                                              |   |                                      |
| **500  Dallas Street, Suite 2615  Houston, TX  77002**       |
| (Address of principal  executive offices)                         |
|                                                              |   |                                      |
| **(713)  336-0844**                                               |
| (Issuer’s telephone  number)                                 |

 

APPLICABLE ONLY TO CORPORATEISSUERS

 

As of November 10, 2002,the Issuer had 15,426,318 shares of its common stock outstanding.

 

Transitional SmallBusiness Disclosure Format:  Yes         o              No         ý

 

 

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**FORM 10-QSB**

 

**Part  I**

 
| **Item  1.** | **Financial  Statements**                                                                                                              |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                   |
|              | Unaudited Consolidated  Balance Sheet as of September 30, 2002                                                                         |
|              |                                                                                                                                   |
|              | Unaudited  Consolidated Statements of Operations for the three months and nine months  ended September 30, 2002 and September 30, 2001 |
|              |                                                                                                                                   |
|              | Unaudited  Consolidated Statements of Cash Flows for the nine months ended September 30,  2002 and September 30, 2001                  |
|              |                                                                                                                                   |
|              | Notes to  Unaudited Consolidated Financial Statements                                                                                  |

 

2

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**GATEWAY ENERGY CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEET**

**September 30, 2002**

**(Unaudited)**

 
| **ASSETS**                                                                                                   |   |        |      |
|--------------------------------------------------------------------------------------------------------------|--------|-------------|-----------|
| Current Assets                                                                                               |   |        |      |
| Cash and cash equivalents                                                                                    |   | $           | 179,478   |   |
| Certificates of deposit                                                                                      |   | 653,595     |      |
| Trade accounts receivable, net of reserve of $130,832                                                        |   | 782,339     |      |
| Receivable from sale of property                                                                             |   | 85,000      |      |
| Note receivable                                                                                              |   | 28,428      |      |
| Inventories, at average cost                                                                                 |   | 53,584      |      |
| Prepaid expenses and other assets                                                                            |   | 332,105     |      |
| Total current assets                                                                                         |   | 2,114,529   |      |
|                                                                                                         |   |        |      |
| Property and Equipment, at cost                                                                              |   |        |      |
| Gas gathering, processing and transportation                                                                 |   | 8,007,260   |      |
| Office furniture and other equipment                                                                         |   | 801,464     |      |
|                                                                                                         |   | 8,808,724   |      |
| Less accumulated depreciation and amortization                                                               |   | 3,069,620   |      |
|                                                                                                         |   | 5,739,104   |      |
| Other Assets                                                                                                 |   |        |      |
| Investment in AET license, net of accumulated amortization of $85,305                                        |   | 335,746     |      |
| Other                                                                                                        |   | 61,545      |      |
|                                                                                                         |   | 397,291     |      |
|                                                                                                         |   | $           | 8,250,924 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                               |   |        |      |
| Current Liabilities                                                                                          |   |        |      |
| Accounts payable                                                                                             |   | $           | 627,689   |   |
| Accrued expenses and other liabilities                                                                       |   | 124,174     |      |
| Notes payable                                                                                                |   | 623,529     |      |
| Current maturities of long-term debt                                                                         |   | 420,643     |      |
| Total current liabilities                                                                                    |   | 1,796,035   |      |
|                                                                                                         |   |        |      |
| Long-term Debt, less current maturities                                                                      |   | 1,002,902   |      |
|                                                                                                         |   |        |      |
| Stockholders’ Equity                                                                                    |   |        |      |
| Preferred stock – $1.00 par value; 10,000 shares authorized; no shares  issued and outstanding          |   | —      |      |
| Common stock – $0.25 par value; 35,000,000 shares authorized;  15,426,318 shares issued and outstanding |   | 3,856,577   |      |
| Additional paid-in capital                                                                                   |   | 15,989,102  |      |
| Accumulated deficit                                                                                          |   | (14,393,692 | )         |
|                                                                                                         |   | 5,451,987   |      |
|                                                                                                         |   | $           | 8,250,924 |   |

 

Theaccompanying notes are an integral part of this statement.

 

3

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**GATEWAYENERGY CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                                  |   | **Three  Months Ended  September 30,** |      | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------------------------|--------|----------------------------------------|-----------|---------------------------------------|--------|
|                                                                  |   | **2002**                               |      | **2001**                              |   | **2002** |   | **2001** |   |
| Operating  revenues                                                   |   |                                   |      |                                  |   |   |   |   |   |
| Natural gas  sales                                                    |   | $                                      | 1,616,298 |                                  | $      | 1,925,715 |   | $ | 4,050,374 |   | $ | 6,310,577 |   |
| Transportation of natural gas and liquids                             |   | 141,029                                |      | 288,663                               |   | 448,524 |   | 787,473 |   |
| Treating and  other                                                   |   | 41,585                                 |      | 44,340                                |   | 149,733 |   | 129,643 |   |
|                                                                  |   | 1,798,912                              |      | 2,258,718                             |   | 4,648,631 |   | 7,227,693 |   |
| Operating costs  and expenses                                         |   |                                   |      |                                  |   |   |   |   |   |
| Cost of natural  gas purchased                                        |   | 1,171,089                              |      | 1,251,461                             |   | 2,948,960 |   | 4,851,145 |   |
| Operation and  maintenance                                            |   | 208,326                                |      | 274,931                               |   | 648,532 |   | 866,805 |   |
| Depreciation and  amortization                                        |   | 133,086                                |      | 131,157                               |   | 399,756 |   | 378,463 |   |
| Dry hole cost                                                         |   | —                                 |      | —                                |   | — |   | 89,940 |   |
| General and  administrative                                           |   | 451,842                                |      | 403,010                               |   | 1,433,681 |   | 1,396,859 |   |
|                                                                  |   | 1,964,343                              |      | 2,060,559                             |   | 5,430,929 |   | 7,583,212 |   |
| Operating (loss) income                                               |   | (165,431                               | )         | 198,159                               |   | (782,298 | ) | (355,519 | ) |
|                                                                  |   |                                   |      |                                  |   |   |   |   |   |
| Other income  (expense)                                               |   |                                   |      |                                  |   |   |   |   |   |
| Interest income                                                       |   | 10,260                                 |      | 10,959                                |   | 37,273 |   | 34,930 |   |
| Interest expense                                                      |   | (63,509                                | )         | (79,884                               | )      | (170,293 | ) | (185,400 | ) |
| Interest  capitalized                                                 |   | 18,837                                 |      | —                                |   | 37,395 |   | — |   |
| Other income  (expense), net                                          |   | (121                                   | )         | (6,881                                | )      | 37,474 |   | 24,541 |   |
|                                                                  |   | (34,533                                | )         | (75,806                               | )      | (58,151 | ) | (125,929 | ) |
| (Loss) income  from continuing operations                             |   | (199,964                               | )         | 122,353                               |   | (840,449 | ) | (481,448 | ) |
|                                                                  |   |                                   |      |                                  |   |   |   |   |   |
| Discontinued  operations                                              |   |                                   |      |                                  |   |   |   |   |   |
| Operations of  properties sold (Note 4)                               |   | 6,449                                  |      | (6,911                                | )      | 22,746 |   | 38,265 |   |
| Gain on sale of  properties                                           |   | 63,865                                 |      | —                                |   | 63,865 |   | — |   |
|                                                                  |   | 70,314                                 |      | (6,911                                | )      | 86,611 |   | 38,265 |   |
| Net (loss)  income                                                    |   | $                                      | (129,650  | )                                     | $      | 115,442 |   | $ | (753,838 | ) | $ | (443,183 | ) |
|                                                                  |   |                                   |      |                                  |   |   |   |   |   |
| Basic and  diluted (loss) income from continuing operations per share |   | $                                      | (0.01     | )                                     | $      | 0.01 |   | $ | (0.05 | ) | $ | (0.03 | ) |
| Basic and  diluted net (loss) income per share                        |   | $                                      | (0.01     | )                                     | $      | 0.01 |   | $ | (0.05 | ) | $ | (0.03 | ) |
|                                                                  |   |                                   |      |                                  |   |   |   |   |   |
| Weighted average  number of common shares outstanding:                |   |                                   |      |                                  |   |   |   |   |   |
| Basic                                                                 |   | 15,426,318                             |      | 15,358,633                            |   | 15,385,234 |   | 15,331,889 |   |
| Diluted                                                               |   | 15,426,318                             |      | 15,442,210                            |   | 15,385,234 |   | 15,331,889 |   |

