CORENERGY INFRASTRUCTURE TRUST, INC., 10-K filed on 2/28/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Feb. 27, 2018
Jun. 30, 2017
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
CorEnergy Infrastructure Trust, Inc. 
 
 
Entity Central Index Key
0001347652 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Amendment Flag
false 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
Q4 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 396,879,929 
Entity Common Stock, Shares Outstanding
 
11,915,830 
 
Consolidated Balance Sheets (USD $)
Dec. 31, 2017
Dec. 31, 2016
Assets
 
 
Leased property, net of accumulated depreciation of $72,155,753 and $52,219,717
$ 465,956,467 
$ 489,258,369 
Property and equipment, net of accumulated depreciation of $12,643,636 and $9,292,712
113,158,872 
116,412,806 
Financing notes and related accrued interest receivable, net of reserve of $4,100,000 and$4,100,000
1,500,000 
1,500,000 
Other equity securities, at fair value
2,958,315 
9,287,209 
Cash and cash equivalents
15,787,069 
7,895,084 
Deferred rent receivable
22,060,787 
14,876,782 
Accounts and other receivables
3,786,036 
4,538,884 
Deferred costs, net of accumulated amortization of $623,764 and $2,261,151
3,504,916 
3,132,050 
Prepaid expenses and other assets
742,154 
354,230 
Deferred tax asset, net
2,244,629 
1,758,289 
Goodwill
1,718,868 
1,718,868 
Total Assets
633,418,113 
650,732,571 
Liabilities and Equity
 
 
Secured credit facilities, net of debt issuance costs of $254,646 and $212,592 (including $0 and $8,860,577 with related party)
40,745,354 
89,387,985 
Unsecured convertible senior notes, net of discount and debt issuance costs of $1,967,917 and $2,755,105
112,032,083 
111,244,895 
Asset retirement obligation
9,170,493 
11,882,943 
Accounts payable and other accrued liabilities
2,333,782 
2,416,283 
Management fees payable
1,748,426 
1,735,024 
Income tax liability
2,204,626 
Unearned revenue
3,397,717 
155,961 
Total Liabilities
171,632,481 
216,823,091 
Equity
 
 
Series A Cumulative Redeemable Preferred Stock 7.375%, $130,000,000 and $56,250,000 liquidation preference ($2,500 per share, $0.001 par value), 10,000,000 authorized; 52,000 and 22,500 issued and outstanding at December 31, 2017 and December 31, 2016, respectively
130,000,000 
56,250,000 
Capital stock, non-convertible, $0.001 par value; 11,915,830 and 11,886,216 shares issued and outstanding at December 31, 2017 and December 31, 2016 (100,000,000 shares authorized)
11,916 
11,886 
Additional paid-in capital
331,773,716 
350,217,746 
Accumulated other comprehensive loss
(11,196)
Total CorEnergy Equity
461,785,632 
406,468,436 
Non-controlling Interest
27,441,044 
Total Equity
461,785,632 
433,909,480 
Total Liabilities and Equity
$ 633,418,113 
$ 650,732,571 
Consolidated Balance Sheets (Parenthetical) (USD $)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Accumulated depreciation, leased property
$ 72,155,753 
$ 52,219,717 
Accumulated depreciation, property and equipment
12,643,636 
9,292,712 
Accumulated amortization, Deferred costs
623,764 
2,261,151 
Reserve for financing notes and related accrued interest receivable
4,100,000 
4,100,000 
Secured debt, related party
8,860,577 
Preferred stock, par value (in dollars per share)
$ 0.001 
 
Preferred stock, authorized (in shares)
10,000,000 
 
Capital stock non-convertible, par value (in dollars per share)
$ 0.001 
$ 0.001 
Capital stock non-convertible, shares issued (in shares)
11,915,830 
11,886,216 
Capital stock non-convertible, shares outstanding (in shares)
11,915,830 
11,886,216 
Capital stock non-convertible, shares authorized (in shares)
100,000,000 
100,000,000 
Series A Cumulative Redeemable Preferred Stock [Member]
 
 
Preferred stock interest rate
7.375% 
 
Preferred Stock, Liquidation Preference
130,000,000 
56,250,000 
Preferred Stock, Liquidation Preference (in dollars per share)
$ 2,500 
$ 2,500 
Preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Preferred stock, authorized (in shares)
10,000,000 
10,000,000 
Preferred stock, issued (in shares)
52,000 
22,500 
Preferred stock, outstanding (in shares)
52,000 
22,500 
Convertible Debt [Member]
 
 
Net of discount and debt issuance costs
1,967,917 
2,755,105 
Deferred debt financing costs, net
241,000 
 
Secured Debt [Member]
 
 
Deferred debt financing costs, net
$ 254,646 
$ 212,592 
Consolidated Statements of Income and Comprehensive Income (USD $)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenue
 
 
 
Lease revenue
$ 68,803,804 
$ 67,994,130 
$ 48,086,072 
Transportation and distribution revenue
19,945,573 
21,094,112 
14,345,269 
Financing revenue
162,344 
1,697,550 
Sales revenue
7,160,044 
Total Revenue
88,749,377 
89,250,586 
71,288,935 
Expenses
 
 
 
Transportation and distribution expenses
6,729,707 
6,463,348 
4,609,725 
Cost of Sales
2,819,212 
General and administrative
10,786,497 
12,270,380 
9,745,704 
Depreciation, amortization and ARO accretion expense
24,047,710 
22,522,871 
18,766,551 
Provision for loan loss and disposition
5,000,000 
13,800,000 
Total Expenses
41,563,914 
46,271,065 
49,725,329 
Operating Income
47,185,463 
42,979,521 
21,563,606 
Other Income (Expense)
 
 
 
Net distributions and dividend income
680,091 
1,140,824 
1,270,755 
Net realized and unrealized gain (loss) on other equity securities
1,531,827 
824,482 
(1,063,613)
Interest expense
(12,378,514)
(14,417,839)
(9,781,184)
Loss on extinguishment of debt
(336,933)
Total Other Expense
(10,503,529)
(12,452,533)
(9,574,042)
Income before income taxes
36,681,934 
30,526,988 
11,989,564 
Taxes
 
 
 
Current tax expense (benefit)
2,831,658 
(313,107)
922,010 
Deferred tax benefit
(486,340)
(151,313)
(2,869,563)
Income tax expense (benefit), net
2,345,318 
(464,420)
(1,947,553)
Net Income
34,336,616 
30,991,408 
13,937,117 
Less: Net Income attributable to non-controlling interest
1,733,826 
1,328,208 
1,617,206 
Net Income attributable to CorEnergy Stockholders
32,602,790 
29,663,200 
12,319,911 
Preferred dividend requirements
7,953,988 
4,148,437 
3,848,828 
Net Income attributable to Common Stockholders
24,648,802 
25,514,763 
8,471,083 
Other comprehensive income (loss):
 
 
 
Changes in fair value of qualifying hedges / AOCI attributable to CorEnergy stockholders
11,196 
(201,993)
(262,505)
Changes in fair value of qualifying hedges / AOCI attributable to non-controlling interest
2,617 
(47,226)
(61,375)
Net Change in Other Comprehensive Income (Loss)
13,813 
(249,219)
(323,880)
Total Comprehensive Income
34,350,429 
30,742,189 
13,613,237 
Less: Comprehensive income attributable to non-controlling interest
1,736,443 
1,280,982 
1,555,831 
Comprehensive Income attributable to CorEnergy Stockholders
$ 32,613,986 
$ 29,461,207 
$ 12,057,406 
Earnings Per Common Share:
 
 
 
Basic (in dollars per share)
$ 2.07 
$ 2.14 
$ 0.79 
Diluted (in dollars per share)
$ 2.07 
$ 2.14 
$ 0.79 
Weighted Average Shares of Common Stock Outstanding:
 
 
 
Basic (in shares)
11,900,516 
11,901,985 
10,685,892 
Diluted (in shares)
11,900,516 
11,901,985 
10,685,892 
Dividends declared per share (in dollars per share)
$ 3.000 
$ 3.000 
$ 2.750 
Consolidated Statements of Equity (USD $)
Total
Capital Stock [Member]
Preferred Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Retained Earnings [Member]
Non-Controlling Interest [Member]
Series A Cumulative Redeemable Preferred Stock [Member]
Series A Cumulative Redeemable Preferred Stock [Member]
Preferred Stock [Member]
Series A Cumulative Redeemable Preferred Stock [Member]
Additional Paid-in Capital [Member]
Beginning balance at Dec. 31, 2014
$ 337,541,042 
$ 9,321 
$ 0 
$ 309,987,724 
$ 453,302 
$ 0 
$ 27,090,695 
 
 
 
Beginning balance, (in shares) at Dec. 31, 2014
 
9,321,010 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
Net income
13,937,117 
 
 
 
 
12,319,911 
1,617,206 
 
 
 
Net Change in Other Comprehensive Income (Loss)
(323,880)
 
 
 
(262,505)
 
(61,375)
 
 
 
Total Comprehensive Income
13,613,237 
 
 
 
(262,505)
12,319,911 
1,555,831 
 
 
 
Issuance of shares during period, (in shares)
 
2,587,500 
 
 
 
 
 
 
 
 
Issuance of shares during period
73,257,364 
2,587 
 
73,254,777 
 
 
 
