UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________________
FORM 10-Q
___________________________________________
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
OR
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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
_________________________________________________________
CORENERGY INFRASTRUCTURE TRUST, INC.
______________________________________________________________________
(Exact name of registrant as specified in its charter)
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Maryland | | 20-3431375 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
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1100 Walnut, Ste. 3350 Kansas City, MO | | 64106 |
(Address of Principal Executive Offices) | | (Zip Code) |
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(816) 875-3705 |
(Registrant's telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act: |
Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange On Which Registered |
Common Stock, par value $0.001 per share | | CORR | | New York Stock Exchange |
7.375% Series A Cumulative Redeemable Preferred Stock | | CORRPrA | | New York Stock Exchange |
___________________________________________
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 every Interactive Data File required to be submitted 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 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.
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Large accelerated filer | o | | Accelerated filer | x |
Non-accelerated filer | o | | Smaller reporting company | x |
| | | 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 October 30, 2019, the registrant had 13,534,856 common shares outstanding.
CorEnergy Infrastructure Trust, Inc.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
____________________________________________________________________________________________
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, 2018.
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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019 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, 2018.
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| GLOSSARY OF DEFINED TERMS | |
Certain of the defined terms used in this Report are set forth below:
5.875% Convertible Notes: the Company's 5.875% Convertible Senior Notes due 2025.
7.00% Convertible Notes: the Company's 7.00% Convertible Senior Notes due 2020.
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, effective December 29, 2017.
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: FASB Accounting Standard Update.
Bbls: standard barrel containing 42 U.S. gallons.
Company or CorEnergy: CorEnergy Infrastructure Trust, Inc. (NYSE: CORR).
Compass SWD: Compass SWD, LLC, the current borrower under the Compass REIT Loan.
Compass REIT Loan: the financing notes between Compass SWD and Four Wood Corridor.
Convertible Notes: collectively, the Company's 5.875% Convertible Notes and the Company's 7.00% Convertible Notes.
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.
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.
Cox Acquiring Entity: MLCJR LLC, an affiliate of Cox Oil, LLC.
Cox Oil: Cox Oil, LLC.
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. Effective October 18, 2018, EGC became an indirect wholly-owned subsidiary of MLCJR LLC ("Cox Acquiring Entity"), an affiliate of Cox Oil, LLC, as a result of a merger transaction. Throughout this document, references to EGC will refer to both the pre- and post-bankruptcy entities and, for dates on and after October 18, 2018, to EGC as an indirect wholly-owned subsidiary of the Cox Acquiring Entity.
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.
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| GLOSSARY OF DEFINED TERMS (Continued from previous page) |
Four Wood Corridor: Four Wood Corridor, LLC, a wholly-owned subsidiary of CorEnergy.
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.
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: the current management 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 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 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 was triple-net leased to Zenith Terminals, which terminated on December 21, 2018 upon sale of the facility.
Portland Terminal Facility: a petroleum products terminal located in Portland, Oregon sold on December 21, 2018 to Zenith Terminals.
Prudential: the Prudential Insurance Company of America.
REIT: real estate investment trust.
SEC: Securities and Exchange Commission.
Securities Act: the Securities Act of 1933, as amended.
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| GLOSSARY OF DEFINED TERMS (Continued from previous page) |
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 approximately 50,197 shares represented by 5,019,727 depositary shares, each representing 1/100th of a whole share of Series A Preferred Stock.
SWD: SWD Enterprises, LLC, the previous debtor of the financing notes with Four Wood Corridor.
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 Terminals 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).
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this Quarterly Report on Form 10-Q ("Report") 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:
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• | 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; |
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• | the ability and willingness of each of our tenants to satisfy their obligations under the respective lease agreements; |
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• | 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; |
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• | 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; |
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• | 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; |
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• | 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; |
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• | the potential impact of greenhouse gas regulation and climate change on our or our tenants' business, financial condition and results of operations; |
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• | the loss of any member of our management team; |
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• | our continued ability to access the debt and equity markets, including our ability to continue using our SEC shelf registration statements; |
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• | our ability to successfully implement our selective acquisition strategy; |
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• | our ability to obtain suitable tenants for our properties; |
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• | our ability to refinance amounts outstanding under our credit facilities and our convertible notes at maturity on terms favorable to us; |
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• | 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; |
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• | our ability to comply with certain debt covenants; |
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• | dependence by us and our tenants on key customers for significant revenues, and the risk of defaults by any such tenants or customers; |
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• | our or our tenants' ability to secure adequate insurance and risk of potential uninsured losses, including from natural disasters; |
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• | the continued availability of third-party pipelines, railroads or other facilities interconnected with certain of our infrastructure assets; |
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• | 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; |
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• | our ability to sell properties at an attractive price; |
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• | market conditions and related price volatility affecting our debt and equity securities; |
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• | competitive and regulatory pressures on the revenues of our interstate natural gas transmission business; |
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• | changes in federal or state tax rules or regulations that could have adverse tax consequences; |
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• | 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; |
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• | 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 |
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• | 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, 2018, filed with the SEC on February 28, 2019, as supplemented by the disclosures contained in Part II, Item 1A, "Risk Factors", in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019, and in this Report.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED BALANCE SHEETS
