CAPITAL PROPERTIES, INC. AND SUSIDIARY
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Capital Properties, Inc.
Providence, Rhode Island
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Capital Properties, Inc. (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income and retained earnings, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Refer to Note 2 to the Consolidated Financial Statements
Critical Audit Matter Description
The Company derives revenue from long-term leases with original terms ranging from 39 years to 149 years. Effective January 1, 2019 the Company adopted ASC 842, Leases, and elected the “package of practical expedients” which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification, and initial indirect costs and determined that all pre-existing leases were properly accounted for as operating. The long-term leases contain periodic rent increases based on either a specific percentage, market appraisals, changes in the consumer price index or combination thereof. In accordance with generally accepted accounting principles, lease income should be recognized on a straight-line basis. Where straight-line income exceeds the actual contractual payments (the “Excess”), the Excess should only be recognized to the extent it is collectible. In accordance with ASC 842, if collectability of the lease payments is not probable, lease income shall be limited to
11
the lesser of the income that would be recognized in accordance with ASC 842 (straight-line basis) or the actual lease payment, including variable payments that have been collected from the lessee. The Company evaluates the entire stream of remaining lease payments on a lease-by-lease basis. Analysis of collectability from the lessee (tenant) is subjective and complex and is dependent on many factors including historical experience and the creditworthiness of the tenant. The creditworthiness of the tenant can, and often is, significantly influenced by major factors including the creditworthiness of multiple sub-tenants. The inability to access reliable credit information on all parties impacting the probability of collection creates a collectability constraint. Management updates its collectability analysis of long-term leases annually and has determined that collection of the entire remaining stream of remaining lease payments is not probable. Accordingly lease revenue, including variable payments, is recorded when received from the lessee.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the recognition of long-term lease revenue on a straight-line basis included the following, among others:
|
• |
We tested the effectiveness of controls over lease revenue recognition, including managements analysis of and conclusions regarding collection probability. |
|
• |
We evaluated the application of the Company’s accounting policies in the context of the applicable accounting standards (ASC842) as adopted on January 1, 2019. |
|
• |
We evaluated the appropriateness and consistency of methods and assumptions used by management to determine and support its collection probability conclusion. |
|
• |
We considered changes in the lease terms, including tenant payment patterns or other information, and determined such information was properly considered by management in its analysis. |
/s/ Stowe & Degon, LLC
We have served as the Company’s auditor since 2016.
Westborough, Massachusetts
February 23, 2022
12
See accompanying notes to Consolidated Financial Statements.
See accompanying notes to Consolidated Financial Statements.
See accompanying notes to Consolidated Financial Statements.
CAPITAL PROPERTIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
1. |
Description of business: |
The operations of Capital Properties, Inc. and its wholly-owned subsidiary, Tri-State Displays, Inc. (collectively “the Company”) consist of the long-term leasing of certain of its real estate interests in the Capital Center area in downtown Providence, Rhode Island (upon the commencement of which the tenants have been required to construct buildings thereon, with the exception of the parking garage and Parcel 20) and the leasing of locations along interstate and primary highways in Rhode Island and Massachusetts to Lamar Outdoor Advertising, LLC (“Lamar”) which has constructed outdoor advertising boards thereon. The Company anticipates that the future development of its remaining properties in the Capital Center area will consist primarily of long-term ground leases. Pending this development, the Company leases these undeveloped parcels (other than Parcel 6C) for public parking to Metropark, Ltd.
2. |
Summary of significant accounting policies: |
Principles of consolidation:
The accompanying consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments:
The Company believes that the fair values of its financial instruments, including cash and cash equivalents and payables, approximate their respective book values because of their short-term nature. The fair values described herein were determined using significant other observable inputs (Level 2) as defined by GAAP.
Properties and equipment:
Properties and equipment are stated at cost. Acquisitions and additions are capitalized while routine maintenance and repairs, which do not improve the asset or extend its life, are charged to expense when incurred. Depreciation is being provided by the straight-line method over the estimated useful lives of the respective assets.
The Company reviews properties and equipment for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss will be recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. Generally, the amount of the impairment loss is measured as the difference between the net book value and the estimated fair value of the asset.
Cash and cash equivalents:
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents include money market accounts totaling $1,355,000 and $1,555,000, at December 31, 2021 and 2020, respectively. The Company and its subsidiary each maintain a checking account and one money market account in a bank, all of which are insured by the Federal Deposit Insurance Corporation to a maximum of $250,000. The Company has not experienced any losses in such accounts.
