CORENERGY INFRASTRUCTURE TRUST, INC., 10-K filed on 3/4/2021
Annual Report
v3.20.4
Cover Page - USD ($)
12 Months Ended
Dec. 31, 2020
Mar. 03, 2021
Jun. 30, 2020
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2020    
Current Fiscal Year End Date --12-31    
Document Transition Report false    
Entity File Number 001-33292    
Entity Registrant Name CORENERGY INFRASTRUCTURE TRUST, INC.    
Entity Incorporation, State or Country Code MD    
Entity Tax Identification Number 20-3431375    
Entity Address, Address Line One 1100 Walnut, Ste. 3350    
Entity Address, City or Town Kansas City    
Entity Address, State or Province MO    
Entity Address, Postal Zip Code 64106    
City Area Code (816)    
Local Phone Number 875-3705    
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Non-accelerated Filer    
Entity Small Business true    
Entity Emerging Growth Company false    
ICFR Auditor Attestation Flag true    
Entity Shell Company false    
Entity Public Float     $ 124,446,978
Entity Common Stock, Shares Outstanding   13,651,521  
Documents Incorporated by Reference Portions of the registrant's Proxy Statement for its 2021 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference into Part III of this Form 10-K.    
Entity Central Index Key 0001347652    
Amendment Flag false    
Document Fiscal Year Focus 2020    
Document Fiscal Period Focus FY    
Common Stock      
Title of 12(b) Security Common Stock, par value $0.001 per share    
Trading Symbol CORR    
Security Exchange Name NYSE    
Series A Cumulative Redeemable Preferred Stock      
Title of 12(b) Security 7.375% Series A Cumulative Redeemable Preferred Stock    
Trading Symbol CORRPrA    
Security Exchange Name NYSE    
v3.20.4
Consolidated Balance Sheets - USD ($)
Dec. 31, 2020
Dec. 31, 2019
Assets    
Financing notes and related accrued interest receivable, net of reserve of $600,000 and $600,000 $ 1,209,736 $ 1,235,000
Cash and cash equivalents 99,596,907 120,863,643
Deferred rent receivable 0 29,858,102
Accounts and other receivables 3,675,977 4,143,234
Deferred costs, net of accumulated amortization of $2,130,334 and $1,956,710 1,077,883 2,171,969
Prepaid expenses and other assets 2,228,623 804,341
Deferred tax asset, net 4,282,576 4,593,561
Goodwill 1,718,868 1,718,868
Total Assets 284,953,178 651,455,794
Liabilities and Equity    
Secured credit facilities, net of debt issuance costs of $0 and $158,070 0 33,785,930
Unsecured convertible senior notes, net of discount and debt issuance costs of $3,041,870 and $3,768,504 115,008,130 118,323,496
Asset retirement obligation 8,762,579 8,044,200
Accounts payable and other accrued liabilities 4,685,288 6,000,981
Management fees payable 971,626 1,669,950
Unearned revenue 6,125,728 6,891,798
Total Liabilities 135,553,351 174,716,355
Equity    
Series A Cumulative Redeemable Preferred Stock 7.375%, $125,270,350 and $125,493,175 liquidation preference ($2,500 per share, $0.001 par value), 10,000,000 authorized; 50,108 and 50,197 issued and outstanding at December 31, 2020 and December 31, 2019, respectively 125,270,350 125,493,175
Capital stock, non-convertible, $0.001 par value; 13,651,521 and 13,638,916 shares issued and outstanding at December 31, 2020 and December 31, 2019 (100,000,000 shares authorized) 13,652 13,639
Additional paid-in capital 339,742,380 360,844,497
Retained deficit (315,626,555) (9,611,872)
Total Equity 149,399,827 476,739,439
Total Liabilities and Equity 284,953,178 651,455,794
Assets Leased to Others    
Assets    
Property and equipment, net of accumulated depreciation 64,938,010 379,211,399
Property, Plant and Equipment, Other Types    
Assets    
Property and equipment, net of accumulated depreciation $ 106,224,598 $ 106,855,677
v3.20.4
Consolidated Balance Sheets (Parenthetical) - USD ($)
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Reserve for financing notes and related accrued interest receivable $ 600,000 $ 600,000
Deferred costs, accumulated amortization 2,130,334 1,956,710
Secured debt, debt issuance costs $ 0 $ 158,070
Preferred stock, par value (in dollars per share) $ 0.001  
Preferred stock, authorized (in shares) 10,000,000.0  
Preferred stock, outstanding (in shares) 50,108  
Capital stock non-convertible, par value (in dollars per share) $ 0.001 $ 0.001
Capital stock non-convertible, shares issued (in shares) 13,651,521 13,638,916
Capital stock non-convertible, shares outstanding (in shares) 13,651,521 13,638,916
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 $ 125,270,350 $ 125,493,175
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) 50,108 50,197
Preferred stock, outstanding (in shares) 50,108 50,197
Convertible Debt    
Unamortized discount and debt issuance costs $ 3,041,870 $ 3,768,504
Assets Leased to Others    
Accumulated depreciation 6,832,167 105,825,816
Property, Plant and Equipment, Other Types    
Accumulated depreciation $ 22,580,810 $ 19,304,610
v3.20.4
Consolidated Statements of Operations - USD ($)
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Revenue      
Lease revenue $ 21,351,123 $ 67,050,506 $ 72,747,362
Deferred rent receivable write-off (30,105,820) 0 0
Total Revenue 11,338,071 85,945,570 89,231,598
Expenses      
Transportation and distribution expenses $ 6,059,707 $ 5,242,244 $ 7,210,748
Cost, product and service [Extensible List] corr:TransportationAndDistributionMember corr:TransportationAndDistributionMember corr:TransportationAndDistributionMember
General and administrative $ 12,231,922 $ 10,596,848 $ 13,042,847
Depreciation, amortization and ARO accretion expense 13,654,429 22,581,942 24,947,453
Loss on impairment of leased property 140,268,379 0 0
Loss on impairment and disposal of leased property 146,537,547 0 0
Loss on termination of lease 458,297 0 0
Provision for loan gain 0 0 (36,867)
Total Expenses 319,210,281 38,421,034 45,164,181
Operating Loss (307,872,210) 47,524,536 44,067,417
Other Income (Expense)      
Net distributions and other income 471,449 1,328,853 106,795
Net realized and unrealized loss on other equity securities 0 0 (1,845,309)
Interest expense (10,301,644) (10,578,711) (12,759,010)
Gain on the sale of leased property, net 0 0 11,723,257
Gain (loss) on extinguishment of debt 11,549,968 (33,960,565) 0
Total Other Income (Expense) 1,719,773 (43,210,423) (2,774,267)
Income (loss) before income taxes (306,152,437) 4,314,113 41,293,150
Taxes      
Current tax expense (benefit) (395,843) (120,024) (585,386)
Deferred tax expense (benefit) 310,985 354,642 (1,833,340)
Income tax expense (benefit), net (84,858) 234,618 (2,418,726)
Net Income (loss) attributable to CorEnergy Stockholders (306,067,579) 4,079,495 43,711,876
Preferred dividend requirements 9,189,809 9,255,468 9,548,377
Net Income (loss) attributable to Common Stockholders $ (315,257,388) $ (5,175,973) $ 34,163,499
Earnings (Loss) Per Common Share:      
Basic (in dollars per share) $ (23.09) $ (0.40) $ 2.86
Diluted (in dollars per share) $ (23.09) $ (0.40) $ 2.79
Weighted Average Shares of Common Stock Outstanding:      
Basic (in shares) 13,650,718 13,041,613 11,935,021
Diluted (in shares) 13,650,718 13,041,613 15,389,180
Dividends declared per share (in dollars per share) $ 0.900 $ 3.000 $ 3.000
Transportation and distribution revenue      
Revenue      
Revenue $ 19,972,351 $ 18,778,237 $ 16,484,236
Financing revenue      
Revenue      
Revenue $ 120,417 $ 116,827 $ 0
v3.20.4
Consolidated Statements of Equity - USD ($)
Total
Cumulative Effect, Period of Adoption, Adjustment
Capital Stock
Preferred Stock
Additional Paid-in Capital
Additional Paid-in Capital
Cumulative Effect, Period of Adoption, Adjustment
Retained Earnings (Deficit)
Beginning balance (in shares) at Dec. 31, 2017     11,915,830        
Beginning balance at Dec. 31, 2017 $ 461,785,632 $ (2,449,245) $ 11,916 $ 130,000,000 $ 331,773,716 $ (2,449,245) $ 0
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 43,711,876           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    
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 [2]     11,960,225        
Ending balance at Dec. 31, 2018 [2] 455,011,305   $ 11,960 125,555,675 320,295,969   9,147,701
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 4,079,495           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   (9,611,872)
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income (306,067,579)           (306,067,579)
Series A preferred stock dividends (9,242,797)       (9,242,797)    
Preferred stock repurchases [1] (161,997)     (222,825) 7,932   52,896
Common stock dividends (12,286,368)       (12,286,368)    
Common stock issued upon exchange of convertible notes (in shares)     12,605        
Common stock issued upon exchange of convertible notes $ 419,129   $ 13   419,116    
Ending balance (in shares) at Dec. 31, 2020 13,651,521   13,651,521        
Ending balance at Dec. 31, 2020 $ 149,399,827   $ 13,652 $ 125,270,350 $ 339,742,380   $ (315,626,555)
[1] (1) In connection with the repurchases of Series A Preferred Stock during 2018 and 2020, the deduction to preferred dividends of $10,554 and $52,896, respectively, 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 $245 represents the premium in the repurchase price paid compared to the carrying amount derecognized.