 

The accompanyingnotes are an integral part of these statements.

 

4

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**GATEWAY ENERGY CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                                                                             |   | **Nine Months Ended September 30,** |     |
|----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|----------|
|                                                                                                                             |   | **2002**                            |     | **2001** |   |
| **Increase  (Decrease) in Cash and Cash   Equivalents**                                                                     |   |                                |     |   |   |
|                                                                                                                             |   |                                |     |   |   |
| Cash flows from operating activities                                                                                             |   |                                |     |   |   |
| Net loss                                                                                                                         |   | $                                   | (753,838 | ) | $ | (443,183 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                                                     |   |                                |     |   |   |
| Depreciation and amortization, including $75,874 and $146,195 related  to discontinued operations in 2002 and 2001, respectively |   | 475,630                             |     | 524,658 |   |
| Gain on sale of properties                                                                                                       |   | (64,784                             | )        | (2,500 | ) |
| Stock compensation expense                                                                                                       |   | 30,000                              |     | 4,515 |   |
| Other non-cash expenses, net                                                                                                     |   | 12,715                              |     | 20,753 |   |
| Change in assets and liabilities:                                                                                                |   |                                |     |   |   |
| Trade accounts receivable                                                                                                        |   | 143,254                             |     | 642,169 |   |
| Inventories                                                                                                                      |   | 2,763                               |     | 1,708 |   |
| Prepaid expenses and other current assets                                                                                        |   | (206,357                            | )        | (256,176 | ) |
| Accounts payable                                                                                                                 |   | (63,002                             | )        | (1,036,951 | ) |
| Accrued expenses and other liabilities                                                                                           |   | (2,550                              | )        | 49,965 |   |
| Net  cash used by operating activities                                                                                           |   | (426,169                            | )        | (495,042 | ) |
|                                                                                                                             |   |                                |     |   |   |
| Cash flows from investing activities                                                                                             |   |                                |     |   |   |
| Capital expenditures                                                                                                             |   | (851,038                            | )        | (643,142 | ) |
| Additional investment in AET license                                                                                             |   | —                              |     | (90,000 | ) |
| Proceeds from sale of properties                                                                                                 |   | 840,000                             |     | 2,500 |   |
| Note receivable                                                                                                                  |   | 82,432                              |     | — |   |
| Decrease in certificate of deposit                                                                                               |   | 17,569                              |     | 20,223 |   |
| Net  cash provided (used) by investing activities                                                                                |   | 88,963                              |     | (710,419 | ) |
|                                                                                                                             |   |                                |     |   |   |
| Cash flows from financing activities                                                                                             |   |                                |     |   |   |
| Proceeds from borrowings                                                                                                         |   | 1,434,000                           |     | 1,988,827 |   |
| Payments on borrowings                                                                                                           |   | (1,019,200                          | )        | (864,110 | ) |
| Debt issue costs                                                                                                                 |   | (39,453                             | )        | — |   |
| Retirement of common stock                                                                                                       |   | —                              |     | (630 | ) |
| Net  cash provided by financing activities                                                                                       |   | 375,347                             |     | 1,124,087 |   |
|                                                                                                                             |   |                                |     |   |   |
| Net increase (decrease) in cash and cash equivalents                                                                             |   | 38,141                              |     | (81,374 | ) |
| Cash and cash equivalents at beginning of period                                                                                 |   | 141,337                             |     | 171,367 |   |
| Cash and cash equivalents at end of period                                                                                       |   | $                                   | 179,478  |   | $ | 89,993 |   |
|                                                                                                                             |   |                                |     |   |   |   |   |
| Supplemental Disclosures of Cash Flow Information:                                                                               |   |                                |     |   |   |
| Cash interest (including capitalized interest in 2002)                                                                           |   | $                                   | 144,390  |   | $ | 122,737 |   |
|                                                                                                                             |   |                                |     |   |   |
| Non-cash transactions:                                                                                                           |   |                                |     |   |   |
| Receivable from sale of property                                                                                                 |   | $                                   | 85,000   |   | $ | — |   |

 

The accompanying notesare an integral part of these statements.

 

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**GATEWAY ENERGY CORPORATION ANDSUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**(1)           Principles of Consolidation andNature of Business**

 

The consolidated financial statements include theaccounts of Gateway Energy Corporation and its wholly owned subsidiarycompanies, Gateway Pipeline Company, Gateway Offshore Pipeline Company, GatewayEnergy Marketing Company, Fort Cobb Fuel Authority, L.L.C. (“Fort Cobb”) andGateway Processing Company.  Allsignificant intercompany transactions have been eliminated in consolidation.

 

The accompanying consolidated financial statementshave been prepared by the Company, without audit.  Certain prior period amounts have been reclassified to make themconform to the current financial statement presentation.  In the opinion of management, such financialstatements reflect all adjustments necessary for a fair presentation of thefinancial position and results of operations in accordance with generallyaccepted accounting principles. The financial statements should be read inconjunction with the financial statements and the Notes thereto included in theCompany’s Annual Report on Form 10-KSB for the year ended December 31, 2001.

 

The Company owns and operates natural gas gathering,transportation and distribution systems and related facilities in Texas andOklahoma, and offshore in Texas and federal waters of the Gulf of Mexico.  The Company also owns the exclusive U.S.license to a state-of-the-art, patented, absorption based technology to removenitrogen from natural gas.

