UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
___________________________________________
FORM 10-Q
 ___________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number: 001-33292
_________________________________________________________
corenergylogo21.jpg
CORENERGY INFRASTRUCTURE TRUST, INC.
______________________________________________________________________
(Exact name of registrant as specified in its charter)
Maryland
 
20-3431375
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
1100 Walnut, Ste. 3350
Kansas City, MO
 
64106
(Address of Principal Executive Offices)
 
(Zip Code)

(816) 875-3705
(Registrant’s telephone number, including area code)

n/a
(Former name, former address and former fiscal year, if changed since last report)
___________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)     Yes   o   No  x
As of August 1, 2018, the registrant had 11,934,575 common shares outstanding.



CorEnergy Infrastructure Trust, Inc.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2018
TABLE OF CONTENTS
____________________________________________________________________________________________
 
 
 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

This Report on Form 10-Q ("Report") should be read in its entirety. No one section of the Report deals with all aspects of the subject matter. It should be read in conjunction with the consolidated financial statements, related notes, and with the Management's Discussion & Analysis ("MD&A") included within, as well as provided in the Annual Report on Form 10-K, for the year ended December 31, 2017.


2


The consolidated unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018 or for any other interim or annual period. For further information, refer to the consolidated financial statements and footnotes thereto included in the CorEnergy Infrastructure Trust, Inc. Annual Report on Form 10-K, for the year ended December 31, 2017.


3

GLOSSARY OF DEFINED TERMS
 

Certain of the defined terms used in this Report are set forth below:
Accretion Expense: the expense recognized when adjusting the present value of the GIGS ARO for the passage of time.
Administrative Agreement: the Administrative Agreement dated December 1, 2011, as amended effective August 7, 2012, between the Company and Corridor.
Amended Pinedale Term Credit Facility: Pinedale LP's $41.0 million second amended and restated term credit agreement and note purchase agreement with Prudential as lender.
Arc Logistics: Arc Logistics Partners LP, a wholly-owned subsidiary of Zenith Energy U.S., LP.
ARO: the Asset Retirement Obligation liabilities assumed with the acquisition of GIGS.
ASC: FASB Accounting Standards Codification.
ASU: Accounting Standard Update.
Bbls: standard barrel containing 42 U.S. gallons.
Company or CorEnergy: CorEnergy Infrastructure Trust, Inc. (NYSE: CORR).
Convertible Notes: the Company's 7.00% Convertible Senior Notes due 2020.
CorEnergy Credit Facility: the Company's upsized $160.0 million CorEnergy Revolver and the $1.0 million MoGas Revolver with Regions Bank.
CorEnergy Revolver: the Company's $160.0 million secured revolving line of credit facility with Regions Bank.
CorEnergy Term Loan: the Company's $45.0 million secured term loan with Regions Bank that was paid off in conjunction with the amendment and restatement of the CorEnergy Credit Facility on July 28, 2017.
Corridor: Corridor InfraTrust Management, LLC, the Company's external manager pursuant to the Management Agreement.
Corridor MoGas: Corridor MoGas, Inc., a wholly-owned taxable REIT subsidiary of CorEnergy and the holding company of MoGas, United Property Systems and CorEnergy Pipeline Company, LLC.
Corridor Private: Corridor Private Holdings, Inc., an indirect wholly-owned taxable REIT subsidiary of CorEnergy.
CPI: Consumer Price Index.
Exchange Act: the Securities Exchange Act of 1934, as amended.
EGC: Energy XXI Ltd, the parent company (and guarantor) of our tenant on the Grand Isle Gathering System lease, emerged from a reorganization under Chapter 11 of the US Bankruptcy Code on December 30, 2016, with the succeeding company named Energy XXI Gulf Coast, Inc. Throughout this document, references to EGC will refer to both the pre- and post-bankruptcy entities.
EGC Tenant: Energy XXI GIGS Services, LLC, a wholly-owned operating subsidiary of Energy XXI Gulf Coast, Inc. that is the tenant under Grand Isle Corridor's triple-net lease of the Grand Isle Gathering System.
FASB: Financial Accounting Standards Board.
FERC: Federal Energy Regulatory Commission.
Four Wood Corridor: Four Wood Corridor, LLC, a wholly-owned subsidiary of CorEnergy.
Four Wood Energy: Four Wood Energy Partners LLC, a wholly-owned subsidiary of Four Wood Capital Partners LLC.
Four Wood Notes: the financing notes between Four Wood Corridor and Corridor Private and SWD.
GAAP: U.S. generally accepted accounting principles.
GIGS: the Grand Isle Gathering System, owned by Grand Isle Corridor, LP and triple-net leased to a wholly-owned subsidiary of Energy XXI Gulf Coast, Inc.

4

GLOSSARY OF DEFINED TERMS (Continued from previous page)

Grand Isle Corridor: Grand Isle Corridor, LP, an indirect wholly-owned subsidiary of the Company.
Grand Isle Gathering System: a subsea midstream pipeline gathering system located in the shallow Gulf of Mexico shelf and storage and onshore processing facilities.
Grand Isle Lease Agreement: the June 2015 agreement pursuant to which the Grand Isle Gathering System assets are triple-net leased to EGC Tenant.
Lightfoot: collectively, Lightfoot Capital Partners LP and Lightfoot Capital Partners GP LLC.
Management Agreement: an agreement between the Company and Corridor entered into May 8, 2015, effective as of May 1, 2015.
MoGas: MoGas Pipeline LLC, an indirect wholly-owned subsidiary of CorEnergy.
MoGas Pipeline System: an approximately 263-mile interstate natural gas pipeline system in and around St. Louis and extending into central Missouri, owned and operated by MoGas.
MoGas Revolver: a $1.0 million secured revolving line of credit facility at the MoGas subsidiary level with Regions Bank.
Mowood: Mowood, LLC, an indirect wholly-owned subsidiary of CorEnergy and the holding company of Omega Pipeline Company, LLC.
Mowood/Omega Revolver: a $1.5 million revolving line of credit facility at the Mowood subsidiary level with Regions Bank.
NAREIT: National Association of Real Estate Investment Trusts.
Omega: Omega Pipeline Company, LLC, a wholly-owned subsidiary of Mowood, LLC.
Omega Pipeline: Omega's natural gas distribution system in south central Missouri.
Pinedale Credit Facility: a $70.0 million secured term credit facility, with the Company and Prudential as refinance lenders, used by Pinedale Corridor, LP to finance a portion of the acquisition of the Pinedale LGS.
Pinedale LGS: the Pinedale Liquids Gathering System, a system consisting of approximately 150 miles of pipelines and four above-ground central gathering facilities located in the Pinedale Anticline in Wyoming, owned by Pinedale LP and triple-net leased to a wholly-owned subsidiary of Ultra Petroleum.
Pinedale Lease Agreement: the December 2012 agreement pursuant to which the Pinedale LGS assets are triple-net leased to a wholly owned subsidiary of Ultra Petroleum.
Pinedale LP: Pinedale Corridor, LP, an indirect wholly-owned subsidiary of CorEnergy.
Pinedale LP I: Pinedale LP I, LLC, a wholly-owned subsidiary of CorEnergy, which purchased the 18.95 percent noncontrolling equity interest in Pinedale LGS from Prudential on December 29, 2017.
Pinedale GP: the general partner of Pinedale LP and a wholly-owned subsidiary of CorEnergy.
Portland Lease Agreement: the January 2014 agreement pursuant to which the Portland Terminal Facility is triple-net leased to Zenith Terminals.
Portland Terminal Facility: a petroleum products terminal located in Portland, Oregon.
Prudential: the Prudential Insurance Company of America.
REIT: real estate investment trust.
SEC: Securities and Exchange Commission.
Series A Preferred Stock: the Company's 7.375% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share, of which there currently are outstanding 52,000 shares represented by 5,200,000 depositary shares, each representing 1/100th of a whole share of Series A Preferred.
SWD: SWD Enterprises, LLC, a wholly-owned subsidiary of Four Wood Energy Partners, LLC.

5

GLOSSARY OF DEFINED TERMS (Continued from previous page)

TRS: taxable REIT subsidiary.
UPL: Ultra Petroleum Corp.
Ultra Wyoming: Ultra Wyoming LGS LLC, an indirect wholly-owned subsidiary of Ultra Petroleum.
United Property Systems: United Property Systems, LLC, an indirect wholly-owned subsidiary of CorEnergy, acquired with the MoGas transaction in November 2014.
VIE: variable interest entity.
Zenith: Zenith Energy U.S., LP.
Zenith Terminals: Zenith Energy Terminal Holdings, LLC (f/k/a Arc Terminal Holdings, LLC), a wholly-owned operating subsidiary of Arc Logistics LP (and, subsequent to December 21, 2017, an indirect wholly-owned subsidiary of Zenith).


