ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto in this report on Form 10-Q of CorEnergy Infrastructure, Inc. (“the Company”, “CorEnergy”, “we” or “us”). The forward-looking statements included in this discussion and elsewhere in this report on Form 10-Q involve risks and uncertainties, including anticipated financial performance, business prospects, industry trends, shareholder returns, performance of leases by tenants, performance on loans to customers, and other matters, which reflect management's best judgment based on factors currently known. See “Cautionary Statement Concerning Forward-Looking Statements” which is incorporated herein by reference. Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2015
, filed with the SEC on March 14, 2016 and Part II, Item 1A - "Risk Factors" in this report on Form 10-Q.
BUSINESS OBJECTIVE
CorEnergy primarily owns assets in the midstream and downstream U.S. energy sectors that perform utility-like functions, such as pipelines, storage terminals, and transmission and distribution assets. Our objective is to provide stockholders with a stable and growing cash dividend, supported by long-term contracted revenue from operators of our assets, primarily under triple-net participating leases. We believe our leadership team’s energy and utility expertise provides CorEnergy with a competitive advantage to own and acquire U.S. energy infrastructure assets in a tax-efficient, transparent REIT.
We also may provide other types of capital, including loans secured by energy infrastructure assets. The assets we own and seek to acquire include pipelines, storage tanks, transmission lines, and gathering systems, among others. The assets are primarily mission-critical, in that utilization of the assets is necessary for the business the operators of those assets seek to conduct and their rental payments are an essential operating expense. We acquire assets that will enhance the stability of our dividend through diversification, while offering the potential for long-term distribution growth. These sale-leaseback or real property mortgage transactions provide the energy company with a source of capital that is an alternative to sources such as corporate borrowing, bond offerings, or equity offerings.
State of the Market
According to court filings, 105 North American oil and gas producers have filed for bankruptcy since the beginning of 2015, 61 of which filed in 2016 (through October 19). The parent companies of two of CorEnergy’s largest tenants, Energy XXI and Ultra Petroleum, have been among those companies declaring bankruptcy.
Between July 1 and October 31, 2016, CorEnergy’s share price decreased six percent to $27.08. This compares to the Alerian MLP Index (“AMZ”) which was down six percent and the S&P 500 Index (“SPX”) which increased one percent over the same time period. CorEnergy, AMZ, and SPX hit low points on February 11, 2016, of $10.90, $199.10, and $1,810.10, respectively. The rebound since then was likely influenced by a recovery in the oil and gas markets from year-to-date lows of $26.05 per barrel (WTI, on February 11) and $1.611 per MMbtu (on March 4), respectively,which in turn affects the health of Energy XXI and Ultra Petroleum. WTI crude oil prices were $46.86 per barrel on October 31, 2016, and natural gas prices were $3.026 per MMBtu. These prices represent a decrease of three percent in WTI crude oil and a three percent increase in natural gas between July1 and October 31, respectively. For up-to-date commodity prices, please refer to http://www.eia.gov.
As with other companies invested primarily in real property and related infrastructure, our share price can be positively or negatively affected by the decisions, or market perception of the decisions, of the Federal Reserve to raise, maintain, or lower interest rates. In the most recent Federal Reserve meeting on September 21, 2016 interest rates remained unchanged. Nonetheless, the Federal Reserve may increase interest rates in upcoming quarters, which in turn could have a slightly adverse effect on our share price.
On September 1, 2016, Real Estate became a separate sector in the Global Industry Classification Standard ("GICS"). Analysts and news sources expect that this will benefit real estate companies, which in the U.S. consist primarily of REITs, as capital will flow into the sector in order to maintain balanced portfolios. Additionally, market exposure and understanding of REIT structures and their reporting standards are expected to increase as a result of the new GICS categorization. It is possible that CorEnergy shares may experience some benefit from capital flows into the REIT sector due to the new classification.
Energy companies are finding a number of ways to address capital constraints, including capital raises (frequently in the form of preferred shares), joint ventures, and asset sales. We believe that our business offers companies an alternative source of capital and we remain in discussions with companies who do not expect to file bankruptcy, but have needs for capital to exploit potential oil and gas reserves. Our team continues to assess these opportunities for assets which fit our underwriting criteria and will provide a long-term benefit to current shareholders through growth and diversification.
Basis of Presentation
The consolidated financial statements include CorEnergy Infrastructure Trust, Inc., as of
September 30, 2016
, and its direct and indirect wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
RESULTS OF OPERATIONS
We believe the Lease Revenue, Security Distributions, Financing Revenue, and Operating Results overview presented below provides investors with information that will assist them in analyzing the operating performance of our leased assets, financing notes receivable, other equity securities, and operating entities. As it pertains to other equity securities, the Company believes that net distributions received are indicative of the operating performance of the assets. Accordingly, we have included them in EBITDA, resulting in an adjusted EBITDA metric.
The following Results of Operations analysis includes Lease Revenue and Depreciation Expense related to the PNM Lease Agreement and the EIP leased asset, which was sold on April 1, 2015,
for the nine months ended September 30, 2015.
The following is a comparison of lease revenues, security distributions, financing revenue, operating results, and expenses
for the three and nine months ended September 30, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Lease Revenue, Security Distributions, Financing Revenue, and Operating Results
|
|
|
|
|
|
|
|
Leases:
|
|
|
|
|
|
|
|
|
|
Lease revenue
|
$
|
16,996,155
|
|
|
$
|
16,966,056
|
|
|
$
|
50,988,299
|
|
|
$
|
31,102,036
|
|
Other Equity Securities:
|
|
|
|
|
|
|
|
|
|
Net cash distributions received
|
278,782
|
|
|
274,550
|
|
|
753,655
|
|
|
742,056
|
|
Financing:
|
|
|
|
|
|
|
|
|
|
Financing revenue
|
—
|
|
|
182,604
|
|
|
162,344
|
|
|
1,511,900
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
Transportation and distribution revenue
(1)
|
5,119,330
|
|
|
4,991,790
|
|
|
15,283,461
|
|
|
16,196,067
|
|
Transportation and distribution expense
(2)
|
(1,482,161
|
)
|
|
(1,503,713
|
)
|
|
(4,222,792
|
)
|
|
(5,791,994
|
)
|
Net Operations (excluding depreciation, amortization, and ARO accretion)
|
3,637,169
|
|
|
3,488,077
|
|
|
11,060,669
|
|
|
10,404,073
|
|
Total Lease Revenue, Security Distributions, Financing Revenue, and Operating Results
|
$
|
20,912,106
|
|
|
$
|
20,911,287
|
|
|
$
|
62,964,967
|
|
|
$
|
43,760,065
|
|
General and administrative
|
(3,021,869
|
)
|
|
(2,837,762
|
)
|
|
(9,084,961
|
)
|
|
(7,311,610
|
)
|
Non-Controlling Interest attributable to Adjusted EBITDA Items
|
(945,142
|
)
|
|
(971,243
|
)
|
|
(2,852,432
|
)
|
|
(2,912,908
|
)
|
Adjusted EBITDA
|
$
|
16,945,095
|
|
|
$
|
17,102,282
|
|
|
$
|
51,027,574
|
|
|
$
|
33,535,547
|
|
(1) MoGas and Omega revenues have been combined and are presented net of Omega's natural gas and propane costs subsequent to the new contract with the DOD executed on January 28, 2016, effective February 1, 2016. In accordance with GAAP, Omega's historical Sales revenue and Cost of sales for the three and nine months ended September 30, 2015, are presented separately, on a gross basis, in the Consolidated Statements of Income and Comprehensive Income in this quarterly report on Form 10-Q. For ease of comparison in this results of operations discussion, Omega's historical Sales revenue, Cost of sales, and Operating expenses for the three and nine months ended September 30, 2016 and 2015, are presented on a gross basis and are included in the Transportation and distribution lines in this table.
|
(2) MoGas' transportation, maintenance, and administrative expenses and Omega's distribution and operating expenses and cost of sales on non-DOD customers have been combined subsequent to the new contract with the DOD executed on January 28, 2016.
|
Lease Revenue, Security Distributions, Financing Revenue, and Operating Results
Our operating performance was derived primarily from leases of real property assets, distributions from our remaining portfolio of equity investments, financing revenue from our loan agreements, and the operating results of our subsidiaries. Total lease revenue, security distributions, financing revenue, and operating results generated by our investments for the nine months ended September 30, 2016 increased
$19.2 million
compared to the prior-year period, primarily due to the addition of the GIGS lease on July 1, 2015.
For the nine months ended September 30, 2016,
lease revenue increased
$19.9 million
over the prior-year period. The increase was a result of
$20.3 million
in incremental revenue from the GIGS lease and an increase for the Portland Terminal Facility of
$164 thousand
related to completion of the planned construction projects in November 2015, partially offset by a
$638 thousand
decline in lease revenues due to the termination of the PNM Lease Agreement on April 1, 2015.