 

**(2)           Summary of Significant AccountingPolicies**

 

A summary of the significant accounting policiesconsistently applied in the preparation of the accompanying consolidatedfinancial statements follows.

 

*Revenue Recognition Policy*

 

The Company’s sales revenues are generated underback-to-back purchase and sales contracts. Sales revenues are recognized at the redelivery point, which is the pointat which title to the gas transfers. The Company’s transportation revenues are generated under contractswhich have a stated fee per unit of production (Mcf, MMBtu, or Bbl) gathered ortransported.  Transportation revenuesare recognized at the redelivery point, which is the point at which anotherparty takes physical custody of the gas.

 

*Property and Equipment*

 

Property andequipment is stated at cost, plus capitalized interest costs on major pipelineprojects during their construction period. Additions and improvements that add to the productive capacity or extendthe useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense asincurred.  Depreciation is providedusing the straight-line method over estimated useful lives ranging from 6 to 30years for pipeline systems, gas plant and processing equipment, and from 2 to10 years for office furniture and other equipment.  Upon disposition or retirement of pipeline components or gasplant components, any gain or loss is charged or credited to accumulateddepreciation.  When entire pipelinesystems, gas plants or other property and equipment are retired or sold, anyresulting gain or loss is credited to or charged against operations.

 

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Impairment lossesare recognized for long-lived assets used in operations when indicators ofimpairment are present and the undiscounted cash flows are not sufficient torecover the assets’ carrying value.  Theamount of impairment is measured by comparing the fair value of the asset toits carrying amount.

 

*Other Assets*

 

The Company’sprimary other asset, its license for a patented process to remove nitrogen fromnatural gas, is being amortized to expense over the average 17-year life of theunderlying patents.  Investment in thelicense was $335,746 at September 30, 2002, net of accumulated amortization of$85,305.

 

*CashEquivalents*

 

For purposes ofthe consolidated statements of cash flows, the Company considers all highlyliquid debt instruments purchased with original maturities of three months orless to be cash equivalents.

 

*IncomeTaxes*

 

Deferred taxassets and liabilities are recognized for the expected future tax consequencesof events that have been included in the financial statements or income taxreturns. Under this method, deferred tax assets and liabilities are determinedbased on the difference between the financial statement and tax bases of assetsand liabilities as measured by the enacted tax rates expected to apply whenthese differences reverse. Deferred tax assets are reduced by a valuationallowance when it is more likely than not that they will not be realized.  The deferred tax provision is the result ofchanges in deferred tax assets and liabilities.

 

*Stock-BasedCompensation*

 

Compensation forstock-based awards to employees is measured using the intrinsic method.  This method recognizes compensation over thevesting period when the fair value of the underlying common stock exceeds theexercise price of the instrument at the date of grant.

 

*EarningsPer Share*

 

Basic earnings pershare is computed by dividing net earnings or loss by the weighted averagenumber of common shares outstanding during the period.  Diluted earnings per share is computed bydividing net earnings or loss by the weighted average number of sharesoutstanding, after giving effect to potentially dilutive common shareequivalents outstanding during the period. For the three-month and nine-month periods ended September 30, 2002 and2001, the diluted loss per common share is the same as basic since the effectof potentially dilutive common shares arising from outstanding stock optionsand warrants was anti-dilutive or not material.  For the three-month periods ended September 30, 2002 and 2001 thepotentially dilutive common share equivalents totaled 0 and 83,577.  For the nine-month periods ended September30, 2002 and 2001, the potentially dilutive common share equivalents totaled18,185 and 103,544.

 

7

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The Company issued71,429 shares of common stock to its directors in June 2002 as part of theirannual compensation.  Compensationexpense of $30,000 is recognized in the accompanying financial statements forthe issuance of these shares.

 

*Recent Regulatory Developments*

 

In August  2002, the Securities and Exchange Commission(the “SEC”) took action to implement some of its responsibilities pursuant tothe Sarbanes-Oxley Act of 2002 (the “Act”). The Act, which encompasses a broadrange of new legislation designed to increase accountability of publiccompanies and investor confidence, was signed into law on July 30, 2002.  Among other matters, the SEC adoptedamendments to accelerate filing deadlines for certain public reports, andadopted new rules to implement Section 302 of the Act pertaining to financialstatement certification and clarify disclosure controls and procedures.  The Company is not subject to theaccelerated filing deadlines at this time due to its size, however, it issubject to the financial statement certification and disclosure controlrules.  The Company intends to fullycomply with all applicable new rules as they become effective.

 

*Useof Estimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

**(3)****                                DryHole Cost**

 

During the first quarter of 2001, Gateway ProcessingCompany participated as a non-operating working interest owner in the drillingof a natural gas well on a prospect in the Sacramento Basin, California.  The well was expected to yield high-nitrogennatural gas reserves and employ the Company’s licensed nitrogen rejectionprocess to meet pipeline quality specifications.  The well was determined to be uneconomic and was abandoned.  The accompanying consolidated statement ofoperations for the nine months ended September 30, 2001 includes an impairmentcharge against earnings of $89,940 reflecting the abandonment of this project.

 

**(4)****                                PropertySales**

 

The Company sold 14 non-core onshore natural gasgathering systems located in Texas, Oklahoma and Louisiana, effective August 1,2002.  Cash of $839,000 was received atclosing, and a contingent payment of up to $260,000 will be due in the fourthquarter of 2003 based on subsequent performance of the assets.  Additonally, the Company sold its interestin an onshore joint venture that owned a south Texas natural gas gatheringsystem for $85,000 cash.  A net gain of$63,865 was recognized in the accompanying financial statements in connectionwith these sales, not including the contingent payment.

 

8

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**(5)****                                Debt**

 

*NotesPayable*

 

The Company’s operating line of credit provides formaximum borrowings of $500,000 through September 20, 2003.  Interest is payable monthly at 5.3% perannum and principal is due on demand, or if no demand is made, at maturity.  The line is collateralized by a $500,000certificate of deposit earning interest at 4.3% per annum.  At September 30, 2002, the Company hadavailable borrowings of $7,486 under the agreement.

 

The Company’s revolving credit agreement provides formaximum available borrowings of up to $250,000 through May 22, 2003.  Principal outstanding under the agreementaccrues interest at a variable rate, based on the bank’s prime rate index plus1.25%, with a minimum rate of 8%.  Thebalance under the agreement is due upon demand, or if no demand is made, atmaturity and is renewable annually. Costs of obtaining this debt totaled $4,932 and are being charged tointerest expense ratably over the maturity period of the note.  Fort Cobb uses the proceeds from time totime for general working capital purposes. The agreement, along with the Fort Cobb term note, is collateralizedwith the assets of Fort Cobb and guaranteed by the Company.  The Company had $118,985 of availableborrowings under the agreement as of September 30, 2002.