6

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this Quarterly Report on Form 10-Q may be deemed "forward-looking statements" within the meaning of the federal securities laws. In many cases, these forward-looking statements may be identified by the use of words such as "will," "may," "should," "could," "believes," "expects," "anticipates," "estimates," "intends," "projects," "goals," "objectives," "targets," "predicts," "plans," "seeks," or similar expressions.
Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance or results and we can give no assurance that these expectations will be attained. Our actual results may differ materially from those indicated by these forward-looking statements due to a variety of known and unknown risks and uncertainties. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
the ability of our tenants and borrowers to make payments under their respective leases and mortgage loans, our reliance on certain major tenants under single tenant leases and our ability to re-lease properties;
changes in economic and business conditions in the energy infrastructure sector where our investments are concentrated, including the financial condition of our tenants or borrowers and general economic conditions in the particular sectors of the energy industry served by each of our infrastructure assets;
the inherent risks associated with owning real estate, including real estate market conditions, governing laws and regulations, including potential liabilities related to environmental matters, and the relative illiquidity of real estate investments;
risks associated with the bankruptcy or default of any of our tenants or borrowers, including the exercise of the rights and remedies of bankrupt entities;
the impact of laws and governmental regulations applicable to certain of our infrastructure assets, including additional costs imposed on our business or other adverse impacts as a result of any unfavorable changes in such laws or regulations;
the potential impact of greenhouse gas regulation and climate change on our or our tenants' business, financial condition and results of operations;
the loss of any member of our management team;
our continued ability to access the debt and equity markets;
our ability to successfully implement our selective acquisition strategy;
our ability to obtain suitable tenants for our properties;
our ability to refinance amounts outstanding under our credit facilities and our convertible notes at maturity on terms favorable to us;
changes in interest rates under our current credit facilities and under any additional variable rate debt arrangements that we may enter into in the future;
our ability to comply with certain debt covenants;
dependence by us and our tenants on key customers for significant revenues, and the risk of defaults by any such tenants or customers;
the risk of adverse impacts to our results of operations if the tenant exercises its early lease termination or lease buy-out options at our Portland Terminal Facility;
our or our tenants' ability to secure adequate insurance and risk of potential uninsured losses, including from natural disasters;
the continued availability of third-party pipelines, railroads or other facilities interconnected with certain of our infrastructure assets;
risks associated with owning, operating or financing properties for which the tenants', mortgagors' or our operations may be impacted by extreme weather patterns and other natural phenomena;
our ability to sell properties at an attractive price;
market conditions and related price volatility affecting our debt and equity securities;
competitive and regulatory pressures on the revenues of our interstate natural gas transmission business;
changes in federal or state tax rules or regulations that could have adverse tax consequences;
declines in the market value of our investment securities;

7

 

our ability to maintain internal controls and processes to ensure all transactions are accounted for properly, all relevant disclosures and filings are timely made in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted or detected;
changes in federal income tax regulations (and applicable interpretations thereof), or in the composition or performance of our assets, that could impact our ability to continue to qualify as a real estate investment trust for federal income tax purposes; and
risks related to potential terrorist attacks, acts of cyber-terrorism, or similar disruptions that could disrupt access to our information technology systems or result in other significant damage to our business and properties, some of which may not be covered by insurance and all of which could adversely impact distributions to our stockholders.
Forward-looking statements speak only as of the date on which they are made. While we may update these statements from time to time, we are not required to do so other than pursuant to applicable laws. For a further discussion of these and other factors that could impact our future results and performance, see Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 28, 2018, and Part II, Item 1A, "Risk Factors", in this Report.

8

 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
corenergylogo21.jpg
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED BALANCE SHEETS
 
June 30, 2018
 
December 31, 2017
Assets
(Unaudited)
 
 
Leased property, net of accumulated depreciation of $82,749,089 and $72,155,753
$
455,363,130

 
$
465,956,467

Property and equipment, net of accumulated depreciation of $14,312,665 and $12,643,636
111,514,726

 
113,158,872

Financing notes and related accrued interest receivable, net of reserve of $4,600,000 and $4,100,000
1,000,000

 
1,500,000

Other equity securities, at fair value
2,091,181

 
2,958,315

Cash and cash equivalents
14,175,860

 
15,787,069

Deferred rent receivable
25,769,989

 
22,060,787

Accounts and other receivables
3,373,602

 
3,786,036

Deferred costs, net of accumulated amortization of $956,999 and $623,764
3,171,680

 
3,504,916

Prepaid expenses and other assets
1,068,526

 
742,154

Deferred tax asset, net
4,115,834

 
2,244,629

Goodwill
1,718,868

 
1,718,868

Total Assets
$
623,363,396

 
$
633,418,113

Liabilities and Equity
 
 
 
Secured credit facilities, net of debt issuance costs of $237,302 and $254,646
$
38,998,698

 
$
40,745,354

Unsecured convertible senior notes, net of discount and debt issuance costs of $1,574,323 and $1,967,917
112,425,677

 
112,032,083

Asset retirement obligation
9,426,350

 
9,170,493

Accounts payable and other accrued liabilities
2,512,598

 
2,333,782

Management fees payable
1,814,105

 
1,748,426

Income tax liability
36,971

 
2,204,626

Unearned revenue
5,321,069

 
3,397,717

Total Liabilities
$
170,535,468

 
$
171,632,481

Equity
 
 
 
Series A Cumulative Redeemable Preferred Stock 7.375%, $130,000,000 liquidation preference ($2,500 per share, $0.001 par value), 10,000,000 authorized; 52,000 issued and outstanding at June 30, 2018 and December 31, 2017
$
130,000,000

 
$
130,000,000

Capital stock, non-convertible, $0.001 par value; 11,933,774 and 11,915,830 shares issued and outstanding at June 30, 2018 and December 31, 2017 (100,000,000 shares authorized)
11,934

 
11,916

Additional paid-in capital
322,815,994

 
331,773,716

Total Equity
452,827,928

 
461,785,632

Total Liabilities and Equity
$
623,363,396

 
$
633,418,113

See accompanying Notes to Consolidated Financial Statements.

9

 

corenergylogo21.jpg
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Revenue
 
 
 
 
 
 
 
Lease revenue
$
18,275,859


$
17,050,092

 
$
35,867,718

 
$
34,116,618

Transportation and distribution revenue
3,874,157


4,775,780

 
7,827,136

 
9,786,370

Total Revenue
22,150,016


21,825,872

 
43,694,854

 
43,902,988

Expenses
 
 
 
 
 
 
 
Transportation and distribution expenses
1,534,524


1,362,980

 
3,107,420

 
2,698,550

General and administrative
3,107,776

 
2,558,339

 
5,834,833

 
5,619,579

Depreciation, amortization and ARO accretion expense
6,290,082


6,005,995

 
12,579,412

 
12,011,903

Provision for loan losses



 
500,000



Total Expenses
10,932,382


9,927,314

 
22,021,665


20,330,032

Operating Income
$
11,217,634


$
11,898,558

 
$
21,673,189

 
$
23,572,956

Other Income (Expense)
 
 
 
 
 
 
 
Net distributions and dividend income
$
55,714

 
$
221,440

 
$
59,665

 
$
264,902

Net realized and unrealized gain (loss) on other equity securities
(881,100
)
 
614,634

 
(867,134
)
 
70,426

Interest expense
(3,196,248
)
 
(3,202,837
)
 
(6,406,838
)
 
(6,657,234
)
Total Other Expense
(4,021,634
)
 
(2,366,763
)
 
(7,214,307
)
 
(6,321,906
)
Income before income taxes
7,196,000

 
9,531,795

 
14,458,882

 
17,251,050

Taxes
 
 
 
 
 
 
 
Current tax expense (benefit)
(10,785
)
 
57,651

 
(46,334
)
 
23,891

Deferred tax expense (benefit)
(604,064
)
 
38,084

 
(1,013,341
)
 
(260,762
)
Income tax expense (benefit), net
(614,849
)
 
95,735

 
(1,059,675
)
 
(236,871
)
Net Income
7,810,849

 
9,436,060

 
15,518,557

 
17,487,921

Less: Net Income attributable to non-controlling interest

 
435,888

 

 
818,271

Net Income attributable to CorEnergy Stockholders
$
7,810,849

 
$
9,000,172

 
$
15,518,557

 
$
16,669,650

Preferred dividend requirements
2,396,875

 
2,123,129

 
4,793,750

 
3,160,238

Net Income attributable to Common Stockholders
$
5,413,974

 
$
6,877,043

 
$
10,724,807

 
$
13,509,412

 
 
 
 
 
 
 
 
Net Income
$
7,810,849

 
$
9,436,060

 
$
15,518,557

 
$
17,487,921

Other comprehensive income:
 
 
 
 
 
 
 
Changes in fair value of qualifying hedges / AOCI attributable to CorEnergy stockholders

 
3,006

 

 
5,978

Changes in fair value of qualifying hedges / AOCI attributable to non-controlling interest

 
702

 

 
1,396

Net Change in Other Comprehensive Income
$

 
$
3,708

 
$

 
$
7,374

Total Comprehensive Income
7,810,849

 
9,439,768

 
15,518,557

 
17,495,295

Less: Comprehensive income attributable to non-controlling interest

 
436,590

 

 
819,667

Comprehensive Income attributable to CorEnergy Stockholders
$
7,810,849

 
$
9,003,178

 
$
15,518,557

 
$
16,675,628

Earnings Per Common Share:
 
 
 
 
 
 
 
Basic
$
0.45

 
$
0.58

 
$
0.90

 
$
1.14

Diluted
$
0.45

 
$
0.58

 
$
0.90

 
$
1.14

Weighted Average Shares of Common Stock Outstanding:
 
 
 
 
 
 
 
Basic
11,928,297

 
11,896,616

 
11,923,627

 
11,892,670

Diluted
11,928,297

 
11,896,616

 
11,923,627

 
11,892,670

Dividends declared per share
$
0.750

 
$
0.750

 
$
1.500

 
$
1.500

See accompanying Notes to Consolidated Financial Statements.