v3.20.4
Consolidated Statements of Equity (Parenthetical) - USD ($)
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Statement of Stockholders' Equity [Abstract]      
Increase (decrease) in preferred dividends $ (52,896) $ 245 $ (10,554)
v3.20.4
Consolidated Statements of Cash Flow - USD ($)
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Operating Activities      
Net income (loss) $ (306,067,579) $ 4,079,495 $ 43,711,876
Adjustments to reconcile net income (loss) to net cash provided by operating activities:      
Deferred income tax, net 310,985 354,642 (1,845,710)
Depreciation, amortization and ARO accretion 14,924,464 23,808,083 26,361,907
Gain on sale of leased property, net 0 0 (11,723,257)
Loss on impairment of leased property 140,268,379 0 0
Loss on impairment and disposal of leased property 146,537,547 0 0
Loss on termination of lease 458,297 0 0
Deferred rent receivable write-off, noncash 30,105,820 0 0
Provision for loan gain 0 0 (36,867)
(Gain) loss on extinguishment of debt (11,549,968) 33,960,565 0
Gain on sale of equipment (13,683) (7,390) (8,416)
Net realized and unrealized loss on other equity securities 0 0 1,845,309
Loss on settlement of asset retirement obligation 0 0 310,941
Common stock issued under directors' compensation plan 0 0 67,500
Changes in assets and liabilities:      
Increase in deferred rent receivables (247,718) (3,915,347) (7,038,848)
(Increase) decrease in accounts and other receivables 467,257 940,009 (1,297,207)
Increase in financing note accrued interest receivable (18,069) 0 0
(Increase) decrease in prepaid expenses and other assets (1,424,332) (136,108) 73,505
Increase (decrease) in management fee payable (698,324) (161,663) 83,187
Increase (decrease) in accounts payable and other accrued liabilities (1,903,936) 2,517,069 476,223
Decrease in income tax liability 0 0 (2,204,626)
Increase (decrease) in unearned revenue (766,070) 339,749 (152,777)
Net cash provided by operating activities 10,383,070 61,779,104 48,622,740
Investing Activities      
Proceeds from the sale of leased property 0 0 55,553,975
Proceeds from sale of other equity securities 0 0 449,067
Purchases of property and equipment, net (2,186,155) (372,934) (105,357)
Proceeds from sale of property and equipment 15,000 7,000 17,999
Principal payment on financing note receivable 43,333 65,000 236,867
Principal payment on note receivable 0 5,000,000 0
Return of capital on distributions received 0 0 663,939
Net cash provided by (used in) investing activities (2,127,822) 4,699,066 56,816,490
Financing Activities      
Debt financing costs 0 (372,759) (264,010)
Cash paid for extinguishment of convertible notes 0 (78,939,743) 0
Cash paid for maturity of convertible notes (1,676,000) 0 0
Cash paid for repurchase of convertible notes (1,316,250) 0 0
Cash paid for settlement of Pinedale Secured Credit Facility (3,074,572) 0 0
Net offering proceeds on convertible debt 0 116,355,125 0
Repurchases of Series A preferred stock (161,997) (60,550) (4,275,553)
Dividends paid on Series A preferred stock (9,242,797) (9,255,121) (9,587,500)
Dividends paid on common stock (12,286,368) (39,100,656) (34,284,059)
Principal payments on secured credit facilities (1,764,000) (3,528,000) (3,528,000)
Net cash used in financing activities (29,521,984) (14,901,704) (51,939,122)
Net change in cash and cash equivalents (21,266,736) 51,576,466 53,500,108
Cash and cash equivalents at beginning of period 120,863,643 69,287,177 15,787,069
Cash and cash equivalents at end of period 99,596,907 120,863,643 69,287,177
Supplemental Disclosure of Cash Flow Information      
Interest paid 9,272,409 6,834,439 11,200,835
Income taxes paid (net of refunds) (466,236) 89,433 2,136,563
Non-Cash Investing Activities      
Proceeds from sale of leased property provided directly to secured lender 18,000,000 0 0
Purchases of property, plant and equipment in accounts payable and other accrued liabilities 591,421 0 0
Note receivable in consideration of the sale of leased property 0 0 5,000,000
Non-Cash Financing Activities      
Proceeds from sale of leased property used in settlement of Pinedale Secured Credit Facility (18,000,000) 0 0
Change in accounts payable and accrued expenses related to debt financing costs 0 0 (255,037)
Reinvestment of distributions by common stockholders in additional common shares 0 403,831 1,509,830
Common stock issued upon exchange and conversion of convertible notes $ 419,129 $ 66,064,966 $ 42,654
v3.20.4
Introduction and Basis of Presentation
12 Months Ended
Dec. 31, 2020
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. Historically, the Company has focused primarily on entering into long-term triple-net participating leases with energy companies, and also has provided 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 can 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. The Company's leases have typically contained 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's Private Letter Rulings ("PLRs") enable the Company to invest in a broader set of revenue contracts within its REIT structure, including the opportunity to not only own but also operate infrastructure assets. CorEnergy considers its investments in these energy infrastructure assets to be a single business segment and reports them accordingly in its financial statements.
On February 4, 2021, the Company leveraged its PLRs and acquired a 49.50 percent interest in Crimson Midstream Holdings, LLC ("Crimson"), a California Public Utilities Commission ("CPUC") regulated crude oil pipeline owner and operator. The acquired assets include four critical infrastructure pipeline systems spanning approximately 2,000 miles (including 1,300 active miles) across northern, central and southern California, connecting desirable native California crude production to in-state refineries producing state-mandated specialized fuel blends, among other products. This interest was acquired effective as of February 1, 2021. Refer to Note 16 ("Subsequent Events") for further details on the acquisition.
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 and Grand Isle Corridor LP, the consolidated financial statements presented include full consolidation with respect to both partnerships.
v3.20.4
Significant Accounting Policies
12 Months Ended
Dec. 31, 2020
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, with no impact to retained earnings. The standard did not materially impact the Company's Consolidated Statements of Operations and had no impact on the Consolidated Statements of Cash Flows. The Company continues to apply legacy guidance in ASC 840, "Leases," including its disclosure requirements for the year ended December 31, 2018, the remaining comparative period presented prior to adoption.
Beginning in 2019, for the underlying asset class related to single-use office space, the Company accounts 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 accounts for each separate lease component and non-lease component as a single lease component if the non-lease components otherwise are 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. The Company carried forward the accounting treatment for land easements under existing agreements, which are currently accounted for within property, plant and equipment. Land easements are reassessed under ASC 842 when such agreements are modified.
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. 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 collectibility 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 Operations. 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 Operations.
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. For the year ended December 31, 2020, the Company recognized a loss on impairment for the GIGS asset of $140.3 million and a loss on impairment and disposal of the Pinedale LGS of $146.5 million, respectively, as more fully described in Note 3 ("Leased Properties And Leases"). There were no impairments of long-lived assets recorded during the years ended December 31, 2019 or 2018.
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 collectibility 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 collectibility 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 determines an allowance is necessary, the amount deemed uncollectible 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, 2020, 2019 and 2018, the Company recorded provisions for loan gain of approximately $0, $0 and $37 thousand, respectively. The Company's financing notes receivable are discussed more fully in Note 5 ("Financing Notes Receivable").
F. 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.
G. 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.
H. 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 collectibility based on an analysis of specific outstanding receivables, current economic conditions and past collection experience. For the years ended December 31, 2020 and 2019, the Company determined that an allowance for doubtful accounts was not necessary.
I. Deferred rent receivables – Lease receivables are determined according to the terms of the lease agreements entered into by the Company and its lessees. Lease receivables primarily represent timing differences between straight-line revenue recognition and contractual lease receipts. Beginning April 1, 2020, lease payments by the Company's GIGS tenant lapsed due to conditions
related to the COVID-19 pandemic and energy markets, which resulted in the write-off of the deferred rent receivable of $30.1 million for the year ended December 31, 2020. Refer to Note 3 ("Leased Properties And Leases") for further details.