Environmental incidents:
The Company accrues a liability when an environmental incident has occurred and the costs are estimable. The Company does not record a receivable for recoveries from third parties for environmental matters until it has determined that the amount of the collection is reasonably assured. The accrued liability is relieved when the Company pays the liability or a third party assumes the liability. Upon determination that collection is reasonably assured or a third party assumes the liability, the Company records the amount as a reduction of expense.
16
Revenues:
The Company’s properties leased to others are under operating leases. The Company reports leasing revenue when earned under the operating method.
Certain of the Company’s long-term leases (land and billboard) provide for presently known scheduled rent increases over the remaining terms (28 to 132 years). The Company follows GAAP in accounting for leases whereby revenue is recognized on straight-line basis over the terms of the leases when management is able to conclude that all remaining lease payments are collectible. To date, management has recognized revenue on a contractual basis as it has been unable to conclude that the remaining lease payments are realizable (collectible) due to the magnitude of the remaining lease payments to be collected, the length of the lease terms and other related uncertainties.
The Company reports contingent revenue in the period in which the factors occur on which the contingent payments are predicated.
Income taxes:
The Company and its subsidiary file consolidated income tax returns.
The Company provides for income taxes based on income reported for financial reporting purposes.
Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements. The Company will report any tax-related interest and penalties related to uncertain tax positions as a component of income tax expense. The Company’s federal and state income tax returns are generally open for examination for the past three years.
Legal fees:
The Company recognizes legal fees as incurred.
Basic earnings per common share:
Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period.
Recently adopted accounting pronouncements:
In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance was effective for the Company in the first quarter of 2021 on a prospective basis, and early adoption is permitted. The adoption of this pronouncement did not have a material effect on our consolidated financial statements.
Recently issued accounting pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The Company will adopt the new standard effective January 1, 2023. The Company is currently evaluating the impact of the new guidance on our consolidated financial statements.
17
3. |
Properties and equipment: |
Properties and equipment consist of the following:
|
|
Estimated Useful |
|
|
December 31, |
|
|
|
Life in Years |
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and land improvements on lease or held for lease: |
|
|
|
|
|
$ |
4,439,000 |
|
|
$ |
4,439,000 |
|
Building and improvements, Steeple Street (Note 6) |
|
|
30 |
|
|
|
2,582,000 |
|
|
|
2,582,000 |
|
Office equipment |
|
5-10 |
|
|
|
67,000 |
|
|
|
67,000 |
|
|
|
|
|
|
|
|
7,088,000 |
|
|
|
7,088,000 |
|
Less accumulated depreciation: |
|
|
|
|
|
|
|
|
|
|
|
|
Land improvements on lease or held for lease |
|
|
|
|
|
|
93,000 |
|
|
|
93,000 |
|
Steeple Street property (Note 6) |
|
|
|
|
|
|
258,000 |
|
|
|
172,000 |
|
Office equipment |
|
|
|
|
|
|
67,000 |
|
|
|
67,000 |
|
|
|
|
|
|
|
|
418,000 |
|
|
|
332,000 |
|
|
|
|
|
|
|
$ |
6,670,000 |
|
|
$ |
6,756,000 |
|
Liabilities, other consist of the following:
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
Deferred revenue, Parcel 20 |
|
$ |
- |
|
|
$ |
199,000 |
|
Accrued professional fees |
|
|
152,000 |
|
|
|
152,000 |
|
Deposits and prepaid rent |
|
|
87,000 |
|
|
|
121,000 |
|
Accrued payroll and related costs |
|
|
75,000 |
|
|
|
75,000 |
|
Other |
|
|
36,000 |
|
|
|
16,000 |
|
|
|
$ |
350,000 |
|
|
$ |
563,000 |
|
5. |
Note Payable - Revolving Credit Line: |
|
In March 2021, the Company entered into a financing agreement (“Agreement”) with BankRI that provides for a revolving line-of-credit (“Line”) with a maximum borrowing capacity of $2,000,000 through March 2024. Amounts outstanding under the Agreement bear interest at the rate of the one-month LIBOR plus 200 basis points but not less than 3.25% or, at the option of the Company, the Wall Street Journal Prime Rate. Borrowings under the Line are secured by a First Mortgage on Parcel 5 in the Capital Center District in Providence, Rhode Island (the “Property”). The Line requires the maintenance of a debt service coverage ratio of not less than 1.25 to 1.0 on the Property and 1.20 to 1.0 for the Company. The Agreement contains other restrictive covenants, including, among others, a $250,000 limitation on the purchase of its outstanding capital stock in any twelve-month period. No advances have been made under the Line. |
6. |
Description of leasing arrangements: |
Long-term land leases:
Through December 31, 2021, excluding Parcel 6C and Parcel 20, the Company had entered into eight long-term land leases, all of which have completed construction of improvements thereon. The leases generally have a term of 99 years or more, are triple net, and provide for periodic adjustment in rent of various types depending on the particular lease, and otherwise contain terms and conditions normal for such instruments.
