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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________________
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
OR
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☐ | 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
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CORENERGY INFRASTRUCTURE TRUST, INC.
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(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 Registrant's 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 ☒ No ☐
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 ☒ No ☐
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 | ☐ | | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | | Smaller reporting company | ☒ |
| | | Emerging growth company | ☐ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No ☒
As of May 5, 2023, the registrant had 15,350,883 shares of Common Stock outstanding and 683,761 shares of Class B Common Stock outstanding.
CorEnergy Infrastructure Trust, Inc.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2023
TABLE OF CONTENTS
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This Report on Form 10-Q should be read in its entirety. No one section of this report deals with all aspects of the subject matter disclosed herein. It should be read in conjunction with the unaudited consolidated financial statements, related notes, and with the Management's Discussion & Analysis included within, as well as provided in the CorEnergy Infrastructure Trust, Inc. Annual Report on Form 10-K, for the year ended December 31, 2022.
The unaudited consolidated 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 months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ended December 31, 2023 or for any other interim or annual period. For further information, refer to the audited 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, 2022.
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| GLOSSARY OF DEFINED TERMS | |
Certain of the defined terms used in this Report as set forth below:
5.875% Convertible Notes: the Company's 5.875% Unsecured Convertible Senior Notes due 2025.
Adjusted SOFR: SOFR plus an adjustment based on tenor. The adjustment is 0.10% for one-month, 0.15% for three-month and 0.25% for six-month, SOFR rates. The adjustment was implemented when changing to SOFR to make the interest expense using SOFR as a reference rate equivalent to that using LIBOR.
ASC: FASB Accounting Standards Codification.
ASU: FASB Accounting Standard Update.
Bbls: standard barrel containing 42 U.S. gallons.
bpd: Barrels per day.
Cash Available for Distribution, or CAD (a non-GAAP financial measure): the Company's earnings before interest, taxes, depreciation and amortization, less (i) cash interest expense, (ii) preferred dividend requirements, including Crimson Class A-1 Units, (iii) regularly scheduled debt amortization, (iv) maintenance capital expenditures, and (v) reinvestment allocation and plus or minus other adjustments, but excluding the impact of extraordinary or nonrecurring expenses unrelated to the operations of Crimson and all of its subsidiaries, as defined in the Articles Supplementary for the Class B Common Stock and effective beginning with the quarter ending June 30, 2021.
Class B Common Stock: the Company's Class B Common Stock, par value $0.001 per share.
Code: the Internal Revenue Code of 1986, as amended.
Common Stock: the Company's Common Stock, par value $0.001 per share.
Company or CorEnergy: CorEnergy Infrastructure Trust, Inc. (NYSE: CORR).
Contribution Agreement: the Contribution Agreement, dated as of February 4, 2021, among the Company and the Contributors, pursuant to which the Company acquired Corridor in the Internalization transaction.
Corridor: Corridor InfraTrust Management, LLC, the Company's former external manager.
Corridor MoGas: Corridor MoGas, Inc., a wholly-owned taxable REIT subsidiary of CorEnergy, the holding company of MoGas, United Property Systems and CorEnergy Pipeline Company, LLC and a co-borrower under the Crimson Credit Facility.
COVID-19: Coronavirus disease of 2019; a pandemic affecting many countries globally.
CPUC: California Public Utility Commission.
Crimson: Crimson Midstream Holdings, LLC, the indirect owner of CPUC-regulated crude oil pipeline companies, of which the Company owns a 49.50% voting interest and all of the Class B-1 equity ownership interests.
Crimson Credit Facility: the Amended and Restated Credit Agreement, dated as of February 4, 2021, with Crimson Midstream Operating and Corridor MoGas, as co-borrowers, the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing bank, which provides borrowing capacity of up to $155.0 million, consisting of: the $50.0 million Crimson Revolver, the $80.0 million Crimson Term Loan and an uncommitted incremental facility of $25.0 million.
Crimson Midstream Operating: Crimson Midstream Operating, LLC, a wholly-owned subsidiary of Crimson and a co-borrower under the Crimson Credit Facility and direct owner of CPUC-regulated crude oil pipeline companies.
Crimson Pipeline System: an approximately 2,000-mile crude oil transportation pipeline system, which includes approximately 1,100 active miles, with associated storage facilities located in southern California and the San Joaquin Valley, owned and operated by subsidiaries of Crimson.
Crimson Revolver: the $50.0 million secured revolving line of credit facility with Wells Fargo Bank, National Association entered into on February 4, 2021.
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| GLOSSARY OF DEFINED TERMS (Continued from previous page) |
Crimson Term Loan: the $80.0 million secured term loan with Wells Fargo Bank, National Association entered into on February 4, 2021.
Crimson Transaction: the Company's acquisition of a 49.50% voting interest in Crimson effective February 1, 2021 with the right to acquire the remaining 50.50% voting interest upon receiving CPUC approval.
Exchange Act: the Securities Exchange Act of 1934, as amended.
FASB: Financial Accounting Standards Board.
FERC: Federal Energy Regulatory Commission.
Four Wood Corridor: Four Wood Corridor, LLC, a wholly-owned subsidiary of CorEnergy.
GAAP: U.S. generally accepted accounting principles.
Grier Members: Mr. John D. Grier, Mrs. M. Bridget Grier and certain of their affiliated trusts, which collectively own all of the Class A-1, Class A-2, and Class A-3 equity ownership interests in Crimson, which is reflected as a non-controlling interest in the Company's financial statements. The Grier Members own a 50.5% voting interest in Crimson through their ownership of the Crimson C-1 Units.
Indenture: that certain Indenture, dated August 12, 2019, between the Company and U.S. Bank National Association, as Trustee for the 5.875% Convertible Notes.
Internalization: CorEnergy's acquisition of its external manager, Corridor, pursuant to the Contribution Agreement. The Internalization transaction closed July 6, 2021.
IRS: Internal Revenue Service.
LIBOR: the London Interbank Offered Rate, a benchmark interest rate being replaced by SOFR.