J. 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.
The Company elected to perform a qualitative goodwill impairment assessment for the years ended December 31, 2020 and 2018. 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, including the COVID-19 pandemic for 2020, energy markets, natural gas pricing, input costs, liquidity and capital resources and customer outlook. 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. For the years ended December 31, 2020, 2019 and 2018, the Company recognized no impairment for the MoGas reporting unit.
K. 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.
L. 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 Operations, 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 Operations for the difference between the liability and actual decommissioning costs incurred.
Refer to Note 12 ("Asset Retirement Obligation") for additional information.
M. 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. 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.
N. 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.
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 (M) above.
O. Other Income Recognition Specific policies for the Company's other income items are as follows:
Net distributions and other income – Includes interest income earned on the Company's money market instruments and distributions and dividends from historical investments. Distributions and dividends from investments were recorded on their ex-dates and were reflected as other income within the accompanying Consolidated Statements of Operations. Distributions received from the Company's investments were generally characterized as ordinary income, capital gains and distributions received from investment securities. The portion characterized as return of capital was paid by the Company's investees from their cash flow from operations. The Company recorded investment income, capital gains and distributions received from investment securities based on estimates made at the time such distributions were received. Such estimates were based on information available from each company and other industry sources. These estimates may have subsequently been revised based on information received from the entities after their tax reporting periods were concluded, as the actual character of these distributions was not known until after the fiscal year end of the Company.
Net realized and unrealized gain (loss) from investments – Securities transactions were accounted for on the date the securities were purchased or sold. Realized gains and losses were reported on an identified cost basis. The Company recorded investment income and return of capital based on estimates made at the time such distributions were received. Such estimates were based on information available from the portfolio company and other industry sources. These estimates may have subsequently been revised based on information received from the portfolio company after their tax reporting periods were concluded, as the actual character of these distributions were not known until after the Company's fiscal year end.
P. 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.
Q. 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.
R. Earnings (Loss) Per Share – Basic earnings (loss) 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.
S. 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 were limited partnerships or limited liability companies which were treated as partnerships for federal and state income tax purposes. As a limited partner, the Company reported 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 was included in the Consolidated Statements of Operations based on the component of income or gains and losses to which such expense or benefit related. 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, 2020, 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.
T. 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.
In December of 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)" ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years; however, early adoption is permitted for all entities. The Company will adopt the standard effective January 1, 2021 and has substantially completed its assessment of the standard. The Company does not believe the standard will have a material impact on its consolidated financial statements.
In March of 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)" ("ASU 2020-04"). In response to concerns about structural risks of interbank offered rates including the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable and less susceptible to manipulation. The provisions of ASU 2020-04 are elective and apply to all entities, subject to meeting certain criteria, that have debt or hedging contracts, among other contracts, that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04, among other things, provides optional expedients and exceptions for a limited period of time for applying U.S. GAAP to these contracts if certain criteria are met to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating its contracts that reference LIBOR and the optional expedients and exceptions provided by the FASB.
In August 2020, the FASB issued ASU 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity" ("ASU 2020-06"). The new guidance (i) simplifies an issuer's accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models in ASC 470-20 that require separate accounting for embedded conversion features, (ii) simplifies the settlement assessment that issuers perform to determine whether a contract in its own equity qualifies for equity classification and (iii) requires entities to use the if-converted method for all convertible instruments and generally requires them to include the effect of share settlement for instruments that may be settled in cash or shares. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted for fiscal years beginning after December 15, 2020, but an entity must early adopt the guidance at the beginning of the fiscal year. The Company elected to
early adopt ASU 2020-06 on January 1, 2021 and noted that the standard does not have an impact on the Company's consolidated financial statements.
v3.20.4
Leased Properties and Leases
12 Months Ended
Dec. 31, 2020
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, historically, has leased many of 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, 2020, following the sale of the Pinedale LGS on June 30, 2020 (refer to "Impairment and Sale of the Pinedale Liquids Gathering System" below), the Company had one significant property located in Louisiana and the Gulf of Mexico leased on a triple-net basis to a major tenant, described in the table below. The major tenant is responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to the leased property. The Company's long-term, triple-net leases generally have an initial term with options for renewals. Lease payments are scheduled to increase at varying intervals during the initial term of the lease. The following table summarizes the significant leased property, major tenant and lease term:
Summary of Leased Property, Major Tenant and Lease Terms
PropertyGrand Isle Gathering System
LocationGulf of Mexico/Louisiana
TenantEnergy XXI GIGS Services, 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.
Date AcquiredJune 2015
Initial Lease Term11 years
Renewal Option
Equal to the lesser of 9-years or 75 percent of the remaining useful life
Current Monthly Rent Payments
7/1/19 - 6/30/20: $3,223,917
7/1/20 - 6/30/21: $4,033,583
Estimated Useful Life(1)
15 years
(1) In conjunction with the impairment of the Grand Isle Gathering System discussed below, the remaining estimated useful life of the GIGS asset was adjusted to approximately 15 years beginning in the second quarter of 2020. Additionally, the Company updated the useful life of its ARO segments resulting in a change to the timing of the undiscounted cash flows. The timing change resulted in an increase to the ARO asset and liability of approximately $257 thousand as discussed in Note 12 ("Asset Retirement Obligation").
Beginning in 2019, the Company concluded that Omega's long-term contract with the 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 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; therefore, 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 accounted 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 earned 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.
LEASED PROPERTIES AND 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.
The COVID-19 pandemic-related reduction in energy demand and the uncertainty of production from OPEC members, US producers and other international suppliers caused significant disruptions and volatility in the global oil marketplace during 2020, which have adversely affected our tenants. In response to COVID-19, governments around the world have implemented stringent measures to help reduce the spread of the virus, including stay-at-home and shelter-in-place orders, travel restrictions and other measures. These measures have adversely affected the economies and financial markets of the U.S. and many other countries, resulting in an economic downturn that has negatively impacted global demand and prices for the products handled by the Company's pipelines, terminals and other facilities.
The events and conditions described above adversely impacted the Gulf of Mexico operations of the EGC Tenant, the tenant of the GIGS asset, under the Grand Isle Gathering Lease as discussed under "Energy Gulf Coast/Cox Oil" and "Grand Isle Gathering System" below.
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.
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.
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. EGC and Cox Oil refused to fulfill these obligations and did not fulfill these obligations prior to the disposal of the GIGS asset and termination of the Grand Isle Lease on February 4, 2021, as described further below. 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 was remanded to the trial court for further proceedings. In May 2020, the trial court granted the Company's motion for summary judgment mandating the tenant deliver the required financial statements. The Company believed that it was entitled to such relief, but the parties agreed to stay this case in order to facilitate settlement discussions as discussed further below.
On April 1, 2020, the EGC Tenant, a wholly owned indirect subsidiary of Cox Oil, ceased paying rent due. EGC Tenant was contractually obligated to pay rent and rent continued to accrue whether or not oil was being shipped. EGC Tenant was a special purpose entity engaged solely in activities related to the lease, and it does not own or operate any wells. EGC, parent of the EGC Tenant, owned and operated wells, including those connected to GIGS, and was the guarantor of the EGC Tenant's obligations under the lease. Following EGC Tenant's failure to pay rent due for April of 2020, and following discussions with Cox Oil management concerning its various operations, the Company sent EGC Tenant and EGC a notice of non-payment. After the required two-day cure period, a default occurred under the lease.
The EGC Tenant also failed to make required rent payments from May of 2020 through January of 2021. As a result, the Company initiated litigation in the State Court of Texas to recover the unpaid rent, plus interest, for April through July of 2020 from the EGC Tenant. Further, EGC filed an action to attempt to set aside the guarantee obligations of EGC under the lease. The Company intended to enforce its rights under the lease. These cases were stayed pending negotiation of a business resolution with EGC and the EGC Tenant.
As more fully described in Note 16 ("Subsequent Events"), on February 4, 2021, the Company contributed the GIGS asset as partial consideration for the acquisition of its interest in Crimson. In connection with the disposition, the Company and Grand Isle Corridor entered into a Settlement and Mutual Release Agreement (the "Settlement Agreement") with the EGC Tenant, EGC, and CEXXI, LLC (the "EXXI Entities"). The EGC Tenant is the tenant under the Grand Isle Lease Agreement, dated June 30, 2015 with Grand Isle Corridor. Grand Isle Corridor initially received a Guaranty dated June 22, 2015 from Energy XXI Ltd. in connection with the original purchase of the GIGS, which was assumed by EGC, as guarantor of the obligations of the EGC Tenant pursuant to the terms of the Assignment and Assumption of Guaranty and Release dated December 30, 2016 (as assigned and assumed, the "Landlord Guaranty").