On July 30, 2020 the tenant of Parcel 6C exercised its right to terminate its lease effective August 29, 2020. In September 2021, the Company sent a Notice of Default (“Default Notice”) to the tenant of Parcel 20 for the nonpayment of September’s rent and the 2021 first quarter property taxes. Subsequently, the tenant cured the rent default. On October 6, 2021 the tenant was sent a Notice of Lease Termination (“Termination Notice”) informing the tenant that the lease would terminate on October 18, 2021 unless the failure to pay the first quarter real estate taxes along with any related penalties and interest was cured. Subsequently, it was agreed that, provided the first and second quarter real estate taxes and any related penalties and interest were paid in full by October 31, 2021, the lease would not be terminated. Since payment was not made, the lease was terminated effective October 31, 2021.
18
The Parcel 20 Steeple Street Building (“Building”) lease was originally accounted for as a sales-type lease due to the transfer of the Building to the tenant. The land directly under the Building was allocated in the determination of the value of the property transferred in accordance with ASC 360-20, Property, Plant and Equipment - Real Estate Sales. Since the initial investment by the tenant was insufficient to recognize the transaction as a sale, in accordance with ASC 360-20, the Company reported the acquisition period rent and an allocable portion of the ground rent collected as deferred revenue on its consolidated balance sheet. Upon termination of the lease, deferred revenue of $293,000 through October 31, 2021 was recognized as leasing revenue in the consolidated statements of income and retained earnings. With the termination of the Parcel 20 lease, the Company became obligated for the real property taxes which currently total $134,000 annually.
Under the eight land leases, the tenants may negotiate tax stabilization treaties or other arrangements, appeal any changes in real property assessments, and pay real property taxes assessed on land and improvements under these arrangements. Accordingly, real property taxes payable by the tenants are excluded from leasing revenues and leasing expenses on the accompanying consolidated statements of income and retained earnings. For the years ended December 31, 2021 and 2020, the real property taxes attributable to the Company’s land under leases were $1,168,000 and $1,261,000, respectively.
Under two of the long-term land leases, the Company receives contingent rentals (based on a fixed percentage of gross revenue received by the tenants) which totaled $88,000 and $99,000 for the years ended December 31, 2021 and 2020, respectively.
With respect to Parcel 6C lease, on the termination date the annual rent was $220,000 and annual real estate taxes paid by the tenant equaled $311,000. Upon termination, the real estate taxes became an obligation of the Company effective with the taxes assessed as on December 31, 2020. The Company believed that the assessed value of Parcel 6C as agreed to by the City of Providence (“City”) and the former tenant of Parcel 6C pursuant to a Tax Stabilization Agreement (“TSA”) was much greater than similar parcels in the Capital Center area. Negotiations with the City to reduce the assessment were initially unsuccessful. Accordingly, the Company filed a complaint against the Providence Tax Assessor in Rhode Island Superior Court asserting that the Company was not a party to the TSA and that the assessed value should be determined based on the value of other Parcels in the Capital Center Area. On December 20, 2021, the Company and the City entered into a consent judgment that dissolved the TSA upon the termination of the ground lease between the Company and the tenant and provided that the taxes assessed as on December 31, 2020 would be based on the assessed value as determined by the firm engaged by the City, Vision Government Solutions, Inc. The adjusted assessed value results in an annual real estate tax expense of $160,000. For the years ended December 31, 2021 and 2020, operating expenses includes $160,000 and $53,000 for real property taxes attributable to Parcel 6C, respectively on the accompanying consolidated statements of income and retained earnings.