 

*Long-term Debt*

 

Long-term debt asof September 30, 2002 consisted of the following:

 

| Subordinated notes            |   | $         | 429,453   |   |
|-------------------------------|--------|-----------|-----------|--------|
| Term note – Fort Cobb    |   | 694,092   |      |
| Term note – Madisonville |   | 300,000   |      |
|                          |   | 1,423,545 |      |
| Less current  maturities      |   | 420,643   |      |
|                          |   | $         | 1,002,902 |   |

 

Effective February 21, 2002, Gateway Pipeline Company and GatewayProcessing Company (the “Borrowers”) entered into a term credit agreement witha bank.  Under the agreement, as amendedeffective August 31, 2002, the Borrowers may borrow through February 28, 2003up to $1.5 million in one or more advances. Principal outstanding under the note accrues interest at a fixed rate of71⁄4% and the note matures August 31, 2005. The monthly note payments through February 28, 2003 represent interestonly, and thereafter the note requires monthly payments of principal and interestranging from $9,063 to $54,819 if the maximum available under the agreement isborrowed.  If less than the maximumamount is borrowed, the monthly payments are proportionately reduced.  The Borrowers are using the proceeds tofinance the construction of gathering and sales pipelines servicing theMadisonville Plant, as hereinafter defined. The agreement is collateralized with the Company’s economic interest inthe Madisonville project and the Waxahachie distribution system, and theCompany has guaranteed the loan and pledged the common stock of theBorrowers.  The Company had $300,000outstanding under the agreement as of September 30, 2002.  Interest of $37,395 related to this projectwas capitalized through September 30, 2002. Costs of securing this debt, as amended, were $43,860 and are beingcharged to interest expense ratably over the maturity period of the note.

** **

9

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*Letters of Credit*

 

As of September 30, 2002, the Company had outstandingletters of credit totaling $548,595.

 

**(6)****                                Commitmentsand Contingencies**

 

In June 2001 the Company announced that GatewayProcessing Company entered into a long-term agreement with a producer topurchase non-pipeline quality natural gas near Madisonville, Texas.  Concurrently, Gateway Processing enteredinto an agreement with Hanover Compression Limited Partnership (“Hanover”), anaffiliate of The Hanover Company, under which Hanover will treat the gas toremove impurities from the gas to enable the gas to meet pipeline sales qualityspecifications.

 

Of significance to Gateway, Hanover is employing thestate-of-the-art, patented, absorption based technology developed by AET, forwhich Gateway has the exclusive U.S. license, to remove the nitrogen from thegas.

 

Hanover’s facilities (the “Madisonville Plant”) aredesigned initially to treat 18,000 Mcf per day, and Gateway Pipeline Companywill construct the gathering system upstream of the Plant, and the ten-inchsales pipeline to transport the treated residue gas.  The Company expects its capital commitment in this project to beapproximately $2.2 million, about $700,000 more than it has currently availableunder the term loan for the project. See Note (5) for a description of the Company’s financing related tothis project.  The additional requiredcapital is expected to come from internally generated funds or additional bankborrowings.

 

Installation of the Madisonville Plant has beendelayed by negotiations to acquire appropriate sites for the Plant and theinjection well required to properly dispose of the impurities removed from thegas.  Site selections are now completeand the sites have been acquired.  Theproducer has successfully completed and tested the natural gas well on whichthe initial phase of the project is based, and has successfully completed andtested the injection well. Consequently, the Company and Hanover are proceeding to install theirrespective facilities, and it is expected that the Madisonville Plant willcommence operations during the first half of 2003.

 

The Company and its subsidiaries are parties tolitigation and claims arising in the normal course of business.  Management, after consultation with legalcounsel, believes that the liabilities, if any, arising from such litigationand claims, will not be material to the Company’s financial position, resultsof operations or cash flows.

 

**(7)           Segment Disclosures**

 

All of the Company’s operations are in the domesticU.S. and the Gulf of Mexico in Texas and federal waters.  The Company’s management reviews andevaluates the operations separately of three main segments—Onshore Operations,Offshore Operations and Fort Cobb Operations. Each segment is an aggregation of operations subject to similar economicand regulatory conditions such that they are likely to have similar long-termprospects for financial performance. Onshore Operations include natural gas gathering, transportation anddistribution activities in Texas and Oklahoma. Offshore Operations

 

10

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include natural gas gathering and transportation activities in the Gulfof Mexico in Texas and federal waters. Fort Cobb Operations are comprised of a local natural gas distributioncompany in Oklahoma.  This segmentsupplies natural gas to approximately 2,350 customers, principally forirrigation and crop drying fuel for farming cooperatives, and residential fuel.

 

The accounting policies of the reportable segments arethe same as those described in Note 2 to the Consolidated Financial Statements.  The Company evaluates the segments based onoperating margin, defined as revenues less cost of purchased gas and operatingand maintenance expenses.  Such amountsare before general and administrative expense, depreciation, interest income orexpense or income taxes.  Inter-segmentsales of $275,574 and $509,270 were eliminated during consolidation for thethree months ended September 30, 2002 and 2001.  Inter-segment sales of $582,714 and $1,252,339 were eliminatedduring consolidation for the nine months ended September 30, 2002 and 2001.

 

Summarized financial information of the Company’sreportable segments, and a reconciliation of operating margin to consolidatednet loss, is presented below:

 
|                                    |   | **Three  Months Ended  September 30,** |      | **Nine  Months Ended  September 30,** |   |      |
|-----------------------------------------|--------|----------------------------------------|-----------|---------------------------------------|--------|-----------|
|                                    |   | **2002**                               |      | **2001**                              |   | **2002**  |   | **2001** |   |   |
| **Onshore Operations**                  |   |                                   |      |                                  |   |      |   |   |   |   |
| Revenues                                |   | $                                      | 1,077,020 |                                  | $      | 884,840   |   | $ | 2,802,724 |   | $ | 4,197,828 |   |
| Operating margin                        |   | 148,751                                |      | 172,845                               |   | 349,990   |   | 579,632 |   |   |
| Depreciation and  amortization          |   | 49,375                                 |      | 46,554                                |   | 146,385   |   | 125,593 |   |   |
| Total assets                            |   | 4,211,291                              |      | 4,813,142                             |   | 4,211,291 |   | 4,813,142 |   |   |
|                                    |   |                                   |      |                                  |   |      |   |   |   |   |
| **Offshore Operations**                 |   |                                   |      |                                  |   |      |   |   |   |   |
| Revenues                                |   | 182,612                                |      | 330,379                               |   | 590,777   |   | 902,316 |   |   |
| Operating margin                        |   | 125,609                                |      | 211,499                               |   | 405,566   |   | 519,360 |   |   |
| Depreciation and  amortization          |   | 35,413                                 |      | 35,114                                |   | 106,239   |   | 104,551 |   |   |
| Total assets                            |   | 1,783,980                              |      | 1,926,900                             |   | 1,783,980 |   | 1,926,900 |   |   |
|                                    |   |                                   |      |                                  |   |      |   |   |   |   |
| **Fort Cobb Operations**                |   |                                   |      |                                  |   |      |   |   |   |   |
| Revenues                                |   | 539,280                                |      | 1,043,499                             |   | 1,255,130 |   | 2,127,549 |   |   |
| Operating margin                        |   | 145,137                                |      | 347,982                               |   | 295,583   |   | 410,751 |   |   |
| Depreciation and  amortization          |   | 48,298                                 |      | 49,489                                |   | 147,132   |   | 148,319 |   |   |
| Total assets                            |   | 2,255,653                              |      | 2,569,514                             |   | 2,255,653 |   | 2,569,514 |   |   |
|                                    |   |                                   |      |                                  |   |      |   |   |   |   |
| **Total**                               |   |                                   |      |                                  |   |      |   |   |   |   |
| Revenues                                |   | 1,798,912                              |      | 2,258,718                             |   | 4,648,631 |   | 7,227,693 |   |   |
| Operating margin                        |   | 419,497                                |      | 732,326                               |   | 1,051,139 |   | 1,509,743 |   |   |
| Depreciation and  amortization          |   | 133,086                                |      | 131,157                               |   | 399,756   |   | 378,463 |   |   |
| Total assets                            |   | 8,250,924                              |      | 9,309,556                             |   | 8,250,924 |   | 9,309,556 |   |   |
|                                    |   |                                   |      |                                  |   |      |   |   |   |   |
| **Reconciliation to net loss (income)** |   |                                   |      |                                  |   |      |   |   |   |   |
| Operating margin                        |   | $                                      | 419,497   |                                  | $      | 732,326   |   | $ | 1,051,139 |   | $ | 1,509,743 |   |
| Depreciation and  amortization          |   | 133,086                                |      | 131,157                               |   | 399,756   |   | 378,463 |   |   |
| Dry hole cost                           |   | —                                 |      | —                                |   | —    |   | 89,940 |   |   |
| General &  administrative           |   | 451,842                                |      | 403,010                               |   | 1,433,681 |   | 1,396,859 |   |   |
| Other income (expense),  net            |   | (34,533                                | )         | (75,806                               | )      | (58,151   | ) | (125,929 | ) |   |
| Discontinued  operations                |   | 70,314                                 |      | (6,911                                | )      | 86,611    |   | 38,265 |   |   |
| Net loss  (income)                      |   | $                                      | (129,650  | )                                     | $      | 115,442   |   | $ | (753,838 | ) | $ | (443,183 | ) |
|                                         |        |                                        |           |                                       |        |           |  |  |  |  |  |  |  |  |  |

 

11

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**Item 2.    Management’s Discussion and Analysis of Financial Conditionand Results of Operations.**

 

The followingmanagement’s discussion and analysis contains trend analysis and otherforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended.  Actual results coulddiffer materially from those projected in the forward-looking statementsthroughout this document as a result of the risk factors set forth below in thesection entitled *Factors Affecting Future Results* and elsewhere in thisdocument.

 

**Results of Operations**

 

*General*

 

The Company evaluates each of its activities based onthe operating margin it produces.  TheCompany defines operating margin as revenues, less the cost of purchased gasand operating and maintenance expenses. Management reviews and evaluates the operations of three main segments –Onshore operations, Offshore operations and Fort Cobb operations.  The Company continues to actively pursue opportunitiesin all three segments.  All commentsbelow pertain to continuing operations.

 

**Three Months Ended September 30, 2002 Compared to September30, 2001**

 

*TotalOperations*

 

The following table sets forth information for thethree months ended September 30, 2002 and 2001:

 
|                           |   | **2002** |      | **2001** |   |
|--------------------------------|--------|----------|-----------|----------|--------|
| Revenues                       |   | $        | 1,798,912 |     | $      | 2,258,718 |   |
| Operating margin               |   | 419,497  |      | 732,326  |   |
| Depreciation and  amortization |   | 133,086  |      | 131,157  |   |
|                                |        |          |           |          |        |  |  |

 

Operating margin for the three months ended September30, 2002 decreased $313,000 compared to the same period of the prior year.  Fort Cobb operating margin decreased$203,000, Offshore operating margin decreased $86,000 and Onshore operatingmargin decreased $24,000.  Revenues werelower for the period due to lower sale and transport volumes, partially offsetby higher natural gas prices.  The

 

12

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average Henry Hub index price was $3.17 for the three months, comparedto $2.90 for the prior period.  Thesesegments are discussed individually below in greater detail.

 

*Onshore Operations*

 

The following table sets forth information for thethree months ended September 30, 2002 and 2001:

 
|                           |   | **2002** |      | **2001** |   |
|--------------------------------|--------|----------|-----------|----------|--------|
| Revenues                       |   | $        | 1,077,020 |     | $      | 884,840 |   |
| Operating margin               |   | 148,751  |      | 172,845  |   |
| Depreciation and  amortization |   | 49,375   |      | 46,554   |   |
|                                |        |          |           |          |        |  |  |

 

Operating margin for Onshore operations decreased inthe second quarter by $24,000 from the same period of the prior year, mainlydue to the impact of lower transportation volumes.

 

*Offshore Operations*

 

The following table sets forth information for thethree months ended September 30, 2002 and 2001:

 
|                           |   | **2002** |    | **2001** |   |
|--------------------------------|--------|----------|---------|----------|--------|
| Revenues                       |   | $        | 182,612 |     | $      | 330,379 |   |
| Operating margin               |   | 125,609  |    | 211,499  |   |
| Depreciation and  amortization |   | 35,413   |    | 35,114   |   |
|                                |        |          |         |          |        |  |  |

 

Operating margin for Offshore operations decreased inthe second quarter by $86,000 from the same period of the prior year. Thedecrease was primarily due to declines in natural gas and liquids volumestransported for producers in the areas of Galveston Blocks 144L, 190L and 213L,and High Island Block 98L, partially offset by reductions in operating costs.

 

*FortCobb Operations*

 

The following table sets forth information for thethree months ended September 30, 2002 and 2001:

 
|                           |   | **2002** |    | **2001** |   |
|--------------------------------|--------|----------|---------|----------|--------|
| Revenues                       |   | $        | 539,280 |     | $      | 1,043,499 |   |
| Operating margin               |   | 145,137  |    | 347,982  |   |
| Depreciation and  amortization |   | 48,298   |    | 49,489   |   |
|                                |        |          |         |          |        |  |  |

 

Operating margin for Fort Cobb operations decreased$203,000 in the three months ended September 30, 2002 from the same period ofthe prior year.  Demand for irrigationfuel dropped by 51% compared to the prior period due to unseasonably wetweather in Fort Cobb’s service area. Fort Cobb’s business normally peaks in the third and fourth quartersbecause a significant portion of its load comes from supplying natural gas toirrigation and crop-drying customers.