Pursuant to the terms of the Settlement Agreement, the Company and Grand Isle Corridor released the EXXI Entities from any and all claims, except for the Environmental Indemnity under the Grand Isle Lease Agreement, which shall survive, and the EXXI Entities released the Company and Grand Isle Corridor from any and all claims. The parties have also agreed to jointly dismiss the litigation described above in connection with the Settlement Agreement. Additionally, the Grand Isle Lease Agreement and Landlord Guaranty were cancelled and terminated. The termination of the Grand Isle Lease Agreement will result in the write-off of deferred lease costs of $166 thousand in the first quarter of 2021.
Grand Isle Gathering System
The Company identified the EGC Tenant's nonpayment of rent discussed above along with the significant decline in the global oil market as indicators of impairment for the GIGS asset. As a result, the Company assessed the GIGS asset for impairment as of March 31, 2020. The Company performed a step 1 impairment assessment on the GIGS asset by estimating the undiscounted contractual cash flows relating to the lease using probability-weighted scenarios, which indicated that the GIGS asset's carrying value was not recoverable. As a result, the fair value of the GIGS asset was estimated through the use of probability-weighted discounted estimated cash flow scenarios to measure the impairment loss. The probability-weighted cash flows used to assess recoverability of the GIGS asset and measure its fair value were developed using assumptions related to the Grand Isle Lease Agreement and near-term crude oil and water price and volume projections reflective of the current environment and management's projections for long-term average prices and volumes. In addition to near and long-term price assumptions, other key assumptions include the timing and collectibility of lease payments, operating costs, timing of incurring such costs and the use of an appropriate discount rate. The Company believes its estimates and models used to determine fair value are similar to what a market participant would use.
The Company engaged specialists and other third-parties to assist with the valuation methodology and analysis of certain underlying assumptions. The fair value measurement of the GIGS asset was based, in part, on significant inputs not observable in the market (as discussed above) and thus represents a Level 3 measurement. The significant unobservable input used includes a discount rate based on an estimated weighted average cost of capital of a theoretical market participant. The Company utilized a weighted average discount rate of 10.0 percent when deriving the fair value of the GIGS asset impaired during the first quarter of 2020. The weighted average discount rate reflects management's best estimate of inputs a market participant would utilize. For the year ended December 31, 2020, the Company recognized a $140.3 million loss on impairment of leased property related to the GIGS asset in the Consolidated Statements of Operations. As of December 31, 2020, the carrying value of the GIGS asset is $63.6 million, which is included in leased properties on the Consolidated Balance Sheet.
The Company previously recognized a deferred rent receivable for the Grand Isle Gathering Lease, which primarily represents timing differences between the straight-line revenue recognition and contractual lease receipts over the lease term. Given the EGC's Tenant's nonpayment of rent and the Company's expectations surrounding the collectibility of the contractual lease payments under the lease, the Company did not expect the deferred rent receivable to be recoverable. Accordingly, the Company recognized a non-cash write-off of the deferred rent receivable of $30.1 million for the year ended December 31, 2020. The non-cash write-off was recognized as a reduction of revenue in the Consolidated Statements of Operations.
As discussed above, on February 4, 2021, the Company contributed the GIGS asset as partial consideration for the acquisition of its interest in Crimson resulting in its disposal, along with the asset retirement obligation (collectively, the "GIGS Disposal Group"), which was assumed by the sellers. Upon meeting the held for sale criteria in mid-January 2021, the Company ceased recording depreciation on the GIGS asset. The contribution of the GIGS Disposal Group will result in a loss on impairment and disposal of leased property and asset retirement obligation, net in the Consolidated Statements of Operations in the first quarter of 2021.
Impairment and Sale of the Pinedale Liquids Gathering System
On April 14, 2020, UPL, the parent and guarantor of the lease obligations of the tenant and operator of the Company's Pinedale LGS, announced that its significant indebtedness and extremely challenging current market conditions raised a substantial doubt about its ability to continue as a going concern. The going concern qualification in UPL's financial statements filed in its 2019 10-K resulted in defaults under UPL's credit and term loan agreement. UPL also disclosed that it elected not to make interest payments on certain outstanding indebtedness, triggering a 30-day grace period. If such interest payments were not made by the end of the grace period, an event of default would occur, potentially causing its outstanding indebtedness to become immediately due and payable. UPL further disclosed that if it was unable to obtain sufficient additional capital to repay the outstanding indebtedness and sufficient liquidity to meet its operating needs, it may be necessary for UPL to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.
On May 14, 2020, UPL filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. The filing included Ultra Wyoming, the operator of the Pinedale LGS and tenant under the Pinedale Lease Agreement with the Company's indirect wholly owned subsidiary Pinedale LP. The bankruptcy filing of both the guarantor, UPL, and the tenant constituted defaults under the terms of the Pinedale Lease Agreement. The bankruptcy filing imposed a stay of CorEnergy's ability to exercise remedies for the foregoing defaults. Ultra Wyoming also filed a motion to reject the Pinedale Lease Agreement, with a request that such motion be effective June 30, 2020. Pending the effective date of the rejection, Section 365 of the Bankruptcy Code generally requires Ultra Wyoming to comply on a timely basis with the provisions of the Pinedale Lease Agreement, including the payment provisions. Accordingly, the Company received the rent payments due on the first day of April, May and June 2020.
Pinedale LP, along with Prudential, the lender under the Amended Pinedale Term Credit Facility discussed in Note 11 ("Debt"), commenced discussions with UPL which resulted in UPL presenting an initial offer to purchase the Pinedale LGS. The Amended Pinedale Term Credit Facility was secured by the Pinedale LGS and was not secured by any assets of CorEnergy or its other subsidiaries.
On June 5, 2020, Pinedale LP filed a motion with the U.S. Bankruptcy Court objecting to Ultra Wyoming's motion to reject the Pinedale Lease Agreement while continuing its negotiations with UPL. Pinedale LP and the Company agreed in principle to terms with Ultra Wyoming to sell the Pinedale LGS for $18.0 million cash as set forth in a non-binding term sheet that was filed with the U.S. Bankruptcy Court in UPL’s Chapter 11 case along with a motion for approval of the transaction on June 22, 2020. A copy of the draft definitive purchase and sale agreement was also filed with the motion.
On June 26, 2020, the U.S. Bankruptcy Court in UPL’s Chapter 11 case approved the sale of the Pinedale LGS. Following such approval, on June 29, 2020, Pinedale LP entered into the purchase and sale agreement (the "Sale Agreement") with Ultra Wyoming. On June 30, 2020, Pinedale LP closed on the sale of the Pinedale LGS to its tenant, Ultra Wyoming, for total cash consideration of $18.0 million, and the Pinedale Lease Agreement was terminated. The sale was completed pursuant to the terms of the Sale Agreement previously approved by the bankruptcy court as discussed above. In connection with the closing of the sale, the Company and Pinedale LP entered into a mutual release of all claims related to the Pinedale LGS and the Pinedale Lease Agreement with UPL and Ultra Wyoming, including a release by Pinedale LP of all claims against UPL and Ultra Wyoming arising from the rejection or termination of the Pinedale Lease Agreement.
In conjunction with the sale of the Pinedale LGS described above, Pinedale LP and the Company entered into a compromise and release agreement (the "Release Agreement") with Prudential related to the Amended Pinedale Term Credit Facility, which had an outstanding balance of approximately $32.0 million, net of $132 thousand of deferred debt issuance costs. Pursuant to the Release Agreement, the $18.0 million sale proceeds from the Sale Agreement were provided by Ultra Wyoming directly to Prudential. The Company also provided the remaining cash available at Pinedale LP of approximately $3.3 million (including $198 thousand for accrued interest) to Prudential in exchange for (i) the release of all liens on the Pinedale LGS and the other assets of Pinedale LP, (ii) the termination of the Company’s pledge of equity interests of the general partner of Pinedale LP, (iii) the termination and satisfaction in full of the obligations of Pinedale LP under the Amended Pinedale Term Credit Facility and (iv) a general release of any other obligations of Pinedale LP and/or the Company and their respective directors, officers, employees or agents pertaining to the Amended Pinedale Term Credit Facility.
During the negotiation and closing of the sale of the Pinedale LGS to Ultra Wyoming, the Company determined impairment indicators existed as the value to be received from the sale was less than the carrying value of the asset of $164.5 million. As a result of these indicators and the sale of the Pinedale LGS, the Company recognized a loss on impairment and disposal of leased property in the Consolidated Statement of Operations of approximately $146.5 million for the year ended December 31, 2020. Further, the sale of the Pinedale LGS resulted in the termination of the Pinedale Lease Agreement, and the Company recognized a loss on termination of lease of approximately $458 thousand for the year ended December 31, 2020. These losses were partially offset by the settlement of the Amended Pinedale Term Credit Facility with Prudential (as discussed above and in Note 11 ("Debt")), which resulted in a gain on extinguishment of debt of $11.0 million for year ended December 31, 2020.
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 Operations for the year ended December 31, 2018. Refer to Note 10 ("Fair Value") for additional information on the sale of the interest in Joliet.
