CORENERGY INFRASTRUCTURE TRUST, INC., 10-K filed on 2/27/2020
Annual Report
v3.19.3.a.u2
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2019
Feb. 26, 2020
Jun. 28, 2019
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, 2019    
Amendment Flag false    
Entity Shell Company false    
Entity Emerging Growth Company false    
Entity Small Business true    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Filer Category Accelerated Filer    
Entity Public Float     $ 506,662,643
Entity Common Stock, Shares Outstanding   13,651,521  
v3.19.3.a.u2
Consolidated Balance Sheets - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Assets    
Leased property, net of accumulated depreciation of $105,825,816 and $87,154,095 $ 379,211,399 $ 398,214,355
Property and equipment, net of accumulated depreciation of $19,304,610 and $15,969,346 106,855,677 109,881,552
Financing notes and related accrued interest receivable, net of reserve of $600,000 and $600,000 1,235,000 1,300,000
Note receivable 0 5,000,000
Cash and cash equivalents 120,863,643 69,287,177
Deferred rent receivable 29,858,102 25,942,755
Accounts and other receivables 4,143,234 5,083,243
Deferred costs, net of accumulated amortization of $1,956,710 and $1,290,236 2,171,969 2,838,443
Prepaid expenses and other assets 804,341 668,584
Deferred tax asset, net 4,593,561 4,948,203
Goodwill 1,718,868 1,718,868
Total Assets 651,455,794 624,883,180
Liabilities and Equity    
Secured credit facilities, net of debt issuance costs of $158,070 and $210,891 33,785,930 37,261,109
Unsecured convertible senior notes, net of discount and debt issuance costs of $3,768,504 and $1,180,729 118,323,496 112,777,271
Asset retirement obligation 8,044,200 7,956,343
Accounts payable and other accrued liabilities 6,000,981 3,493,490
Management fees payable 1,669,950 1,831,613
Unearned revenue 6,891,798 6,552,049
Total Liabilities 174,716,355 169,871,875
Equity    
Series A Cumulative Redeemable Preferred Stock 7.375%, $125,493,175 and $125,555,675 liquidation preference ($2,500 per share, $0.001 par value), 10,000,000 authorized; 50,197 and 50,222 issued and outstanding at December 31, 2019 and December 31, 2018, respectively 125,493,175 125,555,675
Capital stock, non-convertible, $0.001 par value; 13,638,916 and 11,960,225 shares issued and outstanding at December 31, 2019 and December 31, 2018 (100,000,000 shares authorized) 13,639 11,960
Additional paid-in capital 360,844,497 320,295,969
Retained earnings (deficit) (9,611,872) 9,147,701
Total Equity 476,739,439 455,011,305 [1]
Total Liabilities and Equity $ 651,455,794 $ 624,883,180
[1] (2) The retained earnings balance at December 31, 2018 was generated due to the timing of quarterly dividends and quarterly net income. In the fourth quarter of 2018, net income was greater than dividends due to the gain on sale of leased property, net from the sale of the Portland Terminal Facility resulting in a retained earnings balance as of December 31, 2018.
v3.19.3.a.u2
Consolidated Balance Sheets (Parenthetical) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Accumulated depreciation, leased property $ 105,825,816 $ 87,154,095
Accumulated depreciation, property and equipment 19,304,610 15,969,346
Accumulated amortization, deferred costs 1,956,710 1,290,236
Reserve for financing notes and related accrued interest receivable $ 600,000 $ 600,000
Preferred stock, par value (in dollars per share) $ 0.001  
Preferred stock, authorized (in shares) 10,000,000  
Preferred stock, outstanding (in shares) 50,197  
Capital stock non-convertible, par value (in dollars per share) $ 0.001 $ 0.001
Capital stock non-convertible, shares issued (in shares) 13,638,916 11,960,225
Capital stock non-convertible, shares outstanding (in shares) 13,638,916 11,960,225
Capital stock non-convertible, shares authorized (in shares) 100,000,000 100,000,000
Series A Cumulative Redeemable Preferred Stock    
Preferred stock interest rate 7.375% 7.375%
Preferred stock, liquidation preference $ 125,493,175 $ 125,555,675
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) 50,197 50,222
Preferred stock, outstanding (in shares) 50,197 50,222
Convertible Debt    
Unamortized discount and debt issuance costs $ 3,768,504 $ 1,180,729
Secured Debt    
Deferred debt financing costs, net $ 158,070 $ 210,891
v3.19.3.a.u2
Consolidated Statements of Income and Comprehensive Income - USD ($)
3 Months Ended 12 Months Ended
Dec. 31, 2018
Sep. 30, 2018
Jun. 30, 2018
Mar. 31, 2018
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Revenue              
Lease revenue         $ 67,050,506    
Lease revenue $ 18,487,661 $ 18,391,983 $ 18,275,859 $ 17,591,859   $ 72,747,362 $ 68,803,804
Total Revenue 22,900,039 22,636,705 22,150,016 21,544,838 85,945,570 89,231,598 88,749,377
Expenses              
Transportation and distribution expenses 1,861,329 2,241,999 1,534,524 1,572,896 5,242,244 7,210,748 6,729,707
General and administrative 4,161,533 3,046,481 3,107,776 2,727,057 10,596,848 13,042,847 10,786,497
Depreciation, amortization and ARO accretion expense 6,078,582 6,289,459 6,290,082 6,289,330 22,581,942 24,947,453 24,047,710
Provision for loan gain (536,867) 0 0 500,000 0 (36,867) 0
Total Expenses 11,564,577 11,577,939 10,932,382 11,089,283 38,421,034 45,164,181 41,563,914
Operating Income 11,335,462 11,058,766 11,217,634 10,455,555 47,524,536 44,067,417 47,185,463
Other Income (Expense)              
Net distributions and other income 41,503 5,627 55,714 3,951 1,328,853 106,795 680,091
Net realized and unrealized gain (loss) on other equity securities (48,028) (930,147) (881,100) 13,966 0 (1,845,309) 1,531,827
Interest expense (3,168,583) (3,183,589) (3,196,248) (3,210,590) (10,578,711) (12,759,010) (12,378,514)
Gain on the sale of leased property, net 11,723,257 0 0 0 0 11,723,257 0
Loss on extinguishment of debt         (33,960,565) 0 (336,933)
Total Other Expense 8,548,149 (4,108,109) (4,021,634) (3,192,673) (43,210,423) (2,774,267) (10,503,529)
Income before income taxes 19,883,611 6,950,657 7,196,000 7,262,882 4,314,113 41,293,150 36,681,934
Taxes              
Current tax expense (benefit) (530,659) (8,393) (10,785) (35,549) (120,024) (585,386) 2,831,658
Deferred tax expense (benefit) (81,725) (738,274) (604,064) (409,277) 354,642 (1,833,340) (486,340)
Income tax expense (benefit), net (612,384) (746,667) (614,849) (444,826) 234,618 (2,418,726) 2,345,318
Net Income         4,079,495 43,711,876 34,336,616
Less: Net Income attributable to non-controlling interest         0 0 1,733,826
Net Income attributable to CorEnergy Stockholders 20,495,995 7,697,324 7,810,849 7,707,708 4,079,495 43,711,876 32,602,790
Preferred dividend requirements 2,357,752 2,396,875 2,396,875 2,396,875 9,255,468 9,548,377 7,953,988
Net Income (Loss) attributable to Common Stockholders $ 18,138,243 $ 5,300,449 $ 5,413,974 $ 5,310,833 (5,175,973) 34,163,499 24,648,802
Net Income         4,079,495 43,711,876 34,336,616
Other comprehensive income:              
Changes in fair value of qualifying hedges / AOCI attributable to CorEnergy stockholders         0 0 11,196
Changes in fair value of qualifying hedges / AOCI attributable to non-controlling interest         0 0 2,617
Net Change in Other Comprehensive Income         0 0 13,813
Total Comprehensive Income         4,079,495 43,711,876 34,350,429
Less: Comprehensive income attributable to non-controlling interest         0 0 1,736,443
Comprehensive Income attributable to CorEnergy Stockholders         $ 4,079,495 $ 43,711,876 $ 32,613,986
Earnings (Loss) Per Common Share:              
Basic (in dollars per share) $ 1.52 $ 0.44 $ 0.45 $ 0.45 $ (0.40) $ 2.86 $ 2.07
Diluted (in dollars per share) $ 1.32 $ 0.44 $ 0.45 $ 0.45 $ (0.40) $ 2.79 $ 2.07
Weighted Average Shares of Common Stock Outstanding:              
Basic (in shares)         13,041,613 11,935,021 11,900,516
Diluted (in shares)         13,041,613 15,389,180 11,900,516
Dividends declared per share (in dollars per share)         $ 3.000 $ 3.000 $ 3.000
Transportation and distribution revenue              
Revenue              
Revenue $ 4,412,378 $ 4,244,722 $ 3,874,157 $ 3,952,979 $ 18,778,237 $ 16,484,236 $ 19,945,573
Financing revenue              
Revenue              
Revenue         $ 116,827 $ 0 $ 0
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Consolidated Statements of Equity - USD ($)
Total
Capital Stock
Preferred Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Deficit)
Non-Controlling Interest
Series A Cumulative Redeemable Preferred Stock
Series A Cumulative Redeemable Preferred Stock
Preferred Stock
Series A Cumulative Redeemable Preferred Stock
Additional Paid-in Capital
Beginning balance (in shares) at Dec. 31, 2016   11,886,216                
Beginning balance at Dec. 31, 2016 $ 433,909,480 $ 11,886 $ 56,250,000 $ 350,217,746 $ (11,196) $ 0 $ 27,441,044      
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Net income 34,336,616         32,602,790 1,733,826      
Amortization related to de-designated cash flow hedges 13,813       11,196   2,617      
Total Comprehensive Income 34,350,429       11,196 32,602,790 1,736,443      
Issuance of Series A preferred stock               $ 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 $ 2   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 (in shares) at Dec. 31, 2017   11,915,830                
Ending balance at Dec. 31, 2017 461,785,632 $ 11,916 130,000,000 331,773,716 0 0 0      
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Net income 43,711,876         43,711,876        
Total Comprehensive Income 43,711,876                  
Series A preferred stock dividends (9,587,500)         (9,587,500)        
Preferred stock repurchases [1] (4,275,553)   (4,444,325) 158,218   10,554        
Common stock dividends (35,793,889)     (10,806,660)   (24,987,229)        
Common stock issued under director's compensation plan (in shares)   1,807                
Common stock issued under director's compensation plan 67,500 $ 2   67,498            
Common stock issued upon conversion of convertible notes (in shares)   1,271                
Common stock issued upon conversion of convertible notes 42,654 $ 1   42,653     0      
Reinvestment of dividends paid to common stockholders (in shares)   41,317                
Reinvestment of dividends paid to common stockholders $ 1,509,830 $ 41   1,509,789            
Ending balance (in shares) at Dec. 31, 2018 11,960,225 11,960,225 [2]                
Ending balance at Dec. 31, 2018 [2] $ 455,011,305 $ 11,960 125,555,675 320,295,969 0 9,147,701 0      
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Net income 4,079,495         4,079,495 0      
Total Comprehensive Income 4,079,495                  
Series A preferred stock dividends (9,255,121)     (4,627,561)   (4,627,560)        
Preferred stock repurchases [3] (60,550)   (62,500) 2,195   (245)        
Common stock dividends (39,504,487)     (21,293,224)   (18,211,263)        
Common stock issued upon exchange of convertible notes (in shares)   1,540,472                
Common stock issued upon exchange of convertible notes 61,871,302 $ 1,540   61,869,762            
Common stock issued upon conversion of convertible notes (in shares)   127,143                
Common stock issued upon conversion of convertible notes 4,193,664 $ 128   4,193,536            
Reinvestment of dividends paid to common stockholders (in shares)   11,076                
Reinvestment of dividends paid to common stockholders $ 403,831 $ 11   403,820            
Ending balance (in shares) at Dec. 31, 2019 13,638,916 13,638,916                
Ending balance at Dec. 31, 2019 $ 476,739,439 $ 13,639 $ 125,493,175 $ 360,844,497 $ 0 $ (9,611,872) $ 0      
[1] (1) In connection with the repurchases of Series A Preferred Stock during 2018, the deduction to preferred dividends of $10,554 represents the discount in the repurchase price paid compared to the carrying amount derecognized.
[2] (2) The retained earnings balance at December 31, 2018 was generated due to the timing of quarterly dividends and quarterly net income. In the fourth quarter of 2018, net income was greater than dividends due to the gain on sale of leased property, net from the sale of the Portland Terminal Facility resulting in a retained earnings balance as of December 31, 2018.
[3] (3) In connection with the repurchases of Series A Preferred Stock during 2019, the addition to preferred dividends of $245 represents the premium in the repurchase price paid compared to the carrying amount derecognized.
v3.19.3.a.u2
Consolidated Statements of Equity (Parenthetical) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Statement of Stockholders' Equity [Abstract]    
Increase (decrease) in preferred dividends $ 245 $ (10,554)
v3.19.3.a.u2
Consolidated Statements of Cash Flow - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Operating Activities      
Net Income $ 4,079,495 $ 43,711,876 $ 34,336,616
Adjustments to reconcile net income to net cash provided by operating activities:      
Deferred income tax, net 354,642 (1,845,710) (486,340)
Depreciation, amortization and ARO accretion 23,808,083 26,361,907 25,708,891
Gain on sale of leased property, net 0 (11,723,257) 0
Provision for loan gain 0 (36,867) 0
Loss on extinguishment of debt 33,960,565 0 336,933
Non-cash settlement of accounts payable 0 0 (221,609)
(Gain) loss on sale of equipment (7,390) (8,416) 4,203
Net distributions and other income, including recharacterization of income 0 0 148,649
Net realized and unrealized (gain) loss on other equity securities 0 1,845,309 (1,531,827)
Loss on settlement of asset retirement obligation 0 310,941 0
Common stock issued under directors' compensation plan 0 67,500 67,500
Changes in assets and liabilities:      
Increase in deferred rent receivables (3,915,347) (7,038,848) (7,184,005)
(Increase) decrease in accounts and other receivables 940,009 (1,297,207) 752,848
(Increase) decrease in prepaid expenses and other assets (136,108) 73,505 (16,717)
Increase (decrease) in management fee payable (161,663) 83,187 13,402
Increase (decrease) in accounts payable and other accrued liabilities 2,517,069 476,223 (225,961)
Increase (decrease) in income tax liability 0 (2,204,626) 2,204,626
Increase (decrease) in unearned revenue 339,749 (152,777) 2,884,362
Net cash provided by operating activities 61,779,104 48,622,740 56,791,571
Investing Activities      
Proceeds from the sale of leased property 0 55,553,975 0
Proceeds from sale of other equity securities 0 449,067 7,591,166
Purchases of property and equipment, net (372,934) (105,357) (116,595)
Proceeds from asset sale 7,000 17,999 0
Principal payment on financing note receivable 65,000 236,867 0
Principal payment on note receivable 5,000,000 0 0
Return of capital on distributions received 0 663,939 120,906
Net cash provided by investing activities 4,699,066 56,816,490 7,595,477
Financing Activities      
Debt financing costs (372,759) (264,010) (1,462,741)
Net offering proceeds on Series A preferred stock 0 0 71,161,531
Cash paid for extinguishment of convertible notes (78,939,743) 0 0
Net offering proceeds on convertible debt 116,355,125 0 0
Repurchases of Series A preferred stock (60,550) (4,275,553) 0
Dividends paid on Series A preferred stock (9,255,121) (9,587,500) (8,227,734)
Dividends paid on common stock (39,100,656) (34,284,059) (34,731,892)
Distributions to non-controlling interest 0 0 (1,833,650)
Advances on revolving line of credit 0 0 10,000,000
Payments on revolving line of credit 0 0 (54,000,000)
Proceeds from term debt 0 0 41,000,000
Principal payments on secured credit facilities (3,528,000) (3,528,000) (45,600,577)
Purchase of non-controlling interest 0 0 (32,800,000)
Net cash used in financing activities (14,901,704) (51,939,122) (56,495,063)
Net Change in Cash and Cash Equivalents 51,576,466 53,500,108 7,891,985
Cash and Cash Equivalents at beginning of period 69,287,177 15,787,069 7,895,084
Cash and Cash Equivalents at end of period 120,863,643 69,287,177 15,787,069
Supplemental Disclosure of Cash Flow Information      
Interest paid 6,834,439 11,200,835 10,780,150
Income taxes paid (net of refunds) 89,433 2,136,563 199,772
Non-Cash Investing Activities      
Note receivable in consideration of the sale of leased property 0 5,000,000 0
Investment in other equity securities 0 0 (1,161,034)
Non-Cash Financing Activities      
Change in accounts payable and accrued expenses related to debt financing costs 0 (255,037) 255,037
Reinvestment of distributions by common stockholders in additional common shares 403,831 1,509,830 962,308
Common stock issued upon exchange and conversion of convertible notes $ 66,064,966 $ 42,654 $ 0
v3.19.3.a.u2
Introduction and Basis of Presentation
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
INTRODUCTION AND BASIS OF PRESENTATION
INTRODUCTION AND BASIS OF PRESENTATION
Introduction
CorEnergy Infrastructure Trust, Inc. (referred to as "CorEnergy" or "the Company"), was organized as a Maryland corporation and commenced operations on December 8, 2005. The Company's common 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 Company's net earnings have been reduced by the portion of net earnings attributable to non-controlling interests, when applicable.