 

13

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*OperationsSupport*

 

The following table sets forth information for thethree months ended September 30, 2002 and 2001:

 
|                         |   | **2002** |    | **2001** |   |
|------------------------------|--------|----------|---------|----------|--------|
| General and  administrative  |   | $        | 451,842 |     | $      | 403,010 |   |
| Interest income              |   | 10,260   |    | 10,959   |   |
| Interest expense             |   | (63,509  | )       | (79,884  | )      |
| Interest  capitalized        |   | 18,837   |    | —   |   |
| Other income  (expense), net |   | (121     | )       | (6,881   | )      |
|                              |        |          |         |          |        |  |  |

 

General and administrative expenses for the quarterare 12% higher than for the same period of last year.  The increase was primarily due to the non-cash impact of lastyear’s downward revaluation of employee stock options that were repriced in1999.  Under the Financial AccountingStandards Board Interpretation 44, *Interpretation of APB Opinion 25*, theCompany is required to account for these options under variable awardaccounting, due to the change in the option exercise price.  Variable award accounting requiresrecognition of compensation expense (or income) under certain circumstanceswhen the market price of the Company’s stock exceeds the exercise price of thestock option.  Excluding that priorperiod expense reduction, general and administrative expense for the quarterdecreased 3% from the same period of the prior year.  General and administrative expenses are expected to be reduced byup to 25% beginning in January 2003 due to targeted reductions in certainsalaries, employee related and other costs, which should more than offset thereduction in operating margin due to the onshore property sales.

 

Interest income varies directly with the balance ondeposit in the Company’s certificates of deposit and short-term money marketaccounts.  Interest expense for thethree months ended September 30, 2001 includes $35,000 of interest related to thesettlement of a contingent payable on the Waxahachie system.  Otherwise, it fluctuates directly with theamount of outstanding long-term debt and the amount of borrowings under theCompany’s operating line of credit and revolving credit agreement.  Interest expense of $18,837 related to theCompany’s Madisonville term loan was capitalized during the three months endedSeptember 30, 2002.

 

Other income (expense), net for the prior periodincludes mainly the write-off of certain project development costs.

 

**Nine Months Ended September 30, 2002Compared to September 30, 2001**

 

*TotalOperations*

 

The following table sets forth information for thenine months ended September 30, 2002 and 2001:

 
|                           |   | **2002**  |      | **2001**  |   |
|--------------------------------|--------|-----------|-----------|-----------|--------|
| Revenues                       |   | $         | 4,648,631 |      | $      | 7,227,693 |   |
| Operating margin               |   | 1,051,139 |      | 1,509,743 |   |
| Depreciation and  amortization |   | 399,756   |      | 378,463   |   |
|                                |        |           |           |           |        |  |  |

 

Operating margin for the nine months ended September30, 2002 decreased $459,000 compared to the same period of the prior year.  Onshore operating margin decreased $230,000,Fort Cobb operating margin decreased $115,000, and Offshore operating margindecreased $114,000.  Revenues were lowerthan the prior period due to lower average sales prices, and due to lowertransportation volumes.  The averageHenry Hub index price was $2.96 for the nine months, compared to $4.87 for theprior period.  Operating margins werenot proportionally affected due to the corresponding decrease in the cost ofpurchased gas.  These segments arediscussed individually below in greater detail.

 

14

----

 

*OnshoreOperations*

 

The following table sets forth information for thenine months ended September 30, 2002 and 2001:

 
|                           |   | **2002** |      | **2001** |   |
|--------------------------------|--------|----------|-----------|----------|--------|
| Revenues                       |   | $        | 2,802,724 |     | $      | 4,197,828 |   |
| Operating margin               |   | 349,990  |      | 579,632  |   |
| Depreciation and  amortization |   | 146,385  |      | 125,593  |   |
|                                |        |          |           |          |        |  |  |

 

Operating margin for onshore operations decreased$230,000 in the nine months ended September 30, 2002 from the same period ofthe prior year, mainly due to changes in gas transportation terms imposed by amajor natural gas pipeline.  In responseto the unfavorable transportation terms, the Company has constructed newfacilities to allow access to another pipeline and additional supply sources.

 

During the first quarter of 2001, Gateway ProcessingCompany participated as a non-operating working interest owner in the drillingof a natural gas well on a prospect in the Sacramento Basin, California.  The well was expected to yield high-nitrogennatural gas reserves and employ the Company’s licensed nitrogen rejectionprocess to meet pipeline quality specifications.  The well was determined to be uneconomic and was abandoned.  The accompanying consolidated statement ofoperations for the nine months ended September 30, 2001 includes an impairmentcharge against earnings of $89,940 reflecting the abandonment of this project.

 

*OffshoreOperations*

 

The following table sets forth information for thenine months ended September 30, 2002 and 2001:

 
|                           |   | **2002** |    | **2001** |   |
|--------------------------------|--------|----------|---------|----------|--------|
| Revenues                       |   | $        | 590,777 |     | $      | 902,316 |   |
| Operating margin               |   | 405,566  |    | 519,360  |   |
| Depreciation and  amortization |   | 106,239  |    | 104,551  |   |
|                                |        |          |         |          |        |  |  |

 

Operating margin for Offshore operations decreased$114,000 in the nine months ended September 30, 2002 from the same period ofthe prior year.  The decrease wasprimarily due to declines in natural gas and liquids volumes transported forproducers in the area of Galveston Blocks 144L, 190L and 213L, and High IslandBlock 98L, partially offset by reductions in operating costs.

 

*FortCobb Operations*

 

The following table sets forth information for thenine months ended September 30, 2002 and 2001:

 
|                           |   | **2002** |      | **2001** |   |
|--------------------------------|--------|----------|-----------|----------|--------|
| Revenues                       |   | $        | 1,255,130 |     | $      | 2,127,549 |   |
| Operating margin               |   | 295,583  |      | 410,751  |   |
| Depreciation and  amortization |   | 147,132  |      | 148,319  |   |
|                                |        |          |           |          |        |  |  |

 

Operating margin for Fort Cobb operations decreased$115,000 in the nine months ended September 30, 2002 from the same period ofthe prior year.  Demand for irrigationfuel dropped by 32% compared to the prior period due to unseasonably wetweather in Fort Cobb’s service area. Fort Cobb’s

 

15

----

 

business normally peaks in the third and fourth quarters because asignificant portion of its load comes from supplying natural gas to irrigationand crop-drying customers.