10

 

corenergylogo21.jpg
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENT OF EQUITY

Capital Stock

Preferred Stock

Additional
Paid-in
Capital

Retained
Earnings

Total

Shares

Amount

Amount



Balance at December 31, 2017
11,915,830

 
$
11,916

 
$
130,000,000

 
$
331,773,716

 
$

 
$
461,785,632

Cumulative transition adjustment upon the adoption of ASC 606, net of tax

 

 

 
(2,449,245
)
 

 
(2,449,245
)
Net income

 

 

 

 
15,518,557

 
15,518,557

Series A preferred stock dividends

 

 

 

 
(4,793,750
)
 
(4,793,750
)
Common stock dividends

 

 

 
(7,156,178
)
 
(10,724,807
)
 
(17,880,985
)
Common stock issued under director's compensation plan
1,006

 
1

 

 
37,499

 

 
37,500

Reinvestment of dividends paid to common stockholders
16,938

 
17

 

 
610,202

 

 
610,219

Balance at June 30, 2018 (Unaudited)
11,933,774

 
$
11,934

 
$
130,000,000

 
$
322,815,994

 
$

 
$
452,827,928

See accompanying Notes to Consolidated Financial Statements.


11

 

corenergylogo21.jpg
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Six Months Ended

June 30, 2018

June 30, 2017
Operating Activities



Net Income
$
15,518,557


$
17,487,921

Adjustments to reconcile net income to net cash provided by operating activities:



Deferred income tax, net
(1,013,341
)

(260,762
)
Depreciation, amortization and ARO accretion
13,286,595


12,949,644

Provision for loan losses
500,000



Non-cash settlement of accounts payable

 
(171,609
)
Gain on sale of equipment
(3,724
)


Net distributions and dividend income, including recharacterization of income


148,649

Net realized and unrealized (gain) loss on other equity securities
867,134


(70,426
)
Unrealized gain on derivative contract


(16,453
)
Common stock issued under directors' compensation plan
37,500


30,000

Changes in assets and liabilities:



Increase in deferred rent receivable
(3,709,202
)
 
(3,588,136
)
Decrease in accounts and other receivables
412,434


1,162,548

(Increase) decrease in prepaid expenses and other assets
(326,372
)

134,023

Increase in management fee payable
65,679


10,301

Increase (decrease) in accounts payable and other accrued liabilities
433,853


(53,621
)
Decrease in current income tax liability
(2,167,655
)


Increase (decrease) in unearned revenue
(1,383,757
)

29,695

Net cash provided by operating activities
$
22,517,701


$
27,791,774

Investing Activities



Purchases of property and equipment
(47,883
)

(13,745
)
Proceeds from sale of property and equipment
11,499



Return of capital on distributions received


61,828

Net cash (used in) provided by investing activities
$
(36,384
)

$
48,083

Financing Activities



Debt financing costs
(264,010
)

(2,512
)
Net offering proceeds on Series A preferred stock


71,170,611

Dividends paid on Series A preferred stock
(4,793,750
)
 
(3,433,984
)
Dividends paid on common stock
(17,270,766
)

(17,318,618
)
Distributions to non-controlling interest

 
(480,488
)
Payments on revolving line of credit


(44,000,000
)
Principal payments on secured credit facilities
(1,764,000
)

(4,389,261
)
Net cash (used in) provided by financing activities
$
(24,092,526
)

$
1,545,748

Net Change in Cash and Cash Equivalents
$
(1,611,209
)

$
29,385,605

Cash and Cash Equivalents at beginning of period
15,787,069


7,895,084

Cash and Cash Equivalents at end of period
$
14,175,860


$
37,280,689

 
 
 
 
Supplemental Disclosure of Cash Flow Information



Interest paid
$
5,546,660

 
$
5,777,328

Income taxes paid (net of refunds)
2,121,321

 
132,202

 
 
 
 
Non-Cash Financing Activities
 
 
 
Change in accounts payable and accrued expenses related to debt financing costs
$
(255,037
)
 
$

Reinvestment of distributions by common stockholders in additional common shares
610,219

 
516,565

See accompanying Notes to Consolidated Financial Statements.
 
 
 

12

 

corenergylogo21.jpg
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2018
1. INTRODUCTION AND BASIS OF PRESENTATION
Introduction
CorEnergy Infrastructure Trust, Inc. ("CorEnergy" or "the Company"), was organized as a Maryland corporation and commenced operations on December 8, 2005. The Company's common shares are listed on the New York Stock Exchange ("NYSE") under the symbol "CORR" and its depositary shares representing Series A Preferred Stock are listed on the NYSE under the symbol "CORR PrA".
The Company is primarily focused on acquiring and financing real estate assets within the U.S. energy infrastructure sector and concurrently entering into long-term triple-net participating leases with energy companies. The Company also may provide other types of capital, including loans secured by energy infrastructure assets. Targeted assets include pipelines, storage tanks, transmission lines, and gathering systems, among others. These sale-leaseback or real property mortgage transactions provide the energy company with a source of capital that is an alternative to other sources such as corporate borrowing, bond offerings, or equity offerings. Many of the Company's leases contain participation features in the financial performance or value of the underlying infrastructure real property asset. The triple-net lease structure requires that the tenant pay all operating expenses of the business conducted by the tenant, including real estate taxes, insurance, utilities, and expenses of maintaining the asset in good working order. CorEnergy considers its investments in these energy infrastructure assets to be a single business segment and reports them accordingly in its financial statements.
Basis of Presentation
The accompanying consolidated financial statements include CorEnergy accounts and the accounts of its wholly-owned subsidiaries and have been prepared in accordance with GAAP set forth in the ASC, as published by the FASB, and with the SEC instructions to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. There were no adjustments that, in the opinion of management, were not of a normal and recurring nature. All intercompany transactions and balances have been eliminated in consolidation, and the Company's net earnings have been reduced by the portion of net earnings attributable to non-controlling interests, when applicable.
The FASB issued ASU 2015-02 "Consolidations (Topic 810) - Amendments to the Consolidation Analysis" ("ASU 2015-02"), which amended previous consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities are considered a variable interest entity ("VIE") unless the limited partners hold substantive kick-out rights or participating rights. Management determined that Pinedale LP and Grand Isle Corridor LP are VIEs under the amended guidance because the limited partners of both partnerships lack both substantive kick-out rights and participating rights. However, based on the general partners' roles and rights as afforded by the partnership agreements and its exposure to losses and benefits of each of the partnerships through its significant limited partner interests, management determined that CorEnergy is the primary beneficiary of both Pinedale LP and Grand Isle Corridor LP. Based upon this evaluation and the Company's 100 percent ownership of the limited partnership interest in both Pinedale LP and Grand Isle Corridor LP, the consolidated financial statements presented include full consolidation with respect to both of the partnerships.
Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any other interim or annual period. These consolidated financial statements and Management's Discussion and Analysis of the Financial Condition and Results of Operations should be read in conjunction with CorEnergy's Annual Report on Form 10-K, for the year ended December 31, 2017, filed with the SEC on February 28, 2018 (the "2017 CorEnergy 10-K").
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers" ("ASU 2014-09" or "ASC 606"), which became effective for all public entities on January 1, 2018, if not adopted early. ASC 606 supersedes previously existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g. leases). The model requires an entity to recognize as revenue the amount of consideration to which it expects to be entitled for the transfer of promised