Future Minimum Lease Receipts & Significant Leases
As of December 31, 2020, the Grand Isle Lease Agreement was the Company's only remaining triple-net lease, and the future contracted minimum rental receipts for this lease included $49.6 million for 2021, $48.6 million for 2022, $45.5 million for 2023, $43.7 million for 2024, $42.2 million for 2025, and $20.8 million thereafter. As described above, the Grand Isle Lease Agreement was terminated on February 4, 2021. The Company will not collect the contracted future minimum rental receipts outlined above.
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 PropertiesLease Revenues
As of December 31,For the Years Ended December 31,
20202019
2020(2)
20192018
Pinedale LGS (3)
— %44.4 %52.0 %39.2 %35.2 %
Grand Isle Gathering System (4)
98.0 %55.3 %47.6 %60.6 %55.9 %
Portland Terminal Facility (5)
— %— %— %— %8.8 %
(1) Insignificant leases are not presented; thus percentages may not sum to 100%.
(2) Total lease revenue is exclusive of the deferred rent receivable write-off for the year ended December 31, 2020 discussed above.
(3) Pinedale LGS lease revenues include variable rent of $28 thousand, $4.6 million and $4.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Pinedale LGS was sold to Ultra Wyoming and the Pinedale Lease Agreement was terminated on June 30, 2020, as discussed above.
(4) As of December 31, 2020, the Grand Isle Gathering System's percentage of leased properties increased as a result of the sale of the Pinedale LGS on June 30, 2020. For the year ended December 31, 2020, the Grand Isle Gathering System's percentage of lease revenues is exclusive of the deferred rent receivable write-off discussed further above.
(5) 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 Operations associated with the Company's leases and leased properties:
For the Years Ended December 31,
202020192018
Depreciation Expense
GIGS$6,013,322 $9,763,163 $10,836,590 
Pinedale (1)
3,695,599 8,869,440 8,869,440 
Portland Terminal Facility (2)
— — 1,243,769 
United Property Systems39,737 39,117 36,662 
Total Depreciation Expense$9,748,658 $18,671,720 $20,986,461 
Amortization Expense - Deferred Lease Costs
GIGS$30,564 $30,564 $30,564 
Pinedale (1)
30,684 61,368 61,368 
Total Amortization Expense - Deferred Lease Costs$61,248 $91,932 $91,932 
ARO Accretion Expense
GIGS$461,713 $443,969 $499,562 
Total ARO Accretion Expense$461,713 $443,969 $499,562 
(1) On June 30, 2020, the Pinedale LGS was sold to Ultra Wyoming, terminating the Pinedale Lease Agreement.
(2) 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, 2020December 31, 2019
Net Deferred Lease Costs
GIGS$168,191 $198,755 
Pinedale— 488,981 
Total Deferred Lease Costs, net$168,191 $687,736 
LESSEE - LEASED PROPERTIES
The Company's operating subsidiaries currently lease single-use office space and equipment with remaining lease terms of approximately two years, some of which may include renewal options. These leases are classified as operating leases and immaterial to the consolidated financial statements. The Company recognizes lease expense in the Consolidated Statements of Operations on a straight-line basis over the remaining lease term.
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, historically, has leased many of 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, 2020, following the sale of the Pinedale LGS on June 30, 2020 (refer to "Impairment and Sale of the Pinedale Liquids Gathering System" below), the Company had one significant property located in Louisiana and the Gulf of Mexico leased on a triple-net basis to a major tenant, described in the table below. The major tenant is responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to the leased property. The Company's long-term, triple-net leases generally have an initial term with options for renewals. Lease payments are scheduled to increase at varying intervals during the initial term of the lease. The following table summarizes the significant leased property, major tenant and lease term:
Summary of Leased Property, Major Tenant and Lease Terms
PropertyGrand Isle Gathering System
LocationGulf of Mexico/Louisiana
TenantEnergy XXI GIGS Services, 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.
Date AcquiredJune 2015
Initial Lease Term11 years
Renewal Option
Equal to the lesser of 9-years or 75 percent of the remaining useful life
Current Monthly Rent Payments
7/1/19 - 6/30/20: $3,223,917
7/1/20 - 6/30/21: $4,033,583
Estimated Useful Life(1)
15 years
(1) In conjunction with the impairment of the Grand Isle Gathering System discussed below, the remaining estimated useful life of the GIGS asset was adjusted to approximately 15 years beginning in the second quarter of 2020. Additionally, the Company updated the useful life of its ARO segments resulting in a change to the timing of the undiscounted cash flows. The timing change resulted in an increase to the ARO asset and liability of approximately $257 thousand as discussed in Note 12 ("Asset Retirement Obligation").
Beginning in 2019, the Company concluded that Omega's long-term contract with the 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 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; therefore, 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 accounted 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 earned 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.
LEASED PROPERTIES AND 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.
The COVID-19 pandemic-related reduction in energy demand and the uncertainty of production from OPEC members, US producers and other international suppliers caused significant disruptions and volatility in the global oil marketplace during 2020, which have adversely affected our tenants. In response to COVID-19, governments around the world have implemented stringent measures to help reduce the spread of the virus, including stay-at-home and shelter-in-place orders, travel restrictions and other measures. These measures have adversely affected the economies and financial markets of the U.S. and many other countries, resulting in an economic downturn that has negatively impacted global demand and prices for the products handled by the Company's pipelines, terminals and other facilities.
The events and conditions described above adversely impacted the Gulf of Mexico operations of the EGC Tenant, the tenant of the GIGS asset, under the Grand Isle Gathering Lease as discussed under "Energy Gulf Coast/Cox Oil" and "Grand Isle Gathering System" below.
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.
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.
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. EGC and Cox Oil refused to fulfill these obligations and did not fulfill these obligations prior to the disposal of the GIGS asset and termination of the Grand Isle Lease on February 4, 2021, as described further below. 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 was remanded to the trial court for further proceedings. In May 2020, the trial court granted the Company's motion for summary judgment mandating the tenant deliver the required financial statements. The Company believed that it was entitled to such relief, but the parties agreed to stay this case in order to facilitate settlement discussions as discussed further below.
On April 1, 2020, the EGC Tenant, a wholly owned indirect subsidiary of Cox Oil, ceased paying rent due. EGC Tenant was contractually obligated to pay rent and rent continued to accrue whether or not oil was being shipped. EGC Tenant was a special purpose entity engaged solely in activities related to the lease, and it does not own or operate any wells. EGC, parent of the EGC Tenant, owned and operated wells, including those connected to GIGS, and was the guarantor of the EGC Tenant's obligations under the lease. Following EGC Tenant's failure to pay rent due for April of 2020, and following discussions with Cox Oil management concerning its various operations, the Company sent EGC Tenant and EGC a notice of non-payment. After the required two-day cure period, a default occurred under the lease.
The EGC Tenant also failed to make required rent payments from May of 2020 through January of 2021. As a result, the Company initiated litigation in the State Court of Texas to recover the unpaid rent, plus interest, for April through July of 2020 from the EGC Tenant. Further, EGC filed an action to attempt to set aside the guarantee obligations of EGC under the lease. The Company intended to enforce its rights under the lease. These cases were stayed pending negotiation of a business resolution with EGC and the EGC Tenant.
As more fully described in Note 16 ("Subsequent Events"), on February 4, 2021, the Company contributed the GIGS asset as partial consideration for the acquisition of its interest in Crimson. In connection with the disposition, the Company and Grand Isle Corridor entered into a Settlement and Mutual Release Agreement (the "Settlement Agreement") with the EGC Tenant, EGC, and CEXXI, LLC (the "EXXI Entities"). The EGC Tenant is the tenant under the Grand Isle Lease Agreement, dated June 30, 2015 with Grand Isle Corridor. Grand Isle Corridor initially received a Guaranty dated June 22, 2015 from Energy XXI Ltd. in connection with the original purchase of the GIGS, which was assumed by EGC, as guarantor of the obligations of the EGC Tenant pursuant to the terms of the Assignment and Assumption of Guaranty and Release dated December 30, 2016 (as assigned and assumed, the "Landlord Guaranty").
Pursuant to the terms of the Settlement Agreement, the Company and Grand Isle Corridor released the EXXI Entities from any and all claims, except for the Environmental Indemnity under the Grand Isle Lease Agreement, which shall survive, and the EXXI Entities released the Company and Grand Isle Corridor from any and all claims. The parties have also agreed to jointly dismiss the litigation described above in connection with the Settlement Agreement. Additionally, the Grand Isle Lease Agreement and Landlord Guaranty were cancelled and terminated. The termination of the Grand Isle Lease Agreement will result in the write-off of deferred lease costs of $166 thousand in the first quarter of 2021.