MoGas: MoGas Pipeline LLC, an indirect wholly-owned subsidiary of CorEnergy.
MoGas Pipeline System: an approximately 263-mile interstate natural gas pipeline system located in and around St. Louis and extending into central Missouri, which is owned and operated by MoGas.
Mowood: Mowood, LLC, a wholly-owned subsidiary of CorEnergy and the holding company of Omega.
NYSE: New York Stock Exchange.
Omega: Omega Pipeline Company, LLC, a wholly-owned subsidiary of Mowood.
Omega Pipeline System: a 75-mile natural gas distribution system providing unregulated service in south central Missouri, which is owned and operated by Omega.
Omnibus Plan: the CorEnergy Infrastructure Trust, Inc. Omnibus Equity Incentive Plan, which was approved by the Company's stockholders on May 25, 2022.
Pipeline Loss Allowance (or PLA): the portion of crude oil provided by or on behalf of each shipper, at no cost to the carrier, (as allowance for losses sustained due to evaporation, measurement and other losses in transit) and retained by the carrier in recognition of loss and shrinkage in carrier's system.
PLR: the Private Letter Ruling dated November 16, 2018 (PLR 201907001) issued to CorEnergy by the IRS.
REIT: real estate investment trust.
RSU: Restricted Stock Unit.
SEC: Securities and Exchange Commission.
Securities Act: the Securities Act of 1933, as amended.
Series A Preferred Stock: the Company's 7.375% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share, which are represented by depositary shares, each representing 1/100th of a whole share of Series A Preferred Stock.
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| GLOSSARY OF DEFINED TERMS (Continued from previous page) |
SOFR: the Secured Overnight Financing Rate, a benchmark interest rate for dollar-denominated loans that will replace LIBOR. It reflects the pricing of overnight loans that are secured by U.S. Treasury securities.
United Property Systems: United Property Systems, LLC, an indirect wholly-owned subsidiary of CorEnergy, acquired with the MoGas transaction in November 2014.
U.S.: United States
VIE: variable interest entity.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of historical information, 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. Any forward-looking statement speaks only as of the date on which it is made and is qualified in its entirety by reference to the factors discussed throughout this Report.
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. Therefore, you should not rely on any of these forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and you 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, among others, the following:
•the impact of regulatory actions in California to curtail oil production;
•our ability to complete the sale of our MoGas and Omega Pipeline Systems on terms that will allow us to repay our Crimson Credit Facility and a material portion of our 5.875% Convertible Notes;
•our ability to meet the NYSE continuous listing standards so as to avoid an obligation to repurchase 5.875% Convertible Notes at par value if our Common Stock is delisted;
•changes in economic and business conditions in the energy infrastructure sector where our investments are concentrated, including the financial condition of our customers or borrowers and general economic conditions in the U.S. and in the particular sectors of the energy industry served by each of our infrastructure assets, including inflationary and recessionary risks;
•systemic pressures in the banking system, including potential disruptions in credit markets;
•competitive and regulatory pressures on the revenues of our California intrastate crude oil transportation business and our interstate natural gas transmission business;
•risks associated with the receipt of CPUC approval for the Company to obtain operational control over Crimson's CPUC-regulated pipeline assets;
•the impact of environmental, pipeline safety and other 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;
•our ability to comply with covenants in instruments governing our indebtedness;
•the potential impact of greenhouse gas regulation and climate change on our or our customers' business, financial condition and results of operations;
•risks associated with security breaches through cyber-attacks or acts of cyber terrorism or other cyber intrusions, or any other significant disruptions of our information technology (IT) networks and related systems;
•risks associated with the age of Crimson's assets, which were constructed over many decades, and which may increase future inspection, maintenance or repair costs, or result in downtime that could have a material adverse effect on our business and results of operations;
•the loss of any member of our management team;
•our ability to refinance amounts outstanding under our credit facilities and our 5.875% Convertible Notes at maturity on terms favorable to us;
•changes in interest rates under our current credit facilities and under any additional variable rate debt arrangements that we may enter into in the future;
•our dependence on key customers for significant revenues, and the risk of defaults by any such customers;
•our customers' ability to secure adequate insurance and risk of potential uninsured losses, including from natural disasters;
•the continued availability of third-party pipelines or other facilities interconnected with certain of our infrastructure assets;
•risks associated with owning, operating or financing properties for which our customers' or our operations may be impacted by extreme weather patterns and other natural phenomena;
•our ability to sell properties at an attractive price;
•market conditions and related price volatility affecting our debt and equity securities;
•changes in federal or state tax rules or regulations that could have adverse tax consequences;
•our ability to maintain internal controls and processes to ensure that all transactions are properly accounted for, that all relevant disclosures and filings are timely made in accordance with all rules and regulations, and that any potential fraud or embezzlement is thwarted or detected;
•changes in federal income tax regulations (and applicable interpretations thereof), or in the composition or performance of our assets, that could impact our ability to continue to qualify as a REIT for federal income tax purposes;
•conflicts of interest that some of our directors and officers may have with respect to certain other business interests related to the Crimson Transaction;
•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; and
•the loss of crude oil volumes on pipelines indirectly owned by Crimson due to lower than expected oil production in California or changes in customer shipping practices.
