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 ("Report") of CorEnergy Infrastructure, Inc. ("the Company," "CorEnergy," "we" or "us"). The forward-looking statements included in this discussion and elsewhere in this Report involve risks and uncertainties, including anticipated financial performance, business prospects, industry trends, stockholder returns, performance by our customers and 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 Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 4, 2021, and in Part II, Item 1A, "Risk Factors", in this Report.
RECENT DEVELOPMENTS
The COVID-19 pandemic-related reduction in energy demand and the uncertainty of production from OPEC members, US producers and other international suppliers caused significant disruptions and volatility in the global oil marketplace since March 2020, which have adversely affected our customers and tenants. In response to COVID-19, governments around the world have implemented stringent measures to help reduce the spread of the virus, including stay-at-home and shelter-in-place orders, travel restrictions and other measures. These measures have adversely affected the economies and financial markets of the U.S. and many other countries, resulting in an economic downturn that has negatively impacted global demand and prices for the products handled by our pipelines and other facilities. As various vaccines are administered across the globe, there continues to be significant uncertainty regarding how long these conditions will persist and the impact of the virus on the energy industry and potential impacts to our business.
OVERVIEW
We are a publicly traded real estate investment trust ("REIT") focused on energy infrastructure. Our business strategy is to own and operate or lease critical energy midstream infrastructure connecting the upstream and downstream sectors within the industry. We currently generate revenue from the transportation, via pipeline, of crude oil and natural gas for our customers.
Our pipelines are located in areas where it would be difficult to replicate rights of way or transport crude oil or natural gas via non-pipeline alternatives, resulting in our assets providing utility-like criticality in the midstream supply chain for our customers. As primarily regulated assets, the near to medium term value of our regulated pipelines is supported by revenue derived from cost-of-service methodology. The cost-of-service methodology is used to establish appropriate transportation rates based on several factors including expected volumes, expenses, debt and return on equity. The regulated nature of the majority of our assets provides a degree of support for our profitability over the long-term, where the majority of our customers own the products shipped on, or stored in, our facilities. We believe these characteristics provide CorEnergy with the attractive attributes of other globally listed infrastructure companies, including high barriers to entry and predictable revenue streams, while mitigating risks and volatility experienced by other companies engaged in the midstream energy sector.
For a description of our assets, see Part I, Item 2 of our 2020 Form 10-K Annual Report.
Current Year 2021 Developments:
•Effective February 1, 2021, we acquired a 49.50 percent interest in Crimson, with the right to acquire the remaining 50.50 percent interest, in exchange for a combination of cash on hand of $74.6 million (after giving effect to initial working capital adjustments), commitments to issue new common and preferred equity with a fair value of $115.3 million (also after giving effect to the initial working capital adjustments), contribution of the GIGS to the sellers with a fair value of $48.9 million and $105.0 million in new term loan and revolver borrowings (the "Crimson Credit Facility"), all as detailed further below (the "Crimson Transaction"). The preliminary fair value of the aggregate consideration is $343.8 million, subject to certain post-closing purchase price adjustments, including a non-controlling interest of $115.3 million.
•Effective February 1, 2021, in order to transfer GIGS to the sellers of Crimson, we terminated the lease of GIGS, and agreed to forgo collection efforts on past rents and to dismiss other claims against the tenant of GIGS.
•On May 28, 2021, Crimson's subsidiary San Pablo Bay Pipeline Company, LLC applied for authority to increase rates by 10% for its crude oil pipeline services with the CPUC. The rate increase became effective July 1, 2021 after completing a 30-day review period.
•On June 29, 2021, the Board of the Company authorized management to enter into an agreement to convert the right that the holders of Crimson Class A-1 Units would have had to exchange such units for shares of the Company’s 9.0% Series C Preferred Stock, into a right to exchange Class A-1 Units (following CPUC approval) for depositary shares representing the Company's 7.375% Series A Cumulative Redeemable Preferred Stock. As of June 30, 2021, the Class A-1 Units receive distributions based on dividends declared by the Company's Board of Directors on the Series A Preferred Stock.