Lamar lease:
Tri-State Display’s, Inc., leases 23 outdoor advertising locations containing 44 billboard faces along interstate and primary highways in Rhode Island and Massachusetts to Lamar under a lease which expires in 2049. The Lamar lease provides, among other things, for the following: (1) the base rent will increase annually at the rate of 2.75% for each leased billboard location on June 1 of each year, and (2) in addition to base rent, for each 12-month period commencing each June 1, Lamar must pay to the Company within thirty days after the close of the lease year 30% of the gross revenues from each standard billboard and 20% of the gross revenues from each electronic billboard for such 12-month period, reduced by the sum of (a) commissions paid to third parties and (b) base monthly rent for each leased billboard display for each 12-month period. For the lease years ended May 31, 2021 and 2020, the percentage rent totaled $136,000 and $139,000, respectively, which amounts are included in operating revenues on the accompanying consolidated statements of income and retained earnings for the years ended December 31, 2021 and 2020.
Parking lease:
The Company leases the undeveloped parcels of land in or adjacent to the Capital Center area (other than Parcel 6C) for public parking purposes to Metropark under a ten-year lease. The lease is cancellable as to all or any portion of the leased premises at any time on thirty day’s written notice in order for the Company or any new tenant of the Company to develop all or any portion of the leased premises. The parking lease provides for contingent rent based on a fixed percentage of gross revenue in excess of the base rent as defined in the agreement. For the year ended December 31, 2020, revenue includes a $34,000 reduction due to the revision of the estimate of 2019’s contingent rent.
19
The COVID-19 pandemic continues to have a significant adverse impact on Metropark’s parking operations. On July 31, 2020, Metropark and the Company entered into an agreement for revenue sharing at various percentages until parking revenues received by Metropark equal or exceed $70,000 per month whereupon Metropark would be obligated to resume regularly scheduled rental payments under its lease. Upon resumption of regularly scheduled rent payments, Metropark and the Company will share fifty (50) percent of the revenue in excess of $70,000 until the arrearage has been paid in full. If prior to payment in full of the arrearage one or more of the lots is removed from the Metropark lease for development, the amount of the then unpaid arrearage in the ratio of the number of parking spaces on the removed lot to the total parking spaces on all lots prior to such lot’s removal shall be deemed paid in full.
At December 31, 2021 and 2020, the receivable from Metropark equaled $766,000 and $340,000, respectively, and was fully reserved in both years. The Company will continue to recognize Metropark’s rent on a cash basis.
Minimum future contractual rental payments, inclusive of presently known scheduled rent increases to be received from non-cancellable long-term leases as of December 31, 2021 are:
Year ending December 31, |
|
|
|
|
2022 |
|
$ |
4,119,000 |
|
2023 |
|
|
4,147,000 |
|
2024 |
|
|
4,248,000 |
|
2025 |
|
|
4,435,000 |
|
2026 |
|
|
4,480,000 |
|
2027 - 2153 |
|
|
796,075,000 |
|
|
|
$ |
817,504,000 |
|
Historically, the Company has made financial statement footnote disclosure of the excess of straight-line rentals over contractual payments and its determination of collectability of such excess. Included in the amount of the excess were payments which under ASC 842 are deemed variable payments. As part of its ongoing review of the requirements of ASC 842, the Company has concluded that under ASC 842 variable rental payments should not be included in the straight-line rental amount. To the extent the Company determines that the excess of straight-line rentals over contractual payments is not collectible, such excess is not recognized as revenue. Consistent with prior conclusions, the Company has determined that, at this time, the excess of straight-line rentals over contractual payments is not probable of collection. Accordingly, the Company has not included any part of that amount in revenue. As a matter of information only, as of December 31, 2021 the excess of straight-line rentals (calculated by excluding variable payments) over contractual payments was $86,076,000.
In the event of tenant default, the Company has the right to reclaim its leased land together with any improvements thereon, subject to the right of any leasehold mortgagee to enter into a new lease with the Company with the same terms and conditions as the lease in default.