Forward-looking statements speak only as of the date on which they are made. Except as otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. 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 CorEnergy's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 29, 2023.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED BALANCE SHEETS
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| March 31, 2023 | | December 31, 2022 |
Assets | (Unaudited) | | |
Property and equipment, net of accumulated depreciation of $26,828,668 and $52,908,191, respectively (Crimson VIE*: $339,362,408, and $340,205,058, respectively) | $ | 339,386,557 | | | $ | 440,148,967 | |
Leased property, net of accumulated depreciation of $— and $299,463, respectively | — | | | 1,226,565 | |
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Financing notes and related accrued interest receivable, net of reserve of $50,000 and $600,000, respectively | 760,002 | | | 858,079 | |
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Cash and cash equivalents (Crimson VIE: $1,357,594 and $1,874,319, respectively) | 8,500,377 | | | 17,830,482 | |
Accounts and other receivables (Crimson VIE: $8,378,442 and $10,343,769, respectively) | 8,381,158 | | | 14,164,525 | |
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Due from affiliated companies (Crimson VIE: $85,259 and $167,743, respectively) | 85,259 | | | 167,743 | |
Deferred costs, net of accumulated amortization of $827,763 and $726,619, respectively | 385,779 | | | 415,727 | |
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Inventory (Crimson VIE: $8,734,990 and $5,804,776, respectively) | 8,734,990 | | | 5,950,051 | |
Prepaid expenses and other assets (Crimson VIE: $2,817,082 and $3,414,372, respectively) | 6,303,301 | | | 9,478,146 | |
Operating right-of-use assets (Crimson VIE: $4,147,085 and $4,452,210, respectively) | 4,281,136 | | | 4,722,361 | |
Deferred tax asset, net (Crimson VIE:$119,960 and $—, respectively) | 119,960 | | | — | |
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Assets held for sale | 107,716,203 | | | — | |
Total Assets | $ | 484,654,722 | | | $ | 494,962,646 | |
Liabilities and Equity | | | |
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Secured credit facilities, net of deferred financing costs of $513,123 and $665,547, respectively | $ | 101,486,877 | | | $ | 100,334,453 | |
Unsecured convertible senior notes, net of discount and debt issuance costs of $1,562,045 and $1,726,470, respectively | 116,487,955 | | | 116,323,530 | |
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Accounts payable and other accrued liabilities (Crimson VIE: $12,448,678 and $16,889,980, respectively) | 17,125,948 | | | 26,316,216 | |
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Income tax payable (Crimson VIE: $85,437 and $85,437, respectively) | 184,641 | | | 174,849 | |
Due to affiliated companies (Crimson VIE: $175,025 and $209,750, respectively) | 175,025 | | | 209,750 | |
Operating lease liability (Crimson VIE: $3,830,463 and $4,454,196, respectively) | 3,964,513 | | | 4,696,410 | |
Deferred tax liability, net | — | | | 1,292,300 | |
Unearned revenue (Crimson VIE: $689,085 and $203,725, respectively) | 689,085 | | | 5,948,621 | |
Liabilities held for sale | 8,192,552 | | | — | |
Total Liabilities | $ | 248,306,596 | | | $ | 255,296,129 | |
Commitments and Contingencies (Note 9) | | | |
Equity | | | |
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Series A Cumulative Redeemable Preferred Stock 7.375%, $131,913,805 liquidation preference at March 31, 2023 and $129,525,675 liquidation preference at December 31, 2022 ($2,500 per share, $0.001 par value); 69,367,000 authorized; 51,810 issued and outstanding at March 31, 2023 and December 31, 2022 | $ | 129,525,675 | | | $ | 129,525,675 | |
Common stock, non-convertible, $0.001 par value; 15,350,883 and 15,253,958 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively (100,000,000 shares authorized) | 15,351 | | | 15,254 | |
Class B Common Stock, $0.001 par value; 683,761 shares issued and outstanding at March 31, 2023 and December 31, 2022 (11,896,100 shares authorized) | 684 | | | 684 | |
Additional paid-in capital | 326,948,418 | | | 327,016,573 | |
Retained deficit | (337,844,642) | | | (333,785,097) | |
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Total CorEnergy Equity | 118,645,486 | | | 122,773,089 | |
Non-controlling interest | 117,702,640 | | | 116,893,428 | |
Total Equity | 236,348,126 | | | 239,666,517 | |
Total Liabilities and Equity | $ | 484,654,722 | | | $ | 494,962,646 | |
*Variable Interest Entity ("VIE") (Note 14) | | | |
See accompanying Notes to Consolidated Financial Statements. |
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CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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| For the Three Months Ended | | | | |
| March 31, 2023 | | March 31, 2022 | | | | | | |
Revenue | | | | | | | | | |
Transportation and distribution | $ | 29,343,386 | | | $ | 29,761,354 | | | | | | | |
Pipeline loss allowance subsequent sales | — | | | 2,731,763 | | | | | | | |
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Lease and other revenue | (1,214) | | | 379,234 | | | | | | | |
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Total Revenue | 29,342,172 | | | 32,872,351 | | | | | | | |
Expenses | | | | | | | | | |
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Transportation and distribution | 17,481,063 | | | 13,945,843 | | | | | | | |
Pipeline loss allowance subsequent sales cost of revenue | — | | | 2,192,649 | | | | | | | |