For each of the three months ended September 30, 2016 and 2015, MoGas contributed
$2.7 million
to Net Operations (excluding depreciation and amortization). Transportation revenues totaled
$3.6 million
for the current and prior-year periods while transportation costs and expenses were approximately
$900 thousand
. For the nine months ended September 30, 2016 and 2015, MoGas contributed
$8.3 million
and
$7.8 million
, respectively, to Net Operations (excluding depreciation and amortization). Transportation revenues totaled approximately
$10.8 million
for each of the periods while transportation costs and expenses were approximately
$2.5 million
and
$2.9 million
, respectively. The decline in MoGas' costs and expenses versus the prior-year periods was due to legal fees incurred in the first half of 2015 related to obtaining approval for a planned sale-leaseback transaction which was submitted to FERC in November 2015, and subsequently approved in June 2016.
For the three months ended September 30, 2016 and 2015,
our subsidiary, Omega, contributed
$890 thousand
and
$787 thousand
, respectively, to Net Operations (excluding depreciation and amortization) from its natural gas operations.
For the nine months ended September 30, 2016 and 2015,
Omega's contribution was
$2.7 million
and
$2.6 million
, respectively. Omega's contribution represents the contract revenues related to distribution of natural gas on our pipeline after deducting distribution expenses (excluding depreciation and amortization) for the respective periods.
Our financing revenues were historically derived from our loans to BBWS and SWD. As of
December 31, 2015
, the Company had recorded a loan loss reserve on the Black Bison loans. During the first quarter of 2016, our loan to SWD became delinquent, at which time the Company recorded a loan loss reserve and placed the Four Wood loan on non-accrual basis, which accounts for the decline in revenues from prior year. See
Note 4, Financing Notes Receivable
, for additional information on the Black Bison financing notes and the Four Wood loans.
General and Administrative
Total general and administrative expenses
for the three months ended September 30, 2016 and 2015,
were
$3.0 million
and
$2.8 million
, respectively. Total general and administrative expenses
for the nine months ended September 30, 2016 and 2015,
were
$9.1 million
and
$7.3 million
, respectively. The most significant components of the variance from the prior-year periods are outlined in the following table and explained below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Management fees
|
$
|
1,934,873
|
|
|
$
|
1,716,423
|
|
|
$
|
5,391,569
|
|
|
$
|
4,055,919
|
|
Acquisition and professional fees
|
655,810
|
|
|
792,939
|
|
|
2,187,459
|
|
|
2,451,485
|
|
Other expenses
|
431,186
|
|
|
328,400
|
|
|
1,505,933
|
|
|
804,206
|
|
Total
|
$
|
3,021,869
|
|
|
$
|
2,837,762
|
|
|
$
|
9,084,961
|
|
|
$
|
7,311,610
|
|
Management fees are directly proportional to the Company's asset base. As such, the 2016 increases versus the prior-year periods are directly related to the acquisition of GIGS. The GIGS-related increase over prior year was partially offset by certain reductions in the asset base, such as the sale of EIP in April 2015. Additionally, expenses were reduced by the waiver of Management fees by the management company on the non-performing financing notes.
The Management Agreement includes an incentive fee, calculated as a percentage of common stock dividends paid in excess of a predetermined threshold. In June 2015, the Company issued an additional
2.6 million
shares of common stock to partially fund the acquisition of GIGS and subsequently raised its quarterly common stock dividend to $0.75 per share on January 26, 2016. The increase in common stock dividends paid resulted in an increase in incentive fees paid to the Manager of
$279 thousand
for the nine months ended September 30, 2016,
as compared to the prior year. Incentive fees recorded for the three months ended September 30, 2016, were $259 thousand, an increase of approximately $200 thousand over the prior-year period. This increase was driven by the increase in the quarterly dividend to $0.75 per share noted above, as well as both the second quarter and third quarter incentive fees being recorded to the income statement during the three months ended September 30, 2016. The Manager voluntarily waived approximately $54 thousand of the incentive fee for the second quarter that would have otherwise been payable under the management Agreement. There was no such waiver for the third quarter incentive fee. See
Note 8, Management Agreement
, for additional information.
Acquisition and professional fees
for the three months ended September 30, 2016,
decreased
$137 thousand
to
$656 thousand
versus the prior-year period.
For the nine months ended September 30, 2016,
acquisition and professional fees decreased
$264 thousand
to
$2.2 million
versus the prior-year period.
Generally, we expect asset acquisition expenses to be repaid over time from income generated by acquisitions. However, any particular period may reflect significant expenses arising from third party legal, engineering, and consulting fees that are incurred in the early to mid-stages of due diligence. Recently, due to the uncertainty in the energy industry and the number of energy companies going through the bankruptcy process, we have experienced lower asset acquisitions costs. Acquisition expense
for
the nine months ended September 30, 2016,
declined
$808 thousand
compared to the prior-year period primarily because the Company pursued opportunities during the first three months of 2015 which were not completed.
For the nine months ended September 30, 2016,
professional fees increased
$544 thousand
versus the prior-year period. The year-to-date increase was primarily due to legal fees incurred in the monitoring of our assets at Pinedale and GIGS and the March 2016 assignment and modification of the Pinedale Credit Facility. Additional expenses incurred related to the Black Bison foreclosure and sale activities and the valuation of the Four Woods REIT Loan collateral also contributed to the increase.
Other expenses
for the three and nine months ended September 30, 2016 and 2015,
increased
$103 thousand
and
$702 thousand
, respectively, versus the prior-year periods. Together with valuation and other costs associated with the Black Bison foreclosure, the increases were predominantly related to Black Bison operating costs subsequent to the foreclosure. We also incurred additional costs in connection with: (i) the redesign of our website; (ii) travel related to monitoring of our assets and participation in industry conferences; (iii) increased syndicate services fees associated with the Regions Revolver; and (iv) higher printing and mailing expenses associated with the Company's January 2016 Form S-3 Registration Statement and our February 2016 Prospectus Supplement.
Non-Controlling Interest Attributable to Adjusted EBITDA Items
Based on Prudential's 18.95 percent ownership interest in Pinedale LP, the Company is required to make a further adjustment to the adjusted EBITDA items presented above to exclude the portion attributable to Prudential's non-controlling interest.
For the three months ended September 30, 2016 and 2015,
Prudential's interest in these items totaled
$945 thousand
and
$971 thousand
, respectively. For each of the nine months ended September 30, 2016 and 2015, Prudential's interest in these items totaled
$2.9 million
.
Adjusted EBITDA
Adjusted EBITDA attributable to CorEnergy Stockholders
for the three months ended September 30, 2016 and 2015,
was
$16.9 million
and
$17.1 million
, respectively.
For the nine months ended September 30, 2016 and 2015,
adjusted EBITDA attributable to CorEnergy Stockholders was
$51.0 million
as compared to
$33.5 million
for the prior-year period. As noted above, the increase in adjusted EBITDA for the nine months ended September 30, 2016, was primarily associated with the acquisition of GIGS in June 2015, partially offset by reduced revenues related to our financing agreements and the increase in general and administrative expenses.
The following table presents a reconciliation of Adjusted EBITDA to Income Attributable to Common Stockholders as reported in the Consolidated Statements of Income and Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Adjusted EBITDA
|
$
|
16,945,095
|
|
|
$
|
17,102,282
|
|
|
$
|
51,027,574
|
|
|
$
|
33,535,547
|
|
Other Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Distributions and dividends received in prior period previously deemed a return of capital (recorded as a cost reduction) and reclassified as income in a subsequent period
(1)
|
—
|
|
|
—
|
|
|
117,004
|
|
|
371,323
|
|
Net realized and unrealized gain (loss) on securities, noncash portion
|
1,429,599
|
|
|
(1,441,738
|
)
|
|
998,377
|
|
|
(1,003,566
|
)
|
Depreciation, amortization, and ARO accretion
|
(5,744,266
|
)
|
|
(5,836,665
|
)
|
|
(16,778,109
|
)
|
|
(13,381,483
|
)
|
Interest expense, net
|
(3,520,856
|
)
|
|
(3,854,913
|
)
|
|
(10,987,677
|
)
|
|
(6,129,073
|
)
|
Provision for loan losses
|
—
|
|
|
(7,951,137
|
)
|
|
(5,014,466
|
)
|
|
(7,951,137
|
)
|
Non-controlling interest attributable to depreciation, amortization, and interest expense
(2)
|
604,765
|
|
|
560,437
|
|
|
1,852,594
|
|
|
1,679,923
|
|
Income tax benefit (expense)
|
(483,152
|
)
|
|
1,848,953
|
|
|
361,536
|
|
|
1,577,451
|
|
Preferred dividend requirements
|
(1,037,109
|
)
|
|
(1,037,109
|
)
|
|
(3,111,327
|
)
|
|
(2,811,718
|
)
|
Income (Loss) Attributable to Common Stockholders
|
$
|
8,194,076
|
|
|
$
|
(609,890
|
)
|
|
$
|
18,465,506
|
|
|
$
|
5,887,267
|
|
(1)
We characterize distributions received from private investments estimated based on prior year activity. After receiving the K-1s, which depict the Company's share of income and losses from the investment in the security, previously unrealized gains can be reclassified as dividend income.
|
(2) ARO accretion expense has no impact on non-controlling interest.
|
Net Distributions and Dividends Recorded as Income
The following table summarizes the breakout of net distributions and dividends reported as income on the income statement. The table begins with the gross cash distributions and dividend income received from our investment securities during the three and
nine months ended September 30, 2016 and 2015.