13

 

goods or services to customers. A substantial portion of the Company's revenue consists of rental income from leasing arrangements, which is specifically excluded from ASC 606. However, the Company's transportation and distribution revenue is within the scope of the new guidance. The Company adopted ASC 606 effective on January 1, 2018 using the modified retrospective method. The Company elected to apply the guidance only to open contracts as of the effective date. The Company recognized the cumulative effect of applying the new standard as an adjustment to the opening balance of stockholders' equity. The comparative information has not been restated and continues to be reported under accounting standards in effect for those periods. Refer to Note 4 ("Transportation And Distribution Revenue") for further discussion of our transportation and distribution revenue recognition policy, transition impact and related disclosures under ASC 606.
In February 2016, the FASB issued ASU 2016-02 "Leases" ("ASU 2016-02"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. At adoption, the standard will be applied using a modified retrospective approach. Management is in the process of evaluating the impact of the standard on its consolidated financial statements and related disclosures. As part of its assessment work, the Company has formed an implementation team, completed training on the new lease standard and is undertaking a review of its contracts.
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" ("ASU 2016-13"), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. The new model, referred to as the current expected credit losses ("CECL model"), will apply to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact that adopting the new standard will have on the Company's consolidated financial statements but believes that, unless the Company acquires any additional financing receivables, the impact would not be material.
3. LEASED PROPERTIES AND LEASES
As of June 30, 2018, the Company had three significant leased properties located in Oregon, Wyoming, Louisiana, and the Gulf of Mexico, which are leased on a triple-net basis to major tenants, described in the table below. These major tenants are responsible for the payment of all taxes, maintenance, repairs, insurance, and other operating expenses relating to the leased properties. The long-term, triple-net leases generally have an initial term of 11 to 15 years with options for renewals. Lease payments are scheduled to increase at varying intervals during the initial terms of the leases. The following table summarizes the significant leased properties, major tenants and lease terms:
Summary of Leased Properties, Major Tenants and Lease Terms
Property
Grand Isle Gathering System
Pinedale LGS
Portland Terminal Facility
Location
Gulf of Mexico/Louisiana
Pinedale, WY
Portland, OR
Tenant
Energy XXI GIGS Services, LLC
Ultra Wyoming LGS, LLC
Zenith Energy Terminals Holdings LLC
Asset Description
Approximately 153 miles of offshore pipeline with total capacity of 120 thousand Bbls/d, including a 16-acre onshore terminal and saltwater disposal system.
Approximately 150 miles of pipelines and four central storage facilities.
A 39-acre rail and marine facility property adjacent to the Willamette River with 84 tanks and total storage capacity of approximately 1.5 million barrels.
Date Acquired
June 2015
December 2012
January 2014
Initial Lease Term
11 years
15 years
15 years(1)
Renewal Option
Equal to the lesser of 9-years or 75 percent of the remaining useful life
5-year terms
5-year terms
Current Monthly Rent Payments
7/1/2017 - 6/30/2018: $2,854,667
7/1/2018 - 6/30/2019: $2,860,917
$1,776,772
$513,355
Initial Estimated
Useful Life
27 years
26 years
30 years
(1) The lessee of the Portland Terminal Facility has a purchase option on the facility, which it can exercise with 90-days notice, as well as lease termination options on the fifth and tenth anniversaries of the lease. If exercised, the purchase option and termination options are subject to additional payment provisions and termination fees prescribed under the lease.

14

 

The future contracted minimum rental receipts for all leases as of June 30, 2018, are as follows:
Future Minimum Lease Receipts (1)
Years Ending December 31,
Amount
2018
$
30,919,514

2019
64,103,462

2020
71,264,921

2021
77,445,396

2022
76,553,434

Thereafter
302,242,184

Total
$
622,528,911

(1) Future minimum lease receipts include base rents for the Portland Terminal Facility through its initial 15-year term.
The table below displays the Company's individually significant leases as a percentage of total leased properties and total lease revenues for the periods presented:
 
As a Percentage of (1)
 
Leased Properties
 
Lease Revenues
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Pinedale LGS(2)
39.9
%
 
39.9
%
 
35.3
%
 
30.6
%
 
34.1
%
 
30.6
%
Grand Isle Gathering System
49.7
%
 
49.7
%
 
55.6
%
 
59.6
%
 
56.7
%
 
59.6
%
Portland Terminal Facility
10.2
%
 
10.1
%
 
9.0
%
 
9.6
%
 
9.1
%
 
9.7
%
(1) Insignificant leases are not presented; thus percentages may not sum to 100%.
 
 
 
 
(2) Pinedale LGS lease revenues include variable rent of $1.1 million and $1.5 million for the three and six months ended June 30, 2018, respectively.
The following table reflects the depreciation and amortization included in the accompanying Consolidated Statements of Income associated with the Company's leases and leased properties:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Depreciation Expense
 
 
 
 
 
 
 
GIGS
$
2,751,272

 
$
2,438,649

 
$
5,502,544

 
$
4,877,298

Pinedale
2,217,360

 
2,217,360

 
4,434,720

 
4,434,720

Portland Terminal Facility
318,915

 
318,915

 
637,830

 
637,830

United Property Systems
9,120

 
9,060

 
18,242

 
18,119

Total Depreciation Expense
$
5,296,667

 
$
4,983,984

 
$
10,593,336

 
$
9,967,967

Amortization Expense - Deferred Lease Costs
 
 
 
 
 
 
 
GIGS
$
7,641

 
$
7,641

 
$
15,282

 
$
15,282

Pinedale
15,342

 
15,342

 
30,684

 
30,684

Total Amortization Expense - Deferred Lease Costs
$
22,983

 
$
22,983

 
$
45,966

 
$
45,966

ARO Accretion Expense
 
 
 
 
 
 
 
GIGS
$
127,928

 
$
160,629

 
$
255,856

 
$
321,258

Total ARO Accretion Expense
$
127,928

 
$
160,629

 
$
255,856

 
$
321,258

The following table reflects the deferred costs that are included in the accompanying Consolidated Balance Sheets associated with the Company's leased properties:
 
June 30, 2018
 
December 31, 2017
Net Deferred Lease Costs
 
 
 
GIGS
$
244,601

 
$
259,883

Pinedale
581,033

 
611,717

Total Deferred Lease Costs, net
$
825,634

 
$
871,600


15

 

Tenant Information
Substantially all of the lease tenants' financial results are driven by exploiting naturally occurring oil and natural gas hydrocarbon deposits beneath the Earth's surface. As a result, the tenants' financial results are highly dependent on the performance of the oil and natural gas industry, which is highly competitive and subject to volatility. During the terms of the leases, management monitors the credit quality of its tenants by reviewing their published credit ratings, if available, reviewing publicly available financial statements, or reviewing financial or other operating statements, monitoring news reports regarding the tenants and their respective businesses, and monitoring the timeliness of lease payments and the performance of other financial covenants under their leases.
Ultra Petroleum
UPL is currently subject to the reporting requirements under the Exchange Act and is required to file with the SEC annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. Its SEC filings can be found at www.sec.gov. Its stock is trading on the NASDAQ under the symbol UPL. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of UPL but has no reason to doubt the accuracy or completeness of such information. In addition, UPL has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information. None of the information in the public reports of UPL that are filed with the SEC is incorporated by reference into, or in any way form, a part of this filing.
Energy Gulf Coast
EGC is currently subject to the reporting requirements of the Exchange Act and is required to file with the SEC annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. Its SEC filings can be found at www.sec.gov. Effective March 21, 2018, EGC changed its NASDAQ ticker symbol from EXXI to EGC. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of EGC but has no reason to doubt the accuracy or completeness of such information. In addition, EGC has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information. None of the information in the public reports of EGC that are filed with the SEC is incorporated by reference into, or in any way form, a part of this filing. Upon closure of the previously announced acquisition of EGC by an affiliate of the privately-held Cox Oil, expected in the third quarter of 2018, EGC will no longer be subject to the filing and reporting requirements of the SEC.
Zenith
Currently our tenant, Zenith Terminals, has a number of different actions available to it under the Portland Lease Agreement, which include (i) continuing with the current terminal lease, (ii) exercising its buy-out option on the terminal or (iii) terminating the lease at its fifth or tenth anniversaries, subject to the termination provisions in the lease. The Company has entered into amendments with Zenith which have extended the notice period for the fifth anniversary termination option through September 1, 2018. The Company has not received notice with respect to either a buy-out or termination option election and, to date, the terminal lease continues to operate in the same manner as prior to the merger.
4. TRANSPORTATION AND DISTRIBUTION REVENUE
The Company's contracts related to transportation and distribution revenue are primarily comprised of a mix of natural gas supply, transportation and distribution performance obligations, as well as limited performance obligations related to system maintenance and expansion. Under the Company's natural gas supply, transportation and distribution performance obligations, the customer simultaneously receives and consumes the benefit of the services as natural gas is delivered. Therefore, the transaction price is allocated proportionally over the series of identical performance obligations with each contract. The transaction price is calculated based on (i) index price, plus a contractual markup in the case of natural gas supply agreements (considered variable due to fluctuations in the index), (ii) FERC regulated rates or negotiated rates in the case of transportation agreements and (iii) contracted amounts (with annual CPI escalators) in the case of the Company's distribution agreement. Based on the nature of the agreements, revenue for all but one of the Company's natural gas supply, transportation and distribution performance obligations is recognized on a right to invoice basis as the performance obligations are met, which represents what the Company expects to receive in consideration and is representative of value delivered to the customer. The Company has a contract with Spire that has fixed pricing which varies over the contract term. For this specific contract, the transaction price has been allocated ratably over the contractual performance obligation, as discussed further below. All invoicing is done in the month following service, with payment typically due a month from invoice date.