The FASB issued ASU 2015-02 Consolidations (Topic 810) - Amendments to the Consolidation Analysis ("ASU 2015-02"), which amended previous consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities are considered a variable interest entity ("VIE") unless the limited partners hold substantive kick-out rights or participating rights. Management determined that Pinedale LP and Grand Isle Corridor LP are VIEs under the amended guidance because the limited partners of both partnerships lack both substantive kick-out rights and participating rights. As such, management evaluated the qualitative criteria under FASB ASC Topic 810 in conjunction with ASU 2015-02 to make a determination whether these partnerships should be consolidated in 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 this evaluation and the Company's 100 percent ownership interest in Pinedale LP (2018-2019) and Grand Isle Corridor LP (2017-2019) and the majority ownership interest in Pinedale LP (2017) of the limited partnership interests, the consolidated financial statements presented include full consolidation with respect to both partnerships.
v3.19.3.a.u2
Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
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 and Leases – In February of 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02" or "ASC 842"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The Company adopted ASC 842 effective January 1, 2019 using the modified retrospective approach by applying the transition provisions at the beginning of the period of adoption. The adoption of the new standard resulted in the recording of right-of-use assets and lease liabilities of approximately $75 thousand each, included in prepaid expenses and other assets and accounts payable and other accrued liabilities, respectively, as of January 1, 2019. There was no difference between the right-of-use assets and lease liabilities resulting in an adjustment to retained earnings. Refer to Note 3 ("Leased Properties And Leases") for further details of the ASC 842 adoption impact. The standard did not materially impact the Company's Consolidated Statements of Income and had no impact on the Consolidated Statements of Cash Flows. The Company will continue to apply legacy guidance in ASC 840, "Leases," including its disclosure requirements, in the comparative periods presented in the year of adoption.
In adopting ASC 842, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the carry forward of historical lease classification. For the underlying lessee asset class related to single-use office space, the Company also elected the lessee separation and allocation practical expedient to not separate lease and non-lease components and instead to account for each separate lease component and non-lease component as a single lease component. For the underlying lessor asset class related to pipelines residing on military bases, the Company elected the lessor separation and allocation practical expedient to not separate lease and non-lease components and instead to account for each separate lease component and non-lease component as a single lease component if the non-lease components otherwise will be accounted for in accordance with the revenue standard, and both the following criteria are met: (i) the timing and pattern of revenue recognition are the same for the non-lease component(s) and the related lease component and (ii) the lease component will be classified as an operating lease. Additionally, the Company elected the practical expedient related to land easements, allowing the carry forward of accounting treatment for land easements on existing agreements, which are currently accounted for within property, plant and equipment.
The Company's current leased properties are classified as operating leases and are recorded as leased property, net of accumulated depreciation, in the Consolidated Balance Sheets. Initial direct costs incurred in connection with the creation and execution of a lease prior to January 1, 2019 are capitalized and amortized over the lease term. The Company did not reassess initial indirect cost as it elected the package of practical expedients. Subsequent to January 1, 2019, initial direct costs under ASC 842 are incremental costs of a lease that would not have been incurred if the lease had not been obtained and may include commissions or payments made to an existing tenant as an incentive to terminate its lease. Base rent related to the Company's leased property is recognized on a straight-line basis over the term of the lease when collectability is probable. Participating rent is recognized when it is earned, based on the achievement of specified performance criteria. Base and participating rent are recorded as lease revenue in the Consolidated Statements of Income. Rental payments received in advance are classified as unearned revenue and included as a liability within the Consolidated Balance Sheets. Unearned revenue is amortized ratably over the lease period as revenue recognition criteria are met. Rental payments received in arrears are accrued and classified as deferred rent receivable and included in assets within the Consolidated Balance Sheets.
Under the Company's triple-net leases, the tenant is required to pay property taxes and insurance directly to the applicable third-party provider. Consistent with guidance in ASC 842, the Company will present the cost and the lessee's direct payment to the third-party under the triple-net leases on a net basis in the Consolidated Statements of Income.
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 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 primarily 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, 2019, 2018 or 2017.
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 typically 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, 2019, 2018 and 2017, the Company recorded provisions for loan gain of approximately $0, $37 thousand and $0, respectively. The Company's financing notes receivable are discussed more fully in Note 5 ("Financing Notes Receivable").
F. Investment Securities – The Company's investments in securities were classified as other equity securities and represented interests in private companies which the Company elected to report at fair value under the fair value option. These investments were subject to restrictions on resale, have no established trading market and were valued on a quarterly basis. Because of the inherent uncertainty of valuation, the fair values of such investments, which were 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. As a result of the sale or disposition of the Company's other equity securities in 2018, the Company no longer holds investments in other equity securities as of December 31, 2019 and 2018.
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, 2019 and 2018, 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, 2019, 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, which simplifies how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test. 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.
For the year ended December 31, 2019 annual impairment test, management proceeded directly to the step one quantitative approach as a result of the MoGas FERC rate case settlement approved in August of 2019. As of the December 31, 2019 testing date, the fair value of the MoGas reporting unit was determined to be greater than its carrying value and no impairment was recorded. The Company elected to perform a qualitative goodwill impairment assessment for the years ended December 31, 2018 and 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 were 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.
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. In accordance with ASC 470, Debt ("ASC 470"), the Company recorded its Convertible 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 of 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 Consolidated Statements 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.
Upon decommissioning of the ARO or a portion thereof, the Company reduces the fair value of the liability and recognizes a (gain) loss on settlement of ARO as an operating item in the Consolidated Statements of Income for the difference between the liability and actual decommissioning costs incurred.
Refer to Note 12 ("Asset Retirement Obligation") for additional information.
N. Revenue Recognition – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09" or "ASC 606"), which became effective for all public entities on January 1, 2018. ASC 606 supersedes previously existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g. leases). The model requires an entity to recognize as revenue the amount of consideration to which it expects to be entitled for the transfer of promised goods or services to customers. A substantial portion of the Company's revenue consists of rental income from leasing arrangements, which is specifically excluded from ASC 606. However, the Company's transportation and distribution revenue is within the scope of the new guidance. The Company adopted ASC 606 effective on January 1, 2018 using the modified retrospective method. The Company elected to apply the guidance only to open contracts as of the effective date. The Company recognized the cumulative effect of applying the new standard as an adjustment to the opening balance of stockholders' equity. The comparative information has not been restated and continues to be reported under accounting standards in effect for those periods. Refer to Note 4 ("Transportation And Distribution Revenue") for further discussion of the transition impact and related disclosures under ASC 606.
Specific recognition policies for the Company's revenue items are as follows:
Lease revenue – Refer to Leased Property and Leases for the Company's lease revenue recognition policy.
Transportation and distribution revenue – The Company's contracts related to transportation and distribution revenue are primarily comprised of a mix of natural gas supply, transportation and distribution performance obligations, as well as limited performance obligations related to system maintenance and improvement. Transportation revenues are recognized by MoGas and distribution revenues are recognized by Omega and Omega Gas Marketing, LLC.
Under the Company's natural gas supply, transportation and distribution performance obligations, the customer simultaneously receives and consumes the benefit of the services as natural gas is delivered. Therefore, the transaction price is allocated proportionally over the series of identical performance obligations with each contract. The transaction price is calculated based on (i) index price, plus a contractual markup in the case of natural gas supply agreements (considered variable due to fluctuations in the index), (ii) FERC regulated rates or negotiated rates in the case of transportation agreements and (iii) contracted amounts (with annual CPI escalators) in the case of the Company's distribution agreement. Based on the nature of the agreements, revenue for all but one of the Company's natural gas supply, transportation and distribution performance obligations is recognized on a right to invoice basis as the performance obligations are met, which represents what the Company expects to receive in consideration and is representative of value delivered to the customer. The Company has a contract with one customer, Spire, that has fixed pricing which varies over the contract term. For this specific contract, the transaction price has been allocated ratably over the contractual performance obligation beginning in 2018 with the adoption of ASC 606. All invoicing is done in the month following service, with payment typically due a month from invoice date.
The Company's contracts also contain performance obligations related to system maintenance and improvement, which are completed on an as-needed basis. The work performed is specific and tailored to the customer's needs and there are no alternative uses for the services provided. Therefore, as the work is being completed, control is transferring to the customer. These services are billed at the Company's cost, plus an agreed upon margin, and the Company has an enforceable right to payment as the services are provided. The Company invoices for this service on a monthly basis according to an agreed upon billing schedule. Revenue is recognized on an input method, based on the actual cost of a service as a measure of performance obligations satisfaction, which the Company determined to be the method which faithfully depicts the transfer of services. Differences between the amounts invoiced and revenue recognized under the input method are reflected as an asset or liability on the Consolidated Balance Sheets. Any differences are typically expected to be recognized within a year. As discussed in Note 3 ("Leased Properties And Leases"), the costs of system improvement projects are recognized as a financing arrangement in accordance with guidance in the lease standard while the margin is recognized in accordance with the revenue standard as discussed above.
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. The Company continues to present the gas sales and cost of gas sales on a net basis upon adoption of ASC 606.
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. 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 DOD, 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 other 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. 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.
T. 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 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, 2019, 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.
U. Recent Accounting Pronouncements – In June of 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. The new model, referred to as the current expected credit losses ("CECL model"), will apply to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November of 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates of these standards for certain entities. Based on the guidance for smaller reporting companies, the effective date of ASU 2016-13 is deferred for the Company until fiscal year 2023, and the Company has elected to defer adoption of this standard.
Although the Company has elected to defer adoption of ASU 2016-13, it will continue to evaluate the potential impact of the standard on its consolidated financial statements. As part of its ongoing assessment work, the Company has formed an implementation team, completed training on the CECL model and has begun developing policies, processes and internal controls.
v3.19.3.a.u2
Leased Properties and Leases
12 Months Ended
Dec. 31, 2019
Leases [Abstract]  
LEASED PROPERTIES AND LEASES
LEASED PROPERTIES AND LEASES
The Company primarily acquires mid-stream and downstream assets in the U.S. energy sector such as pipelines, storage terminals, and gas and electric distribution systems and leases these assets to operators under triple-net leases. These leases typically include a contracted base rent with escalation clauses and participating rents that are tied to contract-specific criteria. Base rents under the Company's leases are structured on an estimated fair market value rent structure over the initial term, which includes assumptions related to the terminal value of the assets and expectations of tenant renewals. At the conclusion of the initial lease term, the Company's leases may contain fair market value repurchase options or fair market rent renewal terms. These clauses also act as safeguards against the Company's tenants pursuing activities which would undermine or degrade the value of the assets faster than the underlying reserves are depleted. Participating rents are structured to provide exposure to the successful commercial activity of the tenant, and as such, also provide protection in the event that the economic life of the assets is reduced based on accelerated production by the Company's tenants. While the Company is primarily a lessor, certain of its operating subsidiaries are lessees and have entered into lease agreements as discussed further below.
LESSOR - LEASED PROPERTIES
As of December 31, 2019, the Company had two significant leases. The properties, located in Wyoming, Louisiana and the Gulf of Mexico, are leased on a triple-net basis to major tenants, described in the table below. These major tenants are responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to the leased properties. The long-term, triple-net leases generally have an initial term of 11 to 15 years with options for renewals. Lease payments are scheduled to increase at varying intervals during the initial term of the leases. The following table summarizes the significant leased properties, major tenants and lease terms:
Summary of Leased Properties, Major Tenants and Lease Terms
Property
Grand Isle Gathering System
Pinedale LGS
Location
Gulf of Mexico/Louisiana
Pinedale, WY
Tenant
Energy XXI GIGS Services, LLC
Ultra Wyoming LGS, LLC
Asset Description
Approximately 137 miles of offshore pipeline with total capacity of 120 thousand Bbls/d, including a 16-acre onshore terminal and saltwater disposal system.
Approximately 150 miles of pipelines and four central storage facilities.
Date Acquired
June 2015
December 2012
Initial Lease Term
11 years
15 years
Renewal Option
Equal to the lesser of 9-years or 75 percent of the remaining useful life
5-year terms
Current Monthly Rent Payments
7/1/18 - 6/30/19: $2,860,917
7/1/19 - 6/30/20: $3,223,917
$1,812,307(1)
Estimated Useful Life
27 years
26 years
(1) Monthly rent payments increased to $1,844,748 beginning January 1, 2020.