This amount is increased by cash distributions received in a prior period that were, at the time, deemed a return of capital and have been reclassified during the current period as income. Finally, a reduction is shown for cash distributions received in the current period that are deemed a return of capital and, as such, are not included in income received from investment securities. The portion of the distributions that are deemed to be return of capital in any period are based on estimates made at the time such distributions are received. These estimates may subsequently be revised based on information received from the portfolio company after their tax reporting periods are concluded, as the actual character of these distributions is not known until after our fiscal year end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Distributions and Dividends Recorded as Income
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Gross distributions and dividends received from investment securities
|
$
|
278,782
|
|
|
$
|
274,550
|
|
|
$
|
753,655
|
|
|
$
|
742,056
|
|
Add:
|
|
|
|
|
|
|
|
Distributions and dividends received in prior period previously deemed a return of capital (recorded as a cost reduction) and reclassified as income in a subsequent period
|
—
|
|
|
—
|
|
|
117,004
|
|
|
371,323
|
|
Less:
|
|
|
|
|
|
|
|
Distributions and dividends received in current period deemed a return of capital and not recorded as income (recorded as a cost reduction) in the current period
|
1,259
|
|
|
32,987
|
|
|
3,394
|
|
|
87,998
|
|
Net distributions and dividends recorded as income
|
$
|
277,523
|
|
|
$
|
241,563
|
|
|
$
|
867,265
|
|
|
$
|
1,025,381
|
|
For the three months ended September 30, 2016, the increase in net distributions and dividends recorded as income versus the prior-year period is due to a change in the characterization of our distributions received from Lightfoot. In the prior year, a higher percentage of the cash we received was deemed return of capital, whereas in the current year, nearly all of the distributions received are considered dividend income. For the nine months ended September 30, 2016, the
$158 thousand
decrease in net distributions and dividends recorded as income versus the prior-year period is primarily due to a
$254 thousand
decrease in adjustments recorded in the first quarter of each year to reclassify previously unrealized gains as dividend income upon the receipt of the annual K-1s, which depict the Company's share of income and losses from the investment in the security. This decrease was offset by a decline in how much of the cash distributions from our investment in Lightfoot were considered a return of capital versus current income in 2016.
Net Realized and Unrealized Gain (Loss) on Securities
For the three months ended September 30, 2016,
the
$2.9 million
increase in the noncash portion of net realized and unrealized gains from other equity securities versus the prior-year period is primarily due to a combination of a
$2.8 million
increase in unrealized gains due to fluctuations in the valuation of Lightfoot plus a
$115 thousand
change in the valuation of the Black Bison warrant.
For the nine months ended September 30, 2016,
the
$2.0 million
increase in noncash portion of net realized and unrealized losses from other equity securities versus the prior-year period is primarily due to a combination of: (i) a
$1.6 million
increase in unrealized gains due to fluctuations in the valuation of Lightfoot; plus (ii) a prior-year valuation loss of
$355 thousand
on the Black Bison warrant; minus (iii) a
$239 thousand
decrease in unrealized gain on the 18-month escrow associated with the sale of VantaCore recognized during the prior-year period; plus (iv) a
$254 thousand
decrease in adjustments recorded in the first quarter of each year to reclassify previously unrealized gains as dividend income upon the receipt of the annual K-1s, which depict the Company's share of income and losses from the investment in the security.
The increase in valuation of Lightfoot is primarily due to an increase in the public share price of Arc Logistics (ARCX), as well as a decrease in the subordination discount ranging between 11.8 percent and 15.2 percent at December 31, 2015 to between 2.8 percent and 3.5 percent at September 30, 2016. The subordination period is expected to end in November 2016. ARCX share price on
September 30, 2016
, was $15.05 per share, an increase of $1.78 per share versus the share price on December 31, 2015. This increase was partially offset by a decrease in the valuation of Gulf LNG due to an increase in the market discount rate and a decrease in the market growth rate, both resulting in a lower valuation.
Depreciation, Amortization, and ARO Accretion
Depreciation, amortization, and ARO accretion expense
for the three months ended September 30, 2016,
decreased
$92 thousand
as compared to the prior-year period.
For the nine months ended September 30, 2016,
depreciation, amortization, and ARO accretion expenses increased
$3.4 million
as compared to the prior-year period. The year-to-date increase is primarily attributable to the
acquisition of the GIGS in June 2015, partially offset by a decrease in depreciation expense due to the termination of the PNM Lease Agreement on April 1, 2015.
Interest Expense
For the three months ended September 30, 2016,
interest expense totaled approximately
$3.5 million
for the current-year period versus
$3.9 million
for the prior-year period. The decrease is primarily attributable to the Company internally refinancing its pro rata share of the Pinedale Credit Facility on March 30, 2016, which resulted in a reduction of the outstanding debt balance with third parties in comparison with the prior-year period.
For the nine months ended September 30, 2016,
interest expense was approximately
$11.0 million
as compared to
$6.1 million
for the prior-year period. The year-to-date increase is mainly the result of the debt incurred in connection with the acquisition of GIGS. The convertible notes accounted for approximately
$4.2 million
of the increase while the Company's $45.0 million draw on the Regions Term Loan accounted for approximately
$786 thousand
of the increase.
Non-Controlling Interest Attributable to Depreciation, Amortization, ARO Accretion, and Interest Expense
Due to Prudential's 18.95 percent ownership interest in Pinedale LP, the Company must make adjustments for non-controlling interests. Prudential's proportionate share of depreciation, amortization, and interest expense increased
$44 thousand
and
$173 thousand
,
for the three and nine months ended September 30, 2016,
respectively. The increase is attributable to interest and related costs reported as interest expense associated with the amendment and modification of the Pinedale Credit Facility.
Net Income Attributable to CorEnergy Stockholders
Net income attributable to CorEnergy stockholders was
$9.2 million
for the three months ended September 30, 2016,
as compared to
$427 thousand
for the prior-year period. After deducting
$1.0 million
for the portion of preferred dividends that are allocable to the current period, net income attributable to common stockholders was
$8.2 million
, or
$0.69
per basic common share and
$0.68
per diluted common share.
For the nine months ended September 30, 2016,
net income attributable to CorEnergy stockholders was
$21.6 million
, as compared to
$8.7 million
, for the prior-year period. After deducting
$3.1 million
for the portion of preferred dividends that are allocable to the current period, net income attributable to common stockholders was
$18.5 million
, or
$1.55
per basic and
$1.55
per diluted common share as compared to
$5.9 million
, or
$0.57
per basic and diluted common share, for the prior-year period.
Common Equity Attributable to CorEnergy Shareholders per Share
As of
September 30, 2016
, our common equity decreased by approximately
$10.0 million
to
$351.8 million
from
$361.8 million
as of
December 31, 2015
. This decrease principally consists of dividends paid to our common shareholders of approximately
$26.8 million
and additional decreases attributable to
$2.0 million
used to repurchase common stock and a
$205 thousand
decline in accumulated other comprehensive income associated with our interest rate swaps. These decreases were partially offset by net income attributable to CorEnergy common stockholders of approximately
$18.5 million
and
$554 thousand
of dividends issued under the DRIP or director's compensation plans. The table below does not reflect non-controlling interest equity.
|
|
|
|
|
|
|
|
|
Book Value Per Share
|
Analysis of Equity
|
September 30, 2016
|
|
December 31, 2015
|
Series A Cumulative Redeemable Preferred Stock 7.375%, $56,250,000 liquidation preference ($2,500 per share, $0.001 par value), 10,000,000 authorized; 22,500 issued and outstanding at September 30, 2016, and December 31, 2015
|
$
|
56,250,000
|
|
|
$
|
56,250,000
|
|
Capital stock, non-convertible, $0.001 par value; 11,876,389 and 11,939,697 shares issued and outstanding at September 30, 2016, and December 31, 2015 (100,000,000 shares authorized)
|
11,876
|
|
|
11,940
|
|
Additional paid-in capital
|
351,754,151
|
|
|
361,581,507
|
|
Accumulated other comprehensive income (loss)
|
(14,235
|
)
|
|
190,797
|
|
Total CorEnergy Stockholders' Equity
|
408,001,792
|
|
|
418,034,244
|
|
Subtract: 7.375% Series A cumulative redeemable preferred stock
|
(56,250,000
|
)
|
|
(56,250,000
|
)
|
Total CorEnergy Common Equity
|
$
|
351,751,792
|
|
|
$
|
361,784,244
|
|
Common shares outstanding
|
11,876,389
|
|
|
11,939,697
|
|
Book Value per Common Share
|
$
|
29.62
|
|
|
$
|
30.30
|
|
NAREIT FFO
FFO is a widely used measure of the operating performance of real estate companies that supplements net income (loss) determined in accordance with GAAP. As defined by the National Association of Real Estate Investment Trusts, NAREIT FFO represents net
income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, impairment losses of depreciable properties, real estate-related depreciation and amortization (excluding amortization of deferred financing costs or loan origination costs), and after adjustments for unconsolidated partnerships and non-controlling interests. Adjustments for non-controlling interests are calculated on the same basis. We define FFO attributable to common stockholders as defined above by NAREIT less dividends on preferred stock. Our method of calculating FFO attributable to common shareholders may differ from methods used by other REITs and, as such, may not be comparable.