General and administrative | 6,771,582 | | | 5,142,865 | | | | | | | |
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Depreciation and amortization | 4,031,627 | | | 3,976,667 | | | | | | | |
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Total Expenses | 28,284,272 | | | 25,258,024 | | | | | | | |
Operating Income | $ | 1,057,900 | | | $ | 7,614,327 | | | | | | | |
Other Income (expense) | | | | | | | | | |
Other income | $ | 141,813 | | | $ | 120,542 | | | | | | | |
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Interest expense | (4,404,565) | | | (3,146,855) | | | | | | | |
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Total Other Expense | (4,262,752) | | | (3,026,313) | | | | | | | |
Income (Loss) before income taxes | (3,204,852) | | | 4,588,014 | | | | | | | |
Taxes | | | | | | | | | |
Current tax expense | 7,076 | | | 151,044 | | | | | | | |
Deferred tax expense (benefit) | (11,595) | | | 72,213 | | | | | | | |
Income tax expense (benefit), net | (4,519) | | | 223,257 | | | | | | | |
Net Income (Loss) | (3,200,333) | | | 4,364,757 | | | | | | | |
Less: Net income attributable to non-controlling interest | 809,212 | | | 809,212 | | | | | | | |
Net Income (Loss) attributable to CorEnergy Infrastructure Trust, Inc. | $ | (4,009,545) | | | $ | 3,555,545 | | | | | | | |
Preferred dividend requirements | 2,388,130 | | | 2,388,130 | | | | | | | |
Net Income (Loss) attributable to Common Stockholders | $ | (6,397,675) | | | $ | 1,167,415 | | | | | | | |
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Common Stock | | | | | | | | | |
Weighted average shares outstanding - basic | 15,272,267 | | | 14,917,165 | | | | | | | |
Basic net earnings (loss) per share | $ | (0.40) | | | $ | 0.08 | | | | | | | |
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Weighted average shares outstanding - diluted | 15,737,224 | | | 15,382,122 | | | | | | | |
Diluted net earnings (loss) per share | $ | (0.41) | | | $ | 0.08 | | | | | | | |
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Class B Common Stock | | | | | | | | | |
Weighted average shares outstanding - basic and diluted | 683,761 | | | 683,761 | | | | | | | |
Basic and diluted net earnings (loss) per share | $ | (0.40) | | | $ | 0.03 | | | | | | | |
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Dividends declared per common share | $ | — | | | $ | 0.050 | | | | | | | |
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See accompanying Notes to Consolidated Financial Statements. | | |
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF EQUITY
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| Common Stock | | Class B Common Stock | | | | Preferred Stock | | Additional Paid-in Capital | | | | Retained Deficit | | Non-controlling Interest | | Total |
| Shares | | Amount | | Shares | | Amount | | | | Amount | | | | | |
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Balance at December 31, 2022 | 15,253,958 | | | $ | 15,254 | | | 683,761 | | | $ | 684 | | | | | $ | 129,525,675 | | | $ | 327,016,573 | | | | | $ | (333,785,097) | | | $ | 116,893,428 | | | $ | 239,666,517 | |
Cumulative effect adjustment for the adoption of ASC 326, Financial Instruments - Credit Losses | — | | | — | | | — | | | — | | | | | — | | | — | | | | | (50,000) | | | — | | | (50,000) | |
Net loss | — | | | — | | | — | | | — | | | | | — | | | — | | | | | (4,009,545) | | | 809,212 | | | (3,200,333) | |
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Shares issued on RSU vesting, net of shares withheld for taxes | 96,925 | | | 97 | | | — | | | — | | | | | — | | | (57,781) | | | | | — | | | — | | | (57,684) | |
Stock-based compensation, net of forfeitures | — | | | — | | | — | | | — | | | | | — | | | (10,374) | | | | | — | | | — | | | (10,374) | |
Balance at March 31, 2023 (Unaudited) | 15,350,883 | | | $ | 15,351 | | | 683,761 | | | $ | 684 | | | | | $ | 129,525,675 | | | $ | 326,948,418 | | | | | $ | (337,844,642) | | | $ | 117,702,640 | | | $ | 236,348,126 | |
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| Common Stock | | Class B Common Stock | | | | Preferred Stock | | Additional Paid-in Capital | | | | Retained Deficit | | Non-controlling Interest | | Total |
| Shares | | Amount | | Shares | | Amount | | | | Amount | | | | | |
Balance at December 31, 2021 | 14,893,184 | | | $ | 14,893 | | | 683,761 | | | $ | 684 | | | | | $ | 129,525,675 | | | $ | 338,302,735 | | | | | $ | (321,028,580) | | | $ | 116,816,116 | | | $ | 263,631,523 | |
Net income | — | | | — | | | — | | | — | | | | | — | | | — | | | | | 3,555,545 | | | 809,212 | | | 4,364,757 | |
Series A preferred stock dividends | — | | | — | | | — | | | — | | | | | — | | | (2,388,130) | | | | | — | | | — | | | (2,388,130) | |
Common stock dividends | — | | | — | | | — | | | — | | | | | — | | | (744,659) | | | | | — | | | — | | | (744,659) | |
Reinvestment of dividends paid to common stockholders | 67,444 | | | 67 | | | — | | | — | | | | | — | | | 206,986 | | | | | — | | | — | | | 207,053 | |
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Crimson dividends on Class A-1 units | — | | | — | | | — | | | — | | | | | — | | | — | | | | | — | | | (809,212) | | | (809,212) | |
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Balance at March 31, 2022 (Unaudited) | 14,960,628 | | | $ | 14,960 | | | 683,761 | | | $ | 684 | | | | | $ | 129,525,675 | | | $ | 335,376,932 | | | | | $ | (317,473,035) | | | $ | 116,816,116 | | | $ | 264,261,332 | |
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See accompanying Notes to Consolidated Financial Statements.