The following table sets forth those major tenants whose revenues exceed 10 percent of the Company’s revenues for the years ended December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Lamar Outdoor Advertising, LLC |
|
$ |
1,129,000 |
|
|
$ |
1,105,000 |
|
HGIT Center Place |
|
|
618,000 |
|
|
|
620,000 |
|
1701 R.C. Sarasota Invest, LLC |
|
|
618,000 |
|
|
|
618,000 |
|
Waterplace Condominiums |
|
|
503,000 |
|
|
|
503,000 |
|
|
|
$ |
2,868,000 |
|
|
$ |
2,846,000 |
|
20
7. |
Income taxes, continuing operations: |
For the years ended December 31, 2021 and 2020, income tax expense (benefit) from continuing operations is comprised of the following components:
|
|
2021 |
|
|
2020 |
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
489,000 |
|
|
$ |
598,000 |
|
State |
|
|
188,000 |
|
|
|
212,000 |
|
|
|
|
677,000 |
|
|
|
810,000 |
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
20,000 |
|
|
|
(57,000 |
) |
State |
|
|
8,000 |
|
|
|
(19,000 |
) |
|
|
|
28,000 |
|
|
|
(76,000 |
) |
|
|
$ |
705,000 |
|
|
$ |
734,000 |
|
For the years ended December 31, 2021 and 2020, a reconciliation of the income tax provision from continuing operations as computed by applying the United States income tax rate of 21% to income before income taxes is as follows:
|
|
2021 |
|
|
2020 |
|
Computed "expected" tax |
|
$ |
534,000 |
|
|
$ |
570,000 |
|
Increase in "expected" tax resulting from state income tax,
net of federal income tax benefit |
|
|
158,000 |
|
|
|
141,000 |
|
Nondeductible expenses and other |
|
|
13,000 |
|
|
|
23,000 |
|
|
|
$ |
705,000 |
|
|
$ |
734,000 |
|
Deferred income taxes are recorded based upon differences between financial statement and tax basis amounts of assets and liabilities. The tax effects of temporary differences from continuing operations which give rise to deferred tax assets and liabilities were as follows:
|
|
2021 |
|
|
2020 |
|
Gross deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property having a financial statement basis in excess of
tax basis |
|
$ |
361,000 |
|
|
$ |
361,000 |
|
Accounts receivable |
|
|
213,000 |
|
|
|
98,000 |
|
Deferred income - Conversion to cash basis of
accounting for tax purposes |
|
|
38,000 |
|
|
|
56,000 |
|
Insurance premiums and accrued leasing revenues |
|
|
23,000 |
|
|
|
19,000 |
|
|
|
|
635,000 |
|
|
|
534,000 |
|
Gross deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
(206,000 |
) |
|
|
(91,000 |
) |
Prepaid rent |
|
|
(23,000 |
) |
|
|
(24,000 |
) |
Accounts payable and accrued expenses |
|
|
(69,000 |
) |
|
|
(75,000 |
) |
Accrued property taxes |
|
|
(75,000 |
) |
|
|
(56,000 |
) |
Deferred income, Parcel 20 |
|
|
- |
|
|
|
(54,000 |
) |
|
|
|
(373,000 |
) |
|
|
(300,000 |
) |
|
|
$ |
262,000 |
|
|
$ |
234,000 |
|
8. |
Discontinued operations and environmental incident: |
Prior to February 2017, the Company operated a petroleum storage facility (“Terminal”) through two of its wholly owned subsidiaries. On February 10, 2017, the Terminal was sold to Sprague Operating Resources, LLC (“Sprague”). In accordance with ASC 205-20, Presentation of Financial Statements – Discontinued Operations, the sale of the Terminal is accounted for as a discontinued operation.
As part of the Terminal Sale Agreement, the Company agreed to retain and pay for the environmental remediation costs associated with a 1994 storage tank fuel oil leak which allowed the escape of a small amount of fuel oil. The Company continues the remediation activities set forth in the Remediation Action Work Plan (“RAWP”) filed with the Rhode Island Department of Environmental Management (“RIDEM”). In 2021 and 2020, the Company incurred costs of $132,000 and $553,000, respectively, which reduced the remediation liability to $358,000 and $490,000 at December 31, 2021 and 2020.
21
Any subsequent increases or decreases to the expected cost of remediation will be recorded in the Company’s consolidated income statement as income or expense from discontinued operations.
The Terminal Sale Agreement also contained a cost sharing provision for the breasting dolphin whereby any cost incurred in connection with the construction of the breasting dolphin in excess of the initial estimate of $1,040,000 will be borne equally by Sprague and the Company subject to certain limitations, including, in the Company’s opinion, a 20% cap on the increase from the initial estimate, subject to a sharing arrangement. In November 2019, the Company received a demand letter from Sprague asserting that it was owed $427,000, which amount represents 50% of the actual costs incurred ($1,894,008) in excess of $1,040,000. The Company asserts that its obligation cannot exceed $104,000. The mediation efforts that occurred in June 2021 were unsuccessful and on July 15, 2021, Sprague commenced an action against the Company in the Rhode Island Superior Court seeking monetary damages of $427,000, interest and attorney’s fees. The Company intends to vigorously defend against the claims being asserted by Sprague.
At its January 26, 2022 regularly scheduled quarterly Board meeting, the Board of Directors voted to declare a quarterly dividend of $.07 per share for shareholders of record on February 11, 2022, payable February 28, 2022.
22