The Company also concluded that Omega's long-term contract with the Department of Defense ("DOD") to provide natural gas distribution to Fort Leonard Wood through Omega's pipeline distribution system on the military post meets the definition of a lease under ASC 842. Omega is the lessor in the contract and the lease is classified as an operating lease. The Company noted the non-lease component is the predominant component in the lease, and the timing and pattern of transfer of the lease component and the associated non-lease component are the same. As discussed in Note 2 ("Significant Accounting Policies"), the Company elected a practical expedient that allows lessors to not separate lease and related non-lease components if the non-lease components otherwise would be accounted for in accordance with the revenue standard under ASC 606. With the election of this practical expedient, the Company continues to account for the DOD contract under the revenue standard.
In the second quarter of 2019, the Company started a system improvement project on Omega's pipeline distribution system, which is considered a "built to suit" transaction under ASC 842. The system improvement project is a separate lease component and the DOD is deemed to control the system improvement due to certain contract provisions. As a result, the Company is accounting for the costs of the system improvement as a financing arrangement, which is included in accounts and other receivables in the Consolidated Balance Sheets. The margin the Company earns on the system improvement project is a non-lease component accounted for under the revenue standard. Refer to Note 2 ("Significant Accounting Policies") for further details.
The future contracted minimum rental receipts for all leases as of December 31, 2019, are as follows:
Future Minimum Lease Receipts
Year Ending December 31,
Amount
2020
$
65,772,473