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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| For the Three Months Ended |
| March 31, 2023 | | March 31, 2022 |
Operating Activities | | | |
Net income (loss) | $ | (3,200,333) | | | $ | 4,364,757 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Deferred income tax, net | (11,595) | | | 72,213 | |
Depreciation and amortization | 4,031,627 | | | 3,976,667 | |
Amortization of debt issuance costs | 417,993 | | | 412,260 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Gain on sale of equipment | (1,074) | | | — | |
Stock-based compensation | (10,374) | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Changes in assets and liabilities: | | | |
| | | |
Accounts and other receivables | 2,488,218 | | | 1,020,985 | |
| | | |
Inventory | (2,930,215) | | | (14,712) | |
Prepaid expenses and other assets | 2,275,824 | | | 1,255,475 | |
Due from affiliated companies, net | 47,759 | | | 282,032 | |
| | | |
Accounts payable and other accrued liabilities | (6,414,000) | | | (4,274,956) | |
Income tax payable | 9,792 | | | 141,226 | |
| | | |
Unearned revenue | 513,243 | | | 46,019 | |
Other changes, net | (324,496) | | | (312,060) | |
Net cash provided by (used in) operating activities | $ | (3,107,631) | | | $ | 6,969,906 | |
Investing Activities | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Purchases of property and equipment | (4,102,119) | | | (1,191,364) | |
| | | |
Proceeds from reimbursable projects | 742,537 | | | 1,478,042 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Other changes, net | (130,439) | | | 42,666 | |
| | | |
| | | |
| | | |
Net cash provided by (used in) investing activities | $ | (3,490,021) | | | $ | 329,344 | |
Financing Activities | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Dividends paid on Series A preferred stock | — | | | (2,388,130) | |
Dividends paid on Common Stock | — | | | (744,659) | |
| | | |
| | | |
| | | |
| | | |
Reinvestment of Dividends Paid to Common Stockholders | — | | | 207,053 | |
Distributions to non-controlling interest | — | | | (809,212) | |
Advances on the Crimson Revolver | 4,000,000 | | | 2,000,000 | |
Payments on the Crimson Revolver | (1,000,000) | | | (3,000,000) | |
| | | |
Principal payments on the Crimson Term Loan | (2,000,000) | | | (2,000,000) | |
Dividends paid on Vested RSUs | (6,332) | | | — | |
| | | |
| | | |
Payments on financing arrangement | (881,499) | | | (862,754) | |
| | | |
| | | |
| | | |
| | | |
Net cash provided by (used in) financing activities | $ | 112,169 | | | $ | (7,597,702) | |
Net change in Cash and Cash Equivalents | (6,485,483) | | | (298,452) | |
Cash and Cash Equivalents at beginning of period | 17,830,482 | | | 11,540,576 | |
Cash and Cash Equivalents at end of period | $ | 11,344,999 | | | $ | 11,242,124 | |
| | | |
| | | | | | | | | | | |
| For the Three Months Ended |
| March 31, 2023 | | March 31, 2022 |
Supplemental Disclosure of Cash Flow Information | | | |
Interest paid | $ | 5,467,817 | | | $ | 4,500,333 | |
Income taxes paid (net of refunds) | — | | | (716) | |
| | | |
Non-Cash Investing Activities | | | |
| | | |
| | | |
| | | |
| | | |
Purchases of property, plant and equipment in accounts payable and other accrued liabilities | $ | 1,174,225 | | | $ | 1,178,271 | |
| | | |
| | | |
| | | |
| | | |
Non-Cash Financing Activities | | | |
Change in accounts payable and accrued expenses related to debt financing costs | $ | 71,196 | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Assets acquired under financing arrangement | — | | | 647,130 | |
See accompanying Notes to Consolidated Financial Statements. | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2023
1. INTRODUCTION AND BASIS OF PRESENTATION
Introduction
CorEnergy Infrastructure Trust, Inc. (referred to as "CorEnergy" or "the Company"), was organized as a Maryland corporation and commenced operations on December 8, 2005. The Company's common stock, par value $0.001 per share ("Common Stock"), is listed on the New York Stock Exchange ("NYSE") under the symbol "CORR" and its depositary shares representing the Company's 7.375% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share ("Series A Preferred Stock"), are listed on the NYSE under the symbol "CORR PrA". The Company's Class B Common Stock, par value $0.001 per share ("Class B Common Stock"), is not listed on an exchange.
The Company owns and operates critical energy midstream infrastructure connecting the upstream and downstream sectors within the industry. The Company currently generates revenue from the transportation, via pipeline systems, of crude oil and natural gas for its customers in California and Missouri, respectively. The pipelines are located in areas where it would be difficult to replicate rights-of-way or transport crude oil or natural gas via non-pipeline alternatives, resulting in the Company's assets providing utility-like criticality in the midstream supply chain for its customers.
CorEnergy's Private Letter Rulings ("PLRs") enable the Company to invest in a broader set of revenue contracts within its real estate investment trust ("REIT") structure, including the opportunity to both own and operate infrastructure assets. CorEnergy has determined its investments in these energy infrastructure assets to be a single reportable business segment and reports them accordingly in its consolidated financial statements.
The principal executive offices of the Company are located at 1100 Walnut, Suite 3350, Kansas City, Missouri 64106.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include CorEnergy accounts and the accounts of its wholly-owned subsidiaries and variable interest entities ("VIEs") for which CorEnergy is the primary beneficiary. The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") set forth in the Accounting Standards Codification ("ASC"), as published by the Financial Accounting Standards Board ("FASB"), and with the Securities and Exchange Commission ("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 unaudited consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. There were no adjustments that, in the opinion of management, were not of a normal and recurring nature. All intercompany transactions and balances have been eliminated in consolidation, and the Company's net earnings have been reduced by the portion of net earnings attributable to non-controlling interests, when applicable. Prior reporting period amounts have been recast to conform with the current period presentation. In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.
Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any other interim or annual period. Amounts as of December 31, 2022 have been derived from the audited consolidated financial statements as of that date and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in CorEnergy's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 29, 2023.
Subsidiaries of the Company and Crimson Midstream Holdings, LLC, a VIE of the Company ("Crimson"), are parties to, and co-borrowers under, that certain Amended and Restated Credit Agreement, dated as February 4, 2021, which provides for borrowing capacity of up to $155.0 million (the "Crimson Credit Facility"). The Crimson Credit Facility is scheduled to mature on May 3, 2024, which is within twelve months of the date of issuance of these financial statements for the period ended March 31, 2023. As previously announced via press release, the Company’s management is in the process of pursuing a sale of the MoGas and Omega pipeline assets, which is currently expected to close during the third quarter of 2023. The Company is required to use the proceeds from such sale to repay the Crimson Credit Facility. If the Company is unable to extend the
maturity date of the Crimson Credit Facility, or to repay or refinance it by May 3, 2024, the Company's ability to meet its obligations would be adversely affected. Failure to extend the maturity date or repay the debt prior to its contractual maturity would result in the potential foreclosure on the collateral securing such debt and could cause a cross-default under other agreements, which could also result in the acceleration of those obligations by the counterparties to those agreements. The Company’s management believes it is probable these measures will be successful and enable the Company to fully retire the Crimson Credit Facility before its contractual maturity, although no such assurance can be given.
During March 2023, the Company determined that the MoGas and Omega pipeline assets have met the criteria of "held for sale" accounting, as specified by FASB's Accounting Standard Codification ("ASC") 360, "Property, Plant and Equipment." The carrying value of the assets and liabilities of this component is less than the fair value less costs to sell. Therefore, amounts are presented at carrying value within the Company's Consolidated Balance Sheet.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June of 2016, the FASB issued Accounting Standards Update ("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 model ("CECL model"), applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. Consistent with the guidance for smaller reporting companies, the Company has adopted this standard as of January 1, 2023.