16

 

Based on a downward revision of the rate during the Company's long-term natural gas transportation contract with Spire, ASC 606 requires the Company to record the contractual transaction price, and therefore aggregate revenue, from the contract ratably over the term of the contract. Accordingly, on January 1, 2018, the Company recorded a cumulative adjustment to recognize a contract liability of approximately $3.3 million, and a corresponding reduction to beginning equity (net of deferred tax impact). The adjustment reflects the difference in amounts previously recognized as invoiced, versus cumulative revenues earned under the contract on a straight-line basis in accordance with ASC 606, as of the date of adoption. The contract liability will continue to accumulate additional unrecognized performance obligations at a rate of approximately $992 thousand per quarter until the contractual rate decrease takes effect in November 2018. Following the rate decline, recognized performance obligations will exceed amounts invoiced and the contract liability is expected to decline at a rate of approximately $138 thousand per quarter through the end of the contract in October 2030. As of June 30, 2018, the revenue allocated to the remaining performance obligation under this contract is approximately $66.2 million.
The Company's contracts also contain performance obligations related to system maintenance and expansion, which are completed on an as-needed basis. The work performed is specific and tailored to the customer's needs and there are no alternative uses for the services provided. Therefore, as the work is being completed, control is transferring to the customer. These services are billed at the Company's cost, plus an agreed upon margin, and the Company has an enforceable right to payment for services provided. The Company invoices for this service on a monthly basis according to an agreed upon billing schedule. Revenue is recognized on an input method, based on the actual cost of a service as a measure of performance obligations satisfaction, which the Company determined to be the method which faithfully depicts the transfer of services. Differences between the amounts invoiced and revenue recognized under the input method are reflected as an asset or liability on the Consolidated Balance Sheet. Any differences are generally expected to be recognized within a year.
The table below summarizes the Company's contract asset and contract liability balances related to its transportation and distribution revenue contracts as of June 30, 2018:
 
Contract Asset(1)
 
Contract Liability(2)
Beginning Balance January 1, 2018
$
328,033

 
$

Cumulative Transition Adjustment Upon Adoption of ASC 606

 
3,307,109

Unrecognized Performance Obligations
(418,314
)
 
1,984,266

Recognized Performance Obligations
111,656

 

Ending Balance June 30, 2018
$
21,375

 
$
5,291,375

(1) The contract asset balance is included in prepaid expenses and other assets in the Consolidated Balance Sheets.
(2) The contract liability balance is included in unearned revenue in the Consolidated Balance Sheets.
The following is a breakout of the Company's transportation and distribution revenue for the three and six months ended June 30, 2018 and 2017:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Natural gas transportation contracts
66.1
%
 
74.1
%
 
66.3
%
 
72.9
%
Natural gas distribution contracts
27.2
%
 
21.4
%
 
26.8
%
 
20.7
%
In accordance with ASC 606 transition disclosure requirements, the cumulative effect of changes made to the Consolidated Balance Sheet as of January 1, 2018 for the adoption of ASC 606 were as follows:
Balance Sheet
 
Balance at December 31, 2017
 
Adjustments Due to ASC 606
 
Balance at
January 1, 2018
Assets
 
 
 
 
 
 
Deferred Tax Asset
 
$
2,244,629

 
$
857,864

 
$
3,102,493

Liabilities
 
 
 
 
 
 
Unearned revenue
 
3,397,717

 
3,307,109

 
6,704,826

Equity
 
 
 
 
 
 
Additional paid in capital
 
331,773,716

 
(2,449,245
)
 
329,324,471


17

 

The tables below disclose the impact of adoption on the Consolidated Balance Sheet and Consolidated Statement of Income as of and for the period ended June 30, 2018:
 
 
As of June 30, 2018
Balance Sheet
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Assets
 
 
 
 
 
 
Deferred Tax Asset
 
$
4,115,834

 
$
2,743,252

 
$
1,372,582

Liabilities
 
 
 
 
 
 
Unearned revenue
 
5,321,069

 
29,694

 
5,291,375

Equity
 
 
 
 
 
 
Additional paid in capital
 
322,815,994

 
326,734,786

 
(3,918,792
)
 
 
For the Three Months Ended June 30, 2018
 
For the Six Months Ended June 30, 2018
Statement of Income
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Transportation and distribution revenue
 
$
3,874,157

 
$
4,866,290

 
$
(992,133
)
 
$
7,827,136

 
$
9,811,402

 
$
(1,984,266
)
Taxes
 
 
 
 
 
 
 
 
 
 
 
 
Deferred tax benefit
 
(604,064
)
 
(346,705
)
 
(257,359
)
 
(1,013,341
)
 
(498,622
)
 
(514,719
)
5. FINANCING NOTES RECEIVABLE
Financing notes receivable are presented at face value plus accrued interest receivable and deferred loan origination costs, and net of related direct loan origination income. Each quarter the Company reviews its financing notes receivable to determine if the balances are realizable based on factors affecting the collectability of those balances. Factors may include credit quality, timeliness of required periodic payments, past due status, and management discussions with obligors. The Company evaluates the collectability of both interest and principal of each of its loans to determine if an allowance is needed. An allowance will be recorded when, based on current information and events, the Company determines it is probable that it will be unable to collect all amounts due according to the existing contractual terms. If the Company does determine an allowance is necessary, the amount deemed uncollectable is expensed in the period of determination. An insignificant delay or shortfall in the amount of payments does not necessarily result in the recording of an allowance. Generally, when interest and/or principal payments on a loan become past due, or if management otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status and will generally cease recognizing financing revenue on that loan until all principal and interest have been brought current. Interest income recognition is resumed if and when the previously reserved for financing notes become contractually current and performance has been demonstrated. Payments received subsequent to the recording of an allowance will be recorded as a reduction to principal.
Four Wood Financing Note Receivable
As a result of decreased economic activity by SWD, the Company recorded a provision for loan loss with respect to the SWD Loans and the loans were placed on non-accrual status during the first quarter of 2016. During the first quarter of 2018, the Company recorded an additional provision for loan loss on the SWD Loans of $500 thousand. The balance of the loans has been valued based on the enterprise value of SWD, the collateral supporting the loans, at $1.0 million and $1.5 million as of June 30, 2018 and December 31, 2017, respectively.

18

 

6. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes. Components of the Company's deferred tax assets and liabilities as of June 30, 2018 and December 31, 2017, are as follows:
Deferred Tax Assets and Liabilities
 
June 30, 2018
 
December 31, 2017
Deferred Tax Assets:
 
 
 
Deferred contract revenue
$
1,372,582

 
$

Net operating loss carryforwards
1,602,683

 
957,719

Loan loss provision
263,508

 
247,814

Basis reduction of investment in partnerships
233,158

 
261,549

Other loss carryforwards
2,965,320

 
2,965,321

Sub-total
$
6,437,251

 
$
4,432,403

Deferred Tax Liabilities:
 
 
 
Net unrealized gain on investment securities
$
(134,317
)
 
$
(342,669
)
Cost recovery of leased and fixed assets
(2,177,589
)
 
(1,845,105
)
Basis reduction in tax goodwill
(9,511
)
 

Sub-total
$
(2,321,417
)
 
$
(2,187,774
)
Total net deferred tax asset
$
4,115,834

 
$
2,244,629

As of June 30, 2018, the total deferred tax assets and liabilities presented above relate to the Company's TRSs. The Company recognizes the tax benefits of uncertain tax positions only when the position is "more likely than not" to be sustained upon examination by the tax authorities based on the technical merits of the tax position. The Company's policy is to record interest and penalties on uncertain tax positions as part of tax expense. Tax years subsequent to the year ended December 31, 2013 remain open to examination by federal and state tax authorities.
The Tax Cuts and Jobs Act (the "2017 Tax Act") was enacted on December 22, 2017. The 2017 Tax Act reduces the US federal corporate tax rate from 35 percent to 21 percent. The 2017 Tax Act also repealed the alternative minimum tax for corporations. The Company has completed its provisional accounting for the tax effects of enactment of the 2017 Tax Act. Due to the timing and complexities of the new legislation, the SEC has issued Staff Accounting Bulletin 118, which allows for the recognition of provisional amounts during a measurement period similar to the measurement period used when accounting for business combinations. The Company remeasured deferred tax assets and liabilities based on the updated rates at which they are expected to reverse in the future, in the table above, which resulted in a $1.3 million transition adjustment that reduced net deferred tax assets at December 31, 2017. The Company will continue to assess the impact of the new tax legislation, as well as any future regulations and updates, and will record any additional impacts as identified during the measurement period, if necessary.
Total income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate of 21 percent for the three and six months ended June 30, 2018 and 35 percent for the three and six months ended June 30, 2017 to income from operations and other income and expense for the periods presented, as follows:
Income Tax Expense (Benefit)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Application of statutory income tax rate
$
1,511,160

 
$
3,158,922

 
$
3,036,365

 
$
5,726,827

State income taxes, net of federal tax expense (benefit)
(121,069
)
 
3,786

 
(265,019
)
 
(31,651
)
Federal Tax Attributable to Income of Real Estate Investment Trust
(2,004,940
)
 
(3,066,973
)
 
(3,819,436
)
 
(5,932,047
)
Other

 

 
(11,585
)
 

Total income tax expense (benefit)
$
(614,849
)
 
$
95,735

 
$
(1,059,675
)
 
$
(236,871
)

19

 

The components of income tax expense (benefit) include the following for the periods presented:
Components of Income Tax Expense (Benefit)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Current tax expense (benefit)
 
 
 
 
 
 
 
Federal
$
(8,537
)
 
$
52,031

 
$
(36,676
)
 
$
21,562

State (net of federal tax expense (benefit))
(2,248
)
 
5,620

 
(9,658
)
 