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| September 30, 2019 | | December 31, 2018 |
Assets | (Unaudited) | | |
Leased property, net of accumulated depreciation of $101,157,834 and $87,154,095 | $ | 384,235,493 |
| | $ | 398,214,355 |
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Property and equipment, net of accumulated depreciation of $18,498,371 and $15,969,346 | 107,640,017 |
| | 109,881,552 |
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Financing notes and related accrued interest receivable, net of reserve of $600,000 and $600,000 | 1,267,500 |
| | 1,300,000 |
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Note receivable | — |
| | 5,000,000 |
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Cash and cash equivalents | 120,430,110 |
| | 69,287,177 |
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Deferred rent receivable | 29,599,410 |
| | 25,942,755 |
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Accounts and other receivables | 3,001,569 |
| | 5,083,243 |
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Deferred costs, net of accumulated amortization of $1,790,091 and $1,290,236 | 2,338,588 |
| | 2,838,443 |
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Prepaid expenses and other assets | 694,288 |
| | 668,584 |
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Deferred tax asset, net | 4,883,349 |
| | 4,948,203 |
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Goodwill | 1,718,868 |
| | 1,718,868 |
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Total Assets | $ | 655,809,192 |
| | $ | 624,883,180 |
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Liabilities and Equity | | | |
Secured credit facilities, net of debt issuance costs of $171,275 and $210,891 | $ | 34,654,725 |
| | $ | 37,261,109 |
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Unsecured convertible senior notes, net of discount and debt issuance costs of $3,942,712 and $1,180,729 | 121,583,288 |
| | 112,777,271 |
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Asset retirement obligation | 8,289,320 |
| | 7,956,343 |
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Accounts payable and other accrued liabilities | 7,133,813 |
| | 3,493,490 |
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Management fees payable | 1,665,026 |
| | 1,831,613 |
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Unearned revenue | 6,511,572 |
| | 6,552,049 |
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Total Liabilities | $ | 179,837,744 |
| | $ | 169,871,875 |
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Equity | | | |
Series A Cumulative Redeemable Preferred Stock 7.375%, $125,493,175 and $125,555,675 liquidation preference ($2,500 per share, $0.001 par value), 10,000,000 authorized; 50,197 and 50,222 issued and outstanding at September 30, 2019 and December 31, 2018, respectively | $ | 125,493,175 |
| | $ | 125,555,675 |
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Capital stock, non-convertible, $0.001 par value; 13,534,856 and 11,960,225 shares issued and outstanding at September 30, 2019 and December 31, 2018 (100,000,000 shares authorized) | 13,535 |
| | 11,960 |
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Additional paid-in capital | 369,884,338 |
| | 320,295,969 |
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Retained earnings (deficit) | (19,419,600 | ) | | 9,147,701 |
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Total Equity | 475,971,448 |
| | 455,011,305 |
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Total Liabilities and Equity | $ | 655,809,192 |
| | $ | 624,883,180 |
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See accompanying Notes to Consolidated Financial Statements. |
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) |
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| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Revenue | | | | | | | |
Lease revenue | $ | 16,984,903 |
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| $ | 18,391,983 |
| | $ | 50,338,489 |
| | $ | 54,259,701 |
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Transportation and distribution revenue | 4,068,338 |
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| 4,244,722 |
| | 13,808,064 |
| | 12,071,858 |
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Financing revenue | 28,003 |
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| — |
| | 89,532 |
| | — |
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Total Revenue | 21,081,244 |
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| 22,636,705 |
| | 64,236,085 |
| | 66,331,559 |
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Expenses | | | | | | | |
Transportation and distribution expenses | 1,116,194 |
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| 2,241,999 |
| | 3,866,092 |
| | 5,349,419 |
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General and administrative | 2,494,240 |
| | 3,046,481 |
| | 8,104,502 |
| | 8,881,314 |
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Depreciation, amortization and ARO accretion expense | 5,645,342 |
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| 6,289,459 |
| | 16,935,688 |
| | 18,868,871 |
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Provision for loan losses | — |
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| — |
| | — |
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| 500,000 |
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Total Expenses | 9,255,776 |
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| 11,577,939 |
| | 28,906,282 |
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| 33,599,604 |
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Operating Income | $ | 11,825,468 |
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| $ | 11,058,766 |
| | $ | 35,329,803 |
| | $ | 32,731,955 |
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Other Income (Expense) | | | | | | | |
Net distributions and other income | $ | 360,182 |
| | $ | 5,627 |
| | $ | 902,056 |
| | $ | 65,292 |
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Net realized and unrealized loss on other equity securities | — |
| | (930,147 | ) | | — |
| | (1,797,281 | ) |
Interest expense | (2,777,122 | ) | | (3,183,589 | ) | | (7,582,199 | ) | | (9,590,427 | ) |
Loss on extinguishment of debt | (28,920,834 | ) | | — |
| | (33,960,565 | ) | | — |
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Total Other Expense | (31,337,774 | ) | | (4,108,109 | ) | | (40,640,708 | ) | | (11,322,416 | ) |
Income (loss) before income taxes | (19,512,306 | ) | | 6,950,657 |
| | (5,310,905 | ) | | 21,409,539 |
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Taxes | | | | | | | |
Current tax expense (benefit) | (1,270 | ) | | (8,393 | ) | | 352,474 |
| | (54,727 | ) |
Deferred tax expense (benefit) | (91,436 | ) | | (738,274 | ) | | 64,854 |
| | (1,751,615 | ) |
Income tax expense (benefit), net | (92,706 | ) | | (746,667 | ) | | 417,328 |
| | (1,806,342 | ) |
Net Income (loss) attributable to CorEnergy Stockholders | (19,419,600 | ) | | 7,697,324 |
| | (5,728,233 | ) | | 23,215,881 |
|
Preferred dividend requirements | 2,313,780 |
| | 2,396,875 |
| | 6,941,688 |
| | 7,190,625 |
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Net Income (loss) attributable to Common Stockholders | $ | (21,733,380 | ) | | $ | 5,300,449 |
| | $ | (12,669,921 | ) | | $ | 16,025,256 |
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Earnings (Loss) Per Common Share: | | | | | | | |
Basic | $ | (1.65 | ) | | $ | 0.44 |
| | $ | (0.98 | ) | | $ | 1.34 |
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Diluted | $ | (1.65 | ) | | $ | 0.44 |
| | $ | (0.98 | ) | | $ | 1.34 |
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Weighted Average Shares of Common Stock Outstanding: | | | | | | | |
Basic | 13,188,546 |
| | 11,939,360 |
| | 12,870,357 |
| | 11,928,929 |
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Diluted | 13,188,546 |
| | 11,939,360 |
| | 12,870,357 |
| | 11,928,929 |
|
Dividends declared per share | $ | 0.750 |
| | $ | 0.750 |
| | $ | 2.250 |
| | $ | 2.250 |
|
See accompanying Notes to Consolidated Financial Statements. |
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENT OF EQUITY
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| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | — |
| | — |
| | — |
| | — |
| | 7,707,708 |
| | 7,707,708 |
|
Series A preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (2,396,875 | ) | | (2,396,875 | ) |
Common stock dividends | — |
| | — |
| | — |
| | (3,626,039 | ) | | (5,310,833 | ) | | (8,936,872 | ) |
Reinvestment of dividends paid to common stockholders | 8,648 |
| | 9 |
| | — |
| | 310,195 |
| | — |
| | 310,204 |
|