Grand Isle Gathering System
The Company identified the EGC Tenant's nonpayment of rent discussed above along with the significant decline in the global oil market as indicators of impairment for the GIGS asset. As a result, the Company assessed the GIGS asset for impairment as of March 31, 2020. The Company performed a step 1 impairment assessment on the GIGS asset by estimating the undiscounted contractual cash flows relating to the lease using probability-weighted scenarios, which indicated that the GIGS asset's carrying value was not recoverable. As a result, the fair value of the GIGS asset was estimated through the use of probability-weighted discounted estimated cash flow scenarios to measure the impairment loss. The probability-weighted cash flows used to assess recoverability of the GIGS asset and measure its fair value were developed using assumptions related to the Grand Isle Lease Agreement and near-term crude oil and water price and volume projections reflective of the current environment and management's projections for long-term average prices and volumes. In addition to near and long-term price assumptions, other key assumptions include the timing and collectibility of lease payments, operating costs, timing of incurring such costs and the use of an appropriate discount rate. The Company believes its estimates and models used to determine fair value are similar to what a market participant would use.
The Company engaged specialists and other third-parties to assist with the valuation methodology and analysis of certain underlying assumptions. The fair value measurement of the GIGS asset was based, in part, on significant inputs not observable in the market (as discussed above) and thus represents a Level 3 measurement. The significant unobservable input used includes a discount rate based on an estimated weighted average cost of capital of a theoretical market participant. The Company utilized a weighted average discount rate of 10.0 percent when deriving the fair value of the GIGS asset impaired during the first quarter of 2020. The weighted average discount rate reflects management's best estimate of inputs a market participant would utilize. For the year ended December 31, 2020, the Company recognized a $140.3 million loss on impairment of leased property related to the GIGS asset in the Consolidated Statements of Operations. As of December 31, 2020, the carrying value of the GIGS asset is $63.6 million, which is included in leased properties on the Consolidated Balance Sheet.
The Company previously recognized a deferred rent receivable for the Grand Isle Gathering Lease, which primarily represents timing differences between the straight-line revenue recognition and contractual lease receipts over the lease term. Given the EGC's Tenant's nonpayment of rent and the Company's expectations surrounding the collectibility of the contractual lease payments under the lease, the Company did not expect the deferred rent receivable to be recoverable. Accordingly, the Company recognized a non-cash write-off of the deferred rent receivable of $30.1 million for the year ended December 31, 2020. The non-cash write-off was recognized as a reduction of revenue in the Consolidated Statements of Operations.
As discussed above, on February 4, 2021, the Company contributed the GIGS asset as partial consideration for the acquisition of its interest in Crimson resulting in its disposal, along with the asset retirement obligation (collectively, the "GIGS Disposal Group"), which was assumed by the sellers. Upon meeting the held for sale criteria in mid-January 2021, the Company ceased recording depreciation on the GIGS asset. The contribution of the GIGS Disposal Group will result in a loss on impairment and disposal of leased property and asset retirement obligation, net in the Consolidated Statements of Operations in the first quarter of 2021.
Impairment and Sale of the Pinedale Liquids Gathering System
On April 14, 2020, UPL, the parent and guarantor of the lease obligations of the tenant and operator of the Company's Pinedale LGS, announced that its significant indebtedness and extremely challenging current market conditions raised a substantial doubt about its ability to continue as a going concern. The going concern qualification in UPL's financial statements filed in its 2019 10-K resulted in defaults under UPL's credit and term loan agreement. UPL also disclosed that it elected not to make interest payments on certain outstanding indebtedness, triggering a 30-day grace period. If such interest payments were not made by the end of the grace period, an event of default would occur, potentially causing its outstanding indebtedness to become immediately due and payable. UPL further disclosed that if it was unable to obtain sufficient additional capital to repay the outstanding indebtedness and sufficient liquidity to meet its operating needs, it may be necessary for UPL to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.
On May 14, 2020, UPL filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. The filing included Ultra Wyoming, the operator of the Pinedale LGS and tenant under the Pinedale Lease Agreement with the Company's indirect wholly owned subsidiary Pinedale LP. The bankruptcy filing of both the guarantor, UPL, and the tenant constituted defaults under the terms of the Pinedale Lease Agreement. The bankruptcy filing imposed a stay of CorEnergy's ability to exercise remedies for the foregoing defaults. Ultra Wyoming also filed a motion to reject the Pinedale Lease Agreement, with a request that such motion be effective June 30, 2020. Pending the effective date of the rejection, Section 365 of the Bankruptcy Code generally requires Ultra Wyoming to comply on a timely basis with the provisions of the Pinedale Lease Agreement, including the payment provisions. Accordingly, the Company received the rent payments due on the first day of April, May and June 2020.
Pinedale LP, along with Prudential, the lender under the Amended Pinedale Term Credit Facility discussed in Note 11 ("Debt"), commenced discussions with UPL which resulted in UPL presenting an initial offer to purchase the Pinedale LGS. The Amended Pinedale Term Credit Facility was secured by the Pinedale LGS and was not secured by any assets of CorEnergy or its other subsidiaries.
On June 5, 2020, Pinedale LP filed a motion with the U.S. Bankruptcy Court objecting to Ultra Wyoming's motion to reject the Pinedale Lease Agreement while continuing its negotiations with UPL. Pinedale LP and the Company agreed in principle to terms with Ultra Wyoming to sell the Pinedale LGS for $18.0 million cash as set forth in a non-binding term sheet that was filed with the U.S. Bankruptcy Court in UPL’s Chapter 11 case along with a motion for approval of the transaction on June 22, 2020. A copy of the draft definitive purchase and sale agreement was also filed with the motion.
On June 26, 2020, the U.S. Bankruptcy Court in UPL’s Chapter 11 case approved the sale of the Pinedale LGS. Following such approval, on June 29, 2020, Pinedale LP entered into the purchase and sale agreement (the "Sale Agreement") with Ultra Wyoming. On June 30, 2020, Pinedale LP closed on the sale of the Pinedale LGS to its tenant, Ultra Wyoming, for total cash consideration of $18.0 million, and the Pinedale Lease Agreement was terminated. The sale was completed pursuant to the terms of the Sale Agreement previously approved by the bankruptcy court as discussed above. In connection with the closing of the sale, the Company and Pinedale LP entered into a mutual release of all claims related to the Pinedale LGS and the Pinedale Lease Agreement with UPL and Ultra Wyoming, including a release by Pinedale LP of all claims against UPL and Ultra Wyoming arising from the rejection or termination of the Pinedale Lease Agreement.
In conjunction with the sale of the Pinedale LGS described above, Pinedale LP and the Company entered into a compromise and release agreement (the "Release Agreement") with Prudential related to the Amended Pinedale Term Credit Facility, which had an outstanding balance of approximately $32.0 million, net of $132 thousand of deferred debt issuance costs. Pursuant to the Release Agreement, the $18.0 million sale proceeds from the Sale Agreement were provided by Ultra Wyoming directly to Prudential. The Company also provided the remaining cash available at Pinedale LP of approximately $3.3 million (including $198 thousand for accrued interest) to Prudential in exchange for (i) the release of all liens on the Pinedale LGS and the other assets of Pinedale LP, (ii) the termination of the Company’s pledge of equity interests of the general partner of Pinedale LP, (iii) the termination and satisfaction in full of the obligations of Pinedale LP under the Amended Pinedale Term Credit Facility and (iv) a general release of any other obligations of Pinedale LP and/or the Company and their respective directors, officers, employees or agents pertaining to the Amended Pinedale Term Credit Facility.
During the negotiation and closing of the sale of the Pinedale LGS to Ultra Wyoming, the Company determined impairment indicators existed as the value to be received from the sale was less than the carrying value of the asset of $164.5 million. As a result of these indicators and the sale of the Pinedale LGS, the Company recognized a loss on impairment and disposal of leased property in the Consolidated Statement of Operations of approximately $146.5 million for the year ended December 31, 2020. Further, the sale of the Pinedale LGS resulted in the termination of the Pinedale Lease Agreement, and the Company recognized a loss on termination of lease of approximately $458 thousand for the year ended December 31, 2020. These losses were partially offset by the settlement of the Amended Pinedale Term Credit Facility with Prudential (as discussed above and in Note 11 ("Debt")), which resulted in a gain on extinguishment of debt of $11.0 million for year ended December 31, 2020.
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 Operations for the year ended December 31, 2018. Refer to Note 10 ("Fair Value") for additional information on the sale of the interest in Joliet.
Future Minimum Lease Receipts & Significant Leases
As of December 31, 2020, the Grand Isle Lease Agreement was the Company's only remaining triple-net lease, and the future contracted minimum rental receipts for this lease included $49.6 million for 2021, $48.6 million for 2022, $45.5 million for 2023, $43.7 million for 2024, $42.2 million for 2025, and $20.8 million thereafter. As described above, the Grand Isle Lease Agreement was terminated on February 4, 2021. The Company will not collect the contracted future minimum rental receipts outlined above.