2021
71,734,473

2022
70,711,973

2023
67,663,973

2024
65,874,973

Thereafter
129,321,920

Total
$
471,079,785


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,
 
2019
 
2018
 
2019
 
2018
 
2017
Pinedale LGS (2)
44.4
%
 
44.5
%
 
39.2
%
 
35.2
%
 
31.2
%
Grand Isle Gathering System
55.3
%
 
55.2
%
 
60.6
%
 
55.9
%
 
59.1
%
Portland Terminal Facility (3)
%
 
%
 
%
 
8.8
%
 
9.6
%
(1) Insignificant leases are not presented; thus percentages may not sum to 100%.
(2) Pinedale LGS lease revenues include variable rent of $4.6 million, $4.3 million and $587 thousand for the years ended December 31, 2019, 2018 and 2017, respectively.
(3) On December 21, 2018, the Portland Terminal Facility was sold to Zenith Terminals, terminating the Portland Lease Agreement.

The following table reflects the depreciation and amortization included in the accompanying Consolidated Statements of Income associated with the Company's leases and leased properties:
 
For the Years Ended December 31,
 
2019
 
2018
 
2017
Depreciation Expense
 
 
 
 
 
GIGS
$
9,763,163

 
$
10,836,590

 
$
9,754,596

Pinedale
8,869,440

 
8,869,440

 
8,869,440

Portland Terminal Facility (1)

 
1,243,769

 
1,275,660

United Property Systems
39,117

 
36,662

 
36,298

Total Depreciation Expense
$
18,671,720

 
$
20,986,461

 
$
19,935,994

Amortization Expense - Deferred Lease Costs
 
 
 
 
 
GIGS
$
30,564

 
$
30,564

 
$
30,564

Pinedale
61,368

 
61,368

 
61,368

Total Amortization Expense - Deferred Lease Costs
$
91,932

 
$
91,932

 
$
91,932

ARO Accretion Expense
 
 
 
 
 
GIGS
$
443,969

 
$
499,562

 
$
663,065

Total ARO Accretion Expense
$
443,969

 
$
499,562

 
$
663,065

(1) On December 21, 2018, the Portland Terminal Facility was sold to Zenith Terminals, terminating the Portland Lease Agreement.