Balance at March 31, 2018 (Unaudited) | 11,924,478 |
| | 11,925 |
| | 130,000,000 |
| | 326,008,627 |
| | — |
| | 456,020,552 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 7,810,849 |
| | 7,810,849 |
|
Series A preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (2,396,875 | ) | | (2,396,875 | ) |
Common stock dividends | — |
| | — |
| | — |
| | (3,530,139 | ) | | (5,413,974 | ) | | (8,944,113 | ) |
Common stock issued under director's compensation plan | 1,006 |
| | 1 |
| | — |
| | 37,499 |
| | — |
| | 37,500 |
|
Reinvestment of dividends paid to common stockholders | 8,290 |
| | 8 |
| | — |
| | 300,007 |
| | — |
| | 300,015 |
|
Balance at June 30, 2018 (Unaudited) | 11,933,774 |
| | 11,934 |
| | 130,000,000 |
| | 322,815,994 |
| | — |
| | 452,827,928 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 7,697,324 |
| | 7,697,324 |
|
Series A preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (2,396,875 | ) | | (2,396,875 | ) |
Common stock dividends | — |
| | — |
| | — |
| | (3,650,482 | ) | | (5,300,449 | ) | | (8,950,931 | ) |
Common stock issued under director's compensation plan | 801 |
| | 1 |
| | — |
| | 29,999 |
| | — |
| | 30,000 |
|
Common stock issued upon conversion of convertible notes | 1,271 |
| | 1 |
| | — |
| | 42,653 |
| | — |
| | 42,654 |
|
Reinvestment of dividends paid to common stockholders | 13,452 |
| | 13 |
| | — |
| | 503,495 |
| | — |
| | 503,508 |
|
Balance at September 30, 2018 (Unaudited) | $ | 11,949,298 |
| | $ | 11,949 |
| | $ | 130,000,000 |
| | $ | 319,741,659 |
| | $ | — |
| | $ | 449,753,608 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Capital Stock |
| Preferred Stock |
| Additional Paid-in Capital |
| Retained Earnings (Deficit) |
| Total |
| Shares |
| Amount |
| Amount |
|
|
|
Balance at December 31, 2018 | 11,960,225 |
| | $ | 11,960 |
| | $ | 125,555,675 |
| | $ | 320,295,969 |
| | $ | 9,147,701 |
| | $ | 455,011,305 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 3,866,441 |
| | 3,866,441 |
|
Series A preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (2,313,780 | ) | | (2,313,780 | ) |
Preferred stock repurchases(1) | — |
| | — |
| | (62,500 | ) | | 2,195 |
| | (245 | ) | | (60,550 | ) |
Common stock dividends | — |
| | — |
| | — |
| | — |
| | (9,597,948 | ) | | (9,597,948 | ) |
Common stock issued upon exchange of convertible notes | 837,040 |
| | 837 |
| | — |
| | 28,868,672 |
| | — |
| | 28,869,509 |
|
Reinvestment of dividends paid to common stockholders | 11,076 |
| | 11 |
| | — |
| | 403,820 |
| | — |
| | 403,831 |
|
Balance at March 31, 2019 (Unaudited) | 12,808,341 |
| | 12,808 |
| | 125,493,175 |
| | 349,570,656 |
| | 1,102,169 |
| | 476,178,808 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 9,824,926 |
| | 9,824,926 |
|
Series A preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (2,313,780 | ) | | (2,313,780 | ) |
Common stock dividends | — |
| | — |
| | — |
| | (992,940 | ) | | (8,613,315 | ) | | (9,606,255 | ) |
Common stock issued upon conversion of convertible notes | 17,690 |
| | 18 |
| | — |
| | 588,184 |
| | — |
| | 588,202 |
|
Balance at June 30, 2019 (Unaudited) | 12,826,031 |
| | 12,826 |
| | 125,493,175 |
| | 349,165,900 |
| | — |
| | 474,671,901 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (19,419,600 | ) | | (19,419,600 | ) |
Series A preferred stock dividends | — |
| | — |
| | — |
| | (2,313,780 | ) | | — |
| | (2,313,780 | ) |
Common stock dividends | — |
| | — |
| | — |
| | (10,148,688 | ) | | — |
| | (10,148,688 | ) |
Common stock issued upon exchange of convertible notes | 703,432 |
| | 703 |
| | — |
| | 33,001,090 |
| | — |
| | 33,001,793 |
|
Common stock issued upon conversion of convertible notes | 5,393 |
| | 6 |
| | — |
| | 179,816 |
| | — |
| | 179,822 |
|
Balance at September 30, 2019 (Unaudited) | 13,534,856 |
| | 13,535 |
| | 125,493,175 |
| | 369,884,338 |
| | (19,419,600 | ) | | 475,971,448 |
|
See accompanying Notes to Consolidated Financial Statements. |
(1) In connection with the repurchases of Series A Preferred Stock during 2019, the addition to preferred dividends of $245 represents the premium in the repurchase price paid compared to the carrying amount derecognized. |
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
| | | | | | | |
| For the Nine Months Ended |
| September 30, 2019 |
| September 30, 2018 |
Operating Activities |
|
|
|
Net income (loss) | $ | (5,728,233 | ) |
| $ | 23,215,881 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
Deferred income tax, net | 64,854 |
|
| (1,751,615 | ) |
Depreciation, amortization and ARO accretion | 17,828,773 |
|
| 19,929,691 |
|
Provision for loan losses | — |
|
| 500,000 |
|
Loss on extinguishment of debt | 33,960,565 |
| | — |
|
Gain on sale of equipment | (1,800 | ) |
| (8,416 | ) |
Net realized and unrealized loss on other equity securities | — |
|
| 1,797,281 |
|
Common stock issued under directors' compensation plan | — |
|
| 67,500 |
|
Changes in assets and liabilities: |
|
|
|
Increase in deferred rent receivable | (3,656,655 | ) | | (5,403,281 | ) |
Decrease in accounts and other receivables | 2,081,674 |
|
| 936,672 |
|
Increase in prepaid expenses and other assets | (26,026 | ) |
| (22,001 | ) |
Increase (decrease) in management fee payable | (166,587 | ) |
| 72,885 |
|
Increase in accounts payable and other accrued liabilities | 3,449,442 |
|
| 2,436,421 |
|
Decrease in current income tax liability | — |
|
| (2,172,200 | ) |
Increase (decrease) in unearned revenue | (40,477 | ) |
| 121,731 |
|
Net cash provided by operating activities | $ | 47,765,530 |
|
| $ | 39,720,549 |
|
Investing Activities |
|
|
|
Purchases of property and equipment, net | (311,566 | ) |
| (94,980 | ) |
Proceeds from sale of property and equipment | — |
|
| 17,999 |
|
Principal payment on note receivable | 5,000,000 |
| | — |
|
Principal payment on financing note receivable | 32,500 |
|
| — |
|
Net cash provided by (used in) investing activities | $ | 4,720,934 |
|
| $ | (76,981 | ) |
Financing Activities |
|
|
|
Debt financing costs | (161,963 | ) |
| (264,010 | ) |
Net offering proceeds on convertible debt | 116,355,125 |
|
| — |
|
Cash paid for extinguishment of convertible notes | (78,939,743 | ) | | — |
|
Repurchases of preferred stock | (60,550 | ) | | — |
|
Dividends paid on Series A preferred stock | (6,941,340 | ) | | (7,190,625 | ) |
Dividends paid on common stock | (28,949,060 | ) |
| (25,718,189 | ) |
Principal payments on secured credit facilities | (2,646,000 | ) |
| (2,646,000 | ) |
Net cash used in financing activities | $ | (1,343,531 | ) |
| $ | (35,818,824 | ) |
Net Change in Cash and Cash Equivalents | $ | 51,142,933 |
|
| $ | 3,824,744 |
|
Cash and Cash Equivalents at beginning of period | 69,287,177 |
|
| 15,787,069 |
|
Cash and Cash Equivalents at end of period | $ | 120,430,110 |
|
| $ | 19,611,813 |
|
| | | |
Supplemental Disclosure of Cash Flow Information |
|
|
|
Interest paid | $ | 5,893,078 |
| | $ | 6,404,134 |
|
Income taxes paid (net of refunds) | 282,786 |
| | 2,117,473 |
|
| | | |
Non-Cash Financing Activities | | | |
Change in accounts payable and accrued expenses related to debt financing costs | $ | 197,227 |
| | $ | (255,037 | ) |
Reinvestment of distributions by common stockholders in additional common shares | 403,831 |
| | 1,113,727 |
|
Common stock issued upon exchange and conversion of convertible notes | 62,639,326 |
| | 42,654 |
|
See accompanying Notes to Consolidated Financial Statements. | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2019
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 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.
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 partnerships.
Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 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, 2018, filed with the SEC on February 28, 2019 (the "2018 CorEnergy 10-K").
2. RECENT ACCOUNTING PRONOUNCEMENTS
In February of 2016, the FASB issued ASU 2016-02 "Leases" ("ASU 2016-02" or "ASC 842"), 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. ASC 842 is effective for fiscal years and interim periods beginning after December 15, 2018. The Company adopted ASC 842 effective January 1, 2019 using the modified retrospective approach by applying the transition provisions at the beginning of the period of adoption. The adoption of the new standard resulted in the recording of right-
of-use assets and lease liabilities of approximately $75 thousand each, included in prepaid expenses and other assets and accounts payable and other accrued liabilities, respectively, as of January 1, 2019. There was no difference between the right-of-use assets and lease liabilities resulting in an adjustment to retained earnings. The standard did not materially impact the Company's Consolidated Statements of Income and had no impact on the Consolidated Statements of Cash Flows. The Company will continue to apply legacy guidance in ASC 840, "Leases," including its disclosure requirements, in the comparative periods presented in the year of adoption.