54,210,476 
56,250,000 
(2,039,524)
Series A preferred stock dividends
(3,503,125)
 
 
 
 
(3,503,125)
 
 
 
 
Common stock dividends
(29,346,139)
 
 
(20,529,353)
 
(8,816,786)
 
 
 
 
Common stock issued under director's compensation plan (in shares)
 
2,677 
 
 
 
 
 
 
 
 
Common stock issued under director's compensation plan
90,000 
 
89,997 
 
 
 
 
 
 
Distributions to Non-controlling interest
(2,486,464)
 
 
 
 
 
(2,486,464)
 
 
 
Reinvestment of dividends paid to common stockholders (in shares)
 
28,510 
 
 
 
 
 
 
 
 
Reinvestment of dividends paid to common stockholders
817,915 
29 
 
817,886 
 
 
 
 
 
 
Ending balance at Dec. 31, 2015
444,194,306 
11,940 
56,250,000 
361,581,507 
190,797 
26,160,062 
 
 
 
Ending balance, (in shares) at Dec. 31, 2015
 
11,939,697 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
Net income
30,991,408 
 
 
 
 
29,663,200 
1,328,208 
 
 
 
Net Change in Other Comprehensive Income (Loss)
(249,219)
 
 
 
(201,993)
 
(47,226)
 
 
 
Total Comprehensive Income
30,742,189 
 
 
 
(201,993)
29,663,200 
1,280,982 
 
 
 
Repurchase of common stock (in shares)
 
(90,613)
 
 
 
 
 
 
 
 
Repurchase of common stock
(2,041,851)
(91)
 
(2,041,760)
 
 
 
 
 
 
Series A preferred stock dividends
(4,148,437)
 
 
 
 
(4,148,437)
 
 
 
 
Common stock dividends
(35,712,616)
 
 
(10,197,853)
 
(25,514,763)
 
 
 
 
Common stock issued under director's compensation plan (in shares)
 
2,551 
 
 
 
 
 
 
 
 
Common stock issued under director's compensation plan
60,000 
 
59,998 
 
 
 
 
 
 
Reinvestment of dividends paid to common stockholders (in shares)
 
34,581 
 
 
 
 
 
 
 
 
Reinvestment of dividends paid to common stockholders
815,889 
35 
 
815,854 
 
 
 
 
 
 
Ending balance at Dec. 31, 2016
433,909,480 
11,886 
56,250,000 
350,217,746 
(11,196)
27,441,044 
 
 
 
Ending balance, (in shares) at Dec. 31, 2016
11,886,216 
11,886,216 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
Net income
34,336,616 
 
 
 
 
32,602,790 
1,733,826 
 
 
 
Net Change in Other Comprehensive Income (Loss)
13,813 
 
 
 
11,196 
 
2,617 
 
 
 
Total Comprehensive Income
34,350,429 
 
 
 
11,196 
32,602,790 
1,736,443 
 
 
 
Issuance of shares during period
 
 
 
 
 
 
 
71,161,531 
73,750,000 
(2,588,469)
Series A preferred stock dividends
(8,227,734)
 
 
(727,001)
 
(7,500,733)
 
 
 
 
Common stock dividends
(35,694,200)
 
 
(10,592,143)
 
(25,102,057)
 
 
 
 
Common stock issued under director's compensation plan (in shares)
 
1,979 
 
 
 
 
 
 
 
 
Common stock issued under director's compensation plan
67,500 
 
67,498 
 
 
 
 
 
 
Distributions to Non-controlling interest
(1,833,650)
 
 
 
 
 
(1,833,650)
 
 
 
Purchase of Non-controlling interest
(32,910,032)
 
 
(5,566,195)
 
 
(27,343,837)
 
 
 
Reinvestment of dividends paid to common stockholders (in shares)
 
27,635 
 
 
 
 
 
 
 
 
Reinvestment of dividends paid to common stockholders
962,308 
28 
 
962,280 
 
 
 
 
 
 
Ending balance at Dec. 31, 2017
$ 461,785,632 
$ 11,916 
$ 130,000,000 
$ 331,773,716 
$ 0 
$ 0 
$ 0 
 
 
 
Ending balance, (in shares) at Dec. 31, 2017
11,915,830 
11,915,830 
 
 
 
 
 
 
 
 
Consolidated Statements of Equity (Parenthetical) (Series A Cumulative Redeemable Preferred Stock [Member])
12 Months Ended
Dec. 31, 2017
Series A Cumulative Redeemable Preferred Stock [Member]
 
Preferred stock interest rate
7.375% 
Consolidated Statements of Cash Flow (USD $)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Operating Activities
 
 
 
Net Income
$ 34,336,616 
$ 30,991,408 
$ 13,937,117 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income tax, net
(486,340)
(151,313)
(2,869,563)
Depreciation, amortization and ARO accretion
25,708,891 
24,548,350 
20,662,297 
Provision for loan loss
5,000,000 
13,800,000 
Loss on extinguishment of debt
336,933 
Non-cash settlement of accounts payable
(221,609)
Loss on sale of equipment
4,203 
Gain on repurchase of convertible debt
(71,702)
Net distributions and dividend income, including recharacterization of income
148,649 
(117,004)
(371,323)
Net realized and unrealized (gain) loss on other equity securities
(1,531,827)
(781,153)
1,063,613 
Unrealized gain on derivative contract
(75,591)
(70,333)
Settlement of derivative contract
(95,319)
Common stock issued under directors compensation plan
67,500 
60,000 
90,000 
Changes in assets and liabilities:
 
 
 
Increase in deferred rent receivables
(7,184,005)
(8,360,036)
(5,016,950)
Decrease (increase) in accounts and other receivables
752,848 
(174,390)
2,743,858 
Decrease (increase) in financing note accrued interest receivable
95,114 
(355,208)
(Increase) decrease in prepaid expenses and other assets
(16,717)
329,735 
(37,462)
Increase (decrease) in management fee payable
13,402 
(28,723)
599,348 
Decrease in accounts payable and other accrued liabilities
(225,961)
(231,151)
(847,683)
Increase in income tax liability
2,204,626 
Increase (decrease) in unearned revenue
2,884,362 
155,961 
(711,230)
Net cash provided by operating activities
56,791,571 
51,108,652 
42,600,618 
Investing Activities
 
 
 
Proceeds from sale of other equity securities
7,591,166 
Proceeds from assets and liabilities held for sale
644,934 
7,678,246 
Deferred lease costs
(336,141)
Acquisition expenditures
(251,513,344)
Purchases of property and equipment, net
(116,595)
(191,926)
(138,918)
Proceeds from asset foreclosure and sale
223,451 
Increase in financing notes receivable
(202,000)
(524,037)
Principal payment on financing note receivable
100,000 
Return of capital on distributions received
120,906 
4,631 
121,578 
Net cash provided by (used in) investing activities
7,595,477 
479,090 
(244,612,616)
Financing Activities
 
 
 
Debt financing costs
(1,462,741)
(193,000)
(1,617,991)
Net offering proceeds on Series A preferred stock
71,161,531 
54,210,476 
Net offering proceeds on common stock
73,184,679 
Net offering proceeds on convertible debt
111,262,500 
Repurchases of common stock
(2,041,851)
Repurchases of convertible debt
(899,960)
Dividends paid on Series A preferred stock
(8,227,734)
(4,148,437)
(3,503,125)
Dividends paid on common stock
(34,731,892)
(34,896,727)
(28,528,224)
Distributions to non-controlling interest
(1,833,650)
(2,486,464)
Advances on revolving line of credit
10,000,000 
44,000,000 
45,392,332 
Payments on revolving line of credit
(54,000,000)
(77,533,609)
Proceeds from term debt
41,000,000 
45,000,000 
Principal payments on secured credit facilities
(45,600,577)
(60,131,423)
(6,328,000)
Purchase of non-controlling interest
(32,800,000)
Net cash (used in) provided by financing activities
(56,495,063)
(58,311,398)
209,052,574 
Net Change in Cash and Cash Equivalents
7,891,985 
(6,723,656)
7,040,576 
Cash and Cash Equivalents at beginning of period
7,895,084 
14,618,740 
7,578,164 
Cash and Cash Equivalents at end of period
15,787,069 
7,895,084 
14,618,740 
Supplemental Disclosure of Cash Flow Information
 
 
 
Interest paid
10,780,150 
12,900,901 
7,873,333 
Income taxes paid (net of refunds)
199,772 
37,736 
747,406 
Non-Cash Investing Activities
 
 
 
Investment in other equity securities
(1,161,034)
Change in accounts and other receivables
(450,000)
Change in accounts payable and accrued expenses related to acquisition expenditures
(614,880)
Change in accounts payable and accrued expenses related to issuance of financing and other notes receivable
(39,248)
Net change in Assets Held for Sale, Property and equipment, Prepaid expenses and other assets, Accounts payable and other accrued liabilities and Liabilities held for sale
(1,776,549)
Non-Cash Financing Activities
 
 
 