FFO ADJUSTED FOR SECURITIES INVESTMENTS (FFO)
Due to the legacy investments that we hold, we have also historically presented a measure of FFO, to which we refer herein as FFO Adjusted for Securities Investments which is derived by further adjusting NAREIT FFO for distributions received from investment securities, income tax expense (benefit) from investment securities, net distributions and dividend income, and net realized and unrealized gain or loss on other equity securities.
We present NAREIT FFO and FFO Adjusted for Securities Investments because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors, and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is a key measure used by the Company in assessing performance and in making resource allocation decisions.
Both NAREIT FFO and FFO Adjusted for Securities Investments are intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions, and that may also be the case with the energy infrastructure assets in which we invest. NAREIT FFO and FFO Adjusted for Securities Investments exclude depreciation and amortization unique to real estate and gains and losses from property dispositions and extraordinary items. As such, it provides a performance measure that provides a perspective not immediately apparent from net income when compared to prior-year periods. These metrics reflect the impact to operations from trends in base and participating rents, company operating costs, development activities, and interest costs.
We calculate NAREIT FFO in accordance with standards established by the Board of Governors of the National Association of Real Estate Investment Trusts in its March 1995 White Paper (as amended in November 1999 and April 2002) and FFO Adjusted for Securities Investment as NAREIT FFO with additional adjustments described above due to our legacy investments. This may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly may not be comparable to such other REITs. NAREIT FFO and FFO Adjusted for Securities Investments do not represent amounts available for management's discretionary use because of needed capital for replacement or expansion, debt service obligations, or other commitments and uncertainties. NAREIT FFO and FFO Adjusted for Securities Investments, as historically reported by the Company, should not be considered as an alternative to net income (computed in accordance with GAAP), as an indicator of our financial performance, or to cash flow from operating activities (computed in accordance with GAAP), as an indicator of our liquidity, or as an indicator of funds available for our cash needs, including our ability to make distributions or to service our indebtedness.
AFFO
Management uses AFFO as a measure of long-term sustainable operational performance. AFFO in excess of dividends is used for debt repayment, reinvestments, funding our ARO liability, or other commitments and uncertainties which are necessary to sustain our dividend over the long term. AFFO should not be considered as an alternative to net income (computed in accordance with GAAP), as an indicator of our financial performance, or as an alternative to cash flow from operating activities (computed in accordance with GAAP), as an indicator of our liquidity, or as an indicator of funds available for our cash needs, including our ability to make distributions or service our indebtedness.
For completeness, the following table sets forth a reconciliation of our net income as determined in accordance with GAAP and our calculations of NAREIT FFO, FFO Adjusted for Securities Investments, and AFFO
for the three and nine months ended September 30, 2016 and 2015.
AFFO is a supplemental, non-GAAP financial measure which we define as FFO Adjusted for Securities Investment plus provision for loan losses, net of tax, transaction costs, amortization of debt issuance costs, amortization of deferred lease costs, accretion of asset retirement obligation, income tax expense (benefit) unrelated to securities investments and provision for loan losses, above-market rent, noncash costs associated with derivative instruments, and certain costs of a nonrecurring nature, less maintenance, capital expenditures (if any), amortization of debt premium, and other adjustments as deemed appropriate by Management. Also presented is information regarding the weighted-average number of shares of our common stock outstanding used for the computation of per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAREIT FFO, FFO Adjusted for Securities Investment, and AFFO Reconciliation
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Net Income attributable to CorEnergy Stockholders
|
|
$
|
9,231,185
|
|
|
$
|
427,219
|
|
|
$
|
21,576,833
|
|
|
$
|
8,698,985
|
|
Less:
|
|
|
|
|
|
|
|
|
Preferred Dividend Requirements
|
|
1,037,109
|
|
|
1,037,109
|
|
|
3,111,327
|
|
|
2,811,718
|
|
Net Income (loss) attributable to Common Stockholders
|
|
$
|
8,194,076
|
|
|
$
|
(609,890
|
)
|
|
$
|
18,465,506
|
|
|
$
|
5,887,267
|
|
Add:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
5,537,179
|
|
|
5,644,320
|
|
|
16,166,599
|
|
|
13,158,454
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Non-Controlling Interest attributable to NAREIT FFO reconciling items
|
|
411,455
|
|
|
411,455
|
|
|
1,234,364
|
|
|
1,234,365
|
|
NAREIT funds from operations (NAREIT FFO)
|
|
$
|
13,319,800
|
|
|
$
|
4,622,975
|
|
|
$
|
33,397,741
|
|
|
$
|
17,811,356
|
|
Add:
|
|
|
|
|
|
|
|
|
Distributions received from investment securities
|
|
278,782
|
|
|
274,550
|
|
|
753,655
|
|
|
742,056
|
|
Income tax expense (benefit) from investment securities
|
|
645,083
|
|
|
(450,699
|
)
|
|
703,211
|
|
|
50,398
|
|
Less:
|
|
|
|
|
|
|
|
|
Net distributions and dividend income
|
|
277,523
|
|
|
241,563
|
|
|
867,265
|
|
|
1,025,381
|
|
Net realized and unrealized gain (loss) on other equity securities
|
|
1,430,858
|
|
|
(1,408,751
|
)
|
|
1,001,771
|
|
|
(915,568
|
)
|
Funds from operations adjusted for securities investments (FFO)
|
|
$
|
12,535,284
|
|
|
$
|
5,614,014
|
|
|
$
|
32,985,571
|
|
|
$
|
18,493,997
|
|
Add:
|
|
|
|
|
|
|
|
|
Provision for loan losses, net of tax
|
|
—
|
|
|
6,667,823
|
|
|
4,409,359
|
|
|
6,667,823
|
|
Transaction costs
|
|
33,984
|
|
|
133,009
|
|
|
71,899
|
|
|
880,307
|
|
Amortization of debt issuance costs
|
|
469,004
|
|
|
699,386
|
|
|
1,556,607
|
|
|
1,313,026
|
|
Amortization of deferred lease costs
|
|
22,983
|
|
|
22,824
|
|
|
68,949
|
|
|
53,508
|
|
Accretion of asset retirement obligation
|
|
184,104
|
|
|
169,521
|
|
|
542,561
|
|
|
169,521
|
|
Income tax benefit
|
|
(161,931
|
)
|
|
(114,940
|
)
|
|
(459,640
|
)
|
|
(344,535
|
)
|
Amortization of above market leases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72,987
|
|
Unrealized gain associated with derivative instruments
|
|
(60,513
|
)
|
|
(13,965
|
)
|
|
(2,818
|
)
|
|
(48,494
|
)
|
Less:
|
|
|
|
|
|
|
|
|
EIP Lease Adjustment
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
542,809
|
|
Non-Controlling Interest attributable to AFFO reconciling items
|
|
(10,715
|
)
|
|
23,837
|
|
|
35,153
|
|
|
69,348
|
|
Adjusted funds from operations (AFFO)
|
|
$
|
13,033,630
|
|
|
$
|
13,153,835
|
|
|
$
|
39,137,335
|
|
|
$
|
26,645,983
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares of Common Stock Outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
11,872,729
|
|
|
11,924,148
|
|
|
11,909,431
|
|
|
10,266,380
|
|
Diluted
(2)
|
|
15,327,274
|
|
|
15,408,998
|
|
|
15,379,792
|
|
|
11,466,292
|
|
NAREIT FFO attributable to Common Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.12
|
|
|
$
|
0.39
|
|
|
$
|
2.80
|
|
|
$
|
1.73
|
|
Diluted
(2)
|
|
$
|
1.01
|
|
|
$
|
0.39
|
|
|
$
|
2.60
|
|
|
$
|
1.73
|
|
FFO attributable to Common Stockholders
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.06
|
|
|
$
|
0.47
|
|
|
$
|
2.77
|
|
|
$
|
1.80
|
|
Diluted
(2)
|
|
$
|
0.96
|
|
|
$
|
0.47
|
|
|
$
|
2.57
|
|
|
$
|
1.79
|
|
AFFO attributable to Common Stockholders
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.10
|
|
|
$
|
1.10
|
|
|
$
|
3.29
|
|
|
$
|
2.60
|
|
Diluted
|
|
$
|
0.98
|
|
|
$
|
0.98
|
|
|
$
|
2.94
|
|
|
$
|
2.50
|
|
(1)
Based on the economic return to CorEnergy resulting from the sale of our 40 percent undivided interest in EIP, we determined that it was appropriate to eliminate the portion of EIP lease income attributable to return of capital, as a means to more accurately reflect the EIP lease revenue contribution to CorEnergy-sustainable AFFO. CorEnergy believes that the portion of the EIP lease revenue attributable to return of capital, unless adjusted, overstates CorEnergy's distribution-paying capabilities and is not representative of sustainable EIP income over the life of the lease. The Company completed the sale of EIP on April 1, 2015.
|
(2) The number of weighted average diluted shares represents the total diluted shares for periods when the Convertible Notes were dilutive in the per share amounts presented. For periods presented without per share dilution, the number of weighted average diluted shares for the period is equal to the number of weighted average basic shares presented.
|
FEDERAL AND STATE INCOME TAXATION
In 2013 we qualified, and in March 2014 elected (effective as of January 1, 2013), to be treated as a REIT for federal income tax purposes (which we refer to as the “REIT Election"). Because certain of our 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 us from qualifying as a REIT.