In accordance with ASC 842 transition disclosure requirements, the cumulative effect of changes made to the Consolidated Balance Sheets as of January 1, 2019 for the adoption of ASC 842 were as follows:
|
| | | | | | | | | | | | |
Balance Sheet | | Balance at December 31, 2018 | | Adjustments Due to ASC 842 | | Balance at January 1, 2019 |
Assets | | | | | | |
Prepaid expenses and other assets | | $ | 668,584 |
| | $ | 74,534 |
| | $ | 743,118 |
|
Liabilities | | | | | | |
Accounts payable and other accrued liabilities | | 3,493,490 |
| | 74,534 |
| | 3,568,024 |
|
Equity | | | | | | |
Retained earnings | | 9,147,701 |
| | — |
| | 9,147,701 |
|
In adopting ASC 842, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the carry forward of historical lease classification. For the underlying lessee asset class related to single-use office space, the Company also elected the lessee separation and allocation practical expedient to not separate lease and non-lease components and instead to account for each separate lease component and non-lease component as a single lease component. For the underlying lessor asset class related to pipelines residing on military bases, the Company elected the lessor separation and allocation practical expedient to not separate lease and non-lease components and instead to account for each separate lease component and non-lease component as a single lease component if the non-lease components otherwise will be accounted for in accordance with ASC 606, and both the following criteria are met: (i) the timing and pattern of revenue recognition are the same for the non-lease component(s) and the related lease component and (ii) the lease component will be classified as an operating lease. Additionally, the Company elected the practical expedient related to land easements, allowing the carry forward of accounting treatment for land easements on existing agreements, which are currently accounted for within property, plant and equipment.
In June of 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. As part of its assessment work, the Company has formed an implementation team, completed training on the CECL model, completed a review of the financial assets in scope, started to assess the accounting impact and has begun developing policies, processes and internal controls. The Company is currently evaluating the potential impact of ASU 2016-13 on its consolidated financial statements.
3. LEASED PROPERTIES AND LEASES
The Company primarily acquires mid-stream and downstream assets in the U.S. energy sector such as pipelines, storage terminals, and gas and electric distribution systems and leases these assets to operators under triple-net leases. These leases typically include a contracted base rent with escalation clauses and participating rents that are tied to contract-specific criteria. Base rents under the Company's leases are structured on an estimated fair market value rent structure over the initial term, which includes assumptions related to the terminal value of the assets and expectations of tenant renewals. At the conclusion of the initial lease term, the Company's leases may contain fair market value repurchase options or fair market rent renewal terms. These clauses also act as safeguards against the Company's tenants pursuing activities which would undermine or degrade the value of the assets faster than the underlying reserves are depleted. Participating rents are structured to provide exposure to the successful commercial activity of the tenant, and as such, also provide protection in the event that the economic life of the assets is reduced based on accelerated production by the Company's tenants. While the Company is primarily a lessor, certain of its operating subsidiaries are lessees and have entered into lease agreements as discussed further below.
LESSOR - LEASED PROPERTIES
The Company's current leased properties are classified as operating leases and are recorded as leased property in the Consolidated Balance Sheets. Initial direct costs incurred in connection with the creation and execution of a lease prior to January 1, 2019 are capitalized and amortized over the lease term. The Company did not reassess initial indirect cost as it elected the package of practical expedients. Subsequent to January 1, 2019, initial direct costs under ASC 842 are incremental costs of a lease that would not have been incurred if the lease had not been obtained and may include commissions or payments made to an existing tenant as an incentive to terminate its lease. Base rent related to the Company's leased property is recognized on a straight-line basis over the term of the lease when collectability is probable. Participating rent is recognized when it is earned, based on the achievement of specified performance criteria. Base and participating rent are recorded as lease revenue in the Consolidated Statements of Income. Rental payments received in advance are classified as unearned revenue and included as a liability within the Consolidated Balance Sheets. Unearned revenue is amortized ratably over the lease period as revenue recognition criteria are met. Rental payments received in arrears are accrued and classified as deferred rent receivable and included in assets within the Consolidated Balance Sheets.
Under the Company's triple-net leases, the tenant is required to pay property taxes and insurance directly to the applicable third-party provider. Consistent with guidance in ASC 842, the Company will present the cost and the lessee's direct payment to the third-party under the triple-net leases on a net basis in the Consolidated Statements of Income.
As of September 30, 2019, the Company had two significant properties located in 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 term 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 |
Location | Gulf of Mexico/Louisiana | Pinedale, WY |
Tenant | Energy XXI GIGS Services, LLC | Ultra Wyoming LGS, LLC |
Asset Description | Approximately 137 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. |
Date Acquired | June 2015 | December 2012 |
Initial Lease Term | 11 years | 15 years |
Renewal Option | Equal to the lesser of 9-years or 75 percent of the remaining useful life | 5-year terms |
Current Monthly Rent Payments | 7/1/2018 - 6/30/2019: $2,860,917 7/1/2019 - 6/30/2020: $3,223,917 | $1,812,307 |
Initial Estimated Useful Life | 27 years | 26 years |
The Company also concluded that Omega's long-term contract with the Department of Defense ("DOD") to provide natural gas distribution to Fort Leonard Wood through Omega's pipeline distribution system on the military post meets the definition of a lease under ASC 842. Omega is the lessor in the contract and the lease is classified as an operating lease. The Company noted the non-lease component is the predominant component in the lease, and the timing and pattern of transfer of the lease component and the associated non-lease component are the same. As discussed in Note 2 ("Recent Accounting Pronouncements"), the Company elected a practical expedient that allows lessors to not separate lease and related non-lease components if the non-lease components otherwise would be accounted for in accordance with the revenue standard under ASC 606. With the election of this practical expedient, the Company continues to account for the DOD contract under the revenue standard.
In the second quarter of 2019, the Company started a system improvement project on Omega's pipeline distribution system, which is considered a "built to suit" transaction under ASC 842. The system improvement project is a separate lease component and the DOD is deemed to control the system improvement due to certain contract provisions. As a result, the Company is accounting for the costs of the system improvement as a financing arrangement, which is included in accounts and other receivables in the Consolidated Balance Sheets. The margin the Company earns on the system improvement project is a non-lease component accounted for under the revenue standard. Refer to Note 4 ("Transportation And Distribution Revenue") for further details.
