CorEnergy Infrastructure Trust, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Leased Properties and Leases

Leased Properties and Leases

12 Months Ended

Dec. 31, 2017

As of December 31, 2017, the Company had three significant leased properties located in Oregon, Wyoming, Louisiana and the Gulf of Mexico, which are leased on a triple-net basis to major tenants, described in the table below. These major tenants are responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to the leased properties. The long-term, triple-net leases generally have an initial term of 11 to 15 years with options for renewals. Lease payments are scheduled to increase at varying intervals during the initial terms of the leases. The following table summarizes the significant leased properties, major tenants and lease terms:



Summary of Leased Properties, Major Tenants and Lease Terms
Property	Grand Isle Gathering System	Pinedale LGS⁽¹⁾	Portland Terminal Facility
Location	Gulf of Mexico/Louisiana	Pinedale, WY	Portland, OR
Tenant	Energy XXI GIGS Services, LLC	Ultra Wyoming LGS, LLC	Zenith Energy Terminals Holdings LLC
Asset Description	Approximately 153 miles of offshore pipeline with total capacity of 120 thousand Bbls/d, including a 16-acre onshore terminal and saltwater disposal system.	Approximately 150 miles of pipelines and four central storage facilities.	A 39-acre rail and marine facility property adjacent to the Willamette River with 84 tanks and total storage capacity of approximately 1.5 million barrels.
Date Acquired	June 2015	December 2012	January 2014
Initial Lease Term	11 years	15 years	15 years⁽³⁾
Renewal Option	Equal to the lesser of 9-years or 75 percent of the remaining useful life	5-year terms	5-year terms
Current Monthly Rent Payments	7/1/16 - 6/30/17: $2,826,250 7/1/17 - 6/30/18: $2,854,667	$1,741,933⁽²⁾	$513,355
Estimated Useful Life	27 years	26 years	30 years
(1) Non-Controlling Interest Partner, Prudential, funded a portion of the original Pinedale LGS acquisition and, as a limited partner, held 18.95 percent of the economic interest in Pinedale LP. Pinedale LP I, a wholly-owned subsidiary of the Company, acquired Prudential's 18.95 percent economic interest on December 29, 2017. Pinedale GP, a wholly-owned subsidiary of the Company, holds the remaining 81.05 percent economic interest.
(2) Monthly rent payments increased to $1,776,772 beginning January 1, 2018.
(3) The lessee of the Portland Terminal Facility has a purchase option beginning in February 2017, which it can exercise with 90-days notice, as well as lease termination options on the fifth and tenth anniversaries of the lease. If exercised, the purchase option and termination options are subject to additional payment provisions and termination fees prescribed under the lease.

The future contracted minimum rental receipts for all leases as of December 31, 2017, are as follows:



Future Minimum Lease Receipts ⁽¹⁾
Year Ending December 31,	Amount
2018	$	61,828,029
2019	64,103,462
2020	71,264,921
2021	77,445,396
2022	76,553,434
Thereafter	302,242,184
Total	$	653,437,426
(1) Future minimum lease receipts include base rents for the Portland Terminal Facility through its initial 15-year term.

The table below displays the Company's individually significant leases as a percentage of total leased properties and total lease revenues for the periods presented:



	As a Percentage of ⁽¹⁾
	Leased Properties				Lease Revenues
	As of December 31,				For the Years Ended December 31,
	2017		2016		2017		2016		2015
Pinedale LGS	39.9	%	39.8	%	31.2	%	30.4	%	42.9	%
Grand Isle Gathering System	49.7	%	50.0	%	59.1	%	59.8	%	42.3	%
Portland Terminal Facility	10.1	%	9.9	%	9.6	%	9.7	%	13.3	%
(1) Insignificant leases are not presented; thus percentages may not sum to 100%.

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 Years Ended December 31,
	2017		2016		2015
Depreciation Expense
GIGS	$	9,754,596	$	8,605,506	$	4,317,769
Pinedale	8,869,440		8,869,440		8,869,440
Portland Terminal Facility	1,275,660		843,084		1,235,369
Eastern Interconnect Project	—		—		569,670
United Property Systems	36,298		32,424		29,700
Total Depreciation Expense	$	19,935,994	$	18,350,454	$	15,021,948
Amortization Expense - Deferred Lease Costs
GIGS	$	30,564	$	30,564	$	15,130
Pinedale	61,368		61,368		61,368
Total Amortization Expense - Deferred Lease Costs	$	91,932	$	91,932	$	76,498
ARO Accretion Expense
GIGS	$	663,065	$	726,664	$	339,042
Total ARO Accretion Expense	$	663,065	$	726,664	$	339,042