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 PropertiesLease Revenues
As of December 31,For the Years Ended December 31,
20202019
2020(2)
20192018
Pinedale LGS (3)
— %44.4 %52.0 %39.2 %35.2 %
Grand Isle Gathering System (4)
98.0 %55.3 %47.6 %60.6 %55.9 %
Portland Terminal Facility (5)
— %— %— %— %8.8 %
(1) Insignificant leases are not presented; thus percentages may not sum to 100%.
(2) Total lease revenue is exclusive of the deferred rent receivable write-off for the year ended December 31, 2020 discussed above.
(3) Pinedale LGS lease revenues include variable rent of $28 thousand, $4.6 million and $4.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Pinedale LGS was sold to Ultra Wyoming and the Pinedale Lease Agreement was terminated on June 30, 2020, as discussed above.
(4) As of December 31, 2020, the Grand Isle Gathering System's percentage of leased properties increased as a result of the sale of the Pinedale LGS on June 30, 2020. For the year ended December 31, 2020, the Grand Isle Gathering System's percentage of lease revenues is exclusive of the deferred rent receivable write-off discussed further above.
(5) 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 Operations associated with the Company's leases and leased properties:
For the Years Ended December 31,
202020192018
Depreciation Expense
GIGS$6,013,322 $9,763,163 $10,836,590 
Pinedale (1)
3,695,599 8,869,440 8,869,440 
Portland Terminal Facility (2)
— — 1,243,769 
United Property Systems39,737 39,117 36,662 
Total Depreciation Expense$9,748,658 $18,671,720 $20,986,461 
Amortization Expense - Deferred Lease Costs
GIGS$30,564 $30,564 $30,564 
Pinedale (1)
30,684 61,368 61,368 
Total Amortization Expense - Deferred Lease Costs$61,248 $91,932 $91,932 
ARO Accretion Expense
GIGS$461,713 $443,969 $499,562 
Total ARO Accretion Expense$461,713 $443,969 $499,562 
(1) On June 30, 2020, the Pinedale LGS was sold to Ultra Wyoming, terminating the Pinedale Lease Agreement.
(2) 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, 2020December 31, 2019
Net Deferred Lease Costs
GIGS$168,191 $198,755 
Pinedale— 488,981 
Total Deferred Lease Costs, net$168,191 $687,736 
LESSEE - LEASED PROPERTIES
The Company's operating subsidiaries currently lease single-use office space and equipment with remaining lease terms of approximately two years, some of which may include renewal options. These leases are classified as operating leases and immaterial to the consolidated financial statements. The Company recognizes lease expense in the Consolidated Statements of Operations on a straight-line basis over the remaining lease term.
v3.20.4
Transportation and Distribution Revenue
12 Months Ended
Dec. 31, 2020
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 policies 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 through mid-December 2020.
During the fourth quarter of 2020, MoGas entered into a new long-term firm transportation services agreement with Spire, its largest customer. Upon completion of the STL interconnect project in mid-December 2020, as described in Note 7 ("Property And Equipment"), the agreement increased Spire’s firm capacity from 62,800 dekatherms per day to 145,600 dekatherms per day through October 2030 and replaced the previous firm transportation agreement. In accordance with ASC 606, the Company accounted for the contract modification in the fourth quarter of 2020 as a termination of the existing transportation contract and a creation of a new transportation contract with Spire, which is accounted for prospectively. Following the contract modification,
the recognized performance obligation will continue to exceed amounts invoiced, and the contract liability will decline at a rate of $146 thousand per quarter through the end of the contract in October 2030. As of December 31, 2020, the revenue allocated to the remaining performance obligation under this contract is approximately $68.7 million.
The table below summarizes the Company's contract liability balance related to its transportation and distribution revenue contracts as of December 31, 2020 and 2019:
Contract Liability(1)
December 31, 2020December 31, 2019
Beginning Balance January 1$6,850,790 $6,522,354 
Unrecognized Performance Obligations 347,811 887,916 
Recognized Performance Obligations (1,093,622)(559,480)
Ending Balance December 31$6,104,979 $6,850,790 
(1) The contract liability balance is included in unearned revenue in the Consolidated Balance Sheets.
The Company's contract asset balance was $363 thousand and $206 thousand as of December 31, 2020 and 2019, respectively. The Company also recognized deferred contract costs related to incremental costs to obtain a transportation performance obligation contract, which are amortized on a straight-line basis over the remaining term of the contract. As of December 31, 2020, the remaining unamortized deferred contract costs balance was $950 thousand. The contract asset and deferred contract costs balances are 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, 2020, 2019 and 2018:
For the Years Ended December 31,
202020192018
Natural gas transportation contracts64.3 %67.8 %64.3 %
Natural gas distribution contracts23.9 %25.5 %26.8 %
v3.20.4
Financing Notes Receivable
12 Months Ended
Dec. 31, 2020
Receivables [Abstract]  
FINANCING NOTES RECEIVABLE FINANCING NOTES RECEIVABLE
Four Wood Financing Note Receivable
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 Operations 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.
On May 22, 2020, the terms of the Compass REIT Loan were amended (i) to extend the maturity date from June 30, 2021 to November 30, 2024 and (ii) to reduce payments to interest only through December 31, 2020. Additionally, the amended Compass REIT Loan will continue to accrue interest at an annual rate of 8.5 percent through May 31, 2021. Subsequent to May 31, 2021 interest will accrue at an annual rate of 12.0 percent. Monthly principal payments of approximately $11 thousand will resume on January 1, 2021 and increase annually beginning on June 30, 2021 through the maturity date. As of December 31, 2020 and 2019, the Compass REIT Loan was valued at $1.2 million.
v3.20.4
Income Taxes
12 Months Ended
Dec. 31, 2020
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, 2020 and 2019, are as follows:
Deferred Tax Assets and Liabilities
December 31, 2020December 31, 2019
Deferred Tax Assets:
Deferred contract revenue$1,474,962 $1,529,473 
Net operating loss carryforwards6,438,628 5,622,052 
Accrued liabilities— 424,604 
Capital loss carryforward92,418 104,595 
Other 420 6,184 
Sub-total$8,006,428 $7,686,908 
Valuation allowance(92,418)(104,595)
Sub-total$7,914,010 $7,582,313 
Deferred Tax Liabilities:
Cost recovery of leased and fixed assets$(3,578,283)$(2,953,319)
Other(53,151)(35,433)
Sub-total$(3,631,434)$(2,988,752)
Total net deferred tax asset$4,282,576 $4,593,561 
As of December 31, 2020, 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, 2017, remain open to examination by federal and state tax authorities.
As of December 31, 2020 and 2019, the TRSs had a cumulative net operating loss ("NOL") of $26.7 million and $23.5 million, respectively. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs originating in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. Certain of the Company’s TRSs have NOLs totaling approximately $1.2 million that are eligible for carryback under the CARES Act. The benefit of these carrybacks has been recorded as an increase to income taxes receivable and a reduction to deferred tax assets. Certain NOLs which were initially measured at the current corporate income tax rate of 21 percent are being carried back to offset taxable income that was taxed at a pre-Tax Cuts and Jobs Act of 2017 rate of 34 percent. The benefit received from the rate differential is reflected in the income tax provision for the year ended December 31, 2020.
Net operating losses of $23.3 million generated during the years ended December 31, 2020, 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, $993 thousand and $2.0 million in the years ending December 31, 2034, 2035, 2036 and 2037, respectively.
For the year ended December 31, 2019, the Company generated a capital loss carryforward resulting from the liquidation of Lightfoot. The capital loss decreased upon receipt of the final 2019 K-1's in the first quarter of 2020. The amount of the carryforward for tax purposes was approximately $440 thousand and $500 thousand as of December 31, 2020 and 2019, respectively, 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 $92 thousand and $105 thousand was recorded equal to the amount of the tax benefit of this carryforward at December 31, 2020 and 2019, respectively. 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 $1.3 million transition adjustment that reduced net deferred
tax assets. One of the Company's TRSs qualifies for the regulated utility and real property business exceptions under the new proposed treasury regulations for Section 163(j). Therefore, previously disqualified interest from years prior to 2018 was deducted and resulted in a reclassification from other deferred tax assets to deferred tax assets for net operating loss carryforwards during the year ended December 31, 2018. The Company will continue to assess the impact of new tax legislation, as well as any future regulations and updates provided by the tax authorities.