The future contracted minimum rental receipts for all leases as of September 30, 2019, are as follows:
|
| | | |
Future Minimum Lease Receipts |
Years Ending December 31, | Amount |
2019 | $ | 15,138,797 |
|
2020 | 65,383,190 |
|
2021 | 71,345,190 |
|
2022 | 70,322,690 |
|
2023 | 67,274,690 |
|
Thereafter | 193,639,760 |
|
Total | $ | 483,104,317 |
|
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 |
| As of | | For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2019 | | December 31, 2018 | | September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Pinedale LGS(2) | 44.4 | % | | 44.5 | % | | 40.0 | % | | 35.7 | % | | 39.3 | % | | 34.6 | % |
Grand Isle Gathering System | 55.3 | % | | 55.2 | % | | 59.8 | % | | 55.3 | % | | 60.6 | % | | 56.2 | % |
Portland Terminal Facility(3) | — | % | | — | % | | — | % | | 8.9 | % | | — | % | | 9.1 | % |
(1) Insignificant leases are not presented; thus, percentages may not sum to 100%. | | | | |
(2) Pinedale LGS lease revenues include variable rent of $1.4 million and $3.5 million for the three and nine months ended September 30, 2019, respectively, compared to $1.2 million and $2.8 million for the three and nine months ended September 30, 2018, respectively. |
(3) On December 21, 2018, the Portland Terminal Facility was sold to Zenith Terminals, terminating the Portland Lease Agreement. |
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 Nine Months Ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Depreciation Expense | | | | | | | |
GIGS | $ | 2,440,791 |
| | $ | 2,751,272 |
| | $ | 7,322,372 |
| | $ | 8,253,816 |
|
Pinedale | 2,217,360 |
| | 2,217,360 |
| | 6,652,080 |
| | 6,652,080 |
|
Portland Terminal Facility(1) | — |
| | 318,915 |
| | — |
| | 956,745 |
|
United Property Systems | 9,831 |
| | 9,210 |
| | 29,286 |
| | 27,452 |
|
Total Depreciation Expense | $ | 4,667,982 |
| | $ | 5,296,757 |
| | $ | 14,003,738 |
| | $ | 15,890,093 |
|
Amortization Expense - Deferred Lease Costs | | | | | | | |
GIGS | $ | 7,641 |
| | $ | 7,641 |
| | $ | 22,923 |
| | $ | 22,923 |
|
Pinedale | 15,342 |
| | 15,342 |
| | 46,026 |
| | 46,026 |
|
Total Amortization Expense - Deferred Lease Costs | $ | 22,983 |
| | $ | 22,983 |
| | $ | 68,949 |
| | $ | 68,949 |
|
ARO Accretion Expense | | | | | | | |
GIGS | $ | 110,992 |
| | $ | 127,928 |
| | $ | 332,977 |
| | $ | 383,784 |
|
Total ARO Accretion Expense | $ | 110,992 |
| | $ | 127,928 |
| | $ | 332,977 |
| | $ | 383,784 |
|
(1) On December 21, 2018, the Portland Terminal Facility was sold to Zenith Terminals, terminating the Portland Lease Agreement. |
The following table reflects the deferred costs that are included in the accompanying Consolidated Balance Sheets associated with the Company's leased properties:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Net Deferred Lease Costs | | | |
GIGS | $ | 206,396 |
| | $ | 229,319 |
|
Pinedale | 504,323 |
| | 550,349 |
|
Total Deferred Lease Costs, net | $ | 710,719 |
| | $ | 779,668 |
|
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 common stock traded on the NASDAQ under the symbol UPL until August 8, 2019 at which time it commenced trading on the OTCQX marketplace under the symbol UPLC. 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/Cox Oil
Prior to October 29, 2018, EGC was subject to the reporting requirements of the Exchange Act and was 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 the filing by EGC of a Form 15 with the SEC on October 29, 2018, following the closing on October 18, 2018 of the previously announced acquisition of EGC by an affiliate of the privately-held Cox Oil, EGC's SEC reporting obligations were suspended and it ceased to file such reports.
The Company believes the terms of the Grand Isle Lease Agreement require EGC and Cox Oil to provide the Company with certain financial statement information of EGC which must be filed pursuant to SEC Regulation S-X. When EGC's financial information ceased to be publicly available, the Company encouraged officials of EGC and Cox Oil and, through Company counsel, the legal counsel to such entities, to satisfy their obligations under the Grand Isle Lease Agreement to provide the required information to the Company for inclusion in its SEC reports. To date, EGC and Cox Oil have refused to fulfill these obligations. The Company intends to enforce the obligations of EGC and Cox Oil and obtained a temporary restraining order ("TRO") from a Texas state court, mandating that they deliver the required EGC financial statements for the year ended December 31, 2018. While the TRO has been stayed pending an appeal by EGC and Cox Oil, the Company will continue to pursue all viable options to obtain and file the necessary financial statements.
LESSEE - LEASED PROPERTIES
The Company's operating subsidiaries currently lease single-use office space and equipment with remaining lease terms of less than two years, some of which may include renewal options. These leases are classified as operating leases and immaterial to the consolidated financial statements. The Company recognizes lease expense in the Consolidated Statements of Income on a straight-line basis over the remaining lease term.
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 improvement. 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. System maintenance and improvement contracts are specific and tailored to the customer's needs, have no alternative use and have an enforceable right to payment as the services are provided. Revenue is recognized on an input method, based on the actual cost of a service as a measure of the performance obligation satisfaction. Differences between amounts invoiced and revenue recognized under the input method are reflected as an asset or liability on the Consolidated Balance Sheets. As discussed in Note 3 ("Leased Properties And Leases"), the costs of system improvement projects are recognized as a financing arrangement in accordance with guidance in the lease standard while the margin is recognized in accordance with the revenue standard as discussed above.
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. 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. Following the November 2018 rate decline, recognized performance obligations exceeded amounts invoiced and the contract liability began to decline at a rate of approximately $138 thousand per quarter and will continue to decline at the same rate through the end of the contract in October 2030. As of September 30, 2019, the revenue allocated to the remaining performance obligation under this contract is approximately $59.5 million.
The table below summarizes the Company's contract liability balance related to its transportation and distribution revenue contracts as of September 30, 2019:
|
| | | |
| Contract Liability(1) |
Beginning Balance January 1, 2019 | $ | 6,522,354 |
|
Unrecognized Performance Obligations | 381,858 |
|
Recognized Performance Obligations | (413,389 | ) |
Ending Balance September 30, 2019 | $ | 6,490,823 |
|
(1) The contract liability balance is included in unearned revenue in the Consolidated Balance Sheets. |
The Company's contract asset balance was $74 thousand and $181 thousand as of September 30, 2019 and December 31, 2018, respectively. The contract asset balance is included in prepaid expenses and other assets in the Consolidated Balance Sheets.
The following is a breakout of the Company's transportation and distribution revenue for the three and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Natural gas transportation contracts | 52.7 | % | | 60.3 | % | | 57.5 | % | | 64.2 | % |
Natural gas distribution contracts | 39.2 | % | | 24.8 | % | | 36.2 | % | | 26.1 | % |
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.
Four Wood Financing Note Receivable
On December 12, 2018, Four Wood Corridor granted SWD, the previous debtor, approval to sell the assets securing the SWD loans to Compass SWD, LLC ("Compass SWD") in exchange for Compass SWD executing a new loan agreement with Four Wood Corridor for $1.3 million (the "Compass REIT Loan") and approximately $237 thousand in cash consideration, net of costs facilitating the close. The Compass REIT Loan was secured by real and personal property providing saltwater disposal services
for the oil and natural gas industry. The Compass REIT Loan was scheduled to mature on June 15, 2019 with interest accruing on the outstanding principal at an annual rate of LIBOR plus 6 percent. As a result of the transaction, SWD was released from the terms of their loans.
On June 12, 2019, Four Wood Corridor entered into an amended and restated Compass REIT Loan. The amended note has a two-year term maturing on June 30, 2021 with monthly principal payments of approximately $11 thousand and interest accruing on the outstanding principal at an annual rate of 8.5 percent. The amended and restated Compass REIT Loan is secured by real and personal property that provides saltwater disposal services for the oil and natural gas industry and pledged ownership interests of Compass SWD members. As of September 30, 2019 and December 31, 2018, the Compass REIT Loan was valued at $1.3 million.
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 September 30, 2019 and December 31, 2018, are as follows:
|
| | | | | | | |
Deferred Tax Assets and Liabilities |
| September 30, 2019 | | December 31, 2018 |
Deferred Tax Assets: | | | |
Deferred contract revenue | $ | 1,475,925 |
| | $ | 1,691,899 |
|
Net operating loss carryforwards | 5,019,001 |
| | 5,424,671 |
|
Loan loss provision | — |
| | 263,508 |
|
Basis reduction of investment in partnerships | 250,359 |
| | — |
|
Other | 968,429 |
| | 95,695 |
|
Sub-total | $ | 7,713,714 |
| | $ | 7,475,773 |
|
Deferred Tax Liabilities: | | | |
Cost recovery of leased and fixed assets | $ | (2,799,360 | ) | | $ | (2,508,547 | ) |
Other | (31,005 | ) | | (19,023 | ) |
Sub-total | $ | (2,830,365 | ) | | $ | (2,527,570 | ) |
Total net deferred tax asset | $ | 4,883,349 |
| | $ | 4,948,203 |
|
As of September 30, 2019, 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, 2015 remain open to examination by federal and state tax authorities.