Change in accounts payable and accrued expenses related to the issuance of common equity
(72,685)
Change in accounts payable and accrued expenses related to debt financing costs
255,037 
(43,039)
Reinvestment of distributions by common stockholders in additional common shares
$ 962,308 
$ 815,889 
$ 817,915 
Introduction and Basis of Presentation
INTRODUCTION AND BASIS OF PRESENTATION
INTRODUCTION AND BASIS OF PRESENTATION
Introduction
CorEnergy Infrastructure Trust, Inc. and its subsidiaries (referred to as "CorEnergy" or "the Company"), were organized as a Maryland corporation and commenced operations on December 8, 2005. The Company's common shares are listed on the New York Stock Exchange ("NYSE") under the symbol "CORR" and its depositary shares representing Series A Preferred Stock are listed on the NYSE under the symbol "CORR PrA".
The Company is primarily focused on acquiring and financing real estate assets within the U.S. energy infrastructure sector and concurrently entering into long-term triple-net participating leases with energy companies. The Company also may provide other types of capital, including loans secured by energy infrastructure assets. Targeted assets include pipelines, storage tanks, transmission lines, and gathering systems, among others. These sale-leaseback or real property mortgage transactions provide the energy company with a source of capital that is an alternative to other sources such as corporate borrowing, bond offerings, or equity offerings. Many of the Company's leases contain participation features in the financial performance or value of the underlying infrastructure real property asset. The triple-net lease structure requires that the tenant pay all operating expenses of the business conducted by the tenant, including real estate taxes, insurance, utilities, and expenses of maintaining the asset in good working order. CorEnergy considers its investments in these energy infrastructure assets to be a single business segment and reports them accordingly in its financial statements.
Basis of Presentation
The accompanying consolidated financial statements include CorEnergy accounts and the accounts of its wholly-owned subsidiaries and have been prepared in accordance with 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-K. The accompanying consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. There were no adjustments that, in the opinion of management, were not of a normal and recurring nature. All intercompany transactions and balances have been eliminated in consolidation, and the net earnings are reduced by the portion of net earnings attributable to non-controlling interests.
Significant Accounting Policies
SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES
A. Use of Estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
B. Leased Property – The Company includes assets subject to lease arrangements within leased property, net of accumulated depreciation, in the Consolidated Balance Sheets. Lease payments received are reflected in lease revenue on the Consolidated Statements of Income, net of amortization of any off-market adjustments. Costs in connection with the creation and execution of a lease are capitalized and amortized over the lease term. See Note 3 ("Leased Properties And Leases") for further discussion.
C. Property and Equipment – Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements, which extend the useful lives of assets, are capitalized and depreciated over the remaining estimated useful life of the asset. The Company initially records long-lived assets at their purchase price plus any direct acquisition costs, unless the transaction is accounted for as a business combination, in which case the acquisition costs are expensed as incurred. If the transaction is accounted for as a business combination, the Company allocates the purchase price to the acquired tangible and intangible assets and liabilities based on their estimated fair values.
D. Long-Lived Asset Impairment – The Company's long-lived assets consist primarily of a subsea midstream pipeline system, liquids gathering system, petroleum products terminal and natural gas pipelines that have been obtained through asset acquisitions and a business combination. Management continually monitors its business, the business environment and performance of its operations to determine if an event has occurred that indicates that the carrying value of a long-lived asset may be impaired. When a triggering event occurs, which is a determination that involves judgment, management utilizes cash flow projections to assess its ability to recover the carrying value of its assets based on the Company's long-lived assets' ability to generate future cash flows on an undiscounted basis. This differs from the evaluation of goodwill, for which the recoverability assessment utilizes fair value estimates that include discounted cash flows in the estimation process and accordingly any goodwill impairment recognized may not be indicative of a similar impairment of the related underlying long-lived assets.
Management's projected cash flows of long-lived assets are generally based on contractual cash flows relating to existing leases that extend many years into the future. If those cash flow projections indicate that the long-lived asset's carrying value is not recoverable, management records an impairment charge for the excess of carrying value of the asset over its fair value. The estimate of fair value considers a number of factors, including the potential value that would be received if the asset were sold, discount rates and projected cash flows. Due to the imprecise nature of these projections and assumptions, actual results can differ from management's estimates. There were no impairments of long-lived assets recorded during the years ended December 31, 2017, 2016 or 2015.
E. Financing Notes Receivable – Financing notes receivable are presented at face value plus accrued interest receivable and deferred loan origination costs and net of related direct loan origination income. Each quarter the Company reviews its financing notes receivable to determine if the balances are realizable based on factors affecting the collectability of those balances. Factors may include credit quality, timeliness of required periodic payments, past due status and management discussions with obligors. The Company evaluates the collectability of both interest and principal of each of its loans to determine if an allowance is needed. An allowance will be recorded when based on current information and events, the Company determines it is probable that it will be unable to collect all amounts due according to the existing contractual terms. If the Company does determine an allowance is necessary, the amount deemed uncollectable is expensed in the period of determination. An insignificant delay or shortfall in the amount of payments does not necessarily result in the recording of an allowance. Generally, when interest and/or principal payments on a loan become past due, or if the Company does not otherwise expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status and will generally cease recognizing financing revenue on that loan until all principal and interest have been brought current. Interest income recognition is resumed if and when the previously reserved-for financing notes become contractually current and performance has been demonstrated. Payments received subsequent to the recording of an allowance will be recorded as a reduction to principal. During the years ended December 31, 2017, 2016 and 2015, the Company recorded provisions for loan losses of approximately $0, $5.0 million and $13.8 million, respectively. The Company's financing notes receivable are discussed more fully in Note 4 ("Financing Notes Receivable").
F. Investment Securities – The Company's investments in securities are classified as other equity securities and represent interests in private companies which the Company has elected to report at fair value under the fair value option. These investments generally are subject to restrictions on resale, have no established trading market and are valued on a quarterly basis. Because of the inherent uncertainty of valuation, the fair values of such investments, which are determined in accordance with procedures approved by the Company's Board of Directors, may differ materially from the values that would have been used had a ready market existed for the investments.
The Company determines fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has determined the principal market, or the market in which the Company exits its private portfolio investments with the greatest volume and level of activity, to be the private secondary market. Typically, private companies are bought and sold based on multiples of EBITDA, cash flows, net income, revenues, or in limited cases, book value.
For private company investments, value is often realized through a liquidity event. Therefore, the value of the company as a whole (enterprise value) at the reporting date often provides the best evidence of the value of the investment and is the initial step for valuing the Company's privately issued securities. For any one company, enterprise value may best be expressed as a range of fair values, from which a single estimate of fair value will be derived. In determining the enterprise value of a portfolio company, an analysis is prepared consisting of traditional valuation methodologies including market and income approaches. The Company considers some or all of the traditional valuation methods based on the individual circumstances of the portfolio company in order to derive its estimate of enterprise value.
The fair value of investments in private portfolio companies is determined based on various factors, including enterprise value, observable market transactions, such as recent offers to purchase a company, recent transactions involving the purchase or sale of the equity securities of the company, or other liquidation events. The determined equity values may be discounted when the Company has a minority position, or is subject to restrictions on resale, has specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other comparable factors exist.
The Company undertakes a multi-step valuation process each quarter in connection with determining the fair value of private investments. It has retained an independent valuation firm to provide third party valuation consulting services based on procedures that the Company has identified and may ask them to perform from time to time on all or a selection of private investments as determined by the Company. The multi-step valuation process is specific to the level of assurance that the Company requests from the independent valuation firm. For positive assurance, the process is as follows:
The independent valuation firm prepares the valuations and the supporting analysis.
The valuation report is reviewed and approved by senior management.
The Audit Committee of the Board of Directors reviews the supporting analysis and accepts the valuations.
G. Fair Value Measurements – FASB ASC 820, Fair Value Measurements and Disclosure ("ASC 820"), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Various inputs are used in determining the fair value of the Company's assets and liabilities. These inputs are summarized in the three broad levels listed below:
Level 1 - quoted prices in active markets for identical investments
Level 2 - other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.)
Level 3 - significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments)
See Note 10 ("Fair Value") for further discussion of the Company's fair value measurements.
H. Cash and Cash Equivalents – The Company maintains cash balances at financial institutions in amounts that regularly exceed FDIC insured limits. The Company's cash equivalents are comprised of short-term, liquid money market instruments.
I. Accounts and other receivables – Accounts receivable are presented at face value net of an allowance for doubtful accounts within accounts and other receivables on the balance sheet. Accounts are considered past due based on the terms of sale with the customers. The Company reviews accounts for collectability based on an analysis of specific outstanding receivables, current economic conditions and past collection experience. For the years ended December 31, 2017 and 2016, the Company determined that an allowance for doubtful accounts was not necessary.
J. Deferred rent receivables – Lease receivables are determined according to the terms of the lease agreements entered into by the Company and its lessees, as discussed within Note 3 ("Leased Properties And Leases"). Lease receivables primarily represent timing differences between straight-line revenue recognition and contractual lease receipts. As of December 31, 2017, lease payments by the Company's tenants have remained timely and without lapse.
K. Goodwill – Goodwill represents the excess of the amount paid for the MoGas business over the fair value of the net identifiable assets acquired. To comply with ASC 350, Intangibles - Goodwill and Other ("ASC 350"), the Company performs an impairment test for goodwill annually, or more frequently in the event that a triggering event has occurred. December 31st is the Company's annual testing date associated with its MoGas reporting unit.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"), which simplifies how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The standard is effective for annual or interim tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. Effective January 1, 2017, the Company elected to early adopt this standard.