The following table reflects the deferred costs that are included in the accompanying Consolidated Balance Sheets associated with the Company's leased properties:



	December 31, 2017		December 31, 2016
Net Deferred Lease Costs
GIGS	$	259,883	$	290,447
Pinedale	611,717		673,085
Total Deferred Lease Costs, net	$	871,600	$	963,532

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 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

On March 14, 2017, the bankruptcy court issued an order confirming its plan of reorganization and on April 12, 2017, UPL emerged from bankruptcy. 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. Following emergence from bankruptcy, Ultra Petroleum Corp. stock is trading on the NASDAQ under the symbol UPL. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of UPL but has no reason to doubt the accuracy or completeness of such information. In addition, UPL has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information. None of the information in the public reports of UPL that are filed with the SEC is incorporated by reference into, or in any way form, a part of this filing.

EXXI

EXXI is currently subject to the reporting requirements of the Exchange Act and is required to file with the SEC annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. Its SEC filings can be found at www.sec.gov. Its stock is currently trading on the NASDAQ under the symbol EXXI. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of EXXI but has no reason to doubt the accuracy or completeness of such information. In addition, EXXI 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 EXXI that are filed with the SEC is incorporated by reference into, or in any way form, a part of this filing.

Zenith

On December 21, 2017, the parent company of our tenant at the Portland Terminal Facility, Arc Logistics, closed on its previously announced merger agreement, whereby it was acquired by Zenith Energy U.S., LP. ("Zenith"). In its earlier proxy filing associated with the merger, Arc Logistics described a number of different actions available to it under the Portland Lease Agreement, which include (i) continuing with the current terminal lease, (ii) exercising its buy-out option on the terminal or (iii) terminating the lease at its fifth anniversary, subject to the termination provisions in the lease. The proxy suggested that Arc Logistics had not yet decided which of those plans of action it may select, and it remains unclear whether the merger will have any impact on whether, or when, any of the options would be exercised. In January 2018, the Company entered into an amendment with Zenith Terminals which extended the notice period for the fifth anniversary termination option for an additional six months, from February 1, 2018 to August 1, 2018. The Company has not received notice with respect to either a buy-out or termination option election and, to date, the terminal lease continues to operate in the same manner as prior to the merger.

Pinedale LGS Acquisition

On December 29, 2017, Pinedale LP I, a wholly-owned subsidiary of the Company, purchased Prudential's 18.95 percent non-controlling equity interest in Pinedale LP for considerations of approximately $32.9 million (including $0.1 million of contingent consideration). The carrying value of Prudential's non-controlling interest at the transaction date was $27.3 million. As the transaction resulted in an increase in the Company's interest in Pinedale LP, but not a change in control, the purchase was accounted for as an equity transaction. The difference between the fair value of the purchase consideration and the carrying value of the non-controlling interest of $5.6 million was recognized in additional paid-in-capital and attributable to the Company. Upon closing the transaction, the Company indirectly owns 100 percent of Pinedale LP through it's wholly-owned subsidiaries Pinedale GP and Pinedale LP I. Concurrently with the equity purchase, Pinedale LP entered into the Amended Pinedale Term Credit Facility with Prudential as lender, which provided a 5-year $41.0 million term loan facility at a fixed rate of 6.50 percent. For additional details related to the Amended Pinedale Term Credit Facility refer to Note 11 ("Debt").

Lease of Property Held for Sale

Public Service Company of New Mexico ("PNM")

On November 1, 2012, the Company entered into a definitive Purchase Agreement with PNM to sell the Company's 40 percent undivided interest in the EIP upon termination of the PNM Lease Agreement on April 1, 2015, for $7.7 million. The EIP leased asset held for sale was leased on a triple-net basis through April 1, 2015, (the "PNM Lease Agreement") to PNM, an independent electric utility company serving approximately 500 thousand customers (unaudited) in New Mexico. PNM is a subsidiary of PNM Resources Inc. (NYSE: PNM).

At the time of acquisition, the lease payments under the PNM Lease Agreement were determined to be above market rates for similar leased assets and the Company recorded an intangible asset of $1.1 million for this premium which was amortized as a reduction to lease revenue over the lease term. Annual amortization of the intangible lease asset totaling $73 thousand for the year ended December 31, 2015 is reflected in the accompanying Consolidated Statements of Income as a reduction to lease revenue. This same amount is included in Amortization expense in the accompanying Consolidated Statements of Cash Flows.