 

*OperationsSupport*

 

The following table sets forth information for thenine months ended September 30, 2002 and 2001:

 
|                         |   | **2002** |      | **2001** |   |
|------------------------------|--------|----------|-----------|----------|--------|
| General and  administrative  |   | $        | 1,433,681 |     | $      | 1,396,859 |   |
| Interest income              |   | 37,273   |      | 34,930   |   |
| Interest expense             |   | (170,293 | )         | (185,400 | )      |
| Interest  capitalized        |   | 37,395   |      | —   |   |
| Other income  (expense), net |   | 37,474   |      | 24,541   |   |
|                              |        |          |           |          |        |  |  |

 

General and administrative expenses increased 3% inthe nine months ended September 30, 2002 compared to the same period of theprior year.  General and administrativeexpenses are expected to be reduced by up to 25% beginning in January 2003 dueto targeted reductions in certain salaries, employee related and other costs,which should more than offset the reduction in operating margin due to theonshore property sales.

 

Interest income varies directly with the balance ondeposit in the Company’s certificates of deposit and short-term money marketaccounts.  Interest expense for the ninemonths ended September 30, 2001 includes $78,000 of interest related to thesettlement of a contingent payable on the Waxahachie system.  Otherwise, it fluctuates directly with theamount of outstanding long-term debt and the amount of borrowings under theCompany’s operating line of credit and revolving credit agreement. Interestexpense of $37,395 related to the Company’s Madisonville term loan wascapitalized during the nine months ended September 30, 2002.

 

Other income for the periods includes refunds, latefees and penalties charged by Fort Cobb and miscellaneous adjustments.

 

**Liquidityand Capital Resources**

 

Net cash used in operating activities totaled $426,000for the nine months ended September 30, 2002, compared to $495,000 used inoperating activities for the same period last year.  The Company has cash and cash equivalents and certificates ofdeposit totaling $833,073 at September 30, 2002.  The Company’s operating line of credit agreement with a bankprovides for maximum borrowings of $500,000, through June 20, 2003, and iscollateralized with a certificate of deposit for the same amount.  The Company’s revolving credit agreementprovides for maximum borrowings of $250,000 through May 22, 2003.  The Company had available borrowings of$7,486 and $118,985 as of September 30, 2002 under the two agreements.

 

As discussed in Note (6) to the financial statements,Gateway Processing entered into long-term agreements with a producer and withHanover Compression Limited Partnership, an affiliate of The Hanover Company,under which the Company expects to invest a total of approximately $2.2million.  The funds for this commitmentare expected to come from outside financing and from available cash. TheCompany’s Madisonville term note, as amended, provides for maximum borrowingsof $1.5 million, and the Company had $1,200,000 available under that agreementas of September 30, 2002.

 

The Company sold 14 non-core onshore natural gasgathering systems located in Texas, Oklahoma and Louisiana, effective August 1,2002.  Cash of $839,000 was received atclosing, and a

 

16

----

 

contingent payment of up to $260,000 will be due in the fourth quarterof 2003 based on subsequent performance of the assets.  Additionally, the Company sold its interestin an onshore joint venture that owned a south Texas natural gas gatheringsystem for $85,000.  The sale of thesenon-core assets (approximately 58 miles of pipeline) is part of an overallstrategy begun several years ago to rationalize the Company’s asset base, sellthose that are non-core and focus on and expand those that generate the mostcash flow and/or provide the greatest growth potential.  While the property sales will reduceoperating margin in future periods, certain reductions in salaries, employeerelated and other general and administrative expenses are expected to more thanoffset this reduction.  General andadministrative expenses are expected to be reduced by up to 25% beginning inJanuary 2003 due to targeted reductions in such costs.

 

At September 30, 2002, the Company’s long-term debt tototal capitalization was approximately 16%, which should still allowopportunity for the Company to utilize conventional long-term financing to fundacquisitions or construction projects.

 

Absent acquisitions or significant developmentprojects, the Company will continue to fund its operations through internallygenerated funds and available cash and certificates of deposit, plus availablebank borrowings.  The Company believesits cash flows from operations and other available cash will be sufficient tofund its ongoing operations for the foreseeable future.  Any significant property acquisitions ordevelopment projects will require outside project financing.

 

**FactorsAffecting Future Results**

 

One of theprincipal objectives of the Company is to enhance stockholder value through theexecution of certain strategies. These strategies include, among other things:(i) focusing on gathering, transporting, distributing and treating natural gas;(ii) expanding the Company’s asset base in core geographic areas; (iii)participating in the development of sub-quality high nitrogen natural gasreserves to create demand for our services, and; (iv) acquiring or constructingproperties in one or more new core areas.

 

The Company mustprovide services to its customers, primarily producers, at a competitive price.Therefore, in order to be successful the Company must contain its costs in linewith industry competitors. The Company’s access to reasonably priced long-termcapital will have a significant effect on its ability to acquire additionalproperties to increase operating margin, enabling fixed overhead costs to bespread over a larger asset base. The Company believes its experienced personnelwill allow the Company to access capital and find properties which can provideattractive returns. However, there can be no assurance that the Company will besuccessful in this endeavor.

 

The Company’sability to generate long-term value for the common stockholder is dependent inpart upon the successful acquisition of additional assets which compliment theCompany’s core business at costs which provide for reasonable returns. Thereare many companies participating in the midstream segment of the natural gasindustry, many with resources greater than the Company. Greater competition forprofitable operations can increase prices and make it more difficult to acquireassets at reasonable multiples of cash flow.

 

The Companybelieves that it will be able to compete in this environment and will be ableto find attractive investments which compliment its existing properties; however,it is not possible to predict competition or the effect this will have on theCompany’s operations.

 

The Company intends to pursue projects that employ itsnitrogen rejection technology, and is actively evaluating several suchprojects.  These projects are located ingeographic areas with well

 

17

----

 

known concentrations of high nitrogen natural gas reserves.  The Company has a technological advantage inthis niche, due to its exclusive U.S. license for the nitrogen rejectionprocess.  Additionally, a substantialportion of the natural gas reserves in the lower 48 states contains nitrogen,either alone or in conjunction with other contaminants, in excess of the maximumpercentage by volume acceptable to most pipeline companies.  Successful completion of these projects willdepend upon the ability of the Company to market the technology to the producercommunity, and to obtain financing on terms satisfactory to the Company forconstruction of nitrogen rejection plants and/or acquisition of workinginterests in the high nitrogen properties.

 

The Company’soperations are also significantly affected by factors which are outside thecontrol of the Company. Gas gathering and processing is dependent on throughputvolume. Throughput on the Company’s systems is dependent on natural gasproduction which is significantly affected by natural gas prices as pricesaffect the willingness of producers to invest the required capital to obtaingeological and geophysical information, to drill development or exploratorywells, and to rework or maximize production on existing wells. Natural gasprices are currently at levels which should provide adequate incentive toproducers; however, there is no assurance that such prices will remain atcurrent levels, and that producers will react positively to the current prices.

 

The Company’srevenues, particularly in its retail operations, are also affected by weather.Much of the retail demand is for crop irrigation and drying.  Above normal precipitation in the growingseason and hot, dry weather in the fall can significantly reduce demand fornatural gas.