In accordance with ASC 350, a company may elect to perform a qualitative assessment to determine whether the quantitative impairment test is required. If the company elects to perform a qualitative assessment, the quantitative impairment test is required only if the conclusion is that it is more likely than not that the reporting unit's fair value is less than its carrying amount. If a company bypasses the qualitative assessment, the quantitative goodwill impairment test should be followed in step one.
Step one compares the fair value of the reporting unit to its carrying value to identify and measure any potential impairment. The reporting unit fair value is based upon consideration of various valuation methodologies, one of which is projecting future cash flows discounted at rates commensurate with the risks involved ("Discounted Cash Flow" or "DCF"). Assumptions used in a DCF require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates and the amount and timing of expected future cash flows. Forecasted cash flows require management to make judgments and assumptions, including estimates of future volumes and rates. Declines in volumes or rates from those forecasted, or other changes in assumptions, may result in a change in management's estimate and result in an impairment.
The Company elected to perform a qualitative goodwill impairment assessment for the year ended December 31, 2017. In performing the qualitative assessment, the Company analyzed the key drivers and other external factors that impact the business in order to determine if any significant events, transactions or other factors had occurred or are expected to occur that would impair earnings or competitiveness, therefore impairing the fair value of the MoGas reporting unit. After assessing the totality of events and circumstances, it was determined that it was not more likely than not that the fair value of the MoGas reporting unit was less than the carrying value, and so it was not necessary to perform the quantitative step one valuation. Key drivers that were considered in the qualitative evaluation of the MoGas reporting unit included: general economic conditions, continued recovery of the energy markets, natural gas pricing, input costs, liquidity and capital resources and customer outlook. Additionally, the Company considered the quantitative impairment analysis performed for the prior year test as of December 31, 2016, including potential updates to key valuation assumptions, in determining that it was not more likely than not that goodwill was impaired for the current year assessment.
L. Debt Discount and Debt Issuance Costs – Costs incurred for the issuance of new debt are capitalized and amortized into interest expense over the debt term. Issuance costs related to long-term debt are recorded as a direct deduction from the carrying amount of that debt liability, net of accumulated amortization. Issuance costs related to line-of-credit arrangements however, are presented as an asset instead of a direct deduction from the carrying amount of the debt. See Note 11 ("Debt") for further discussion. In accordance with ASC 470, Debt ("ASC 470"), the Company recorded its Convertible Senior Notes at the aggregate principal amount, less discount. The Company is amortizing the debt discount over the life of the convertible notes as additional non-cash interest expense utilizing the effective interest method. Refer to Note 11 ("Debt") for additional information.
M. Asset Retirement Obligations – The Company follows ASC 410-20, Asset Retirement Obligations, which requires that an asset retirement obligation ("ARO") associated with the retirement of a long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset. The Company recognized an existing ARO in conjunction with the acquisition of the GIGS in June 2015.
The Company measures changes in the ARO liability due to passage of time by applying an interest method of allocation to the amount of the liability at the beginning of the period. The increase in the carrying amount of the liability is recognized as an expense classified as an operating item in the statement of income, hereinafter referred to as ARO accretion expense. The Company periodically reassesses the timing and amount of cash flows anticipated associated with the ARO and adjusts the fair value of the liability accordingly under the guidance in ASC 410-20.
The fair value of the obligation at the acquisition date was capitalized as part of the carrying amount of the related long-lived assets and is being depreciated over the asset's remaining useful life. The useful lives of most pipeline gathering systems are primarily derived from available supply resources and ultimate consumption of those resources by end users. Adjustments to the ARO resulting from reassessments of the timing and amount of cash flows will result in changes to the retirement costs capitalized as part of the carrying amount of the asset.
Refer to Note 12 ("Asset Retirement Obligation") for additional information.
N. Revenue Recognition – Specific recognition policies for the Company's revenue items are as follows:
Lease revenue – 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 reasonably assured. Participating rent is recognized when it is earned, based on the achievement of specified performance criteria. 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.
Transportation and distribution revenue – This represents revenue related to natural gas transportation, distribution and supply. Transportation revenues are recognized by MoGas on firm contracted capacity over the contract period regardless of whether the contracted capacity is used. For interruptible or volumetric based transportation, revenue is recognized when physical deliveries of natural gas are made at the delivery point agreed upon by both parties. Distribution revenue is recognized by Omega based on agreed upon contractual terms over each annual period during the terms of the contract. Beginning February 1, 2016, due to changes that commenced under a new contract with the Department of Defense ("DOD"), gas sales and cost of gas sales are presented on a net basis in the transportation and distribution revenue line.
Omega is also paid fees for the operation and maintenance of its natural gas distribution system, including any necessary expansion of the distribution system. Omega is responsible for the coordination, supervision, and quality of the expansions while actual construction is generally performed by third party contractors. Revenues from expansion efforts are recognized using either a completed contract, percentage of completion, or cost-plus method based on the level and volume of estimates utilized, as well as the certainty or uncertainty of the Company's ability to collect those revenues. Under the new DOD contract, the annual contracted amount for pipeline maintenance is invoiced monthly by Omega on a straight-line basis. Amounts invoiced in excess of earned revenue are classified as unearned revenue or earned revenues exceeding amounts invoiced are classified as prepaid expenses and other assets, within the Consolidated Balance Sheets.
Financing revenue – Historically, financing notes receivable have been considered a core product offering and therefore the related income is presented as a component of operating income. For increasing rate loans, base interest income is recorded ratably over the life of the loan, using the effective interest rate. The net amount of deferred loan origination income and costs are amortized on a straight-line basis over the life of the loan and reported as an adjustment to yield in financing revenue. Participating financing revenues are recorded when specific performance criteria have been met.
O. Transportation and distribution expense Included here are both MoGas' costs of operating and maintaining the natural gas transmission line and Omega's costs of operating and maintaining the natural gas distribution system, including any necessary expansion of the distribution system. These costs are incurred both internally and externally. The internal costs relate to system control, pipeline operations, maintenance, insurance and taxes. Other internal costs include payroll for employees associated with gas control, field employees and management. The external costs consist of professional services such as audit and accounting, legal and regulatory and engineering.
Historically, Omega's amounts paid for gas and propane delivered to customers were presented as cost of sales. Beginning February 1, 2016, under a new contract with the Department of Defense, amounts paid by Omega for gas and propane are netted against sales and are presented in the transportation and distribution revenue line. See paragraph (N) above.
P. Other Income Recognition Specific policies for the Company's other income items are as follows:
Net distributions and dividend income from investments – Distributions and dividends from investments are recorded on their ex-dates and are reflected as other income within the accompanying Consolidated Statements of Income. Distributions received from the Company's investments are generally characterized as ordinary income, capital gains and distributions received from investment securities. The portion characterized as return of capital is paid by the Company's investees from their cash flow from operations. The Company records investment income, capital gains and distributions received from investment securities based on estimates made at the time such distributions are received. Such estimates are based on information available from each company and other industry sources. These estimates may subsequently be revised based on information received from the entities after their tax reporting periods are concluded, as the actual character of these distributions is not known until after the fiscal year end of the Company.
Net realized and unrealized gain (loss) from investments – Securities transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses are reported on an identified cost basis. The Company records investment income and return of capital based on estimates made at the time such distributions are received. Such estimates are based on information available from the portfolio company and other industry sources. These estimates may subsequently be revised based on information received from the portfolio company after their tax reporting periods are concluded, as the actual character of these distributions are not known until after the Company's fiscal year end.
Q. Asset Acquisition Expenses – Costs incurred in connection with the research of real property acquisitions not accounted for as business combinations are expensed until it is determined that the acquisition of the real property is probable. Upon such determination, costs incurred in connection with the acquisition of the property are capitalized as described in paragraph (C) above. Deferred costs related to an acquisition that the Company has determined, based on management's judgment, not to pursue are expensed in the period in which such determination is made. Costs incurred in connection with a business combination are expensed as incurred.
R. Offering Costs – Offering costs related to the issuance of common or preferred stock are charged to additional paid-in capital when the stock is issued.
S. Derivative Instruments and Hedging Activities – The Company has used forward swap contracts primarily to reduce exposure to changes in interest rates on a portion of its variable-rate debt and to provide a cash flow hedge. In accordance with FASB ASC 815, Derivatives and Hedging ("ASC 815"), these derivative contracts have been recorded on the balance sheet at fair value. Historically, these derivative instruments have been designated as hedges for accounting purposes. The measurement of the cash flow hedge ineffectiveness has historically been recognized in earnings, when applicable. The effective portion of the gain or loss on qualifying swaps has been reported in accumulated other comprehensive income ("AOCI"), in accordance with ASC 815. For swaps de-designated as cash flow hedges, changes in fair value of the swaps have been fully recognized in earnings. See Note 13 ("Interest Rate Hedge Swaps") for further discussion.
T. Earnings Per Share – Basic earnings per share ("EPS") is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period except for periods of net loss for which no common share equivalents are included because their effect would be anti-dilutive. Dilutive common equivalent shares consist of shares issuable upon conversion of the Convertible Notes calculated using the if-converted method.
U. Federal and State Income Taxation – In 2013 the Company qualified for REIT status, and in March 2014 elected (effective as of January 1, 2013), to be treated as a REIT for federal income tax purposes. Because certain of its assets may not produce REIT-qualifying income or be treated as interests in real property, those assets are held in wholly-owned TRSs in order to limit the potential that such assets and income could prevent the Company from qualifying as a REIT.