2,329

Total current tax expense (benefit)
$
(10,785
)
 
$
57,651

 
$
(46,334
)
 
$
23,891

Deferred tax expense (benefit)
 
 
 
 
 
 
 
Federal
$
(485,243
)
 
$
39,918

 
$
(757,981
)
 
$
(226,782
)
State (net of federal tax expense (benefit))
(118,821
)
 
(1,834
)
 
(255,360
)
 
(33,980
)
Total deferred tax expense (benefit)
$
(604,064
)
 
$
38,084

 
$
(1,013,341
)
 
$
(260,762
)
Total income tax expense (benefit), net
$
(614,849
)
 
$
95,735

 
$
(1,059,675
)
 
$
(236,871
)
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Property and Equipment
 
June 30, 2018
 
December 31, 2017
Land
$
580,000

 
$
580,000

Natural gas pipeline
124,303,315

 
124,303,315

Vehicles and trailers
675,517

 
650,634

Office equipment and computers
268,559

 
268,559

Gross property and equipment
$
125,827,391

 
$
125,802,508

Less: accumulated depreciation
(14,312,665
)
 
(12,643,636
)
Net property and equipment
$
111,514,726

 
$
113,158,872


Depreciation expense was $843 thousand and $1.7 million for the three and six months ended June 30, 2018, respectively, and $838 thousand and $1.7 million for the three and six months ended June 30, 2017, respectively.
8. MANAGEMENT AGREEMENT
The Company pays its manager, Corridor, pursuant to a Management Agreement as described in the 2017 CorEnergy 10-K. Fees incurred under the Management Agreement for the three and six months ended June 30, 2018 were $1.9 million and $3.8 million, respectively, compared to $1.8 million and $3.6 million for the three and six months ended June 30, 2017, respectively. Fees incurred under the Management Agreement are reported in the general and administrative line item on the Consolidated Statements of Income.
The Company pays its administrator, Corridor, pursuant to an Administrative Agreement. Fees incurred under the Administrative Agreement for the three and six months ended June 30, 2018 were $70 thousand and $139 thousand, respectively, compared to $67 thousand and $134 thousand for the three and six months ended June 30, 2017, respectively. Fees incurred under the Administrative Agreement are reported in the general and administrative line item on the Consolidated Statements of Income.
9. FAIR VALUE
The following tables set forth the Company's assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
 
 
Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Other equity securities
$
2,091,181

 
$

 
$

 
$
2,091,181

Total Assets
$
2,091,181

 
$

 
$

 
$
2,091,181


20

 

 
December 31, 2017
 
 
 
Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Other equity securities
$
2,958,315

 
$

 
$

 
$
2,958,315

Total Assets
$
2,958,315

 
$

 
$

 
$
2,958,315

At June 30, 2018 and December 31, 2017, the only assets and liabilities measured at fair value on a recurring basis were the Company's equity securities.
The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the six months ended June 30, 2018 and 2017 are as follows:
Level 3 Rollforward
For the Six Months Ended June 30, 2018
 
Fair Value Beginning Balance
 
Acquisitions
 
Disposals
 
Total Realized and Unrealized Gains (Losses) Included in Net Income
 
Return of Capital Adjustments Impacting Cost Basis of Securities
 
Fair Value Ending Balance
 
Changes in Unrealized Gains (Losses), Included In Net Income, Relating to Securities Still Held (1)
Other equity securities
 
$
2,958,315

 
$

 
$

 
$
(867,134
)
 
$

 
$
2,091,181

 
$
(867,134
)
Total
 
$
2,958,315

 
$

 
$

 
$
(867,134
)
 
$

 
$
2,091,181

 
$
(867,134
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other equity securities
 
$
9,287,209

 
$

 
$

 
$
70,426

 
$
(210,477
)
 
$
9,147,158

 
$
70,426

Total
 
$
9,287,209

 
$

 
$

 
$
70,426

 
$
(210,477
)
 
$
9,147,158

 
$
70,426

(1) Located in Net realized and unrealized gain on other equity securities in the Consolidated Statements of Income
The Company utilizes the beginning of reporting period method for determining transfers between levels. There were no transfers between levels 1, 2 or 3 for the six months ended June 30, 2018 and 2017.
Valuation Techniques and Unobservable Inputs
The Company's other equity securities, which represent securities issued by private companies, are classified as Level 3 assets and the Company has elected to report at fair value under the fair value option. Significant judgment is required in selecting the assumptions used to determine the fair values of these investments.
As of both June 30, 2018 and December 31, 2017, the Company's investment in Lightfoot and Arc Terminal Joliet Holdings are its only remaining private company investments. The Company's Lightfoot investment consists of a 6.6 percent and 1.5 percent equity interest in Lightfoot LP and Lightfoot GP, respectively. As of both June 30, 2018 and December 31, 2017, Lightfoot's only material asset consists of its remaining investment in Gulf LNG, a 1.5 billion cubic feet per day ("bcf/d") receiving, storage, and regasification terminal in Pascagoula, Mississippi. Additionally, the Company owns a 0.6 percent interest in Arc Terminal Joliet Holdings, which was acquired in conjunction with the terms of Zenith's acquisition of Arc Logistics discussed below.
On December 21, 2017, Zenith closed its acquisition of Arc Logistics, except for terms pending with respect to the Gulf LNG arbitration with ENI USA. Under the terms of the agreement, Zenith will purchase the remaining 4.16 percent of Lightfoot's Gulf LNG interest ("the Conditional Interest") for an additional $27.3 million upon a successful outcome (as defined) of the Gulf LNG arbitration with Eni USA that is described below.
On March 1, 2016, an affiliate of Gulf LNG received a Notice of Disagreement and Disputed Statements and a Notice of Arbitration from Eni USA, one of the two companies that had entered into a terminal use agreement for capacity of the liquefied natural gas facility owned by Gulf LNG and its subsidiaries. On June 29, 2018, the arbitration panel delivered its award, and the panel's ruling calls for the termination of the agreement and Eni USA's payment of compensation to Gulf LNG. As a result, the Company recorded a loss on its Lightfoot investment of $881 thousand and $867 thousand for the three and six months ended June 30, 2018, respectively. The loss is recorded in net realized and unrealized gain (loss) on other equity securities in the Consolidated Statements of Income.
The Company's remaining private company investments in Lightfoot and Arc Terminal Joliet holdings represent less than 0.5 percent of its total assets. The fair value of the Company's private company investments at June 30, 2018 and December 31, 2017 was approximately $2.1 million and $3.0 million, respectively. As of June 30, 2018, the Lightfoot fair value estimate is based on

21

 

Level 3 valuation assumptions and judgments, including probability weighted discounted cash flow analyses for various forecasted scenarios. The discount rate used in the cash flow analyses was developed by considering several factors, including the Company's minority interest in the investment. This valuation methodology is considered a change from prior periods. As of December 31, 2017, the Lightfoot fair value estimate was determined using recent transaction data and expected proceeds, discounted using a risk-free rate through the expected receipt date. As of both June 30, 2018 and December 31, 2017, the Arc Terminal Joliet fair value estimate was determined using recent transaction data. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company's investment may fluctuate from period to period. Additionally, the fair value of the Company's investment may differ from the values that would have been used had a ready market existed for such investment and may differ materially from the values that the Company may ultimately realize.
The following section describes the valuation methodologies used by the Company for estimating fair value for financial instruments not recorded at fair value, but fair value is included for disclosure purposes only, as required under disclosure guidance related to the fair value of financial instruments.
Cash and Cash Equivalents — The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements approximates fair value.
Financing Notes Receivable — The financing notes receivable are valued on a non-recurring basis. The financing notes receivable are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Financing Notes with carrying values that are not expected to be recovered through future cash flows are written-down to their estimated net realizable value. Estimates of realizable value are determined based on unobservable inputs, including estimates of future cash flow generation and value of collateral underlying the notes.
Secured Credit Facilities — The fair value of the Company's long-term variable-rate and fixed-rate debt under its secured credit facilities approximates carrying value.
Unsecured Convertible Senior Notes — The fair value of the unsecured convertible senior notes is estimated using quoted market prices.
Carrying and Fair Value Amounts
 
Level within fair value hierarchy
 
June 30, 2018
 
December 31, 2017
 
 
Carrying
    Amount (1)
 
Fair Value
 
Carrying
    Amount (1)
 
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
Level 1
 
$
14,175,860

 
$
14,175,860

 
$
15,787,069

 
$
15,787,069

Financing notes receivable (Note 5)
Level 3
 
$
1,000,000

 
$
1,000,000

 
$
1,500,000

 
$
1,500,000

Financial Liabilities:
 
 
 
 
 
 
 
 
Secured Credit Facilities
Level 2
 
$
38,998,698

 
$
38,998,698

 
$
40,745,354

 
$
40,745,354

Unsecured convertible senior notes
Level 1
 
$
112,425,677

 
$
132,032,520

 
$
112,032,083

 
$
139,101,660

(1) The carrying value of debt balances are presented net of unamortized original issuance discount and debt issuance costs.