The following table reflects the deferred costs that are included in the accompanying Consolidated Balance Sheets associated with the Company's leased properties:
 
December 31, 2019
 
December 31, 2018
Net Deferred Lease Costs
 
 
 
GIGS
$
198,755

 
$
229,319

Pinedale
488,981

 
550,349

Total Deferred Lease Costs, net
$
687,736

 
$
779,668


TENANT INFORMATION
Substantially all of the lease tenants' financial results are driven by exploiting naturally occurring oil and natural gas hydrocarbon deposits beneath the Earth's surface. As a result, the tenants' financial results are highly dependent on the performance of the oil and natural gas industry, which is highly competitive and subject to volatility. During the terms of the leases, management monitors the credit quality of its tenants by reviewing their published credit ratings, if available, reviewing publicly available financial statements, or reviewing financial or other operating statements, monitoring news reports regarding the tenants and their respective businesses and monitoring the timeliness of lease payments and the performance of other financial covenants under their leases.
Ultra Petroleum
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. Its common stock traded on the NASDAQ under the symbol UPL until August 8, 2019 at which time it commenced trading on the OTCQX marketplace under the symbol UPLC. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of UPL but has no reason to doubt the accuracy or completeness of such information. In addition, UPL has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information. None of the information in the public reports of UPL that are filed with the SEC is incorporated by reference into, or in any way form, a part of this filing.
Energy Gulf Coast/Cox Oil
Prior to October 29, 2018, EGC was subject to the reporting requirements of the Exchange Act and was required to file with the SEC annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. So long as EGC remained a public reporting company, the Grand Isle Lease Agreement provided this requirement was fulfilled by EGC making its financial statements and reports publicly available through the SEC’s EDGAR system, in lieu of delivering such information directly to the Company. On October 18, 2018, EGC was acquired by an affiliate of privately-held Cox Oil. Upon the filing by EGC of a Form 15 with the SEC on October 29, 2018, EGC's SEC reporting obligations were suspended and it ceased to file such reports.
The Company believes the terms of the Grand Isle Lease Agreement require copies of certain financial statement information be provided that the Company is required to file pursuant to SEC Regulation S-X, as described in Section 2340 of the SEC Financial Reporting Manual. When EGC's financial information ceased to be publicly available, the Company encouraged officials of EGC and Cox Oil and, through Company counsel, the legal counsel to such entities, to satisfy their obligations under the Grand Isle Lease Agreement to provide the required information to the Company for inclusion in its SEC reports. To date, EGC and Cox Oil have refused to fulfill these obligations. The Company sought to enforce the obligations of EGC and Cox Oil and obtained a temporary restraining order ("TRO") from a Texas state court, mandating that they deliver the required EGC financial statements for the year ended December 31, 2018. The TRO was stayed pending an appeal by EGC and Cox Oil and, pursuant to its own terms, had lapsed by the time that appeal was denied on January 6, 2020. The case has been remanded to the trial court for further proceedings. The Company is requesting a hearing for as early in April 2020 as possible to obtain a temporary injunction mandating our tenant deliver the required financial statements, and will continue to pursue all viable options to obtain and file the necessary financial statements. The Company expects to file the financial statement information that is required by Regulation S-X by amendment to its Annual Reports on Form 10-K for the years ended December 31, 2018 and 2019, once such information is made available in accordance with the terms of the lease.
EGC's SEC filings prior to October 29, 2018 can be found at www.sec.gov. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of EGC but has no reason to doubt the accuracy or completeness of such information. In addition, EGC has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information. None of the information in the public reports of EGC that are filed with the SEC is incorporated by reference into, or in any way form, a part of this filing.
Sale of the Portland Terminal Facility
On December 21, 2018, the Company entered into a Purchase and Sale Agreement with Zenith Energy Terminals Holdings, LLC ("Zenith Terminals"), the Company's tenant under the Portland Lease Agreement, to sell the Portland Terminal Facility and remaining interest in the Joliet Terminal ("Joliet") for an aggregate consideration of $61.0 million, net of transaction costs. Of the negotiated sale price of $61.0 million, approximately $56.0 million was paid in cash at closing, with the balance of $5.0 million in a promissory note, which was paid on January 7, 2019. The sale of the Portland Terminal Facility effectively terminated the Portland Lease Agreement, dated January 14, 2014, between the Company and Zenith Terminals.
The consideration was allocated to the Portland Terminal Facility ($60.6 million) and Joliet ($0.4 million) based on fair value information utilized in negotiating the transaction. As of December 21, 2018, the Portland Terminal Facility had a carrying value of $45.7 million. The sale of the Portland Terminal Facility resulted in a gain on sale of leased asset of approximately $11.7 million, net of deferred rent receivable of approximately $3.2 million. Prior to the sale of the Joliet interest, the equity interest was valued at its transacted value of $1.2 million from the required reinvestment during the Arc Logistics merger with Zenith in December 2017. The sale of the Joliet interest resulted in a realized loss on other equity securities of approximately $715 thousand. Both the gain on sale of leased asset, net and the realized loss on other equity securities are included as items in other income (expense) in the Consolidated Statements of Income for the year ended December 31, 2018. Refer to Note 10 ("Fair Value") for additional information on the sale of the interest in Joliet.
Acquisition of Pinedale LGS Non-Controlling Interest
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. 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 its wholly-owned subsidiaries Pinedale GP and Pinedale LP I and there is no longer a noncontrolling interest in the Company's consolidated financial statements.
LESSEE - LEASED PROPERTIES
The Company's operating subsidiaries currently lease single-use office space and equipment with remaining lease terms of less than one year, some of which may include renewal options. These leases are classified as operating leases and immaterial to the consolidated financial statements. The Company recognizes lease expense in the Consolidated Statements of Income on a straight-line basis over the remaining lease term.
In accordance with ASC 842 transition disclosure requirements, the cumulative effect of changes made to the Consolidated Balance Sheets as of January 1, 2019 for the adoption of ASC 842 were as follows:
Balance Sheet
 
Balance at December 31, 2018
 
Adjustments Due to ASC 842
 
Balance at
January 1, 2019
Assets
 
 
 
 
 
 
Prepaid expenses and other assets
 
$
668,584

 
$
74,534

 
$
743,118

Liabilities
 
 
 
 
 
 
Accounts payable and other accrued liabilities
 
3,493,490

 
74,534

 
3,568,024

Equity
 
 
 
 
 
 
Retained earnings
 
9,147,701

 

 
9,147,701

LEASED PROPERTIES AND LEASES
LEASED PROPERTIES AND LEASES
The Company primarily acquires mid-stream and downstream assets in the U.S. energy sector such as pipelines, storage terminals, and gas and electric distribution systems and leases these assets to operators under triple-net leases. These leases typically include a contracted base rent with escalation clauses and participating rents that are tied to contract-specific criteria. Base rents under the Company's leases are structured on an estimated fair market value rent structure over the initial term, which includes assumptions related to the terminal value of the assets and expectations of tenant renewals. At the conclusion of the initial lease term, the Company's leases may contain fair market value repurchase options or fair market rent renewal terms. These clauses also act as safeguards against the Company's tenants pursuing activities which would undermine or degrade the value of the assets faster than the underlying reserves are depleted. Participating rents are structured to provide exposure to the successful commercial activity of the tenant, and as such, also provide protection in the event that the economic life of the assets is reduced based on accelerated production by the Company's tenants. While the Company is primarily a lessor, certain of its operating subsidiaries are lessees and have entered into lease agreements as discussed further below.
LESSOR - LEASED PROPERTIES
As of December 31, 2019, the Company had two significant leases. The properties, located in Wyoming, Louisiana and the Gulf of Mexico, are leased on a triple-net basis to major tenants, described in the table below. These major tenants are responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to the leased properties. The long-term, triple-net leases generally have an initial term of 11 to 15 years with options for renewals. Lease payments are scheduled to increase at varying intervals during the initial term of the leases. The following table summarizes the significant leased properties, major tenants and lease terms:
Summary of Leased Properties, Major Tenants and Lease Terms
Property
Grand Isle Gathering System
Pinedale LGS
Location
Gulf of Mexico/Louisiana
Pinedale, WY
Tenant
Energy XXI GIGS Services, LLC
Ultra Wyoming LGS, LLC
Asset Description
Approximately 137 miles of offshore pipeline with total capacity of 120 thousand Bbls/d, including a 16-acre onshore terminal and saltwater disposal system.
Approximately 150 miles of pipelines and four central storage facilities.
Date Acquired
June 2015
December 2012
Initial Lease Term
11 years
15 years
Renewal Option
Equal to the lesser of 9-years or 75 percent of the remaining useful life
5-year terms
Current Monthly Rent Payments
7/1/18 - 6/30/19: $2,860,917
7/1/19 - 6/30/20: $3,223,917
$1,812,307(1)
Estimated Useful Life
27 years
26 years
(1) Monthly rent payments increased to $1,844,748 beginning January 1, 2020.