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 nine months ended September 30, 2019 and 2018 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 Nine Months Ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Application of statutory income tax rate | $ | (4,097,584 | ) | | $ | 1,459,638 |
| | $ | (1,115,290 | ) | | $ | 4,496,003 |
|
State income taxes, net of federal tax expense (benefit) | (19,632 | ) | | (146,677 | ) | | 503,932 |
| | (411,696 | ) |
Federal Tax Attributable to Income of Real Estate Investment Trust | 3,984,180 |
| | (2,057,531 | ) | | 1,044,600 |
| | (5,876,965 | ) |
Other | 40,330 |
| | (2,097 | ) | | (15,914 | ) | | (13,684 | ) |
Total income tax expense (benefit) | $ | (92,706 | ) | | $ | (746,667 | ) | | $ | 417,328 |
| | $ | (1,806,342 | ) |
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 Nine Months Ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Current tax expense (benefit) | | | | | | | |
Federal | $ | — |
| | $ | (6,643 | ) | | $ | 216,093 |
| | $ | (43,319 | ) |
State (net of federal tax expense (benefit)) | (1,270 | ) | | (1,750 | ) | | 136,381 |
| | (11,408 | ) |
Total current tax expense (benefit) | $ | (1,270 | ) | | $ | (8,393 | ) | | $ | 352,474 |
| | $ | (54,727 | ) |
Deferred tax expense (benefit) | | | | | | | |
Federal | $ | (73,074 | ) | | $ | (593,347 | ) | | $ | (302,697 | ) | | $ | (1,351,327 | ) |
State (net of federal tax expense (benefit)) | (18,362 | ) | | (144,927 | ) | | 367,551 |
| | (400,288 | ) |
Total deferred tax expense (benefit) | $ | (91,436 | ) | | $ | (738,274 | ) | | $ | 64,854 |
| | $ | (1,751,615 | ) |
Total income tax expense (benefit), net | $ | (92,706 | ) | | $ | (746,667 | ) | | $ | 417,328 |
| | $ | (1,806,342 | ) |
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
| | | | | | | |
Property and Equipment |
| September 30, 2019 | | December 31, 2018 |
Land | $ | 580,000 |
| | $ | 580,000 |
|
Natural gas pipeline | 124,578,399 |
| | 124,306,175 |
|
Vehicles and trailers | 711,430 |
| | 696,164 |
|
Office equipment and computers | 268,559 |
| | 268,559 |
|
Gross property and equipment | $ | 126,138,388 |
| | $ | 125,850,898 |
|
Less: accumulated depreciation | (18,498,371 | ) | | (15,969,346 | ) |
Net property and equipment | $ | 107,640,017 |
| | $ | 109,881,552 |
|
Depreciation expense was $843 thousand and $2.5 million for the three and nine months ended September 30, 2019, respectively, and $842 thousand and $2.5 million for the three and nine months ended September 30, 2018, respectively.
8. MANAGEMENT AGREEMENT
The Company pays its manager, Corridor, pursuant to a Management Agreement as described in the 2018 CorEnergy 10-K. During the three months ended March 31, 2019, the Manager voluntarily recommended, and the Company agreed, that the Manager would waive $45 thousand of the total $160 thousand incentive fee that would otherwise be payable under the provisions of the Management Agreement with respect to dividends paid on the Company's common stock.
During the three months ended June 30, 2019, the Manager voluntarily recommended, and the Company agreed, that the Manager would waive $135 thousand of the total $160 thousand incentive fee that would otherwise be payable under the provisions of the Management Agreement with respect to dividends paid on the Company's common stock.
During the three months ended September 30, 2019, the Manager voluntarily recommended, and the Company agreed, that the Manager would waive $126 thousand of the total $169 thousand incentive fee that would otherwise be payable under the provisions of the Management Agreement with respect to dividends paid on the Company's common stock.
In reviewing the application of the quarterly management fee provisions of the Management Agreement to the net proceeds received during the quarter from the offering of 5.875% Convertible Notes, which closed on August 12, 2019, the Manager waived any incremental management fee due as of the end of the third quarter of 2019 based on such proceeds (other than the cash portion of such proceeds that was utilized in connection with the exchange of the Company’s 7.00% Convertible Notes).
Fees incurred under the Management Agreement for the three and nine months ended September 30, 2019 were $1.6 million and $5.2 million, respectively, compared to $1.9 million and $5.7 million for the three and nine months ended September 30, 2018, 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 nine months ended September 30, 2019 were $64 thousand and $200 thousand, respectively, compared to $70 thousand and $209 thousand for the three and nine months ended September 30, 2018, 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
As a result of the sale or disposition of the Company's equity securities in 2018, there are no assets or liabilities measured at fair value on a recurring basis as of September 30, 2019.
Valuation Techniques and Unobservable Inputs
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 from either active (Level 1) or generally active (Level 2) markets.