For the years ended in 2012 and before, the distributions we made to our stockholders from our earnings and profits were treated as qualified dividend income ("QDI") and return of capital. QDI is taxed to our individual shareholders at the maximum rate for long-term capital gains, which through tax year 2012 was
15 percent
and beginning in tax year 2013 is
20 percent
. The Company elected to be taxed as a REIT for 2013 and subsequent years rather than a C corporation and generally will not pay federal income tax on taxable income of the REIT that is distributed to our stockholders. As a REIT, our distributions from earnings and profits will be treated as ordinary income and a return of capital, and generally will not qualify as QDI. To the extent that the REIT had accumulated C corporation earnings and profits from the periods prior to 2013, we distributed such earnings and profits in 2013. A portion of our normal distributions in 2013 have been characterized for federal income tax purposes as a distribution of those earnings and profits from non-REIT years and have been treated as QDI. In addition, to the extent we receive taxable distributions from our TRSs, or the REIT received distributions of C corporation earnings and profits, such portion of our distribution will be treated as QDI.
As a REIT, the Company holds and operates certain of our assets through one or more wholly-owned TRSs. Our use of TRSs enables us to continue to engage in certain businesses while complying with REIT qualification requirements and also allows us to retain income generated by these businesses for reinvestment without the requirement of distributing those earnings. In the future, we may elect to reorganize and transfer certain assets or operations from our TRSs to the Company or other subsidiaries, including qualified REIT subsidiaries.
The Company's trading securities and other equity securities are limited partnerships or limited liability companies which are treated as partnerships for federal and state income tax purposes. As a limited partner, the Company reports its allocable share of taxable income in computing its own taxable income. To the extent held by a TRS, the TRS's tax expense or benefit is included in the Consolidated Statements of Income based on the component of income or gains and losses to which such expense or benefit relates. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.
If we cease 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. Currently, the highest regular marginal federal income tax rate for a corporation is 35 percent. The Company may be subject to a 20 percent federal alternative minimum tax on its federal alternative minimum taxable income to the extent that its alternative minimum tax exceeds its regular federal income tax.
SEASONALITY
Our operating companies, MoGas and Omega, have stable revenues throughout the year and will complete necessary pipeline maintenance during the "non-heating" season, or quarters two and three. Therefore, operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
ASSET PORTFOLIO AND RELATED DEVELOPMENTS
For detailed descriptions of our asset portfolio and related operations, other than our remaining private equity securities as of
September 30, 2016
, please refer to "Item 2 - Properties" in our Annual Report on Form 10-K for the year ended
December 31, 2015
, and to Notes
3
and
4
in the Notes to the Consolidated Financial Statements included in this report. This section provides additional information concerning material developments related to our asset portfolio that occurred during the period ended
September 30, 2016
.
Grand Isle Gathering System
Depressed commodity prices have negatively impacted the operational and financial condition of EXXI. On April 14, 2016, EXXI and substantially all of its directly and indirectly owned subsidiaries filed a voluntary petition to reorganize under Chapter 11 Bankruptcy Code, after reaching an agreement with certain creditors to provide support for a restructuring of its debt. CorEnergy's tenant under the GIGS Lease, Energy XXI GIGS Services, LLC has not filed for bankruptcy. Therefore, its obligations under the GIGS Lease are currently not subject to the bankruptcy proceedings.
The bankruptcy filing of the guarantor of the Grand Isle Gathering System Lease, EXXI, and its failure to make interest payments to its creditors within the applicable cure period, would have constituted defaults under the terms of the GIGS Lease. However, CorEnergy provided a conditional waiver to certain remedies of these defaults. This allowed CorEnergy’s tenant to remain outside the bankruptcy proceedings.
Our tenant continues to make timely rent payments in accordance with the GIGS Lease Agreement. EXXI has stated its intentions to continue normal operations during the bankruptcy proceedings. In September, EXXI received approval of its Supplement to the Third Amended Disclosure Statement. The deadline to object to the Reorganization Plan and assumed contracts and leases was October 31, 2016 and the deadline for voting on the Plan of Reorganization was November 1, 2016. The confirmation hearing is scheduled to begin on November 7, 2016. The bankruptcy court extended EXXI’s exclusivity period to November 14, 2016. CorEnergy will continue to monitor, and take appropriate actions to, the information disclosed throughout the proceedings.
On April 25, 2016, EXXI was delisted from the NASDAQ Stock Market as a result of failing to meet certain listing standards. EXXI has begun trading on the OTC Pink Market under the symbol EXXIQ.
Pinedale LGS
Depressed commodity prices have negatively impacted the operational and financial condition of Ultra Petroleum ("UPL"). UPL filed on April 29, 2016, a voluntary petition to reorganize under Chapter 11. The filing includes Ultra Wyoming LGS, LLC, the operator of the Pinedale LGS and tenant of the Pinedale Lease Agreement.
The bankruptcy filing of both the guarantor, Ultra Petroleum, and the tenant and circumstances prompting the filing constitute defaults under the terms of the Pinedale Lease Agreement. The bankruptcy filing serves as a stay of the Company's ability to exercise remedies for certain of those defaults. However, Section 365 of the Bankruptcy Code requires Ultra Wyoming to comply on a timely basis with many provisions of the Pinedale Lease Agreement, including the payment provisions. The only exception to that requirement is if Ultra Wyoming takes specific action to reject the Pinedale Lease Agreement. Ultra Wyoming has not filed a motion to reject the Pinedale Lease.
Our tenant continues to make timely rent payments in accordance with the Pinedale Lease Agreement. UPL has stated its intentions to continue normal operations during the bankruptcy proceedings. On July 27, 2016, Ultra Petroleum filed with the U.S. Bankruptcy Court a motion to extend the exclusive period during which the Company can file a Chapter 11 plan and solicit acceptances thereof through and including February 28, 2017 and April 30, 2017, respectively.
On August 30, 2016, CorEnergy filed proofs of claim with the bankruptcy court handling the Ultra Petroleum bankruptcies. These filings were made prior to the September 1, 2016 deadline for proofs of claim to be filed and were intended to protect the interest of CorEnergy shareholders based on certain rights granted under guarantee and indemnification provisions in the lease.
On September 20, 2016, the Company filed a motion to dismiss the tenant, Ultra Wyoming from the Ultra Petroleum bankruptcy process based on the Company’s belief in the tenant’s solvency, to which Ultra Petroleum filed a response. Since that time, UPL published financial projections which CorEnergy believes are based on uninterrupted access to the Pinedale LGS, and stated that losing access to the Pinedale LGS upon rejection of the lease would cost hundreds of millions of dollars in foregone revenue. Since UPL has nonetheless threatened to reject the lease and construct access to a replacement system, CorEnergy and Ultra Wyoming have agreed to a non-binding mediation. December 15, 2016 has been set as the new deadline for Ultra Wyoming to accept or reject the Pinedale LGS Lease. The previous deadline for acceptance or rejection had been November 28, 2016. CorEnergy will continue to monitor, and take appropriate actions to, the information disclosed throughout the proceedings.
On May 2, 2016, UPL was delisted from the NYSE Stock Market as a result of failing to meet certain listing standards. UPL has begun trading on the OTC Pink Market under the symbol UPLMQ.
MoGas Pipeline
On June 1, 2016, the Federal Energy Regulatory Commission (“FERC”) authorized MoGas to sell its natural gas pipeline facilities to an affiliate, CorEnergy Pipeline Company, LLC (“CPC”). FERC authorized MoGas to lease these same facilities back from CPC and continue to serve as operator of the facilities. FERC also authorized MoGas to consolidate its accounting with CPC so that MoGas’s lease payments to CPC will be offset by the equivalent revenue received by CPC. The sale and leaseback transaction authorized by FERC will position lease payments that MoGas makes to CPC to qualify as REIT rental income should CorEnergy sell a majority stake in MoGas stock to an unaffiliated third party. At the time of such sale, MoGas must seek FERC approval to combine its accounts with the third-party owner.
Laclede Gas extended its current contract for MoGas to provide natural gas transportation services by one year to expire on October 31, 2017.
Black Bison
On February 29, 2016, the Company foreclosed on 100 percent of the equity of BB Intermediate, the holding company of Black Bison Water Services, LLC, the borrower of the Black Bison financing note receivable. See Note 4 in the Notes to the Consolidated Financial Statements in this report for additional information.