The Company also concluded that Omega's long-term contract with the Department of Defense ("DOD") to provide natural gas distribution to Fort Leonard Wood through Omega's pipeline distribution system on the military post meets the definition of a lease under ASC 842. Omega is the lessor in the contract and the lease is classified as an operating lease. The Company noted the non-lease component is the predominant component in the lease, and the timing and pattern of transfer of the lease component and the associated non-lease component are the same. As discussed in Note 2 ("Significant Accounting Policies"), the Company elected a practical expedient that allows lessors to not separate lease and related non-lease components if the non-lease components otherwise would be accounted for in accordance with the revenue standard under ASC 606. With the election of this practical expedient, the Company continues to account for the DOD contract under the revenue standard.
In the second quarter of 2019, the Company started a system improvement project on Omega's pipeline distribution system, which is considered a "built to suit" transaction under ASC 842. The system improvement project is a separate lease component and the DOD is deemed to control the system improvement due to certain contract provisions. As a result, the Company is accounting for the costs of the system improvement as a financing arrangement, which is included in accounts and other receivables in the Consolidated Balance Sheets. The margin the Company earns on the system improvement project is a non-lease component accounted for under the revenue standard. Refer to Note 2 ("Significant Accounting Policies") for further details.
The future contracted minimum rental receipts for all leases as of December 31, 2019, are as follows:
Future Minimum Lease Receipts
Year Ending December 31,
Amount
2020
$
65,772,473

2021
71,734,473

2022
70,711,973

2023
67,663,973

2024
65,874,973

Thereafter
129,321,920

Total
$
471,079,785


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,
 
2019
 
2018
 
2019
 
2018
 
2017
Pinedale LGS (2)
44.4
%
 
44.5
%
 
39.2
%
 
35.2
%
 
31.2
%
Grand Isle Gathering System
55.3
%
 
55.2
%
 
60.6
%
 
55.9
%
 
59.1
%
Portland Terminal Facility (3)
%
 
%
 
%
 
8.8
%
 
9.6
%
(1) Insignificant leases are not presented; thus percentages may not sum to 100%.
(2) Pinedale LGS lease revenues include variable rent of $4.6 million, $4.3 million and $587 thousand for the years ended December 31, 2019, 2018 and 2017, respectively.
(3) On December 21, 2018, the Portland Terminal Facility was sold to Zenith Terminals, terminating the Portland Lease Agreement.

The following table reflects the depreciation and amortization included in the accompanying Consolidated Statements of Income associated with the Company's leases and leased properties:
 
For the Years Ended December 31,
 
2019
 
2018
 
2017
Depreciation Expense
 
 
 
 
 
GIGS
$
9,763,163

 
$
10,836,590

 
$
9,754,596

Pinedale
8,869,440

 
8,869,440

 
8,869,440

Portland Terminal Facility (1)

 
1,243,769

 
1,275,660

United Property Systems
39,117

 
36,662

 
36,298

Total Depreciation Expense
$
18,671,720

 
$
20,986,461

 
$
19,935,994

Amortization Expense - Deferred Lease Costs
 
 
 
 
 
GIGS
$
30,564

 
$
30,564

 
$
30,564

Pinedale
61,368

 
61,368

 
61,368

Total Amortization Expense - Deferred Lease Costs
$
91,932

 
$
91,932

 
$
91,932

ARO Accretion Expense
 
 
 
 
 
GIGS
$
443,969

 
$
499,562

 
$
663,065

Total ARO Accretion Expense
$
443,969

 
$
499,562

 
$
663,065

(1) On December 21, 2018, the Portland Terminal Facility was sold to Zenith Terminals, terminating the Portland Lease Agreement.

The following table reflects the deferred costs that are included in the accompanying Consolidated Balance Sheets associated with the Company's leased properties:
 
December 31, 2019
 
December 31, 2018
Net Deferred Lease Costs
 
 
 
GIGS
$
198,755

 
$
229,319

Pinedale
488,981

 
550,349

Total Deferred Lease Costs, net
$
687,736

 
$
779,668


TENANT INFORMATION
Substantially all of the lease tenants' financial results are driven by exploiting naturally occurring oil and natural gas hydrocarbon deposits beneath the Earth's surface. As a result, the tenants' financial results are highly dependent on the performance of the oil and natural gas industry, which is highly competitive and subject to volatility. During the terms of the leases, management monitors the credit quality of its tenants by reviewing their published credit ratings, if available, reviewing publicly available financial statements, or reviewing financial or other operating statements, monitoring news reports regarding the tenants and their respective businesses and monitoring the timeliness of lease payments and the performance of other financial covenants under their leases.
Ultra Petroleum
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. Its common stock traded on the NASDAQ under the symbol UPL until August 8, 2019 at which time it commenced trading on the OTCQX marketplace under the symbol UPLC. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of UPL but has no reason to doubt the accuracy or completeness of such information. In addition, UPL has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information. None of the information in the public reports of UPL that are filed with the SEC is incorporated by reference into, or in any way form, a part of this filing.
Energy Gulf Coast/Cox Oil
Prior to October 29, 2018, EGC was subject to the reporting requirements of the Exchange Act and was required to file with the SEC annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. So long as EGC remained a public reporting company, the Grand Isle Lease Agreement provided this requirement was fulfilled by EGC making its financial statements and reports publicly available through the SEC’s EDGAR system, in lieu of delivering such information directly to the Company. On October 18, 2018, EGC was acquired by an affiliate of privately-held Cox Oil. Upon the filing by EGC of a Form 15 with the SEC on October 29, 2018, EGC's SEC reporting obligations were suspended and it ceased to file such reports.
The Company believes the terms of the Grand Isle Lease Agreement require copies of certain financial statement information be provided that the Company is required to file pursuant to SEC Regulation S-X, as described in Section 2340 of the SEC Financial Reporting Manual. When EGC's financial information ceased to be publicly available, the Company encouraged officials of EGC and Cox Oil and, through Company counsel, the legal counsel to such entities, to satisfy their obligations under the Grand Isle Lease Agreement to provide the required information to the Company for inclusion in its SEC reports. To date, EGC and Cox Oil have refused to fulfill these obligations. The Company sought to enforce the obligations of EGC and Cox Oil and obtained a temporary restraining order ("TRO") from a Texas state court, mandating that they deliver the required EGC financial statements for the year ended December 31, 2018. The TRO was stayed pending an appeal by EGC and Cox Oil and, pursuant to its own terms, had lapsed by the time that appeal was denied on January 6, 2020. The case has been remanded to the trial court for further proceedings. The Company is requesting a hearing for as early in April 2020 as possible to obtain a temporary injunction mandating our tenant deliver the required financial statements, and will continue to pursue all viable options to obtain and file the necessary financial statements. The Company expects to file the financial statement information that is required by Regulation S-X by amendment to its Annual Reports on Form 10-K for the years ended December 31, 2018 and 2019, once such information is made available in accordance with the terms of the lease.
EGC's SEC filings prior to October 29, 2018 can be found at www.sec.gov. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of EGC but has no reason to doubt the accuracy or completeness of such information. In addition, EGC has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information. None of the information in the public reports of EGC that are filed with the SEC is incorporated by reference into, or in any way form, a part of this filing.
Sale of the Portland Terminal Facility
On December 21, 2018, the Company entered into a Purchase and Sale Agreement with Zenith Energy Terminals Holdings, LLC ("Zenith Terminals"), the Company's tenant under the Portland Lease Agreement, to sell the Portland Terminal Facility and remaining interest in the Joliet Terminal ("Joliet") for an aggregate consideration of $61.0 million, net of transaction costs. Of the negotiated sale price of $61.0 million, approximately $56.0 million was paid in cash at closing, with the balance of $5.0 million in a promissory note, which was paid on January 7, 2019. The sale of the Portland Terminal Facility effectively terminated the Portland Lease Agreement, dated January 14, 2014, between the Company and Zenith Terminals.
The consideration was allocated to the Portland Terminal Facility ($60.6 million) and Joliet ($0.4 million) based on fair value information utilized in negotiating the transaction. As of December 21, 2018, the Portland Terminal Facility had a carrying value of $45.7 million. The sale of the Portland Terminal Facility resulted in a gain on sale of leased asset of approximately $11.7 million, net of deferred rent receivable of approximately $3.2 million. Prior to the sale of the Joliet interest, the equity interest was valued at its transacted value of $1.2 million from the required reinvestment during the Arc Logistics merger with Zenith in December 2017. The sale of the Joliet interest resulted in a realized loss on other equity securities of approximately $715 thousand. Both the gain on sale of leased asset, net and the realized loss on other equity securities are included as items in other income (expense) in the Consolidated Statements of Income for the year ended December 31, 2018. Refer to Note 10 ("Fair Value") for additional information on the sale of the interest in Joliet.
Acquisition of Pinedale LGS Non-Controlling Interest
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. 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 its wholly-owned subsidiaries Pinedale GP and Pinedale LP I and there is no longer a noncontrolling interest in the Company's consolidated financial statements.
LESSEE - LEASED PROPERTIES
The Company's operating subsidiaries currently lease single-use office space and equipment with remaining lease terms of less than one year, some of which may include renewal options. These leases are classified as operating leases and immaterial to the consolidated financial statements. The Company recognizes lease expense in the Consolidated Statements of Income on a straight-line basis over the remaining lease term.
In accordance with ASC 842 transition disclosure requirements, the cumulative effect of changes made to the Consolidated Balance Sheets as of January 1, 2019 for the adoption of ASC 842 were as follows:
Balance Sheet
 