•On June 30, 2021, Crimson California Pipeline L.P., which manages both Crimson's Southern California and KLM pipelines, applied for authority to increase rates by 10% for its crude oil pipeline services with the CPUC. The rate increase became effective August 1, 2021 after completing a 30-day review period.
•In June 2021, the final working capital adjustment was made for the Crimson Transaction which resulted in an increase in the assets acquired of $1,790,455. This resulted in 37,043 Class A-1 Units being issued to Grier Members for their 50.50 percent ownership interest and $907,728 of cash paid for the 49.50 percent ownership interest CorEnergy purchased. The newly issued units resulted in an increase in non-controlling interest of $882,726. After the working capital adjustment and paid-in-kind dividends, the Grier Members equity ownership interest is 50.62 percent as of September 30, 2021.
•On July 6, 2021, following receipt of stockholder approval at the 2021 Annual Meeting, the Company completed the Internalization transaction whereby it acquired its manager Corridor InfraTrust Management, LLC. Pursuant to a Contribution Agreement, the Company issued to the Contributors, based on each Contributor's percentage ownership in Corridor, an aggregate of: (i) 1,153,846 shares of Common Stock, (ii) 683,761 shares of the newly created Class B Common Stock, and (iii) 170,213 depositary shares of the Company’s 7.375% Series A Cumulative Redeemable Preferred Stock.
•Effective July 7, 2021, following stockholder approval at the 2021 Annual Meeting and in accordance with the terms of the Company's Series B Preferred Stock, the Company converted the right that the holders of Crimson Class A-2 Units would have had to exchange such units for shares of Series B Preferred Stock, into a right to exchange Class A-2 Units (following CPUC approval) for shares of the Company's Class B Common Stock.
HOW WE GENERATE REVENUE
We earn revenue from transporting or storing crude oil and natural gas for our customers. Our revenue is generated based on a:
•Fixed-fee per unit of commodity transported during the period or
•Fixed fee for reserved capacity.
Crimson Pipeline
Crimson Pipeline is an approximately 2,000-mile crude oil transportation pipeline system, which includes nearly 1,300 active miles, with associated storage facilities located in southern California and the San Joaquin Valley. The pipeline network provides a critical link between California crude oil production and California refineries. Revenue is primarily generated based on a fixed-fee tariff paid on each barrel of crude oil transported on our pipeline system. Our tariffs are regulated by the CPUC under a cost-of-service methodology. While the majority of our Crimson pipeline volumes are not contractually obligated to be transported on our pipelines, our pipelines have provided transportation services to the same refineries for decades. Our pipeline system provides a safe, reliable, environmentally sustainable and economical method of transporting crude oil from the California crude oil producers to the California refineries. Furthermore, we are generally the only pipeline providing a connection between the producers and our customers, which are the refineries we serve.
MoGas and Omega Pipelines
MoGas pipeline ("MoGas") is a 263-mile interstate natural gas pipeline regulated by the Federal Energy Regulatory Commission ("FERC"). Omega pipeline ("Omega") is a 75-mile natural gas distribution system providing unregulated service primarily to the U.S. Army’s Fort Leonard Wood military post. MoGas and Omega are part of a system that provides the critical link between natural gas producing regions and local customers in Missouri. MoGas sources natural gas from three major interstate pipelines, Panhandle Eastern pipeline ("EPL"), Rockies Express pipeline ("REX") and Mississippi River Transmission pipeline ("MRT"). MoGas connects to these three pipelines around the St. Louis area and transports the natural gas to south-central Missouri where it connects to the Omega pipeline. MoGas supplies several local natural gas distribution networks along its path. The Omega pipeline system primarily serves as a local natural gas delivery system for Fort Leonard Wood.
MoGas generates approximately 94 percent of its revenue from take-or-pay transportation contracts with investment-grade customers. The majority of MoGas' revenue is under a long-term contract with a remaining term of approximately 9 years. Omega’s revenues are unregulated and are generated under a firm capacity contract for which lease treatment has been applied. The remaining life of the contract is approximately 4 years. Given the nature of the MoGas and Omega contracts, the revenue generated by these assets is marginally dependent on the actual volume transported.