As a REIT, the Company holds and operates certain of its assets through one or more wholly-owned TRSs. The Company's use of TRSs enables it to continue to engage in certain businesses while complying with REIT qualification requirements and also allows it to retain income generated by these businesses for reinvestment without the requirement of distributing those earnings. In the future, the Company may elect to reorganize and transfer certain assets or operations from its TRSs to the Company or other subsidiaries, including qualified REIT subsidiaries.
The Company's trading securities and other equity securities are limited partnerships or limited liability companies which are treated as partnerships for federal and state income tax purposes. As a limited partner, the Company reports its allocable share of taxable income in computing its own taxable income. To the extent held by a TRS, the TRS's tax expense or benefit is included in the Consolidated Statements of Income based on the component of income or gains and losses to which such expense or benefit relates. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. It is expected that for the year ended December 31, 2017, and future periods, any deferred tax liability or asset generated will be related entirely to the assets and activities of the Company's TRSs.
If the Company ceased to qualify as a REIT, the Company, as a C corporation, would be obligated to pay federal and state income tax on its taxable income.
V. Recent Accounting Pronouncements – In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers" ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard was originally effective for interim and annual periods beginning after December 15, 2016. On July 9, 2015, the FASB approved a one-year deferral of the effective date making the standard effective for interim and annual periods beginning after December 15, 2017. During adoption, the standard permits the use of either a full retrospective or modified retrospective transition method. The Company has selected to use the modified retrospective transition method. As part of its assessment work, the Company formed an implementation team, completed training on the new revenue recognition model and completed a review of its contracts. The Company has substantially completed its evaluation of the impact that this standard will have on its consolidated financial statements and disclosures, as well as its processes and internal controls. A substantial portion of the Company's revenue consists of rental income from leasing arrangements, which is not impacted by the new standard as it is specifically excluded from ASU 2014-09. However, on January 1, 2018 the Company expects to record a transition adjustment which will decrease the beginning balance of retained earnings and establish a contract liability of approximately $3.3 million under the modified retrospective transition method. The transition adjustment relates to a step-down in rates associated with a long-term contract with a customer at MoGas, which requires the transaction price to be allocated ratably over the contractual performance obligation under the new guidance.
In January 2016, the FASB issued ASU 2016-01 "Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," which will require entities to measure their investments at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. The practicability exception will be available for equity investments that do not have readily determinable fair values. The guidance is effective for fiscal years beginning after December 15, 2017. The adoption of this new standard will not have a material impact on the Company's consolidated financial statements as its investments are currently recorded at fair value.
In February 2016, the FASB issued ASU 2016-02 "Leases" ("ASU 2016-02"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. At adoption, the standard will be applied using a modified retrospective approach. Management is in the process of evaluating the impact of the standard on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" ("ASU 2016-13"), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. The new model, referred to as the current expected credit losses ("CECL model"), will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact that adopting the new standard will have on the Company's consolidated financial statements but believes that, unless the Company acquires any additional financing receivables, the impact would not be material.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments". This new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017 and will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. Management has evaluated the impact of the new standard and does not expect that its adoption will have a material impact.
In January 2017, the FASB issued ASU 2017-01, "Clarifying the Definition of a Business," which clarifies the definition of "a business" to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is allowed for transactions where the acquisition (or subsidiary deconsolidation) occurs before the effective date of the amendments and the transaction has not been previously reported in the financial statements. Management has evaluated the impact of the new standard and does not expect that its adoption will have a material impact.
Leased Properties and Leases
LEASED PROPERTIES AND LEASES
LEASED PROPERTIES AND LEASES
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.
Financing Notes Receivable
FINANCING NOTES RECEIVABLE
FINANCING NOTES RECEIVABLE
Four Wood Financing Note Receivable
On December 31, 2014, a subsidiary of the Company, Four Wood Corridor, LLC ("Four Wood Corridor"), entered into a Loan Agreement with SWD Enterprises, LLC ("SWD Enterprises"), a wholly-owned subsidiary of Four Wood Energy, pursuant to which Four Wood Corridor made a loan to SWD Enterprises for $4.0 million (the "REIT Loan"). Concurrently, the Company's TRS, Corridor Private entered into a TRS Loan Agreement with SWD Enterprises, pursuant to which Corridor Private made a loan to SWD Enterprises for $1.0 million (the "TRS Loan"). The proceeds of the REIT Loan and the TRS Loan were used by SWD Enterprises and its affiliates to finance the acquisition of real and personal property that provides saltwater disposal services for the oil and natural gas industry, and to pay related expenses. For the REIT Loan from Four Wood Corridor, interest initially accrued on the outstanding principal at an annual base rate of 12 percent. For the TRS Loan from Corridor Private, interest initially accrued on the outstanding principal at an annual base rate of 13 percent. The base rates of both loans were to increase by 2 percent of the current base rate per year. The Loans are secured by the real property and equipment held by SWD Enterprises and the outstanding equity in SWD Enterprises and its affiliates. The Loans are also guaranteed by all affiliates of SWD Enterprises.
As a result of the decreased economic activity by SWD, the Company recorded a provision for loan loss with respect to the SWD Loans. The Consolidated Statement of Income for the year ended December 31, 2016 reflects a Provision for Loan Loss of $3.5 million, which includes $71 thousand of deferred origination income and $98 thousand of interest accrued under the original loan agreements. The loans were placed on non-accrual status during the first quarter of 2016. The balance of the loans has been valued based on the enterprise value of SWD Enterprises, the collateral value supporting the loans, at $1.5 million as of December 31, 2017.
Black Bison Financing Notes
On March 13, 2014, the Company's wholly-owned subsidiary, Corridor Bison, entered into a Loan Agreement with Black Bison Water Services, LLC ("Black Bison WS"). Black Bison WS's initial loan draw in the amount of $4.3 million was used to acquire real property in Wyoming and to pay loan transaction expenses. Corridor Bison agreed to loan Black Bison WS up to $11.5 million (the "Black Bison WS Loan") to finance the acquisition and development of real property to provide water sourcing, water disposal, or water treating and recycling services for the oil and natural gas industry.
On July 23, 2014, the Company increased its secured financing to Black Bison WS from $11.5 million to $15.3 million. The Company executed an amendment to the Black Bison WS Loan Agreement to increase the loan to $12.0 million, and entered into an additional loan for $3.3 million from a taxable REIT subsidiary of the Company, CorEnergy BBWS, on substantially the same terms (the "TRS Loan" and, together with the Black Bison WS Loan, as amended, the "Black Bison Loans"). The purpose of the increase in the secured financing was to fund the acquisition and development of real property and related equipment to provide water sourcing, water disposal, or water treating and recycling services for the oil and natural gas industry. There were no other material changes to the terms of the loan agreement. In connection with the Amendment and the TRS Loan, the Company fully funded the remainder of the $15.3 million capacity of the combined Black Bison Loans. Interest initially accrued on the outstanding principal amount of both Black Bison Loans at an annual base rate of 12 percent, which base rate was to increase by 2 percent of the current base rate per year. In addition, starting in April 2015 and continuing for each month thereafter, the outstanding principal of the Black Bison Loans was set to bear variable interest calculated as a function of the increase in volume of water treated by Black Bison WS during the particular month. The base interest plus variable interest, was payable monthly, and capped at 19 percent per annum. The Black Bison Loans were set to mature on March 31, 2024, and were set to amortize by quarterly payments beginning on March 31, 2015. The Loans were secured by the real property and equipment held by Black Bison WS and the outstanding equity in Black Bison WS and its affiliates. The Black Bison Loans were also guaranteed by all affiliates of Black Bison WS and further secured by all assets of those guarantors.
Due to reduced drilling activity in the Black Bison area of operations, Black Bison WS requested, and the Company granted, certain temporary forbearance waivers in June 2015 and August 2015 that had the effect of excusing the borrower from full performance under the terms of the Black Bison Loans while such waivers were in effect. None of the granted forbearance agreements were deemed to be concessions. As a result of the continued inability of the borrower to perform under the terms of these loans, even as temporarily modified by the waivers, effective December 31, 2015 the Company recorded a provision for loan loss with respect to the Black Bison Loans of $13.8 million, which included $14 thousand in deferred origination income, net of deferred origination costs, and $355 thousand of accrued interest.
On February 29, 2016, the Company foreclosed on 100 percent of the equity of BB Intermediate, the borrower of the Black Bison financing notes, as well as all of the other collateral securing the Black Bison Loans. The foreclosure was accepted in satisfaction of the $2.0 million total outstanding loan balance. On June 16, 2016, the Company entered into an asset sale agreement with Expedition Water Solutions for the sale of specified disposal wells and related equipment as outlined in the sale agreement. Consideration received by the company included $748 thousand cash, net of fees, and the future right to royalty payments, which was recorded at its fair value of $450 thousand. The rights to future cash payments are tied to the future volumes of water disposed of in each of the wells sold. The Company did not record any financing revenue related to the Black Bison Loans for the year ended December 31, 2016 or any subsequent period. These notes were considered by the Company to be on non-accrual status and were reflected as such in the financial statements. For the year ended December 31, 2016, the Company recorded $832 thousand in provision for loan losses related to the Black Bison Loans.
Variable Interest Entities
VARIABLE INTEREST ENTITIES
VARIABLE INTEREST ENTITIES
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. As such, management evaluated the qualitative criteria under FASB ASC Topic 810 - Consolidation in conjunction with ASU 2015-02 to make a determination whether these partnerships should be consolidated on the Company's financial statements. ASC Topic 810-10 requires the primary beneficiary of a variable interest entity's activities to consolidate the VIE. The primary beneficiary is identified as the enterprise that has a) the power to direct the activities of the VIE that most significantly impact the entity's economic performance and b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. The standard requires an ongoing analysis to determine whether the variable interest gives rise to a controlling financial interest in the VIE. 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 that evaluation, the consolidated financial statements presented include full consolidation with respect to both of the partnerships.
Income Taxes
INCOME TAXES
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 December 31, 2017 and 2016, are as follows:
Deferred Tax Assets and Liabilities
 