Balance at December 31, 2018
 
Adjustments Due to ASC 842
 
Balance at
January 1, 2019
Assets
 
 
 
 
 
 
Prepaid expenses and other assets
 
$
668,584

 
$
74,534

 
$
743,118

Liabilities
 
 
 
 
 
 
Accounts payable and other accrued liabilities
 
3,493,490

 
74,534

 
3,568,024

Equity
 
 
 
 
 
 
Retained earnings
 
9,147,701

 

 
9,147,701

v3.19.3.a.u2
Transportation and Distribution Revenue
12 Months Ended
Dec. 31, 2019
Revenue from Contract with Customer [Abstract]  
Transportation and Distribution Revenue
TRANSPORTATION AND DISTRIBUTION REVENUE
The Company's contracts related to transportation and distribution revenue are primarily comprised of a mix of natural gas supply, transportation and distribution performance obligations, as well as limited performance obligations related to system maintenance and improvement. Refer to Note 2 ("Significant Accounting Policies") for additional details on the Company's revenue recognition guidance under ASC 606.
Based on a downward revision of the rate during the Company's contract with Spire, ASC 606 requires the Company to record the contractual transaction price, and therefore aggregate revenue, from the contract ratably over the term of the contract. Accordingly, on January 1, 2018, the Company recorded a cumulative adjustment to recognize a contract liability of approximately $3.3 million, and a corresponding reduction to beginning equity (net of deferred tax impact). The adjustment reflects the difference in amounts previously recognized as invoiced, versus cumulative revenues earned under the contract on a straight-line basis in accordance with ASC 606, as of the date of adoption. The contract liability continued to accumulate additional unrecognized performance obligations at a rate of approximately $992 thousand per quarter until the contractual rate decrease took effect in November 2018. Following the rate decline, recognized performance obligations exceeded amounts invoiced and the contract liability began to decline at a rate of approximately $138 thousand per quarter and will continue to decline at the same rate through the end of the contract in October 2030. As of December 31, 2019, the revenue allocated to the remaining performance obligation under this contract is approximately $58.1 million.
The table below summarizes the Company's contract liability balance related to its transportation and distribution revenue contracts as of December 31, 2019 and 2018:
 
Contract Liability(1)
 
December 31, 2019
 
December 31, 2018
Beginning Balance January 1
$
6,522,354

 
$

Cumulative Transition Adjustment Upon Adoption of ASC 606

 
3,307,109

Unrecognized Performance Obligations
887,916

 
3,307,109

Recognized Performance Obligations
(559,480
)
 
(91,864
)
Ending Balance December 31
$
6,850,790

 
$
6,522,354

(1) The contract liability balance is included in unearned revenue in the Consolidated Balance Sheets.
 
 

The Company's contract asset balance was $206 thousand and $181 thousand as of December 31, 2019 and 2018, respectively. The contract asset balance is included in prepaid expenses and other assets in the Consolidated Balance Sheets.
The following is a breakout of the Company's transportation and distribution revenue for the years ended December 31, 2019, 2018 and 2017:
 
For the Years Ended December 31,
 
2019
 
2018
 
2017
Natural gas transportation contracts
67.8
%
 
64.3
%
 
71.5
%
Natural gas distribution contracts
25.5
%
 
26.8
%
 
20.4
%
v3.19.3.a.u2
Financing Notes Receivable
12 Months Ended
Dec. 31, 2019
Receivables [Abstract]  
FINANCING NOTES RECEIVABLE
FINANCING NOTES RECEIVABLE
Four Wood Financing Note Receivable
On December 31, 2014, Four Wood Corridor entered into loan agreements with SWD Enterprises, which were placed on non-accrual status during the first quarter of 2016. On December 12, 2018, Four Wood Corridor granted SWD Enterprises approval to sell real and personal property that provide saltwater disposal services for the oil and natural gas industry to Compass SWD, LLC ("Compass SWD") in exchange for Compass SWD executing a loan agreement with Four Wood Corridor for $1.3 million (the "Compass REIT Loan") and approximately $237 thousand in cash consideration, net of costs facilitating the close. The Compass REIT Loan was scheduled to mature on June 15, 2019 with interest accruing on the outstanding principal at an annual rate of LIBOR plus 6 percent. As a result of the transaction, SWD Enterprises was released from their loan agreements, and the Company recognized a provision for loan gain of $37 thousand in the Consolidated Statements of Income for the year ended December 31, 2018.
On June 12, 2019, Four Wood Corridor entered into an amended and restated Compass REIT Loan. The amended note has a two-year term maturing on June 30, 2021 with monthly principal payments of approximately $11 thousand and interest accruing on the outstanding principal at an annual rate of 8.5 percent. The amended and restated Compass REIT Loan is secured by real and personal property that provides saltwater disposal services for the oil and natural gas industry and pledged ownership interests of Compass SWD members. As of December 31, 2019 and December 31, 2018, the Compass REIT Loan was valued at $1.2 million and $1.3 million, respectively.
v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
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, 2019 and 2018, are as follows:
Deferred Tax Assets and Liabilities
 
December 31, 2019
 
December 31, 2018
Deferred Tax Assets:
 
 
 
Deferred contract revenue
$
1,529,473

 
$
1,691,899

Net operating loss carryforwards
5,622,052

 
5,424,671

Loan loss provision

 
263,508

Accrued liabilities
424,604

 
83,325

Capital loss carryforward
104,595

 

Other
6,184

 
12,370

Sub-total
$
7,686,908

 
$
7,475,773

Valuation allowance
(104,595
)
 

Sub-total
$
7,582,313

 
$
7,475,773

Deferred Tax Liabilities:
 
 
 
Cost recovery of leased and fixed assets
$
(2,953,319
)
 
$
(2,508,547
)
Other
(35,433
)
 
(19,023
)
Sub-total
$
(2,988,752
)
 