Trade receivables - Accounts receivable from the transportation and distribution of crude oil and natural gas are generally settled with counterparties within 60 days of the service month. The Company has a high historical rate of collectibility of greater than 99% of total revenue, and as such, has adopted an impairment model based on an evaluation of its aging schedule. As of March 31, 2023 the Company's calculated allowance for doubtful accounts was immaterial.
Financing note receivable - Refer to Note 6 ("Financing Notes Receivable") for further discussion.
The Company utilized the modified retrospective approach for implementation and recorded a $50 thousand cumulative-effect adjustment to beginning retained earnings as of January 1, 2023.
3. HELD FOR SALE
MoGas Pipeline and Omega Pipeline Systems
As of March 31, 2023, the Company's MoGas and Omega pipeline systems were classified as assets and liabilities held for sale. The Company is disposing of these assets to address upcoming debt maturities on the Crimson Credit Facility and to reduce outstanding debt associated with the Company's 5.875% Unsecured Convertible Senior Notes due 2025 (the "5.875% Convertible Notes"). It is the Company's expectation that the sale of these assets will be completed by the third quarter of 2023. The carrying value of the assets classified as held for sale was $107.7 million as of March 31, 2023. The carrying value of the liabilities held for sale was $8.2 million as of March 31, 2023. During the three months ended March 31, 2023 and 2022, pre-tax profit from the MoGas and Omega pipeline systems was $634 thousand and $2.3 million, respectively. The Company is contractually obligated to use the proceeds from the anticipated sale to repay the Crimson Credit Facility. As such, the aforementioned pre-tax profit includes allocated interest related to the Crimson Credit Facility of $2.5 million and $1.2 million for the three months ended March 31, 2023 and 2022, respectively.
MoGas and Omega Pipeline Systems
Held for Sale Balance Sheets
| | | | | | | |
| March 31, 2023 | | |
Assets | (Unaudited) | | |
Property and equipment, net of accumulated depreciation of $30,077,502 | $ | 99,136,234 | | | |
| | | |
Leased property, net of accumulated depreciation of $309,778 | 1,216,249 | | | |
| | | |
| | | |
| | | |
Cash and cash equivalents | 2,844,622 | | | |
Accounts and other receivables | 3,228,980 | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Inventory | 145,275 | | | |
Prepaid expenses and other assets | 1,059,643 | | | |
Operating right-of-use assets | 85,200 | | | |
| | | |
| | | |
| | | |
Total Assets | $ | 107,716,203 | | | |
Liabilities | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Accounts payable and other accrued liabilities | 967,732 | | | |
| | | |
| | | |
| | | |
Operating lease liability | 51,376 | | | |
Deferred tax liability, net(1) | 1,400,665 | | | |
Unearned revenue | 5,772,779 | | | |
| | | |
Total Liabilities | $ | 8,192,552 | | | |
| | |
| | | |
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|
|
(1) The deferred tax liability is recorded within certain parent entities that are not part of the disposal group, however, as the liability was generated from the operations of the disposal group, the Company has included it within liabilities held for sale on the Consolidated Balance Sheet. | | |
4. TRANSPORTATION AND DISTRIBUTION REVENUE
The Company's contracts related to transportation and distribution revenue are primarily comprised of a mix of crude oil, natural gas supply and natural gas transportation and distribution performance obligations, as well as limited performance obligations related to system maintenance and improvement.
Crude Oil and Natural Gas Transportation and Distribution
Under the Company's (i) crude oil and natural gas transportation, (ii) natural gas supply and (iii) natural gas distribution performance obligations, the customer simultaneously receives and consumes the benefit of the services as the commodity is delivered. Therefore, the transaction price is allocated proportionally over the series of identical performance obligations with each contract, and the Company satisfies performance obligations over time as transportation and distribution services are performed. The transaction price is calculated based on (i) index price, plus a contractual markup in the case of natural gas supply agreements (considered variable due to fluctuations in the index), (ii) CPUC and Federal Energy Regulatory Commission ("FERC") regulated rates or negotiated rates in the case of transportation agreements and (iii) contracted amounts (with annual Consumer Price Index escalators) in the case of the Company's distribution agreement.
The Company's crude oil transportation revenue also includes amounts earned for pipeline loss allowance ("PLA"). PLA revenue, recorded within transportation revenue, represents the estimated realizable value of the earned loss allowance volumes received by the Company as applicable under the tariff or contract. As is common in the pipeline transportation industry, as crude oil is transported, the Company earns a small percentage of the crude oil volume transported to offset any measurement uncertainty or actual volumes lost in transit. The Company will settle the PLA with its shippers either in-kind or in cash. PLA received by the Company typically exceeds actual pipeline losses in transit and typically results in a benefit to the Company.
When PLA is paid in-kind, the barrels are valued at current market price less standard deductions, recorded as inventory and recognized as non-cash consideration revenue, concurrent with related transportation services. PLA paid in cash is treated in the same way as in-kind, but no inventory is created. In accordance with ASC 606, "Revenue from Contracts with Customers" ("ASC 606") when control of the PLA volumes have been transferred to the purchaser, the Company records this non-cash consideration as revenue at the contractual sales price within PLA revenue and PLA cost of revenues.
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 & Improvement
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 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. The costs of system improvement projects are recognized as a financing arrangement in accordance with guidance in ASC 842, "Leases," while the margin is recognized in accordance with the ASC 606 revenue standard as discussed above.