December 31, 2017
 
December 31, 2016
Deferred Tax Assets:
 
 
 
Net operating loss carryforwards
$
957,719

 
$
1,144,818

Net unrealized loss on investment securities

 
61,430

Cost recovery of leased and fixed assets

 
739,502

Loan Loss Provision
247,814

 
608,086

Basis reduction of investment in partnerships
261,549

 

Other loss carryforwards
2,965,321

 
3,187,181

Sub-total
$
4,432,403

 
$
5,741,017

Deferred Tax Liabilities:
 
 
 
Basis reduction of investment in partnerships
$

 
$
(2,158,746
)
Net unrealized gain on investment securities
(342,669
)
 

Cost recovery of leased and fixed assets
(1,845,105
)
 
(1,823,982
)
Sub-total
$
(2,187,774
)
 
$
(3,982,728
)
Total net deferred tax asset
$
2,244,629

 
$
1,758,289


As of December 31, 2017, the total deferred tax assets and liabilities presented above relate to the Company's TRSs. The Company recognizes the tax benefits of uncertain tax positions only when the position is "more likely than not" to be sustained upon examination by the tax authorities based on the technical merits of the tax position. The Company's policy is to record interest and penalties on uncertain tax positions as part of tax expense. Tax years subsequent to the year ended December 31, 2013, remain open to examination by federal and state tax authorities.
The Tax Cuts and Jobs Act (the "2017 Tax Act") was enacted on December 22, 2017. The 2017 Tax Act reduces the US federal corporate tax rate from 35 percent to 21 percent. The 2017 Tax Act also repealed the alternative minimum tax for corporations. At December 31, 2017, the Company has completed its provisional accounting for the tax effects of enactment of the 2017 Tax Act. Due to the timing and complexities of the new legislation, the SEC has issued Staff Accounting Bulletin 118, which allows for the recognition of provisional amounts during a measurement period similar to the measurement period used when accounting for business combinations. The Company has remeasured deferred tax assets and liabilities based on the updated rates at which they are expected to reverse in the future, in the table above, which resulted in a $1.3 million transition adjustment that reduced net deferred tax assets. The Company will continue to assess the impact of the new tax legislation, as well as any future regulations and updates, and will record any additional impacts as identified during the measurement period, if necessary.
Total income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate of 35 percent, for the years ended December 31, 2017, 2016 and 2015, to income or loss from operations and other income and expense for the years presented, as follows:
Income Tax Expense (Benefit)
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
Application of statutory income tax rate
$
12,231,838

 
$
10,219,573

 
$
3,630,325

State income taxes, net of federal tax benefit
352,708

 
26,215

 
(134,597
)
Income of Real Estate Investment Trust not subject to tax
(11,975,853
)
 
(10,663,371
)
 
(5,189,849
)
Tax reform impact
1,262,444

 

 

Other
474,181

 
(46,837
)
 
(253,432
)
Total income tax expense (benefit)
$
2,345,318

 
$
(464,420
)
 
$
(1,947,553
)

Total income taxes are computed by applying the federal statutory rate of 35 percent plus a blended state income tax rate. Corridor Public Holdings, Inc. and Corridor Private Holdings, Inc. had a blended state rate of approximately 3.78 percent, 3.78 percent and 2.82 percent for the years ended December 31, 2017, 2016 and 2015, respectively. CorEnergy BBWS, Inc. does not record a provision for state income taxes because it operates only in Wyoming, which does not have state income tax. Because Mowood Corridor, Inc. and Corridor MoGas, Inc. primarily only operate in the state of Missouri, a blended state income tax rate of 5 percent was used for the operations of both TRSs for the years ended December 31, 2017, 2016 and 2015. For the years ended December 31, 2017, 2016 and 2015, all of the income tax expense (benefit) presented above relates to the assets and activities held in the Company's TRSs. The components of income tax expense (benefit) include the following for the periods presented:
Components of Income Tax Expense (Benefit)
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
Current tax expense (benefit)
 
 
 
 
 
Federal
$
2,498,363

 
$
(321,720
)
 
$
781,941

State (net of federal tax benefit)
333,295

 
8,613

 
140,069

Total current tax expense (benefit)
$
2,831,658

 
$
(313,107
)
 
$
922,010

Deferred tax expense (benefit)
 
 
 
 
 
Federal
$
(505,753
)
 
$
(168,915
)
 
$
(2,594,897
)
State (net of federal tax benefit)
19,413

 
17,602

 
(274,666
)
Total deferred tax benefit
$
(486,340
)
 
$
(151,313
)
 
$
(2,869,563
)
Total income tax expense (benefit), net
$
2,345,318

 
$
(464,420
)
 
$
(1,947,553
)

As of December 31, 2016 and 2015, the TRSs had a net operating loss of $3.0 million and $1.4 million, respectively. For the year ended December 31, 2017, the TRSs incurred a net operating loss of approximately $1.0 million, resulting in a total net operating loss of approximately $4.1 million as of December 31, 2017. The net operating loss may be carried forward for 20 years. If not utilized, this net operating loss will expire as follows: $90 thousand, $804 thousand, $478 thousand, $1.7 million and $1.0 million in the years ending December 31, 2033, 2034, 2035, 2036 and 2037, respectively. The amount of deferred tax asset for net operating losses as of December 31, 2017, includes amounts for the year ended December 31, 2017. The aggregate cost of securities for federal income tax purposes and securities with unrealized appreciation and depreciation, were as follows:
Aggregate Cost of Securities for Income Tax Purposes
 
December 31, 2017
 
December 31, 2016
Aggregate cost for federal income tax purposes
$
3,063,430

 
$
4,327,077

Gross unrealized appreciation
325,130

 
5,408,242

Gross unrealized depreciation

 

Net unrealized appreciation
$
325,130

 
$
5,408,242


The Company provides the following tax information to its common stockholders pertaining to the character of distributions paid during tax years 2017, 2016 and 2015. For a stockholder that received all distributions in cash during 2017, 79.0 percent will be treated as ordinary dividend income and 21.0 percent will be treated as return of capital. Of the ordinary dividend income, 13.2 percent will be treated as qualified dividend income. The per share characterization by quarter is reflected in the following tables:
2017 Common Stock Tax Information
Record Date
 
Ex-Dividend Date
 
Payable Date
 
Total Distribution per Share
 
Total Ordinary Dividends
 
Qualified Dividends
 
Capital Gain Distributions
 
Nondividend Distributions
2/13/2017
 
2/9/2017
 
2/28/2017
 
$
0.7500

 
$
0.5925

 
$
0.0785

 
$

 
$
0.1575

5/16/2017
 
5/12/2017
 
5/31/2017
 
0.7500

 
0.5925

 
0.0785

 

 
0.1575

8/17/2017
 
8/15/2017
 
8/31/2017
 
0.7500

 
0.5925

 
0.0785

 

 
0.1575

11/15/2017
 
11/14/2017
 
11/30/2017
 
0.7500

 
0.5925

 
0.0785

 

 
0.1575

Total 2017 Distributions
 
$
3.0000

 
$
2.3700

 
$
0.3140

 
$

 
$
0.6300


2016 Common Stock Tax Information
Record Date
 
Ex-Dividend Date
 
Payable Date
 
Total Distribution per Share
 
Total Ordinary Dividends
 
Qualified Dividends
 
Capital Gain Distributions
 
Nondividend Distributions
02/12/2016
 
02/10/2016
 
02/29/2016
 
$
0.7500

 
$
0.2955

 
$

 
$

 
$
0.4545

05/13/2016
 
05/11/2016
 
05/31/2016
 
0.7500

 
0.2955

 

 

 
0.4545

08/17/2016
 
08/15/2016
 
08/31/2016
 
0.7500

 
0.2955

 

 

 
0.4545

11/15/2016
 
11/11/2016
 
11/30/2016
 
0.7500

 
0.2955

 

 

 
0.4545

Total 2016 Distributions
 
$
3.0000

 
$
1.1820

 
$

 
$

 
$
1.8180

2015 Common Stock Tax Information
Record Date
 
Ex-Dividend Date
 
Payable Date
 
Total Distribution per Share
 
Total Ordinary Dividends
 
Qualified Dividends
 
Capital Gain Distributions
 
Nondividend Distributions
02/13/2015
 
02/11/2015
 
02/27/2015
 
$
0.6500

 
$
0.4680

 
$
0.0126

 
$

 
$
0.1820

05/15/2015
 
05/13/2015
 
05/29/2015
 
0.6750

 
0.4860

 
0.0131

 

 
0.1890

08/17/2015
 
08/13/2015
 
08/31/2015
 
0.6750

 
0.4860

 
0.0131

 