On June 16, 2016, the Company sold substantially all of the assets of BBWS and its subsidiaries to Expedition Water Solutions for a combination of cash plus an earn-out. CorEnergy received $1.0 million of cash, before fees, upon closing the agreement, retained certain working capital investments, and will receive royalty payments on future operating revenue generated by BBWS with a limit of $6.5 million. Royalty payments will not increase AFFO.
As of September 30, 2016 no royalty payments have been received.
Four Wood
Effective October 1, 2016, a portion of the Financing Notes with SWD Enterprises, LLC were restructured. The interest rate on the $4.0 million REIT Loan was reduced to 10 percent and required principal amortization was delayed until September 30, 2018. We expect to convert the $1.0 million TRS loan into an ownership interest in the borrower in the form of a preferred equity interest. Cash and accrued interest will not increase AFFO until Four Wood generates sustainable operating margins and the reserve for collection has been removed.
Omega Pipeline
On January 28, 2016, Omega was awarded a new 10-year contract with the Department of Defense, to provide natural gas and gas distribution assets to Fort Leonard Wood through Omega’s approximately 70-mile pipeline distribution system on the military base. As a result of the new contract natural gas and propane costs are being presented net in transportation and distribution revenue. See
Note 2
in the Notes to the Consolidated Financial Statements in this report for additional information.
Private Security Assets
As of
September 30, 2016
, our investment in Lightfoot represents approximately
1.4 percent
of the Company’s total assets. The following table is a summary of the fair value of Lightfoot at
September 30, 2016
, as compared to the fair value at
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Other Equity Securities
|
|
|
Fair Value At
|
|
Fair Value At
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
$ Change
|
|
% Change
|
Lightfoot
|
|
$
|
9,465,736
|
|
|
$
|
8,393,683
|
|
|
$
|
1,072,053
|
|
|
12.8
|
%
|
Lightfoot
The fair value of Lightfoot as of
September 30, 2016
increased approximately
$1.1 million
, or
12.8
percent, as compared to the value at
December 31, 2015
, primarily due to the change in value of Arc Logistics' publicly traded shares and a decrease in the subordination discount ranging between 11.8 percent and 15.2 percent at December 31, 2015 to a discount between 2.8 percent and 3.5 percent at September 30, 2016. The subordination period is expected to end in November of 2016.
During
the three and nine months ended September 30, 2016,
the Company received distributions of
$276 thousand
and
$744 thousand
, respectively, and expects these distributions to be funded primarily by Lightfoot’s distributions from Arc Logistics and Gulf LNG. However, both the ability of Arc Logistics and Gulf LNG to make quarterly distributions and the amount of such distributions will be dependent on Arc Logistics' and Gulf LNG's business results, and neither Arc Logistics, Gulf LNG, nor Lightfoot is under any obligation to make such distributions. On March 1, 2016, an affiliate of Gulf LNG received a Notice of Disagreement and Disputed Statements and a Notice of Arbitration from Eni USA Gas Marketing L.L.C ("Eni USA"), one of the two companies that had entered into a terminal use agreement for capacity of the liquefied natural gas facility owned by Gulf LNG and its subsidiaries. Should Eni USA terminate its' agreement with Gulf LNG, this could materially impact Arc Logistics and Gulf LNG's ability to fund their distributions to the Company. Accordingly, there can be no assurance that our expectations concerning 2016 distributions from Lightfoot will be realized.
VantaCore
The company received its final escrow distribution of
$1.4 million
on April 1, 2016.
LIQUIDITY AND CAPITAL RESOURCES
Overview
At
September 30, 2016
, we had liquidity of approximately
$63.4 million
comprised of cash of
$10.1 million
plus revolver availability of
$53.3 million
. We use cash flows generated from our operations to fund current obligations, projected working capital requirements, debt service payments and dividend payments. Management expects that future operating cash flows, along with access to financial markets, will be sufficient to meet future operating requirements and acquisition opportunities. If our ability to access the capital markets is restricted or if debt or equity capital were unavailable on favorable terms, or at all, our ability to fund acquisition opportunities or to comply with the REIT distribution rules could be adversely affected.
There are acquisition opportunities that are in preliminary stages of review, and consummation of any of these opportunities depends on a number of factors beyond our control. There can be no assurance that any of these acquisition opportunities will result in consummated transactions. As part of our disciplined investment philosophy, we plan to use a moderate level of leverage, approximately 25 percent to 50 percent of assets, supplemented with accretive equity issuance as needed, subject to current market conditions. We may invest in assets subject to greater leverage which could be both recourse and non-recourse to us. We do not intend to fund acquisitions until significant bankruptcy milestones for EXXI and UPL have occurred and been disclosed to the public.
Cash Flows - Operating, Investing, and Financing Activities
Cash Flows from Operating Activities
For the nine months ended September 30, 2016,
cash provided by operating activities totaled approximately
$41.7 million
, representing an increase of approximately
$10.7 million
as compared to
the nine months ended September 30, 2015.
The significant factors impacting the increase are as follows:
|
|
•
|
GIGS lease payments began July 1, 2015 and therefore, nine months of rent during 2016 versus only three months during 2015 has provided
$16.4 million
.
|
|
|
•
|
Proceeds from final escrow distribution related to the sale of Vantacore of approximately
$1.4 million
were received April 1, 2016.
|
|
|
•
|
Increase in interest paid of approximately
$5.2 million
primarily related to the financing of the June 2015 GIGS transaction through the issuance of $115 million in Convertible Notes and a $45 million draw on the Regions Credit Facility.
|
|
|
•
|
Due to reduced drilling and disposal activities in our borrowers' areas of operations, revenue from our financing notes decreased from the prior period by approximately
$1.3 million
.
|
For the nine months ended September 30, 2015,
cash provided by operating activities totaled approximately $30.9 million representing an increase of approximately $13.1 million over the same period of the prior year. The significant increases and decreases in cash provided by operating activities that primarily drove this change included the following:
|
|
•
|
The net operating results of MoGas, acquired in November 2014, provided $8.4 million.
|
|
|
•
|
When the Portland Terminal was acquired in January 2014, a certain amount of construction was required before the terminal became fully operational. Accordingly, the lessor was granted a partial rent holiday during the first six months of the lease. For the nine months ended September 30, 2015, the Portland Terminal lease payments had increased to the full amount of the base rent and had also increased as a result of nearly $9.7 million in completed construction projects, contributing approximately $2.0 million to the increase in cash provided by operating activities as compared to the prior year.
|
|
|
•
|
Additional payments to the Company resulting from a July 2014 increase to the Black Bison financing notes and December 2014 initial funding of the Four Wood financing notes contributed nearly $946 thousand to the increase over prior year.
|
|
|
•
|
Starting July 2015, cash provided by the GIGS lease payments for the current quarter was $7.9 million.
|
|
|
•
|
In conjunction with the agreement to sell EIP to PNM on April 1, 2015 upon expiration of the lease, the lease payments that would have been due over the remainder of the term were accelerated and paid in full on January 1, 2014. Therefore, the first half of 2014 included nearly $4.3 million in advance rental payments.
|
|
|
•
|
A net increase in the Company’s asset base for the nine months ended September 30, 2015 as compared to the prior year period resulted in approximately $1.7 million in additional management fees paid to Corridor.
|
|
|
•
|
Increase in cash interest paid of approximately $553 thousand due to increased facility sizes and borrowings.
|
|
|
•
|
Increase in cash taxes paid of approximately $179 thousand due to estimated tax payments made starting in 2015 related to the Lightfoot investment.
|
Cash Flows from Investing Activities
Significant factors impacting the
$194 thousand
of cash provided by investing activities during
the nine months ended September 30, 2016,
were as follows:
|
|
•
|
Net proceeds from the sale of assets and liabilities held for sale of
$645 thousand
.
|
|
|
•
|
Purchases of property and equipment of
$476 thousand
.
|
|
|
•
|
Proceeds received on foreclosure of BB Intermediate of
$223 thousand
.
|
|
|
•
|
Funding to close operations of Black Bison and Four Wood financing notes of
$202 thousand
.
|
Significant factors impacting the
$243.8 million
of cash used in investing activities during
the nine months ended September 30, 2015,
included the following:
|
|
•
|
Deployed approximately $246.5 million to acquire the GIGS assets.
|
|
|
•
|
$3.7 million of capital improvements in connection with the Portland Terminal facility.
|
|
|
•
|
The sale of the EIP asset on April 1, 2015 provided additional cash of approximately $7.7 million.
|
Cash Flows from Financing Activities
Significant factors impacting the
$46.4 million
of cash used in financing activities during
the nine months ended September 30, 2016,
included the following:
|
|
•
|
Repurchases of common stock of approximately
$2.0 million
.
|
|
|
•
|
Repurchases of convertible debt of approximately
$900 thousand
.
|
|
|
•
|
Common and preferred dividends paid of
$26.3 million
and
$3.1 million
, respectively.
|
|
|
•
|
$44.0 million
drawn on the Regions revolver for use in connection with the Pinedale refinancing.
|
|
|
•
|
Principal payments of
$53.0 million
in connection with the Pinedale facility.