 

**Item 3.  Controls and Procedures**

 

                As required byRule 13a-15 under the Securities Exchange Act of 1934, as amended (the“Exchange Act”), within the 90 days prior to the filing date of this report,the Company carried out an evaluation of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures.  This evaluation was carried out under thesupervision and with the participation of the Company’s management, includingthe Company’s President and Chief Executive Officer along with the Company’sChief Financial Officer.  Based uponthat evaluation, the President and Chief Executive Officer along with the ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective.  There havebeen no significant changes in the Company’s internal controls, or in otherfactors, which could significantly affect internal controls subsequent to thedate the Company carried out its evaluation.

 

                Disclosurecontrols and procedures are controls and other procedures that are designed toensure that information required to be disclosed in Company reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed inCompany reports filed under the Exchange Act is accumulated and communicated tomanagement, including the Company’s President and Chief Executive Officer andthe Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

**Part II**

 
| **Item  1.** |   | **Legal  Proceedings**                                   |
|--------------|--------|----------------------------------------------------------|
|         |   | None                                                     |
|         |   |                                                     |
| **Item  2.** |   | **Changes  in Securities**                               |
|         |   | None                                                     |
|         |   |                                                     |
| **Item  3.** |   | **Defaults  Upon Senior Securities**                     |
|         |   | None                                                     |
|         |   |                                                     |
| **Item  4.** |   | **Submission  of Matters to a Vote of Security Holders** |
|         |   | None                                                     |
|         |   |                                                     |
| **Item  5.** |   | **Other  Information**                                   |
|         |   | None                                                     |

 

 

18

----

 
| **Item  6.** | **Exhibits  and Reports on Form 8-K.** |
|--------------|----------------------------------------|
|         | a)                                     | Exhibits: |
|         |                                   | 11 | Statement Regarding Computation of Per Share  Earnings |
|         |                                   | 99.1 | Officer certification pursuant to Sarbanes Oxley Act  of 2002, Section 906. |
|         |                                   |   |   |
|         | b)                                     | Reports on Form 8-K: |
|         |                                   | September 9, 2002 – Sale of non-core properties and  modifications to term loan agreements. |

 

 

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                                   | /s/  Michael T. Fadden                 |   |   | /s/  Scott D. Heflin |   |
|----------------------------------------|----------------------------------------|--------|--------|----------------------|--------|
| Chief  Executive Officer and President | Chief  Financial Officer and Treasurer |
|                                   |                                   |
| November 14, 2002                      |                                   |   |
| (Date)                                 |                                   |
|                                        |                                        |        |        |                      |        |  |

 

19

----

 

 

**GATEWAY ENERGYCORPORATION AND SUBSIDIARIES**

 

# **OFFICERCERTIFICATION**

 
| I, Michael T. Fadden, certify that:                                                                                                                                                                                                                                                                                                                                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.  I have  reviewed this quarterly report on Form 10-QSB of Gateway Energy Corporation;                                                                                                                                                                                                                                                                                                                |
| 2.  Based on  my knowledge, this quarterly report does not contain any untrue statement of  a material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements  were made, not misleading with respect to the period covered by this  quarterly report;                                                                 |
| 3.  Based on  my knowledge, the financial statements, and other financial information  included in this quarterly report, fairly present in all material respects  the financial condition, results of operations and cash flows of the  registrant as of, and for, the periods presented in this quarterly report;                                                                                     |
| 4.  The  registrant’s other certifying officers and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                      |
| a)  designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared;                                                                                                 |
| b)  evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this quarterly report  (the “Evaluation Date”); and                                                                                                                                                                                     |
| c)  presented  in this quarterly report our conclusions about the effectiveness of the  disclosure controls and procedures based on our evaluation as of the  Evaluation Date;                                                                                                                                                                                                                          |
| 5.  The  registrant’s other certifying officers and I have disclosed, based on our  most recent evaluation, to the registrant’s auditors and the audit committee  of registrant’s board of directors (or persons performing the equivalent  functions):                                                                                                                                  |
| a)  all  significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant’s ability to record, process,  summarize and report financial data and have identified for the registrant’s  auditors any material weaknesses in internal controls; and                                                                                        |
| b)  any  fraud, whether or not material, that involves management or other employees  who have a significant role in the registrant’s internal controls; and                                                                                                                                                                                                                                       |
| 6.  The  registrant’s other certifying officers and I have indicated in this quarterly  report whether or not there were significant changes in internal controls or  in other factors that could significantly affect internal controls subsequent  to the date of our most recent evaluation, including any corrective actions  with regard to significant deficiencies and material weaknesses. |

 
| Date:   November 14, 2002 | /s/ Michael T. Fadden                 |
|--------------------------------|---------------------------------------|
|                           | Michael T. Fadden                     |
|                           | President and Chief Executive Officer |

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# **OFFICERCERTIFICATION**

 
| I, Scott D. Heflin, certify that:                                                                                                                                                                                                                                                                                                                                                                            |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.  I have  reviewed this quarterly report on Form 10-QSB of Gateway Energy Corporation;                                                                                                                                                                                                                                                                                                                |
| 2.  Based on  my knowledge, this quarterly report does not contain any untrue statement of  a material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements  were made, not misleading with respect to the period covered by this  quarterly report;                                                                 |
| 3.  Based on  my knowledge, the financial statements, and other financial information  included in this quarterly report, fairly present in all material respects  the financial condition, results of operations and cash flows of the  registrant as of, and for, the periods presented in this quarterly report;                                                                                     |
| 4.  The  registrant’s other certifying officers and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                      |
| a)  designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared;                                                                                                 |
| b)  evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this quarterly report  (the “Evaluation Date”); and                                                                                                                                                                                     |
| c)  presented  in this quarterly report our conclusions about the effectiveness of the  disclosure controls and procedures based on our evaluation as of the  Evaluation Date;                                                                                                                                                                                                                          |
| 5.  The  registrant’s other certifying officers and I have disclosed, based on our  most recent evaluation, to the registrant’s auditors and the audit committee  of registrant’s board of directors (or persons performing the equivalent  functions):                                                                                                                                  |
| a)  all  significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant’s ability to record, process,  summarize and report financial data and have identified for the registrant’s  auditors any material weaknesses in internal controls; and                                                                                        |
| b)  any  fraud, whether or not material, that involves management or other employees  who have a significant role in the registrant’s internal controls; and                                                                                                                                                                                                                                       |
| 6.  The  registrant’s other certifying officers and I have indicated in this quarterly  report whether or not there were significant changes in internal controls or  in other factors that could significantly affect internal controls subsequent  to the date of our most recent evaluation, including any corrective actions  with regard to significant deficiencies and material weaknesses. |

 
| Date:   November 14, 2002 | /s/ Scott D. Heflin                   |
|--------------------------------|---------------------------------------|
|                           | Scott D. Heflin                       |
|                           | Chief Financial Officer and Treasurer |

 

 

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