|
| | | | | | | | | | | | | | | | | |
Carrying and Fair Value Amounts |
| Level within fair value hierarchy | | September 30, 2019 | | December 31, 2018 |
| | Carrying Amount (1) | | Fair Value | | Carrying Amount (1) | | Fair Value |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | Level 1 | | $ | 120,430,110 |
| | $ | 120,430,110 |
| | $ | 69,287,177 |
| | $ | 69,287,177 |
|
Financing notes receivable (Note 5) | Level 3 | | $ | 1,267,500 |
| | $ | 1,267,500 |
| | $ | 1,300,000 |
| | $ | 1,300,000 |
|
Financial Liabilities: | | | | | | | | |
Secured credit facilities | Level 2 | | $ | 34,654,725 |
| | $ | 34,654,725 |
| | $ | 37,261,109 |
| | $ | 37,261,109 |
|
7.00% Unsecured Convertible Senior Notes | Level 1 | | $ | 5,497,251 |
| | $ | 7,937,160 |
| | $ | 112,777,271 |
| | $ | 119,378,982 |
|
5.875% Unsecured Convertible Senior Notes | Level 2 | | $ | 116,086,037 |
| | $ | 126,430,800 |
| | $ | — |
| | $ | — |
|
(1) The carrying value of debt balances are presented net of unamortized original issuance discount and debt issuance costs. |
10. DEBT
The following is a summary of the Company's debt facilities and balances as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Commitment or Original Principal | | Quarterly Principal Payments | | | | September 30, 2019 | | December 31, 2018 |
| | | Maturity Date | | Amount Outstanding | | Interest Rate | | Amount Outstanding | | Interest Rate |
CorEnergy Secured Credit Facility: | | | | | | | | | | | | | |
CorEnergy Revolver | $ | 160,000,000 |
| | $ | — |
| | 7/28/2022 | | $ | — |
| | 4.77 | % | | $ | — |
| | 5.25 | % |
MoGas Revolver | 1,000,000 |
| | — |
| | 7/28/2022 | | — |
| | 4.77 | % | | — |
| | 5.25 | % |
Omega Line of Credit | 1,500,000 |
| | — |
| | 7/31/2020 | | — |
| | 6.02 | % | | — |
| | 6.50 | % |
Pinedale Secured Credit Facility: | | | | | | | | | | | | | |
Amended Pinedale Term Credit Facility | 41,000,000 |
| | 882,000 |
| | 12/29/2022 | | 34,826,000 |
| | 6.50 | % | | 37,472,000 |
| | 6.50 | % |
7.00% Unsecured Convertible Senior Notes | 115,000,000 |
| | — |
| | 6/15/2020 | | 5,526,000 |
| | 7.00 | % | | 113,958,000 |
| | 7.00 | % |
5.875% Unsecured Convertible Senior Notes | 120,000,000 |
| | — |
| | 8/15/2025 | | 120,000,000 |
| | 5.875 | % | | — |
| | — |
|
Total Debt | | $ | 160,352,000 |
| | | | $ | 151,430,000 |
| | |
Less: | | | | | | | | |
Unamortized deferred financing costs (1) | | $ | 656,479 |
| | | | $ | 283,278 |
| | |
Unamortized discount on 7.00% Convertible Senior Notes | | 26,986 |
| | | | 1,108,342 |
| | |
Unamortized discount on 5.875% Convertible Senior Notes | | 3,430,522 |
| | | | — |
| | |
Total Debt, net of deferred financing costs | | $ | 156,238,013 |
| | | | $ | 150,038,380 |
| | |
Debt due within one year | | $ | 9,025,251 |
| | | | $ | 3,528,000 |
| | |
(1) Unamortized deferred financing costs related to the Company's 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 7.00% Convertible Notes on June 15, 2020. This springing maturity would have been triggered on the first date on or after February 28, 2020 that both (i) the outstanding principal amount of the 7.00% Convertible Notes exceeded $28,750,000 and (ii) the Company's unrestricted cash liquidity (including, for purposes of this calculation, the undrawn portion of the Borrowing Base then available for borrowing under the CorEnergy Credit Facility) was less than the sum of (x) the outstanding principal amount of the 7.00% Convertible Notes plus (y) $5,000,000. The Company will not trigger the springing maturity as a result of the 7.00% Convertible Notes exchange completed in August 2019, which reduced the outstanding principal balance of the 7.00% Convertible Notes below the springing maturity threshold. Refer to "Convertible Debt" section below for further details on convertible debt transactions during the third quarter of 2019.
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 September 30, 2019, the Company was in compliance with all covenants of the CorEnergy Credit Facility.
As of September 30, 2019, the Company had approximately $136.8 million and $1.0 million of availability under the CorEnergy Revolver and MoGas Revolver, respectively.
Amended Pinedale Term Credit Facility
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 monthly.
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 September 30, 2019, the net assets of Pinedale LP were $133.1 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 nine months ended September 30, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
CorEnergy Credit Facility | $ | 143,635 |
| | $ | 143,636 |
| | $ | 430,906 |
| | $ | 430,906 |
|
Amended Pinedale Term Credit Facility | 13,205 |
| | 13,206 |
| | 39,616 |
| | 39,523 |
|
Total Deferred Debt Cost Amortization Expense (1)(2) | $ | 156,840 |
| | $ | 156,842 |
| | $ | 470,522 |
| | $ | 470,429 |
|
(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 credit facility 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 September 30, 2019 under the Amended Pinedale Term Credit Facility are as follows:
|
| | | | |
Year | | Amended Pinedale Term Credit Facility |
2019 | | $ | 882,000 |
|
2020 | | 3,528,000 |
|
2021 | | 3,528,000 |
|
2022 | | 26,888,000 |
|
2023 | | — |
|
Thereafter | | — |
|
Total Remaining Contractual Payments | | $ | 34,826,000 |
|
Convertible Debt
7.00% Convertible Notes
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 "7.00% Convertible Notes"). The 7.00% 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. As of December 31, 2018, the Company had $114.0 million 7.00% Convertible Notes outstanding following certain repurchases and conversions. The conversion rate for the 7.00% Convertible Notes is 30.3030 shares of common stock per $1,000 principal amount of 7.00% Convertible Notes, equivalent to a conversion price of $33.00 per share of common stock.
On January 16, 2019, the Company agreed with three holders of its 7.00% Convertible Notes, pursuant to privately negotiated agreements, to exchange $43.8 million face amount of such notes for an aggregate of 837,040 shares of the Company's common stock, par value $0.001 per share, plus aggregate cash consideration of $19.8 million, including $315 thousand of interest expense. The Company's agent and lenders under the CorEnergy Credit Facility provided a consent for the convertible note exchange. The Company recorded a loss on extinguishment of debt of approximately $5.0 million in the Consolidated Statements of Income for the nine months ended September 30, 2019. The loss on extinguishment of debt included the write-off of a portion of the underwriter's discount and deferred debt costs of $409 thousand and $27 thousand, respectively.
On August 15, 2019, the Company used a portion of the net proceeds from the offering of the 5.875% Convertible Notes discussed further below, together with shares of its common stock, to exchange $63.9 million face amount of its 7.00% Convertible Notes pursuant to privately negotiated agreements with three holders. The total cash and stock consideration for the exchange was valued at approximately $93.2 million. This included an aggregate of 703,432 shares of common stock plus cash consideration of approximately $60.2 million, including $733 thousand of interest expense. The Company recorded a loss on extinguishment of debt of approximately $28.9 million in the Consolidated Statements of Income for the three months ended September 30, 2019. The loss on extinguishment of debt included the write-off of a portion of the underwriter's discount and deferred debt costs of $360 thousand and $24 thousand, respectively. Collectively, for the two exchange transactions described above, the Company recorded a loss on extinguishment of debt of $34.0 million for the nine months ended September 30, 2019.
Additionally, during the three and nine months ended September 30, 2019, certain holders elected to convert (i) $178 thousand of 7.00% Convertible Notes for approximately 5,393 shares of common stock and (ii) $762 thousand of 7.00% Convertible Notes for approximately 23,083 shares of common stock, respectively. As of September 30, 2019, the Company has $5.5 million aggregate principal amount of 7.00% Convertible Notes outstanding.
5.875% Convertible Notes
On August 12, 2019, the Company completed a private placement offering of $120.0 million aggregate principal amount of 5.875% Convertible Senior Notes due 2025 (the "5.875% Convertible Notes") to the initial purchasers of such notes for cash in reliance on an exemption from registration provided by Section 4(a)(2) of the Securities Act. The initial purchasers then resold the 5.875% Convertible Notes for cash equal to 100 percent of the aggregate principal amount thereof to qualified institutional buyers, as defined in Rule 144A under the Securities Act, in reliance on an exemption from registration provided by Rule 144A. The 5.875% Convertible Notes mature on August 15, 2025 and bear interest at a rate of 5.875 percent per annum, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020.
The 5.875% Convertible Notes were issued with an initial purchasers' discount of $3.5 million, which is being amortized over the life of the notes. The Company also incurred approximately $494 thousand of deferred debt costs in issuing the 5.875% Convertible Notes, which are also being amortized over the life of the notes.
Holders may convert all or any portion of their 5.875% Convertible Notes into shares of the Company's common stock at their option at any time prior to the close of business on the business day immediately preceding the maturity date. The initial conversion rate for the 5.875% Convertible Notes is 20.0 shares of common stock per $1,000 principal amount of the 5.875% Convertible Notes, equivalent to an initial conversion price of $50.00 per share of the Company's common stock. Such conversion rate will be subject to adjustment in certain events as specified in the Indenture.