|
|
|
•
|
Principal payments on the term note of
$4.8 million
.
|
Significant factors impacting the
$222.2 million
of cash provided by financing activities during
the nine months ended September 30, 2015,
included the following:
|
|
•
|
The January 2015 preferred stock offering generated approximately $54.2 million, of which, $32.0 million was subsequently used to pay down the Regions Revolver.
|
|
|
•
|
In connection with the acquisition of the GIGS assets, the Company raised a total of $226.7 million as follows:
|
|
|
◦
|
$73.2 million in net proceeds raised in a follow-on common stock offering;
|
|
|
◦
|
$111.3 million in net proceeds from the 7.00% Convertible Note offering; and
|
|
|
◦
|
$42.0 million drawn on the Regions Revolver.
|
|
|
•
|
On July 8, 2015 the company drew $45 million on a term note, the proceeds of which were used to pay off the Regions Revolver. The company also made its first principal payment of $900 thousand on the term note.
|
|
|
•
|
Common and preferred dividends paid of approximately $19.9 million and $2.5 million, respectively.
|
|
|
•
|
Distributions to non-controlling interests of $2.0 million
|
|
|
•
|
Principal payments on the $70 million term loan totaling $2.6 million.
|
Revolving and Term Credit Facilities
Credit Facilities of the REIT
Effective as of March 4, 2016, the Company and the required lenders under the Regions Revolver executed a Limited Consent and Amendment (the “Consent”). Pursuant to such Consent, among other things, the lenders consented to the Company’s use of up to $49.0 million, up to $44.0 million of which could come from the proceeds of draws under the Regions Revolver, in connection with the refinancing of Pinedale LP’s outstanding indebtedness due under the
$70 million
secured term credit facility on March 30, 2016, as discussed below. The Company paid fees to the lenders in connection with the Consent in an aggregate amount of $193 thousand. The Company subsequently drew $44 million on the Regions Revolver in conjunction with the refinancing of the Pinedale Facility and as of
September 30, 2016
, has approximately
$53.3 million
of available borrowing capacity on the Regions Revolver.
For a summary of the additional material terms of the Regions Credit Facility and the refinancing of the Pinedale LP facility (as discussed below), please see Note 14 in the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2015
, and
Note 10
in the Notes to the Consolidated Financial Statements included in this report.
Pinedale Facility
Pinedale LP's $70.0 million secured term credit facility was set to expire at the end of December 2015; however, the Company extended the facility through March 30, 2016. Under the December 31, 2015, extension amendment, outstanding balances accrued interest at a variable annual rate equal to LIBOR plus 4.25 percent. Pinedale LP made principal payments totaling approximately $3.2 million during the extension period through March 30, 2016. On March 30, 2016, the Company and Prudential, as the Refinancing Lenders and in proportion to their pro rata equity interests in Pinedale LP, together paid the remaining $58.5 million principal balance of the $70.0 million secured term credit facility and executed a series of agreements assigning the credit facility to CorEnergy Infrastructure Trust, Inc. as Agent for the Refinancing Lenders. Through March 30, 2016, the interest rate swap derivatives remained in place on $52.5 million of the secured term credit facility at a fixed rate of 0.865 percent less a floating, 1-month LIBOR rate. As part of the March 30, 2016, refinancing, the Company terminated one of the derivative contracts, representing half of the amount hedged. The remaining derivative with a notional amount of $26.3 million was de-designated from hedge accounting.
Refer to
Note 10
in the Notes to the Consolidated Financial Statements included in this report for additional information.
Convertible Notes
As authorized by the board of directors, during May 2016, the Company repurchased
$1.0 million
of face value of the Convertible Notes. Refer to Note 15 in the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2015
and
Note 11
in the Notes to the Consolidated Financial Statements included in this report for additional information concerning the Convertible Notes.
MoGas Credit Facility
As of
September 30, 2016
, the co-borrowers are in compliance with all covenants and there had been no borrowings against the MoGas Revolver.
Mowood/Omega Revolver
The Mowood/Omega Revolver is used by Omega for working capital and general business purposes, is guaranteed and secured by the assets of Omega. On July 28, 2016 the previous maturity date of July 31, 2016 was amended and extended to July 31, 2017. Interest accrues at LIBOR plus 4 percent and is payable monthly in arrears with no unused fee. There was no outstanding balance at
September 30, 2016
.
Debt Covenants
Under the terms of the amended and restated Regions Revolver and term loan agreement, as of June 30, 2015, the Company is subject to certain financial covenants as follows: (i) a minimum debt service coverage ratio of 2.0 to 1.0; (ii) a maximum total leverage ratio of 5.0 to 1.0; (iii) a maximum senior secured recourse leverage ratio (which generally excludes debt from Unrestricted Subs) of 3.0 to 1.0.; and (iv) a maximum total funded debt to capitalization ratio of 50 percent. Effective September 30, 2015, the Regions Revolver was amended to clarify that the covenant related to the Company's ability to make distributions is tied to AFFO and applicable REIT distribution requirements, and provides that, in the absence of any acceleration of maturity following an Event of Default, the Company may make distributions equal to the greater of the amount required to maintain the Company's REIT status and 100 percent of AFFO for the trailing 12-month period.
The
$70 million
secured term credit facility is subject to (i) a minimum interest rate coverage ratio of 5.5 to 1.0; (ii) a maximum leverage ratio of 3.25 to 1.0; and (iii) a minimum net worth of $115.0 million, each measured at the Pinedale LP level and not at the Company level. As a result of the March 30, 2016 refinancing the minimum interest coverage ratio was amended to a ratio of 3.0 to 1.0. We were in compliance with all covenants at
September 30, 2016
.
Equity Offerings
On February 18, 2016, we had a new shelf registration statement declared effective by the SEC, pursuant to which we may publicly offer additional debt or equity securities with an aggregate offering price of up to $600.0 million.
As of
September 30, 2016
, we have issued
24,754
shares of common stock under the Company's dividend reinvestment plan, reducing availability by approximately
$494 thousand
to approximately
$599.5 million
.
Liquidity and Capitalization
Our principal investing activities are acquiring and financing midstream and downstream real estate assets within the U.S. energy infrastructure sector and concurrently entering into long-term triple-net participating leases with energy companies. These investing activities have generally been financed from the proceeds of our public equity and debt offerings as well as the term and credit facilities mentioned above. Continued growth of our asset portfolio will depend in part on our continued ability to access funds through additional borrowings and securities offerings. The following is our liquidity and capitalization on the below-noted dates:
|
|
|
|
|
|
|
|
|
Liquidity and Capitalization
|
|
September 30, 2016
|
|
December 31, 2015
|
Cash and cash equivalents
|
$
|
10,107,754
|
|
|
$
|
14,618,740
|
|
|
|
|
|
Revolving credit facility
|
44,000,000
|
|
|
—
|
|
Long-term debt (including current maturities)
|
149,172,020
|
|
|
216,864,752
|
|
Stockholders' equity:
|
|
|
|
Series A Cumulative Redeemable Preferred Stock 7.375%, $0.001 par value
|
56,250,000
|
|
|
56,250,000
|
|
Capital stock, non-convertible, $0.001 par value
|
11,876
|
|
|
11,940
|
|
Additional paid-in capital
|
351,754,151
|
|
|
361,581,507
|
|
Accumulated other comprehensive (loss) income
|
(14,235
|
)
|
|
190,797
|
|
CorEnergy equity
|
408,001,792
|
|
418,034,244
|
Total CorEnergy capitalization
|
$
|
601,173,812
|
|
|
$
|
634,898,996
|
|
We also have two lines of credit for working capital purposes for two of our subsidiaries with maximum availability of $3.0 million and $1.5 million.
Liquidity Analysis
In analyzing our liquidity, we generally expect that our cash provided by operating activities will fund our normal recurring operating expenses, recurring debt service requirements, and dividends to shareholders.
Our sources of liquidity as of
September 30, 2016
, to pay our remaining
2016
commitments include the amounts available under our revolving credit facilities of approximately
$54.8 million
and unrestricted cash on hand of approximately
$10.1 million
. As authorized by our Board of Directors, we may use our liquidity to purchase up to $10.0 million of our common stock and up to $15.0 million of face value of our convertible debt, subject to market conditions and compliance with all applicable regulatory requirements. As of
September 30, 2016
, the Company had repurchased approximately
$2.0 million
of common stock and
$1.0 million
of face value of the convertible debt. See Notes 11 and 12 in the Notes to the Consolidated Financial Statements in this report, for convertible debt repurchased and shares of common stock purchased, respectively.
We also believe that we will be able to repay, extend, refinance or otherwise settle our debt obligations for 2016 and thereafter as the debt comes due, and that we will be able to fund our remaining commitments as necessary. However, there can be no assurance that additional financing or capital will be available, or that terms will be acceptable or advantageous to us.
Private Securities Investments
As of
September 30, 2016
, our only remaining securities investment was Lightfoot. For additional information concerning Lightfoot and related developments during 2016, please refer to the discussion presented above in this Item 2 under the heading “Asset Portfolio and Related Developments.”