22

 

10. DEBT
The following is a summary of the Company's debt facilities and balances as of June 30, 2018 and December 31, 2017:
 
Total Commitment
 or Original Principal
 
Quarterly Principal Payments
 
 
 
June 30, 2018
 
December 31, 2017
 
 
 
Maturity
Date
 
Amount Outstanding
 
Interest
Rate
 
Amount Outstanding
 
Interest
Rate
CorEnergy Secured Credit Facility:
 
 
 
 
 
 
 
 
 
 
 
 
 
CorEnergy Revolver
$
160,000,000

 
$

 
7/28/2022
 
$

 
4.84
%
 
$

 
4.32
%
MoGas Revolver
1,000,000

 

 
7/28/2022
 

 
4.84
%
 

 
4.32
%
Omega Line of Credit
1,500,000

 

 
7/31/2019
 

 
6.09
%
 

 
5.57
%
Pinedale Secured Credit Facility:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amended Pinedale Term Credit Facility
41,000,000

 
882,000

 
12/29/2022
 
39,236,000

 
6.50
%
 
41,000,000

 
6.50
%
7.00% Unsecured Convertible Senior Notes
115,000,000

 

 
6/15/2020
 
114,000,000

 
7.00
%
 
114,000,000

 
7.00
%
Total Debt
 
$
153,236,000

 
 
 
$
155,000,000

 
 
Less:
 
 
 
 
 
 
 
 
Unamortized deferred financing costs (1)
 
$
333,827

 
 
 
$
375,309

 
 
Unamortized discount on 7.00% Convertible Senior Notes
 
1,477,798

 
 
 
1,847,254

 
 
Long-term debt, net of deferred financing costs
 
$
151,424,375

 
 
 
$
152,777,437

 
 
Debt due within one year
 
$
3,528,000

 
 
 
$
3,528,000

 
 
(1) Unamortized deferred financing costs related to our revolving credit facilities are included in Deferred Costs in the Assets section of the Consolidated Balance Sheets. Refer to the "Deferred Financing Costs" paragraph below.
CorEnergy Credit Facility
On July 28, 2017, the Company entered into an amendment and restatement of the CorEnergy Credit Facility with Regions Bank (as lender and administrative agent for other participating lenders). The amended facility provides for borrowing commitments of up to $161.0 million, consisting of (i) $160.0 million on the CorEnergy Revolver, subject to borrowing base limitations, and (ii) $1.0 million on the MoGas Revolver.
The amended facility has a 5-year term maturing on July 28, 2022, and provides for a springing maturity on February 28, 2020, and thereafter, if the Company fails to meet certain liquidity requirements from the springing maturity date through the maturity of the Company's convertible notes on June 15, 2020. Borrowings under the credit facility will generally bear interest on the outstanding principal amount using a LIBOR pricing grid that is expected to equal a LIBOR rate plus an applicable margin of 2.75 percent to 3.75 percent, based on the Company's senior secured recourse leverage ratio. Total availability is subject to a borrowing base. The CorEnergy Credit Facility contains, among other restrictions, certain financial covenants including the maintenance of certain financial ratios, as well as default and cross-default provisions customary for transactions of this nature (with applicable customary grace periods). As of June 30, 2018, the Company was in compliance with all covenants of the CorEnergy Credit Facility.
As of June 30, 2018, the Company had approximately $145.6 million and $1.0 million of availability under the CorEnergy Revolver and MoGas Revolver, respectively.
Pinedale Credit Facility
On December 20, 2012, Pinedale LP closed on a $70.0 million secured term credit facility. On March 4, 2016, the Company obtained a consent from its lenders under the CorEnergy Credit Facility, which permitted the Company to utilize the CorEnergy Credit Facility to refinance the Company's pro rata share of the remaining balance of the Pinedale secured term credit facility. On March 30, 2016, the Company and Prudential (collectively, "the Refinancing Lenders"), refinanced the remaining $58.5 million principal balance of the $70.0 million credit facility (on a pro rata basis equal to their respective equity interests in Pinedale LP, with the Company's 81.05 percent share being approximately $47.4 million) and executed a series of agreements assigning the credit facility to CorEnergy Infrastructure Trust, Inc. as Agent for the Refinancing Lenders. The facility was further modified to extend the maturity date to March 30, 2021; to increase the LIBOR Rate to the greater of (i) 1.00 percent and (ii) the one-month LIBOR rate; and to increase the LIBOR Rate Spread to 7.00 percent per annum.
On December 29, 2017, Pinedale LP entered into the Amended Pinedale Term Credit Facility with Prudential and a group of lenders affiliated with Prudential as the sole lenders and Prudential serving as administrative agent. Under the terms of the Amended Pinedale Term Credit Facility, Pinedale LP was provided with a 5-year $41.0 million term loan facility, bearing interest at a fixed rate of 6.5 percent, which matures on December 29, 2022. Principal payments of $294 thousand, plus accrued interest, are payable

23

 

monthly. The Amended Pinedale Term Credit Facility was utilized to pay off the balance due to the Refinancing Lenders under the previously existing Pinedale LP credit facility.
Outstanding balances under the facility are secured by the Pinedale LGS assets. The Amended Pinedale Term Credit Facility contains, among other restrictions, specific financial covenants including the maintenance of certain financial coverage ratios and a minimum net worth requirement which, along with other provisions of the credit facility, limit cash dividends and loans by Pinedale LP to the Company. At June 30, 2018, the net assets of Pinedale LP were $139.6 million and Pinedale LP was in compliance with all of the financial covenants of the Amended Pinedale Term Credit Facility.
Deferred Financing Costs
A summary of deferred financing cost amortization expenses for the three and six months ended June 30, 2018 and 2017 is as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
CorEnergy Credit Facility
$
143,635

 
$
272,074

 
$
287,270

 
$
544,148

Pinedale Credit Facility
13,205

 

 
26,317

 

Total Deferred Debt Cost Amortization Expense (1)(2)
$
156,840

 
$
272,074

 
$
313,587

 
$
544,148

(1) Amortization of deferred debt issuance costs is included in interest expense in the Consolidated Statements of Income.
(2) For the amount of deferred debt cost amortization relating to the Convertible Notes included in the Consolidated Statements of Income, refer to the Convertible Note Interest Expense table below.
CorEnergy Credit Facilities
Prior to the July 28, 2017 amendment and restatement, previously existing deferred financing costs related to the CorEnergy Credit Facility were approximately $1.8 million, of which approximately $1.6 million continue to be deferred and amortized under the amended and restated facility. Additionally, the Company incurred approximately $1.3 million in new debt issuance costs which have been deferred and are being amortized over the term of the new facility. Total deferred financing costs of $2.9 million are being amortized on a straight-line basis over the 5-year term of the amended and restated CorEnergy Credit Facility.
Amended Pinedale Term Credit Facility
In connection with entering into the Amended Pinedale Term Credit Facility, Pinedale LP incurred approximately $367 thousand in new debt issuance costs, of which $264 thousand were deferred and are being amortized on a straight-line basis over the 5-year term of the Amended Pinedale Term Credit Facility.
Contractual Payments
The remaining contractual principal payments as of June 30, 2018 under the Pinedale credit facility are as follows:
Year
 
Pinedale Credit Facility
2018
 
$
1,764,000

2019
 
3,528,000

2020
 
3,528,000

2021
 
3,528,000

2022
 
26,888,000

Thereafter
 

Total Remaining Contractual Payments
 
$
39,236,000

Convertible Debt
On June 29, 2015, the Company completed a public offering of $115.0 million aggregate principal amount of 7.00% Convertible Senior Notes Due 2020 (the "Convertible Notes"). The Convertible Notes mature on June 15, 2020 and bear interest at a rate of 7.00 percent per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2015. On May 23, 2016, the Company repurchased $1.0 million of its convertible bonds on the open market.

24

 

The following is a summary of the impact of Convertible Notes on interest expense for the three and six months ended June 30, 2018 and 2017:
Convertible Note Interest Expense
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
7.00% Convertible Notes
$
1,995,000

 
$
1,995,000

 
$
3,990,000

 
$
3,990,000

Discount Amortization
184,728

 
184,728

 
369,456

 
369,456

Deferred Debt Issuance Amortization
12,069

 
12,069

 
24,138

 
24,138

Total Convertible Note Interest Expense
$
2,191,797

 
$
2,191,797

 
$
4,383,594

 
$
4,383,594

The Convertible Notes were initially issued with an underwriters' discount of $3.7 million which is being amortized over the life of the Convertible Notes. Including the impact of the convertible debt discount and related deferred debt issuance costs, the effective interest rate on the Convertible Notes is approximately 7.7 percent for each of the three and six months ended June 30, 2018 and 2017.
11. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As of June 30, 2018, the Company has a total of 5,200,000 depository shares outstanding, or 52,000 whole shares of its 7.375% Series A Preferred Stock. See Note 13 ("Subsequent Events") for further information regarding the declaration of a dividend on the 7.375% Series A Preferred Stock.
COMMON STOCK
As of June 30, 2018, the Company has 11,933,774 of common shares issued and outstanding. See Note 13 ("Subsequent Events") for further information regarding the declaration of a dividend on the common stock.
SHELF REGISTRATION
On February 18, 2016, the Company had a new shelf registration statement declared effective by the SEC, pursuant to which it may publicly offer additional debt or equity securities with an aggregate offering price of up to $600.0 million.
As of June 30, 2018, the Company has issued 79,153 shares of common stock under the its dividend reinvestment plan pursuant to the February 18, 2016 shelf, reducing availability by approximately $2.4 million. Shelf availability was further reduced by approximately $73.8 million as a result of the follow-on offering of additional 7.375% Series A Preferred Stock during the second quarter of 2017. As of June 30, 2018, availability on the current shelf registration is approximately $523.8 million.