 
0.1890

11/13/2015
 
11/11/2015
 
11/30/2015
 
0.7500

 
0.5400

 
0.0146

 

 
0.2100

Total 2015 Distributions
 
$
2.7500

 
$
1.9800

 
$
0.0534

 
$

 
$
0.7700


The Company provides the following tax information to its preferred stockholders pertaining to the character of distributions paid during the 2017, 2016 and 2015 tax years. For a stockholder that received all distributions in cash during 2017, 100 percent will be treated as ordinary dividend income and none will be treated as return of capital. Of the ordinary dividend income, 13.3 percent will be treated as qualified dividend income. The per share characterization by quarter is reflected in the following table:
2017 Preferred Stock Tax Information
Record Date
 
Ex-Dividend Date
 
Payable Date
 
Total Distribution per Share
 
Total Ordinary Dividends
 
Qualified Dividends
 
Capital Gain Distributions
 
Nondividend Distributions
2/13/2017
 
2/9/2017
 
2/28/2017
 
$
0.4609

 
$
0.4609

 
$
0.0611

 
$

 
$

5/16/2017
 
5/12/2017
 
5/31/2017
 
0.4609

 
0.4609

 
0.0611

 

 

8/17/2017
 
8/15/2017
 
8/31/2017
 
0.4609

 
0.4609

 
0.0611

 

 

11/15/2017
 
11/14/2017
 
11/30/2017
 
0.4609

 
0.4609

 
0.0611

 

 

Total 2017 Distributions
 
$
1.8436

 
$
1.8436

 
$
0.2444

 
$

 
$


2016 Preferred Stock Tax Information
Record Date
 
Ex-Dividend Date
 
Payable Date
 
Total Distribution per Share
 
Total Ordinary Dividends
 
Qualified Dividends
 
Capital Gain Distributions
 
Nondividend Distributions
02/12/2016
 
02/10/2016
 
02/29/2016
 
$
0.4609

 
$
0.4609

 
$

 
$

 
$

05/13/2016
 
05/11/2016
 
05/31/2016
 
0.4609

 
0.4609

 

 

 

08/17/2016
 
08/15/2016
 
08/31/2016
 
0.4609

 
0.4609

 

 

 

11/15/2016
 
11/11/2016
 
11/30/2016
 
0.4609

 
0.4609

 

 

 

Total 2016 Distributions
 
$
1.8436

 
$
1.8436

 
$

 
$

 
$


2015 Preferred Stock Tax Information
Record Date
 
Ex-Dividend Date
 
Payable Date
 
Total Distribution per Share
 
Total Ordinary Dividends
 
Qualified Dividends
 
Capital Gain Distributions
 
Nondividend Distributions
05/15/2015
 
05/13/2015
 
06/01/2015
 
$
0.6351

 
$
0.6351

 
$
0.0171

 
$

 
$

08/17/2015
 
08/13/2015
 
08/31/2015
 
0.4609

 
0.4609

 
0.0124

 

 

11/13/2015
 
11/11/2015
 
11/30/2015
 
0.4609

 
0.4609

 
0.0124

 

 

Total 2015 Distributions
 
$
1.5569

 
$
1.5569

 
$
0.0419

 
$

 
$


The Company elected, effective for the 2013 tax year, to be treated as a REIT for federal income tax purposes. The Company's REIT election, assuming continued compliance with the applicable tests, will continue in effect for subsequent tax years. The Company satisfied the annual income test and the quarterly asset tests necessary for us to qualify to be taxed as a REIT for 2017, 2016 and 2015. Distributions made during 2017, 2016 and 2015 are treated as qualifying dividend income related to taxable dividends received from the Company's TRSs that were received and distributed in the respective years.
Property and Equipment
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Property and Equipment
 
December 31, 2017
 
December 31, 2016
Land
$
580,000

 
$
580,000

Natural gas pipeline
124,303,315

 
124,288,156

Vehicles and trailers
650,634

 
570,267

Office equipment and computers
268,559

 
267,095

Gross property and equipment
$
125,802,508

 
$
125,705,518

Less: accumulated depreciation
(12,643,636
)
 
(9,292,712
)
Net property and equipment
$
113,158,872

 
$
116,412,806


Depreciation expense was $3.4 million, $3.4 million and $3.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Concentrations
Concentrations
CONCENTRATIONS
The Company has customer concentrations through major tenants at its three significant leased properties as discussed fully in Note 3 ("Leased Properties And Leases"). In addition to these lease concentrations, contracted transportation revenues from the Company's subsidiary, MoGas, to its largest customer, Spire (formally Laclede Gas Company), represented approximately 11 percent, 12 percent and 15 percent of consolidated revenues for the years ended December 31, 2017, 2016 and 2015, respectively.
Management Agreement
MANAGEMENT AGREEMENT
MANAGEMENT AGREEMENT
The Company has executed a Management Agreement with Corridor InfraTrust Management, LLC ("Corridor"), a related party. Under the Management Agreement, Corridor (i) presents the Company with suitable acquisition opportunities consistent with the investment policies and objectives of the Company, (ii) is responsible for the day-to-day operations of the Company and (iii) performs such services and activities relating to the assets and operations of the Company as may be appropriate. The Management Agreement, which does not have a specific term and will remain in place unless terminated by the Company or Corridor in accordance with its terms, does give a majority of the stockholders of the Company, or two-thirds of the independent directors, the ability to terminate the agreement for any reason on thirty (30) days' prior written notice, so long as that notice is delivered with a termination payment equal to three times the base management fee and incentive fee paid to the manager in the last four quarters.
The terms of the Management Agreement provide for a quarterly management fee to be paid to Corridor equal to 0.25 percent (1.00 percent annualized) of the value of the Company's Managed Assets as of the end of each quarter. "Managed Assets" means the total assets of the Company (including any securities receivables, other personal property or real property purchased with or attributable to any borrowed funds) minus (A) the initial invested value of all non-controlling interests, (B) the value of any hedged derivative assets, (C) any prepaid expenses and (D) all of the accrued liabilities other than (1) deferred taxes and (2) debt entered into for the purpose of leverage. For purposes of the definition of Managed Assets, the Company's securities portfolio will be valued at then current market value. For purposes of the definition of Managed Assets, other personal property and real property assets will include real and other personal property owned and the assets of the Company invested, directly or indirectly, in equity interests in or loans secured by real estate or personal property (including acquisition related costs and acquisition costs that may be allocated to intangibles or are unallocated), valued at the aggregate historical cost, before reserves for depreciation, amortization, impairment charges or bad debts or other similar noncash reserves.
The Management Agreement also provides for payment of a quarterly incentive fee of 10 percent of the increase in distributions paid over a distribution threshold equal to $0.625 per share per quarter, and requires that at least half of any incentive fees that are paid be reinvested in the Company's common stock. The foregoing description of the terms of the May 1, 2015 Management Agreement is qualified in its entirety by reference to the full terms of such agreement, which is incorporated by reference as an exhibit to this Report.
During the years ended December 31, 2017, 2016 and 2015 the Company and the Manager agreed to the following modifications to the fee arrangements described above:
In order to ensure equitable application of the quarterly management fee provisions of the Management Agreement to the GIGS acquisition, which closed on June 30, 2015, the Manager waived any incremental management fee due as of the end of the second quarter of 2015 based on the net impact of the GIGS Acquisition as of June 30, 2015;
In light of the provisions for loan losses recognized by the Company on certain of its energy infrastructure financing investments (collectively, the "Underperforming Loans") during 2015 and the first quarter of 2016, the Manager voluntarily recommended, and the Company agreed, that effective on and after the Company's March 31, 2016 balance sheet date, solely for the purpose of computing the value of the Company's Managed Assets in calculating the quarterly management fee under the terms of the Management Agreement, that portion of the Management Fee attributable to the Company's investment in the Underperforming Loans shall be based on the estimated net realizable value of such loans, which shall not exceed the amount invested in the Underperforming Loans as of the end of the quarter for which the Management Fee is to be calculated. This agreement superseded a similar prior agreement between the Company and the Manager, which was effective as of September 30, 2015, concerning valuation of the Black Bison Loans for purposes of calculating the Management Fee.
In light of the provision for uncollectable interest recorded with respect to Black Bison loans as described in Note 4 ("Financing Notes Receivable"), the Manager voluntarily recommended, and the Company agreed, that the Manager would waive $133 thousand of the total $279 thousand incentive fee that would otherwise be payable under the provisions described above with respect to dividends paid on the Company's common stock during the year ended December 31, 2015, and accordingly the Manager received an incentive fee of $145 thousand for such period.
During the year ended December 31, 2016, the Manager voluntarily recommended, and the Company agreed, that the Manager would waive $88 thousand of the total $595 thousand incentive fee that would have otherwise been payable under the provisions of the Management Agreement with respect to dividends paid on the Company's common stock.
During the year ended December 31, 2017, the Manager voluntarily recommended, and the Company agreed, that the Manager would waive $100 thousand of the total $595 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 order to ensure equitable application of the quarterly management fee provisions of the Management Agreement for the acquisition of Prudential's minority limited partner interest in Pinedale LP, which closed on December 29, 2017, the Manager waived any incremental management fee due as of the end of the fourth quarter of 2017 based on the net impact of the Pinedale LP acquisition.
Fees incurred under the Management Agreement for the years ended December 31, 2017, 2016 and 2015 were $7.2 million, $7.2 million and $5.7 million, respectively, and are reported in the General and Administrative line item on the Consolidated Statements of Income.
The Company pays Corridor, as the Company's Administrator pursuant to an Administrative Agreement, an administrative fee equal to an annual rate of 0.04 percent of the value of the Company's Managed Assets, with a minimum annual fee of $30 thousand. Fees incurred under the Administrative Agreement for the years ended December 31, 2017, 2016 and 2015 were $269 thousand, $266 thousand and $224 thousand, respectively, and are reported in the General and Administrative line item on the Consolidated Statements of Income.
Fair Value
FAIR VALUE
FAIR VALUE
The following tables set forth the Company's assets and liabilities measured at fair value on a recurring basis, by input level within the fair value hierarchy, as of December 31, 2017 and 2016:
 