The table below summarizes the Company's contract liability balance related to its transportation and distribution revenue contracts:
| | | | | | | | | | | |
| Contract Liability(1) |
| March 31, 2023 | | December 31, 2022 |
Beginning Balance January 1 | $ | 5,927,873 | | | $ | 5,339,364 | |
| | | |
Unrecognized Performance Obligations | 687,319 | | | 1,175,824 | |
Recognized Performance Obligations | (174,077) | | | (587,315) | |
Ending Balance | $ | 6,441,115 | | | $ | 5,927,873 | |
(1) As of March 31, 2023, the contract liability balance is included in unearned revenue (Crimson portion) and liabilities held for sale (MoGas and Omega portion) in the Consolidated Balance Sheets. As of December 31, the contract liability balance was included in unearned revenue in the Consolidated Balance Sheets. |
The Company's contract asset balances were immaterial as of both March 31, 2023 and December 31, 2022. The Company also recognized deferred contract costs related to incremental costs to obtain a transportation performance obligation contract, which are amortized on a straight-line basis over the remaining term of the contract. As of March 31, 2023, the remaining unamortized deferred contract costs balance was approximately $732 thousand. The contract asset and deferred contract costs balances are included in assets held for sale and prepaid expenses and other assets in the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022, respectively.
The following is a breakout of the Company's transportation and distribution revenue for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
Crude oil transportation revenue | $ | 23,970,861 | | | 81.7 | % | | $ | 24,129,364 | | 81.1 | % | | | | | | | | |
Natural gas transportation revenue | 3,752,600 | | | 12.8 | % | | 4,061,276 | | | 13.6 | % | | | | | | | | |
Natural gas distribution revenue | 1,238,528 | | | 4.2 | % | | 1,197,904 | | | 4.0 | % | | | | | | | | |
Other | 381,397 | | | 1.3 | % | | 372,810 | | | 1.3 | % | | | | | | | | |
Total | $ | 29,343,386 | | | 100.0 | % | | $ | 29,761,354 | | | 100.0 | % | | | | | | | | |
5. LEASES
The Company and its subsidiaries currently lease land, corporate office space, single-use office space, and equipment. During 2022, Crimson entered into a new corporate office lease that will commence upon possession of the property, which is anticipated during the second quarter of 2023. No lease payments are due for the first year. No right-of-use asset or operating lease liability has been recorded as of March 31, 2023 because the lease has not yet commenced. The Company's leases are classified as operating leases and presented as operating right-of-use asset (assets held for sale for MoGas and Omega) and operating lease liability (liabilities held for sale for MoGas and Omega) on the Consolidated Balance Sheets as of March 31, 2023. The Company's leases are presented as operating right-of-use asset and operating lease liability on the Consolidated Balance Sheets as of December 31, 2022. No right-of-use assets were added to the Company's Consolidated Balance Sheet for the periods ended March 31, 2023 and March 31, 2022. The Company recognizes lease expense in the Consolidated Statements of Operations on a straight-line basis over the remaining lease term. The Company noted the following information regarding its operating leases for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
Lease cost: | | | | | | | |
Operating lease cost | $ | 446,601 | | | $ | 446,601 | | | | | |
| | | | | | | |
| | | | | | | |
Other Information: | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | |
Operating cash flows from operating leases | $ | 765,210 | | | $ | 758,849 | | | | | |
| | | | | | | |
Variable lease costs were immaterial for the three months ended March 31, 2023 and 2022.
The following table reflects the weighted average lease term and discount rate for leases in which the Company is a lessee:
| | | | | | | | | | | | | | |
| | |
| | March 31, 2023 | | December 31, 2022 |
Weighted average remaining lease term - operating leases (in years) | | 11.5 | | 11.0 |
Weighted average discount rate - operating leases | | 7.58 | % | | 7.45 | % |
6. FINANCING NOTES RECEIVABLE
On December 12, 2018, Four Wood Corridor, LLC, a subsidiary of the Company, entered into a $1.3 million note receivable with Compass SWD, LLC related to the sale of real and personal property that provide saltwater disposal services for the oil and natural gas industry (the "Compass REIT Loan"). Subsequent to amendments to the Compass REIT Loan in 2019, 2020 and 2021, the Compass REIT Loan matures on July 31, 2026 and accrues interest at an annual rate of 12.0%, with monthly payments of $24 thousand.
As of March 31, 2023 and December 31, 2022, the Compass REIT Loan balance was $760 thousand and $858 thousand, respectively, net of reserves of $50 thousand and zero, respectively. The Company uses the discounted cash flow method to estimate expected credit losses and also reviews other factors that may affect the collectability of the balance, including timeliness of required payments, past due status and discussions with obligors. As of March 31, 2023, there were no past due payments associated with the Compass REIT Loan.
7. 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 March 31, 2023 and December 31, 2022, are as follows:
| | | | | | | | | | | |
Deferred Tax Assets and Liabilities |
| March 31, 2023 | | December 31, 2022 |
Deferred Tax Assets: | | | |
| | | |
Deferred contract revenue | $ | — | | | $ | 1,230,985 | |
Net operating loss carryforwards | 119,960 | | | 7,027,439 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Capital loss carryforward | — | | | 92,418 | |
Other | — | | | 338 | |
Sub-total | $ | 119,960 | | | $ | 8,351,180 | |
Valuation allowance | — | | | (5,168,148) | |
Sub-total | $ | 119,960 | | | $ | 3,183,032 | |
Deferred Tax Liabilities: | | | |
| | | |
| | | |
Cost recovery of leased and fixed assets | $ | — | | | $ | (4,386,744) | |
Other | — | | | (88,588) | |
Sub-total | $ | — | | | $ | (4,475,332) | |
Total net deferred tax asset (liability) | $ | 119,960 | | | $ | (1,292,300) | |
| | | | | | | |
Deferred Tax Assets and Liabilities - Held For Sale |
| March 31, 2023 | | |
Deferred Tax Assets: | | | |
| | | |
Deferred contract revenue | $ | 1,188,929 | | | |
Net operating loss carryforwards | 7,061,566 | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Capital loss carryforward | 92,418 | | | |
Other | 331 | | | |
Sub-total | $ | 8,343,244 | | | |
Valuation allowance | (5,090,540) | | | |
Sub-total | $ | 3,252,704 | | | |
Deferred Tax Liabilities: | | | |
| | | |
| | | |
Cost recovery of leased and fixed assets | $ | (4,560,353) | | | |
Other | (93,016) | | | |
Sub-total | $ | (4,653,369) | | | |
Total net deferred tax liability(1) | $ | (1,400,665) | | | |
(1) The deferred tax liability is recorded within certain parent entities that are not part of the disposal group, however, as the liability was generated from the operations of the disposal group, the Company has included it within liabilities held for sale on the Consolidated Balance Sheet. | | |
The total deferred tax assets and liabilities presented above relate to the Company's taxable REIT subsidiaries ("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. As of March 31, 2023, the Company had no uncertain tax positions. Tax years beginning with the year ended December 31, 2019 remain open to examination by federal and state tax authorities.