25

 

12. EARNINGS PER SHARE
Basic earnings per share data is computed based on the weighted-average number of shares of common stock outstanding during the periods. Diluted EPS data is computed based on the weighted-average number of shares of common stock outstanding, including all potentially issuable shares of common stock. Diluted EPS for the three and six months ended June 30, 2018 and 2017 excludes the impact to income and the number of shares outstanding from the conversion of the 7.00% Convertible Senior Notes because such impact is antidilutive. If converted, the 7.00% Convertible Senior Notes would result in an additional 3,454,545 common shares outstanding.
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Net income attributable to CorEnergy stockholders
$
7,810,849

 
$
9,000,172

 
$
15,518,557

 
$
16,669,650

Less: preferred dividend requirements
2,396,875

 
2,123,129

 
4,793,750

 
3,160,238

Net income attributable to common stockholders
$
5,413,974

 
$
6,877,043

 
$
10,724,807

 
$
13,509,412

Weighted average shares - basic
11,928,297

 
11,896,616

 
11,923,627

 
11,892,670

Basic earnings per share
$
0.45

 
$
0.58

 
$
0.90

 
$
1.14

 
 
 
 
 
 
 
 
Net income attributable to common stockholders (from above)
$
5,413,974

 
$
6,877,043

 
$
10,724,807

 
$
13,509,412

Add: After tax effect of convertible interest

 

 

 

Income attributable for dilutive securities
$
5,413,974

 
$
6,877,043

 
$
10,724,807

 
$
13,509,412

Weighted average shares - diluted
11,928,297

 
11,896,616

 
11,923,627

 
11,892,670

Diluted earnings per share
$
0.45

 
$
0.58

 
$
0.90

 
$
1.14

13. SUBSEQUENT EVENTS
The Company performed an evaluation of subsequent events through the date of the issuance of these financial statements and determined that no additional items require recognition or disclosure, except for the following:
Common Stock Dividend Declaration
On July 25, 2018, the Company's Board of Directors declared a 2018 second quarter dividend of $0.75 per share for CorEnergy common stock. The dividend is payable on August 31, 2018 to stockholders of record on August 17, 2018.
Preferred Stock Dividend Declaration
On July 25, 2018, the Company's Board of Directors also declared a dividend of $0.4609375 per depositary share for its 7.375% Series A Preferred Stock. The preferred stock dividend is payable on August 31, 2018 to stockholders of record on August 17, 2018.
Preferred Stock Repurchase Program
The Company's Board of Directors authorized a share repurchase program for the Company to buy up to $10.0 million of its preferred stock, which will commence August 6, 2018. The Company plans to repurchase shares from time to time through open market transactions, including through block purchases, in privately negotiated transactions or otherwise. The timing, manner, price and amount of any repurchases are to be determined by senior management, depending on market prices and other conditions, and will be made in accordance with the Company's covenants under the CorEnergy Credit Facility. Purchases may be made through the program through August 5, 2019. The Company is not obligated to repurchase any shares of stock under the program and may terminate the program at any time. The Company did not repurchase any preferred shares during the six months ended June 30, 2018.

26

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto in this Report on Form 10-Q ("Report") of CorEnergy Infrastructure, Inc. ("the Company," "CorEnergy," "we" or "us"). The forward-looking statements included in this discussion and elsewhere in this Report involve risks and uncertainties, including anticipated financial performance, business prospects, industry trends, stockholder returns, performance of leases by tenants, performance on loans to customers, and other matters, which reflect management's best judgment based on factors currently known. See "Cautionary Statement Concerning Forward-Looking Statements" which is incorporated herein by reference. Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 28, 2018, and Part II, Item 1A, "Risk Factors" in this Report.
BUSINESS OBJECTIVE
CorEnergy primarily owns assets in the U.S. energy sector that perform utility-like functions, such as pipelines, storage terminals, rail terminals and gas and electric transmission and distribution assets. Our objective is to generate long-term contracted revenue from operators of our assets, primarily under triple-net participating leases without direct commodity price exposure. We believe our leadership team's energy and utility expertise provides CorEnergy with a competitive advantage to acquire, own and lease U.S. energy infrastructure assets in a tax-efficient, transparent and investor-friendly REIT. Our leadership team also utilizes a disciplined investment philosophy developed through an average of over 25 years of relevant industry experience.
We expect our leases to provide us with contracted base rent, plus participating rent based upon asset-specific criteria. The energy industry commonly employs contracts with participating features, and we provide exposure to both the risk and opportunity of utilization of our assets, which we believe is a hallmark of infrastructure assets of all types. Our participating triple-net leases require the operator to pay all expenses of the business including maintaining our assets in good working order.
The majority of our assets leased to tenants under triple-net leases are dependent upon the tenants' exploitation of hydrocarbon reserves in the fields where our assets are located. These reserves are depleted over time, and therefore, may economically diminish the value of our assets over the period that the underlying reserves are exploited. Accordingly, we expect the contracted base rents under these leases, including fair market renewal rent expectations, to provide for a return-on-capital, as well as a return of our invested capital, over the life of the asset. The portion of rents we believe to constitute a return of our invested capital are utilized for debt repayment and/or are reserved for capital reinvestment activities in order to maintain our long-term earnings and dividend paying capacity. The return-on-capital is that portion of rents which are available for distribution to our stockholders through dividend payouts.
Base rents under our leases are structured on an estimated fair market value rent structure over the initial term, which includes assumptions related to the terminal value of our assets and expectations of tenant renewals. At the conclusion of the initial lease term, our leases generally contain fair market value repurchase options or fair market rent renewal terms. These clauses also act as safeguards against our tenants pursuing activities which would undermine or degrade the value of our assets faster than the underlying reserves are depleted. Our participating rents are structured to provide exposure to the commercial activity of the tenant, and as such, also provide protection in the event that the economic life of our assets is reduced based on accelerated production by our tenants.
Our assets are primarily mission-critical to our customers, in that utilization of our assets is necessary for the business they seek to conduct and their rental payments are an essential operating expense. For example, our crude oil gathering system assets are necessary to the exploitation of upstream crude oil reserves, so the operators' lease of those assets is economically critical to their operations. Some of our assets are subject to rate regulation by FERC or state public utility commissions. Further, energy infrastructure assets are an essential and growing component of the U.S. economy that give us the opportunity to assist the capital expansion plans and meet the capital needs of various midstream and upstream participants.
We intend to distribute substantially all of our cash available for distribution, less prudent reserves, on a quarterly basis. We regularly assess our ability to pay and to grow our dividend to common stockholders. CorEnergy targets long-term revenue growth of 1-3 percent annually from existing contracts, through inflation escalations and participating rents, and additional growth from acquisitions. There can be no assurance that any potential acquisition opportunities will result in consummated transactions. Our management contract includes incentive provisions, aligning our leadership team with our stockholders' interests in raising the dividend only if we believe the rate is sustainable.

27

 

Basis of Presentation
The consolidated financial statements include CorEnergy Infrastructure Trust, Inc., as of June 30, 2018, and its direct and indirect wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
RESULTS OF OPERATIONS
The following tables summarize the financial data and key operating statistics for CorEnergy for the three and six months ended June 30, 2018 and 2017. We believe the Operating Results detail presented below provides investors with information that will assist them in analyzing our operating performance. The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Part I, Item 1 of this Report. All information in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations," except for balance sheet data as of December 31, 2017, is unaudited.

The following table and discussion is a summary of our results of operations for the three and six months ended June 30, 2018 and 2017:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Revenue
 
 
 
 
 
 
 
Lease revenue
$
18,275,859

 
$
17,050,092

 
$
35,867,718

 
$
34,116,618

Transportation and distribution revenue
3,874,157

 
4,775,780

 
7,827,136

 
9,786,370

Total Revenue
22,150,016

 
21,825,872

 
43,694,854

 
43,902,988

Expenses
 
 
 
 
 
 
 
Transportation and distribution expenses
1,534,524

 
1,362,980

 
3,107,420

 
2,698,550

General and administrative
3,107,776

 
2,558,339

 
5,834,833

 
5,619,579

Depreciation, amortization and ARO accretion expense
6,290,082

 
6,005,995

 
12,579,412

 
12,011,903

Provision for loan losses

 

 
500,000

 

Total Expenses
10,932,382

 
9,927,314

 
22,021,665

 
20,330,032

Operating Income
$
11,217,634

 
$
11,898,558

 
$
21,673,189

 
$
23,572,956

Other Income (Expense)
 
 
 
 
 
 
 
Net distributions and dividend income
$
55,714

 
$
221,440

 
$
59,665

 
$
264,902

Net realized and unrealized gain (loss) on other equity securities