December 31, 2017
 
Total
 
Fair Value
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Other equity securities
$
2,958,315

 
$

 
$

 
$
2,958,315

Total Assets
$
2,958,315

 
$

 
$

 
$
2,958,315

 
December 31, 2016
 
Total
 
Fair Value
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Other equity securities
$
9,287,209

 
$

 
$

 
$
9,287,209

Interest rate swap derivative
19,950

 

 
19,950

 

Total Assets
$
9,307,159

 
$

 
$
19,950

 
$
9,287,209

At December 31, 2017 and 2016, the only assets and liabilities measured at fair value on a recurring basis were the Company's (i) equity securities and (ii) derivatives and equity securities, respectively. On March 30, 2016, the Company terminated one of its interest rate swaps with a notional amount of $26.3 million concurrent with the assignment of the Pinedale Credit Facility. The remaining cash flow hedge was de-designated from hedge accounting as of March 30, 2016, and continued to be valued using a consistent methodology and therefore was classified as a Level 2 measurement. Subsequent to de-designation, changes in the fair value were recognized in earnings in the period in which the changes occurred, through expiration in December 2017.
Prior to the interest rate swaps termination and expiration, the valuation of the interest rate swaps was determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. The inputs used to value the derivatives fall primarily within Level 2 of the value hierarchy. See further discussion in Note 13 ("Interest Rate Hedge Swaps").
The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the years ended December 31, 2017 and 2016, are as follows:
Level 3 Rollforward
For the Year Ended 2017
 
Fair Value Beginning Balance
 
Acquisitions
 
Disposals
 
Total Realized and Unrealized Gains Included in Net Income
 
Return of Capital Adjustments Impacting Cost Basis of Securities
 
Fair Value Ending Balance
 
Changes in Unrealized Gains Included In Net Income, Relating to Securities Still Held (1)
Other equity securities
 
$
9,287,209

 
$
1,161,034

 
$
(8,752,201
)
 
$
1,531,827

 
$
(269,554
)
 
$
2,958,315

 
$
295,161

Total
 
$
9,287,209

 
$
1,161,034

 
$
(8,752,201
)
 
$
1,531,827

 
$
(269,554
)
 
$
2,958,315

 
$
295,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Year Ended 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other equity securities
 
$
8,393,683

 
$

 
$

 
$
781,154

 
$
112,372

 
$
9,287,209

 
$
781,154

Total
 
$
8,393,683

 
$

 
$

 
$
781,154

 
$
112,372

 
$
9,287,209

 
$
781,154

(1) Located in Net realized and unrealized gain on other equity securities in the Consolidated Statements of Income

The Company utilizes the beginning of reporting period method for determining transfers between levels. There were no transfers between levels 1, 2 or 3 for the years ended December 31, 2017 and 2016.
Valuation Techniques and Unobservable Inputs
The Company's other equity securities, which represent securities issued by private companies, are classified as Level 3 assets and the Company has elected to report at fair value under the fair value option. Significant judgment is required in selecting the assumptions used to determine the fair values of these investments.
As of December 31, 2017 and 2016, the Company's investment in Lightfoot is its only remaining significant private company investment. As of both December 31, 2017 and 2016, the Company held a 6.6 percent and 1.5 percent equity interest in Lightfoot LP and Lightfoot GP, respectively. Prior to the Zenith acquisition discussed below, Lightfoot's assets included an ownership interest in Gulf LNG, a 1.5 billion cubic feet per day ("bcf/d") receiving, storage and regasification terminal in Pascagoula, Mississippi, and common units and subordinated units representing an approximately 40 percent aggregate limited partner interest, and a noneconomic general partner interest, in Arc Logistics. As of December 31, 2017, Lightfoot's only material asset consists of its remaining investment in Gulf LNG.
On December 21, 2017, Zenith closed its acquisition of Arc Logistics. Under the terms of the agreement, Lightfoot LP received $14.50 per common unit of Arc Logistics. Lightfoot LP additionally received $36.2 million for the sale of 5.52 percent of its interest in Gulf LNG to Zenith (the "Unconditional Interest"). Under the terms of the agreement, Zenith will purchase the remaining 4.16 percent of Lightfoot's Gulf LNG interest (the “Conditional Interest”) for an additional $27.3 million upon a successful outcome (as defined) of the Gulf LNG arbitration with ENI USA, as discussed further below. Lightfoot GP received $94.5 million for 100 percent of the membership interests in Arc Logistics GP. Under the terms of the merger, at closing, Lightfoot LP and Lightfoot GP used a portion of their sale proceeds to purchase an approximate 13.5 percent interest in Arc Terminal Joliet Holdings.
In accordance with the above, subsequent to closing of the transaction, the Company received $7.6 million in cash proceeds related to its pro rata portion of the sale proceeds of Lightfoot, including proceeds related to Arc Logistics common units, the Unconditional Interest in Gulf LNG and membership interests in Arc Logistics GP. Amounts received are net of approximately $1.2 million related to the Company's required reinvestment in Arc Terminal Joliet Holdings, of which it owns approximately 0.6 percent.
As of December 31, 2017, the Company's remaining private company investments in Lightfoot and Arc Terminal Joliet Holdings represent less than 0.5 percent of its total assets. The fair value of the Company's private company investments at December 31, 2017 was approximately $3.0 million, which was determined using recent transaction data and expected proceeds, discounted using a risk-free rate through the expected receipt date. As of December 31, 2016, Lightfoot was valued using a combination of the following valuation techniques: (i) public share price of private companies' investments and (ii) discounted cash flow analysis using an estimated discount rate of 15.3 percent to 17.3 percent.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company's investment may fluctuate from period to period. Additionally, the fair value of the Company's investment may differ from the values that would have been used had a ready market existed for such investment and may differ materially from the values that the Company may ultimately realize.
On March 1, 2016, an affiliate of Gulf LNG received a Notice of Disagreement and Disputed Statements and a Notice of Arbitration from Eni USA, one of the two companies that had entered into a terminal use agreement for capacity of the liquefied natural gas facility owned by Gulf LNG and its subsidiaries. Should Eni USA be successful in terminating its agreement with Gulf LNG, this could significantly impact the value of the Company's remaining investment in Lightfoot.
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.
Derivative Asset — The Company has historically used interest rate swaps to manage interest rate risk. The fair value of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the respective derivative.
Secured Credit Facilities — The fair value of the Company's long-term variable-rate and fixed-rate debt under its secured credit facilities approximates carrying value.
Unsecured Convertible Senior Notes — The fair value of the unsecured convertible senior notes is estimated using quoted market prices.
Carrying and Fair Value Amounts
 
Level within fair value hierarchy
 
December 31, 2017
 
December 31, 2016
 
 
Carrying Amount (1)
 
Fair Value
 
Carrying Amount (1)
 
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
Level 1
 
$
15,787,069

 
$
15,787,069

 
$
7,895,084

 
$
7,895,084

Financing notes receivable (Note 4)
Level 3
 
1,500,000

 
1,500,000

 
1,500,000

 
1,500,000

Derivative asset
Level 2
 

 

 
19,950

 
19,950

Financial Liabilities:
 
 
 
 
 
 
 
 
Secured credit facilities
Level 2
 
$
40,745,354

 
$
40,745,354

 
$
89,387,985

 
$
89,387,985

Unsecured convertible senior notes
Level 1
 
112,032,083

 
139,101,660

 
111,244,895

 
129,527,940

(1) The carrying value of debt balances are presented net of unamortized original issuance discount and debt issuance costs.
Debt
DEBT
DEBT
The following is a summary of debt facilities and balances as of December 31, 2017 and 2016:
 
Total Commitment
 or Original Principal
 
Quarterly Principal Payments
 
 
 
December 31, 2017
 
December 31, 2016
 
 
 
Maturity
Date
 
Amount Outstanding
 
Interest
Rate
 
Amount Outstanding
 
Interest
Rate
CorEnergy Secured Credit Facility:
 
 
 
 
 
 
 
 
 
 
 
 
 
CorEnergy Revolver
$
160,000,000

 
$

 
7/28/2022
 
$

 
4.32
%
 
$
44,000,000

 
3.76
%
CorEnergy Term Loan (1)
45,000,000

 
1,615,000

 
12/15/2019
 

 
%
 
36,740,000

 
3.74
%
MoGas Revolver
1,000,000

 

 
7/28/2022
 

 
4.32
%
 

 
3.77
%
Omega Line of Credit
1,500,000

 

 
7/31/2018