Total income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate of 21 percent for the years ended December 31, 2020, 2019 and 2018, to income or loss from operations and other income and expense for the years presented, as follows:
Income Tax Expense (Benefit)
For the Years Ended December 31,
202020192018
Application of statutory income tax rate$(64,292,012)$904,111 $8,671,562 
State income taxes, net of federal tax benefit35,371 409,839 (583,186)
Income of Real Estate Investment Trust not subject to tax64,331,160 (941,900)(10,339,520)
Other(159,377)(137,432)(167,582)
Total income tax expense (benefit)$(84,858)$234,618 $(2,418,726)
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 for the year ended December 31, 2018. 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 3 percent for the year ended December 31, 2020 and approximately 5 percent for the year ended December 31, 2019 due to its operations in Missouri. CorEnergy BBWS did not record a provision for state income taxes for the year ended December 31, 2018 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 3 percent was used for the operation of the TRS for the year ended December 31, 2020 and 5 percent was used for the years ended December 31, 2019 and 2018. 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 $315 thousand resulting from the application of the newly enacted rate to existing deferred balances was recorded in the first quarter of 2019.
For the years ended December 31, 2020, 2019 and 2018, all of the income tax expense (benefit) presented above relates to the assets and activities held in the Company's TRSs. The components of income tax expense (benefit) include the following for the periods presented:
Components of Income Tax Expense (Benefit)
For the Years Ended December 31,
202020192018
Current tax expense (benefit)
Federal$(420,074)$(159,381)$(413,248)
State (net of federal tax benefit)24,231 39,357 (172,138)
Total current tax benefit$(395,843)$(120,024)$(585,386)
Deferred tax expense (benefit)
Federal$299,845 $(15,840)$(1,422,292)
State (net of federal tax benefit)11,140 370,482 (411,048)
Total deferred tax expense (benefit)$310,985 $354,642 $(1,833,340)
Total income tax expense (benefit), net$(84,858)$234,618 $(2,418,726)

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, 2020December 31, 2019
Aggregate cost for federal income tax purposes$301,314 $345,241 
Gross unrealized appreciation— — 
Gross unrealized depreciation— — 
Net unrealized appreciation$— $— 
The Company provides the following tax information to its common stockholders pertaining to the character of distributions paid during tax years 2020, 2019 and 2018. For a common stockholder that received all distributions in cash during 2020, 100.0 percent will be treated as return of capital. The per share characterization by quarter is reflected in the following tables:
2020 Common Stock Tax Information
Record DateEx-Dividend DatePayable DateTotal Distribution per ShareTotal Ordinary DividendsQualified DividendsCapital Gain DistributionsNondividend DistributionsSection 199A Dividends
2/14/20202/13/20202/28/2020$0.7500 $— $— $— $0.7500 $— 
5/15/20205/14/20205/29/20200.0500 — — — 0.0500 — 
8/17/20208/14/20208/31/20200.0500 — — — 0.0500 — 
11/16/202011/13/202011/30/20200.0500 — — — 0.0500 — 
Total 2020 Distributions$0.9000 $— $— $— $0.9000 $— 

2019 Common Stock Tax Information
Record DateEx-Dividend DatePayable DateTotal Distribution per ShareTotal Ordinary DividendsQualified DividendsCapital Gain DistributionsNondividend DistributionsSection 199A Dividends
2/14/20192/13/20192/28/2019$0.7500 $0.5803 $— $0.0156 $0.1541 $0.5803 
5/17/20195/16/20195/31/20190.7500 0.4578 — 0.0150 0.2772 0.4578 
8/16/20198/15/20198/30/20190.7500 0.4578 — 0.0150 0.2772 0.4578 
11/15/201911/14/201911/29/20190.7500 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 DateEx-Dividend DatePayable DateTotal Distribution per ShareTotal Ordinary DividendsQualified DividendsCapital Gain DistributionsUnrecaptured Section 1250 GainSection 199A Dividends
2/14/20182/13/20182/28/2018$0.7500 $0.5346 $— $0.2154 $0.1007 $0.5346 
5/17/20185/16/20185/31/20180.7500 0.5346 — 0.2154 0.1007 0.5346 
8/17/20188/16/20188/31/20180.7500 0.5346 — 0.2154 0.1007 0.5346 
11/15/201811/14/201811/30/20180.7500 0.5346 — 0.2154 0.1007 0.5346 
Total 2018 Distributions$3.0000 $2.1384 $— $0.8616 $0.4028 $2.1384 
The Company provides the following tax information to its preferred stockholders pertaining to the character of distributions paid during the 2020, 2019 and 2018 tax years. For a preferred stockholder that received all distributions in cash during 2020, 100.0 percent will be treated as return of capital. The per share characterization by quarter is reflected in the following tables:
2020 Preferred Stock Tax Information
Record DateEx-Dividend DatePayable DateTotal Distribution per ShareTotal Ordinary DividendsQualified DividendsCapital Gain DistributionsNondividend DistributionsSection 199A Dividends
2/14/20202/13/20202/28/2020$0.4609 $— $— $— $0.4609 $— 
5/15/20205/14/20205/29/20200.4609 — — — 0.4609 — 
8/17/20208/14/20208/31/20200.4609 — — — 0.4609 — 
11/16/202011/13/202011/30/20200.4609 — — — 0.4609 — 
Total 2020 Distributions$1.8436 $— $— $— $1.8436 $— 

2019 Preferred Stock Tax Information
Record DateEx-Dividend DatePayable DateTotal Distribution per ShareTotal Ordinary DividendsQualified DividendsCapital Gain DistributionsNondividend DistributionsSection 199A Dividends
2/14/20192/13/20192/28/2019$0.4609 $0.4483 $— $0.0126 $— $0.4483 
5/17/20195/16/20195/31/20190.4609 0.4463 — 0.0146 — 0.4463 
8/16/20198/15/20198/30/20190.4609 0.4463 — 0.0146 — 0.4463 
11/15/201911/14/201911/29/20190.4609 0.4463 — 0.0146 — 0.4463 
Total 2019 Distributions$1.8436 $1.7872 $— $0.0564 $— $1.7872 
2018 Preferred Stock Tax Information
Record DateEx-Dividend DatePayable DateTotal Distribution per ShareTotal Ordinary DividendsQualified DividendsCapital Gain DistributionsUnrecaptured Section 1250 GainSection 199A Dividends
2/14/20182/13/20182/28/2018$0.4609 $0.3285 $— $0.1324 $0.0619 $0.3285 
5/17/20185/16/20185/31/20180.4609 0.3285 — 0.1324 0.0619 0.3285 
8/17/20188/16/20188/31/20180.4609 0.3285 — 0.1324 0.0619 0.3285 
11/15/201811/14/201811/30/20180.4609 0.3285 — 0.1324 0.0619 0.3285 
Total 2018 Distributions$1.8436 $1.3140 $— $0.5296 $0.2476 $1.3140 
The Company elected, effective for the 2013 tax year, to be treated as a REIT for federal income tax purposes. The Company's REIT election, assuming continued compliance with the applicable tests, will continue in effect for subsequent tax years. The Company satisfied the annual income test and the quarterly asset tests necessary for us to qualify to be taxed as a REIT for 2020, 2019 and 2018.
v3.20.4
Property and Equipment
12 Months Ended
Dec. 31, 2020
Property, Plant and Equipment [Abstract]  
PROPERTY AND EQUIPMENT PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Property and Equipment
December 31, 2020December 31, 2019
Land$686,330 $605,070 
Natural gas pipeline126,910,465 124,614,696 
Vehicles and trailers719,897 671,962 
Office equipment and computers268,559 268,559 
Construction work in progress220,157 — 
Gross property and equipment$128,805,408 $126,160,287 
Less: accumulated depreciation(22,580,810)(19,304,610)
Net property and equipment$106,224,598 $106,855,677 
Depreciation expense was $3.4 million for each of the years ended December 31, 2020, 2019 and 2018, respectively. In mid-December 2020, the Company completed the STL Interconnect project at a cost of $2.4 million, which will allow gas to be delivered by STL Pipeline LLC and received by MoGas.
v3.20.4
Concentrations
12 Months Ended
Dec. 31, 2020
Risks and Uncertainties [Abstract]  
Concentrations CONCENTRATIONS The Company has customer concentrations through a major tenant at its one significant leased property as discussed fully in Note 3 ("Leased Properties And Leases"). In addition to the lease concentration, contracted transportation revenues from the Company's subsidiary, MoGas, to its largest customer, Spire (formally Laclede Gas Company), represented approximately 16 percent of consolidated revenues excluding the deferred rent receivable write-off recorded on GIGS for the year ended December 31, 2020. Spire represented approximately 7 percent and 6 percent of consolidated revenues for the years ended December 31, 2019 and 2018, respectively. The Company's contracted transportation revenues with Spire beginning with the year ended December 31, 2018 were impacted by the adoption of ASC 606, which required the Company to record the contract with Spire on a straight-line basis and record a transition adjustment on January 1, 2018. Refer to Note 4 ("Transportation And Distribution Revenue") for additional details. Further, MoGas' customer, Ameren Energy, and Omega's customer, the DOD, represented 11 percent and 15 percent, respectively, of consolidated revenues excluding the deferred rent receivable write-off recorded on GIGS for the year ended December 31, 2020.
v3.20.4
Management Agreement
12 Months Ended
Dec. 31, 2020