As of March 31, 2023 and December 31, 2022, the TRSs had cumulative net operating loss carryforwards ("NOLs") of $29.7 million and $29.2 million, respectively. As of March 31, 2023 and December 31, 2022, NOLs of $27.2 million and $26.4 million, respectively, that were generated during the periods ended March 31, 2023, December 31, 2022, 2021, 2020, 2019, and 2018 may be carried forward indefinitely, subject to limitation. NOLs generated for years prior to December 31, 2018 may be carried forward for 20 years.
Management assessed the available evidence and determined that it is more likely than not that the NOLs will not be utilized prior to expiration. Due to the uncertainty of realizing this deferred tax asset, a valuation allowance of $92 thousand was
recorded, equal to the amount of the tax benefit of this carryforward at both March 31, 2023 and December 31, 2022. Additionally, the Company determined that certain of the federal and state NOLs would not be utilized prior to their expiration. Due to the uncertainty of realizing these deferred tax assets, a valuation allowance of $5.1 million and $5.2 million was recorded at March 31, 2023 and December 31, 2022, respectively. In the future, if the Company concludes, based on existence of sufficient evidence, that it should realize more or less of the deferred tax assets, the valuation allowance will be adjusted accordingly in the period such conclusion is made.
The Company provides for income taxes during interim periods based on the estimated effective tax rate for the year and any discrete adjustments. The effective tax rate is subject to change in the future due to various factors such as the operating performance of the TRSs, tax law changes, and future business acquisitions or divestitures. The TRSs’ effective tax rates were (1.2)% and 13.6% for the three months ended March 31, 2023 and 2022, respectively.
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 | | |
| March 31, 2023 | | March 31, 2022 | | | | |
Current tax expense | | | | | | | |
Federal | $ | 6,151 | | | $ | 105,568 | | | | | |
State (net of federal tax expense) | 925 | | | 45,476 | | | | | |
Total current tax expense | $ | 7,076 | | | $ | 151,044 | | | | | |
Deferred tax expense (benefit) | | | | | | | |
Federal | $ | 403 | | | $ | 59,424 | | | | | |
State (net of federal tax expense) | (11,998) | | | 12,789 | | | | | |
Total deferred tax expense (benefit) | $ | (11,595) | | | $ | 72,213 | | | | | |
Total income tax expense (benefit), net | $ | (4,519) | | | $ | 223,257 | | | | | |
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
| | | | | | | | | | | |
Property and Equipment |
| March 31, 2023 | | December 31, 2022 |
Land | $ | 24,303,454 | | | $ | 24,989,784 | |
Crude oil pipelines | 185,507,086 | | | 185,047,366 | |
Natural gas pipeline | — | | | 105,322,987 | |
Right-of-way agreements | 65,159,200 | | | 87,206,374 | |
Pipeline related facilities | 43,288,238 | | | 42,647,865 | |
Tanks | 34,358,392 | | | 33,092,825 | |
| | | |
| | | |
| | | |
Vehicles, trailers and other equipment | 1,811,967 | | | 2,684,993 | |
| | | |
Office equipment and computers | 1,301,139 | | | 1,569,698 | |
| | | |
| | | |
Construction work in progress | 10,485,749 | | | 10,495,266 | |
Gross property and equipment | $ | 366,215,225 | | | $ | 493,057,158 | |
Less: accumulated depreciation | (26,828,668) | | | (52,908,191) | |
Net property and equipment | $ | 339,386,557 | | | $ | 440,148,967 | |
Depreciation expense was $4.0 million and $3.9 million for the three months ended March 31, 2023 and 2022, respectively.
Held-for-sale property and equipment consist of the following:
| | | | | | | |
Property and Equipment |
| March 31, 2023 | | |
Land | 686,330 | | | |
Natural gas pipeline | 105,322,987 | | | |
Right-of-way agreements | 22,047,174 | | | |
| | | |
| | | |
Vehicles, trailers and other equipment | 868,686 | | | |
Office equipment and computers | 268,559 | | | |
Construction work in process | 20,000 | | | |
Gross Property and equipment | $ | 129,213,736 | | | |
Less: accumulated depreciation | (30,077,502) | | | |
Net property and equipment | $ | 99,136,234 | | | |
| | | |
Depreciation expense was $785 thousand for the three months ended March 31, 2023.
9. COMMITMENTS AND CONTINGENCIES
Crimson Legal Proceedings
As a transporter of crude oil, the Company is subject to various environmental regulations that could subject the Company to future monetary obligations. Crimson has received notices of violations and potential fines under various federal, state and local provisions relating to the discharge of materials into the environment or protection of the environment. Management believes that if any one or more of these environmental proceedings were decided against Crimson, it would not be material to the Company's financial position, results of operations or cash flows. Additionally, the Company maintains insurance coverage for environmental liabilities in amounts that management believes are appropriate and customary for the Company's business.
The Company is also subject to various other claims and legal proceedings covering a wide range of matters that arose in the ordinary course of business. In the opinion of management, all such matters are without merit or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
Restructuring Costs
During the three months ended March 31, 2023, the Company approved a restructuring plan associated with changes in management structure and the corresponding reorganization of Crimson management. Total costs incurred to date under this plan are $1.7 million, which was all recognized during the three months ended March 31, 2023. These costs are recorded in transportation and distribution and in general and administrative within the Consolidated Statement of Operations. The Company anticipates $298 thousand of additional restructuring-related costs over the remainder of 2023. As of March 31, 2023, the remaining liability related to these severance payments was $