We do not plan to make additional investments in securities (other than short-term, highly liquid investments to be held pending acquisition of real property assets and, to the extent compatible with our status as a REIT, equity enhancements to certain of our real property investments), and we intend to liquidate our remaining private securities investments in an orderly manner.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual payment obligations as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Notional Value
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5 years
|
Pinedale LP Debt
(2)
|
$
|
9,574,465
|
|
|
$
|
668,556
|
|
|
$
|
1,337,112
|
|
|
$
|
7,568,797
|
|
|
$
|
—
|
|
Interest payments on Pinedale LP Debt
(2)
|
|
|
751,537
|
|
|
1,342,124
|
|
|
892,729
|
|
|
—
|
|
Convertible Debt
|
$
|
114,000,000
|
|
|
—
|
|
|
—
|
|
|
114,000,000
|
|
|
—
|
|
Interest payments on Convertible Debt
|
|
|
7,980,000
|
|
|
15,960,000
|
|
|
7,980,000
|
|
|
—
|
|
Regions Term Note
(1)
|
$
|
38,355,000
|
|
|
6,460,000
|
|
|
12,920,000
|
|
|
18,975,000
|
|
|
—
|
|
Interest payment on Regions Term Note
|
|
|
1,387,203
|
|
|
2,031,667
|
|
|
183,850
|
|
|
—
|
|
Regions Revolver
|
$
|
44,000,000
|
|
|
—
|
|
|
—
|
|
|
44,000,000
|
|
|
—
|
|
Interest payment on Regions Revolver
|
|
|
1,695,222
|
|
|
3,390,444
|
|
|
352,978
|
|
|
—
|
|
Totals
|
|
|
$
|
18,942,518
|
|
|
$
|
36,981,347
|
|
|
$
|
193,953,354
|
|
|
$
|
—
|
|
(1)
The amount shown as the Notional Value for the Regions Term Note represents the outstanding principal balance at September 30, 2016.
|
(2)
The amounts for Pinedale LP debt above represent Prudential's share of the principal and interest payments which is 18.95 percent of the total. The Company's share of the principal and interest are eliminated in consolidation as these became intercompany on March 30, 2016, due to CorEnergy taking over with Prudential as Refinancing Lenders on the Pinedale LP note. See Footnote 10, Credit Facilities, for further information.
|
Fees paid to Corridor under the Management Agreement and the Administrative Agreement are not included because they vary as a function of the value of our total asset base. For additional information see
Note 8
in the Notes to the Consolidated Financial Statements in this report.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have, and are not expected to have, any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
MAJOR TENANTS
As of
September 30, 2016
, the Company had three significant leases. For additional information concerning each of these leases, see
Note 3
in the Notes to the Consolidated Financial Statements included in this report.
DIVIDENDS
Our portfolio of real property assets, promissory notes, and investment securities generates cash flow to us from which we pay distributions to stockholders. For the period ended
September 30, 2016
, the sources of our stockholder distributions include lease revenue, transportation and distribution revenue from our real property assets, and distributions from our investment securities. Distributions to common stockholders are recorded on the ex-dividend date and distributions to preferred stockholders are recorded when declared by the Board of Directors. The characterization of any distribution for federal income tax purposes will not be determined until after the end of the taxable year.
On February 29, 2016, the Company paid fourth quarter dividends of $0.75 per share of common stock and $0.4609375 per depositary share for the Company’s 7.375% Series A Cumulative Redeemable Preferred Stock.
On May 31, 2016, the Company paid first quarter dividends of $.075 per share of common stock and $0.4609375 per depositary share for the Company's 7.375% Series A Cumulative Redeemable Preferred Stock.
On August 31, 2016, the Company paid second quarter dividends of $.075 per share of common stock and $0.4609375 per depositary share for the Company's 7.375% Series A Cumulative Redeemable Preferred Stock.
On October 26, 2016, the Company's Board of Directors declared third quarter dividends of $0.75 per share of common stock and $0.4609375 per depositary share for the Company's 7.375% Series A Cumulative Redeemable Preferred Stock payable on November 30, 2016.
A REIT is generally required to distribute during the taxable year an amount equal to at least 90 percent of the REIT taxable income (determined under Internal Revenue Code section 857(b)(2), without regard to the deduction for dividends paid). We intend to
adhere to this requirement in order to maintain our REIT status. The Board of Directors will continue to determine the amount of any distribution that we expect to pay our stockholders.
IMPACT OF INFLATION AND DEFLATION
Deflation can result in a decline in general price levels, often caused by a decrease in the supply of money or credit. The predominant effects of deflation are high unemployment, credit contraction, and weakened consumer demand. Restricted lending practices could impact our ability to obtain financings or to refinance our properties and our tenants' ability to obtain credit. During inflationary periods, we intend for substantially all of our tenant leases to be designed to mitigate the impact of inflation. Generally, our leases include rent escalators that are based on the CPI, or other agreed upon metrics that increase with inflation.
CRITICAL ACCOUNTING ESTIMATES
The financial statements included in this report are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex, or subjective judgments. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, recognition of distribution income, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
A more complete discussion of our critical accounting estimates is presented under the heading “Critical Accounting Estimates” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended
December 31, 2015
, as previously filed with the SEC. The following information updates our discussion of Critical Accounting Estimates related to Long-Lived Assets and Goodwill in our annual report.
Goodwill Impairment
Our goodwill represents the excess of the amount we paid for MoGas over the fair value of the net identifiable assets acquired. We periodically evaluate our goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This evaluation requires us to compare the fair value of the assets to the current and future operating performance of the assets, the most important of which is discounted operating cash flows. If the fair value exceeds the carrying amount, goodwill is not considered impaired.
We estimate the fair value of MoGas based on a number of factors, including discount rates, projected cash flows, and the potential value we would receive if we sold the business. We also compare the total fair value to our overall enterprise value, which considers the market value for our common and preferred units. Estimating projected cash flows requires us to make certain assumptions as it relates to the future operating performance of MoGas and assumptions related to their customers, such as their future capital and operating plans and their financial condition. When considering operating performance, various factors are considered such as current and changing economic conditions and the commodity price environment, among others. Due to the imprecise nature of these projections and assumptions, actual results can differ from our estimates. If the assumptions embodied in the projections prove inaccurate, we could incur a future impairment charge.
We acquired MoGas on November 24, 2014, and recorded the assets, liabilities and goodwill at fair value on the date they were acquired. As a result, any level of decrease in the forecasted cash flows of these assets or increases in the discount rates utilized to value the assets from their respective acquisition dates would likely result in the fair value of the assets falling below the carrying value, and could result in an assessment of whether the related goodwill is impaired.
Commodity prices have continued to decline since late 2014, and that decline has adversely impacted forecasted cash flows, discount rates, and stock/unit prices for most companies in the energy industry.
We continue to monitor goodwill and we could experience impairments of goodwill in the future if we experience material customer defaults. As of
September 30, 2016
, we have not recorded any impairments of goodwill.
Long-Lived Assets
Our long-lived assets consist primarily of a subsea midstream pipeline system, liquids gathering system, petroleum products terminal, and natural gas pipelines that have been obtained through a business combination and asset acquisitions. The initial recording of these long-lived assets was at fair value, which is estimated by management primarily utilizing market-related information and other projections on the performance of the assets acquired. Management reviews this information to determine its reasonableness in comparison to the assumptions utilized in determining the purchase price of the assets in addition to other
market-based information that was received through the purchase process and other sources. These projections also include projections on potential obligations assumed in these acquisitions. Due to the imprecise nature of the projections and assumptions utilized in determining fair value, actual results can, and often do, differ from our estimates.
We utilize assumptions related to the useful lives and related terminal value of our long-lived assets in order to determine depreciation and amortization expense each period. Due to the imprecise nature of the projections and assumptions utilized in determining useful lives, actual results can differ from our estimates.
We continually monitor our business, the business environment, and the performance of our operations to determine if an event has occurred that indicates that a long-lived asset may be impaired. If an event occurs, which is a determination that involves judgment, we may be required to utilize cash flow projections to assess our ability to recover the carrying value of our assets based on our long-lived assets' ability to generate future cash flows on an undiscounted basis. This differs from our evaluation of goodwill, for which we perform an assessment of the recoverability of goodwill utilizing fair value estimates that primarily utilize discounted cash flows in the estimation process (as described above), and accordingly any goodwill impairment recognized may not be indicative of a similar impairment of the related underlying long-lived assets.
Projected cash flows of our long-lived assets are generally based on contractual cash flows relating to existing leases that extend many years into the future. If those cash flow projections indicate that the long-lived asset's carrying value is not recoverable, we record 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 we would receive if we sold the asset, discount rates, and projected cash flows. Due to the imprecise nature of these projections and assumptions, actual results can differ from our estimates.
We continue to monitor our long-lived assets, and we could experience additional impairments of the remaining carrying value of these long-lived assets in the future if we receive additional negative information about market conditions or our tenants which could negatively impact the forecasted cash flows or discount rates utilized to determine the fair value of those investments. As of
September 30, 2016
, we have not recorded an impairment of long-lived assets.