Upon the occurrence of a make-whole fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or any portion of their 5.875% Convertible Notes at a fundamental change repurchase price equal to 100 percent of the principal amount of the 5.875% Convertible Notes to be repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date as prescribed in the Indenture. Following the occurrence of a make-whole fundamental change, or if the Company delivers a notice of redemption (as discussed below), the Company will, in certain
circumstances, increase the applicable conversion rate for a holder that elects to convert its notes in connection with such make-whole fundamental change or notice of redemption.
The Company may not redeem the 5.875% Convertible Notes prior to August 15, 2023. On or after August 15, 2023, the Company may redeem for cash all or part of the 5.875% Convertible Notes, at its option, if the last reported sale price of its common stock has been at least 125 percent of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will equal 100 percent of the principal amount of the 5.875% Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The 5.875% Convertible Notes rank equal in right of payment to any other current and future unsecured obligations, including the 7.00% Convertible Notes, of the Company and senior in right of payment to any other current and future indebtedness of the Company that is contractually subordinated to the 5.875% Convertible Notes. The 5.875% Convertible Notes are structurally subordinated to all liabilities (including trade payables) of the Company’s subsidiaries. The 5.875% Convertible Notes are effectively junior to all of the Company’s existing or future secured debt, to the extent of the value of the collateral securing such debt.
Convertible Note Interest Expense
The following is a summary of the impact of convertible notes on interest expense for the three and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
Convertible Note Interest Expense |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
7.00% Convertible Notes: | | | | | | | |
Interest Expense | $ | 632,189 |
| | $ | 1,994,853 |
| | $ | 3,265,626 |
| | $ | 5,984,853 |
|
Discount Amortization | 62,030 |
| | 184,728 |
| | 312,079 |
| | 554,184 |
|
Deferred Debt Issuance Amortization | 4,051 |
| | 12,069 |
| | 20,382 |
| | 36,207 |
|
Total 7.00% Convertible Notes | $ | 698,270 |
| | $ | 2,191,650 |
| | $ | 3,598,087 |
| | $ | 6,575,244 |
|
| | | | | | | |
5.875% Convertible Notes: | | | | | | | |
Interest Expense | $ | 959,583 |
| | $ | — |
| | $ | 959,583 |
| | $ | — |
|
Discount Amortization | 79,478 |
| | — |
| | 79,478 |
| | — |
|
Deferred Debt Issuance Amortization | 10,623 |
| | — |
| | 10,623 |
| | — |
|
Total 5.875% Convertible Notes | $ | 1,049,684 |
| | $ | — |
| | $ | 1,049,684 |
| | $ | — |
|
Total Convertible Note Interest Expense | $ | 1,747,954 |
| | $ | 2,191,650 |
| | $ | 4,647,771 |
| | $ | 6,575,244 |
|
Including the impact of the convertible debt discount and related deferred debt issuance costs, (i) the effective interest rate on the 7.00% Convertible Notes is approximately 7.7 percent for each of the three and nine months ended September 30, 2019 and 2018, respectively and (ii) the effective interest rate on the 5.875% Convertible Notes is approximately 6.4 percent for the three and nine months ended September 30, 2019.
11. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As of September 30, 2019, the Company has a total of 5,019,727 depository shares outstanding, or approximately 50,197 whole shares of its 7.375% Series A Preferred Stock. 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 commenced August 6, 2018. Purchases were made through the program until it expired on August 5, 2019. On January 9, 2019, the Company repurchased 2,500 depository shares of Series A Preferred Stock for approximately $61 thousand in cash.
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 September 30, 2019, the Company has 13,534,856 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 STATEMENTS
On October 30, 2018, the Company filed a shelf registration statement with the SEC, pursuant to which it registered 1,000,000 shares of common stock for issuance under its dividend reinvestment plan. As of September 30, 2019, the Company has issued 22,003 shares of common stock under its dividend reinvestment plan pursuant to the shelf, resulting in remaining availability (subject to the current limitation discussed below) of approximately 977,997 shares of common stock.
On November 9, 2018, the Company had a new shelf registration statement declared effective by the SEC replacing the Company's previously filed shelf registration statement, pursuant to which it may publicly offer additional debt or equity securities with an aggregate offering price of up to $600.0 million. As described elsewhere in this Report, EGC and Cox Oil have refused to provide the financial statement information concerning EGC required to be filed by the Company pursuant to SEC Regulation S-X. At least until it is able to file these EGC financial statements, the Company does not expect to be able to use this shelf registration statement, or the shelf registration statement filed for its dividend reinvestment plan, to sell its securities. As previously disclosed in the Company's Current Report on Form 8-K filed on April 24, 2019, the Company has suspended its dividend reinvestment plan.
The Company has engaged in dialogue with the staff of the SEC in an effort to shorten the period during which it does not use its registration statements. The Company does not expect this period to be shortened until the EGC financial statement information has been received and filed.
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 nine months ended September 30, 2019 and 2018 excludes the impact to income and the number of shares outstanding from the conversion of the 7.00% Convertible Senior Notes and the 5.875% Convertible Senior Notes because such impact is antidilutive.
Under the if converted method, and after consideration of the common shares issued in the Convertible Notes exchanges and conversions discussed in Note 10 ("Debt"), the 7.00% Convertible Senior Notes and 5.875% Convertible Senior Notes would result in an additional 2,567,454 common shares outstanding for both the three and nine months ended September 30, 2019. For the three and nine months ended September 30, 2018, the if-converted method would have resulted in an additional 3,453,273 common shares outstanding.
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Net Income (loss) attributable to CorEnergy Stockholders | $ | (19,419,600 | ) | | $ | 7,697,324 |
| | $ | (5,728,233 | ) | | $ | 23,215,881 |
|
Less: preferred dividend requirements | 2,313,780 |
| | 2,396,875 |
| | 6,941,688 |
| | 7,190,625 |
|
Net Income (loss) attributable to Common Stockholders | $ | (21,733,380 | ) | | $ | 5,300,449 |
| | $ | (12,669,921 | ) | | $ | 16,025,256 |
|
Weighted average shares - basic | 13,188,546 |
| | 11,939,360 |
| | 12,870,357 |
| | 11,928,929 |
|
Basic earnings (loss) per share | $ | (1.65 | ) | | $ | 0.44 |
| | $ | (0.98 | ) | | $ | 1.34 |
|
| | | | | | | |
Net Income (loss) attributable to Common Stockholders (from above) | $ | (21,733,380 | ) | | $ | 5,300,449 |
| | $ | (12,669,921 | ) | | $ | 16,025,256 |
|
Add: After tax effect of convertible interest | — |
| | — |
| | — |
| | — |
|
Income (loss) attributable for dilutive securities | $ | (21,733,380 | ) | | $ | 5,300,449 |
| | $ | (12,669,921 | ) | | $ | 16,025,256 |
|
Weighted average shares - diluted | 13,188,546 |
| | 11,939,360 |
| | 12,870,357 |
| | 11,928,929 |
|
Diluted earnings (loss) per share | $ | (1.65 | ) | | $ | 0.44 |
| | $ | (0.98 | ) | | $ | 1.34 |
|
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 October 23, 2019, the Company's Board of Directors declared a 2019 third quarter dividend of $0.75 per share for CorEnergy common stock. The dividend is payable on November 29, 2019 to stockholders of record on November 15, 2019. As previously disclosed in the Company's Current Report on Form 8-K filed on October 23, 2019, the Company will pay this quarter's common stock dividend entirely in cash.
Preferred Stock Dividend Declaration
On October 23, 2019, 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 November 29, 2019 to stockholders of record on November 15, 2019.