$
(2,527,570
)
Total net deferred tax asset
$
4,593,561

 
$
4,948,203


As of December 31, 2019, the total deferred tax assets and liabilities presented above relate to the Company's TRSs. The Company recognizes the tax benefits of uncertain tax positions only when the position is "more likely than not" to be sustained upon examination by the tax authorities based on the technical merits of the tax position. The Company's policy is to record interest and penalties on uncertain tax positions as part of tax expense. Tax years subsequent to the year ended December 31, 2015, remain open to examination by federal and state tax authorities.
For the year ending December 31, 2019, the Company generated a capital loss carryforward resulting from the liquidation of Lightfoot. The amount of the carryforward for tax purposes was approximately $500 thousand, and if not utilized, this carryforward will expire as of December 31, 2024. Management assessed the available evidence and determined that it is more likely than not that the capital loss carryforward will not be utilized prior to expiration. Due to the uncertainty of realizing this deferred tax asset, a valuation allowance of $105 thousand was recorded equal to the amount of the tax benefit of this carryforward at December 31, 2019. In the future, if the Company concludes, based on existence of sufficient evidence, that it should realize more or less of its deferred tax assets, the valuation allowance will be adjusted accordingly in the period such conclusion is made.
The Tax Cuts and Jobs Act (the "2017 Tax Act") was enacted on December 22, 2017. The 2017 Tax Act reduced the US federal corporate tax rate from 35 percent to 21 percent. The 2017 Tax Act also repealed the alternative minimum tax for corporations. In December 2018, the Company completed its accounting for the tax effects of enactment of the 2017 Tax Act as allowed under SEC Staff Accounting Bulletin 118. The Company remeasured deferred tax assets and liabilities based on the updated rates at which they are expected to reverse in the future, which resulted in a $1.3 million transition adjustment that reduced net deferred tax assets. One of the Company's TRSs qualifies for the regulated utility and real property business exceptions under the new proposed treasury regulations for Section 163(j). Therefore, previously disqualified interest from years prior to 2018 was deducted and resulted in a reclassification from other deferred tax assets to deferred tax assets for net operating loss carryforwards during the year ended December 31, 2018. Refer to additional discussion of the Company's net operating loss carryforwards below. The Company will continue to assess the impact of new tax legislation, as well as any future regulations and updates provided by the tax authorities.
Total income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate of 21 percent for the years ended December 31, 2019 and December 31, 2018 and 35 percent for the year ended December 31, 2017, 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,
 
2019
 
2018
 
2017
Application of statutory income tax rate
$
904,111

 
$
8,671,562

 
$
12,231,838

State income taxes, net of federal tax benefit
409,839

 
(583,186
)
 
352,708

Income of Real Estate Investment Trust not subject to tax
(941,900
)
 
(10,339,520
)
 
(11,975,853
)
Tax reform impact

 

 
1,262,444

Other
(137,432
)
 
(167,582
)
 
474,181

Total income tax expense (benefit)
$
234,618

 
$
(2,418,726
)
 
$
2,345,318


Total income taxes are computed by applying the federal statutory rate of 21 percent plus a blended state income tax rate. Corridor Public and Corridor Private had a blended state rate of approximately 5.53 percent and 3.78 percent for the years ended December 31, 2018 and 2017, respectively. In the first quarter of 2019, the state rate for Corridor Public and Corridor Private was adjusted to zero for current and future state liabilities. The decrease in the state rate was the result of the 2018 sale or disposition of assets within the investments held by Corridor Private. CorEnergy BBWS had a blended state income tax rate of approximately 5 percent for the years ended December 31, 2019 and 2018 due to its operations in Missouri. CorEnergy BBWS did not record a provision for state income taxes for the year ended December 31, 2017 because it only operated in Wyoming, which does not have state income tax. Because Corridor MoGas primarily only operates in the state of Missouri, a blended state income tax rate of 5 percent was used for the operation of the TRS for the years ended December 31, 2019, 2018 and 2017. For CorEnergy BBWS and Corridor MoGas, the blended state rate includes the enacted decrease in the Missouri state income tax rate effective in 2020. As a result of the decreased rate, additional deferred state income taxes of $315 thousand resulting from the application of the newly enacted rate to existing deferred balances was recorded in the first quarter of 2019. Prior to its reorganization to a QRS at the end of 2017, Mowood Corridor, Inc. had a blended state income tax rate of 5 percent for the year ended December 31, 2017.
For the years ended December 31, 2019, 2018 and 2017, 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,
 
2019
 
2018
 
2017
Current tax expense (benefit)
 
 
 
 
 
Federal
$
(159,381
)
 
$
(413,248
)
 
$
2,498,363

State (net of federal tax benefit)
39,357

 
(172,138
)
 
333,295

Total current tax expense (benefit)
$
(120,024
)
 
$
(585,386
)
 
$
2,831,658

Deferred tax expense (benefit)
 
 
 
 
 
Federal
$
(15,840
)
 
$
(1,422,292
)
 
$
(505,753
)
State (net of federal tax benefit)
370,482

 
(411,048
)
 
19,413

Total deferred tax expense (benefit)
$
354,642

 
$
(1,833,340
)
 
$
(486,340
)
Total income tax expense (benefit), net
$
234,618

 
$
(2,418,726
)
 
$
2,345,318


As of December 31, 2019 and 2018, the TRSs had a cumulative net operating loss of $23.5 million and $17.1 million, respectively. Net operating losses of $19.8 million generated during the years ended December 31, 2019 and 2018 may be carried forward indefinitely, subject to limitation. Net operating losses generated for years prior to December 31, 2018 may be carried forward for 20 years. If not utilized, the net operating loss will expire as follows: $328 thousand, $176 thousand, $1.2 million and $2.0 million in the years ending December 31, 2034, 2035, 2036 and 2037, respectively.
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, 2019
 
December 31, 2018
Aggregate cost for federal income tax purposes
$
345,241

 
$
408,051

Gross unrealized appreciation

 

Gross unrealized depreciation

 

Net unrealized appreciation
$

 
$


The Company provides the following tax information to its common stockholders pertaining to the character of distributions paid during tax years 2019, 2018 and 2017. For a common stockholder that received all distributions in cash during 2019, 65.1 percent will be treated as ordinary dividend income, 32.9 percent will be treated as return of capital and 2.0 percent will be treated as capital gain distributions. Of the ordinary dividend income, none will be treated as qualified dividend income for a non-corporate taxpayer; all of the ordinary dividend income may be taken into account on an individual's section 199A deduction, subject to the applicable holding period. Of the capital gain distribution, 100.0 percent is subject to a maximum 20 percent federal income tax rate. The per share characterization by quarter is reflected in the following tables:
2019 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
 
Section 199A Dividends
2/14/2019
 
2/13/2019
 
2/28/2019
 
$
0.7500

 
$
0.5803

 
$

 
$
0.0156

 
$
0.1541

 
$
0.5803

5/17/2019
 
5/16/2019
 
5/31/2019
 
0.7500

 
0.4578

 

 
0.0150

 
0.2772

 
0.4578

8/16/2019
 
8/15/2019
 
8/30/2019
 
0.7500

 
0.4578

 

 
0.0150

 
0.2772

 
0.4578

11/15/2019
 
11/14/2019
 
11/29/2019
 
0.7500

 
0.4578

 

 
0.0150

 
0.2772

 
0.4578

Total 2019 Distributions
 
$
3.0000

 
$
1.9537

 
$

 
$
0.0606

 
$
0.9857

 
$
1.9537


2018 Common Stock Tax Information
Record Date
 
Ex-Dividend Date
 
Payable Date
 
Total Distribution per Share
 
Total Ordinary Dividends
 
Qualified Dividends
 
Capital Gain Distributions
 
Unrecaptured Section 1250 Gain
 
Section 199A Dividends
2/14/2018
 
2/13/2018
 
2/28/2018
 
$
0.7500

 
$
0.5346

 
$

 
$
0.2154

 
$
0.1007

 
$
0.5346

5/17/2018
 
5/16/2018
 
5/31/2018
 
0.7500

 
0.5346

 

 
0.2154

 
0.1007

 
0.5346

8/17/2018
 
8/16/2018
 
8/31/2018
 
0.7500

 
0.5346

 

 
0.2154

 
0.1007

 
0.5346

11/15/2018
 
11/14/2018
 
11/30/2018
 
0.7500

 
0.5346

 

 
0.2154

 
0.1007

 
0.5346

Total 2018 Distributions
 
$
3.0000

 
$
2.1384

 
$

 
$
0.8616

 
$
0.4028

 
$
2.1384


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