HOW WE EVALUATE OUR OPERATIONS
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics, which are significant factors in assessing our operating results and profitability, include: (i) volumes; (ii) revenue (including pipeline loss allowance ("PLA")); (iii) total operating and maintenance expenses (including maintenance capital expenses); (iv) Adjusted Net Income; (v) Cash Available for Distribution ("CAD"); and (vi) Adjusted EBITDA.
Volumes and Revenue
Our revenue is primarily generated by transporting either crude oil or natural gas from a supply source to an end customer. Our assets have provided this service for the same customers for many decades.
Crimson Pipeline
The amount of revenue Crimson pipeline generates depends on the volume of crude oil transported through our pipelines multiplied by the fixed-fee tariff applicable for the specific movement. These volumes are dependent on crude oil production in California since our assets are not directly connected to crude oil import facilities. Our volumes can also be impacted by individual refinery decisions around their specific crude oil sourcing. The fixed-fee tariff, or transportation rate, is the other major determinate of our revenue. The majority of our tariffs are regulated by the CPUC under a cost-of-service methodology which provides long term support for our revenue.
In addition to the fixed-fee tariff, we also earn PLA for the majority of the volume we transport. As is common in the pipeline transportation industry, as crude oil is transported, Crimson receives between 0.1% and 0.25% of the majority of crude oil volume transported as PLA to offset any measurement uncertainty or actual volumes lost in transit. We receive either payment in kind or cash, at market value for the crude oil, with the majority of the payments being in kind. For in-kind payments, we record the revenue as Transportation and Distribution revenue at a net realizable market price for the crude oil and place those volumes into inventory. The inventory is subsequently sold, typically within 1 to 2 months, and recognized as PLA subsequent sales revenue with an offsetting expense of PLA subsequent sales cost of revenue.
MoGas and Omega Pipelines
The amount of revenue generated by MoGas and Omega relies on fixed-payment contracts with our customers. These contracts are reservation charges with little dependence on actual volumes transported.
Operations and Maintenance Expenses
Our pipelines have similar fixed and variable operating, maintenance, and regulatory requirements. Our major operations and maintenance expenses consist of:
• labor expenses;
• repairs and maintenance expenses;
• insurance costs (including liability and property coverage); and
• utility costs (including electricity and natural gas).
The majority of our costs remain stable across broad ranges of throughput volumes, but can vary depending upon the level of both planned and unplanned maintenance activity in particular reporting periods. Utility cost is the primary expense which fluctuates based on throughput volumes.
MoGas STL Interconnect
MoGas continues to monitor the regulatory activities relative to the Spire STL Pipeline. On June 22, 2021, the U.S. Court of Appeals for the District of Columbia Circuit issued an order vacating the Spire STL Pipeline’s certificate, stating the problem with the 2018 certificate was that FERC found a market need for the pipeline despite only one shipper, an affiliate of Spire STL Pipeline, committing to use it; and remanding the proceeding back to the FERC. On September 14, 2021, FERC issued a temporary certificate authorizing the continued operation of Spire STL Pipeline for 90 days, a first step in keeping the STL
Pipeline in service ahead of this winter. There have been filings with FERC from several impacted parties expressing concern of the adverse effect to the area should the court’s order to vacate the certificate remain. While there is no impairment at this time, if the STL Pipeline is taken out of service, CorEnergy's financial condition and results of operations may be adversely impacted by impairment of our interconnect assets, currently carried at approximately $3.5 million.
FACTORS AFFECTING THE COMPARABILITY OF OUR FINANCIAL RESULTS
The comparability of our current financial results, in relation to prior periods, are affected by the recent transactions described below. As a result, the usefulness of the year over year comparisons between the quarter and year-to-date periods ended September 30, 2021 and the quarter and year-to-date periods ended September 30, 2020 are limited. The financial results should be read in connection with the financial information in Form 8-K filed February 10, 2021, Form 8-K/A filed April 22, 2021, and Form 8-K/A filed September 3, 2021.
Disposal of Grand Isle Gathering System
Effective February 1, 2021, the Grand Isle Gathering System was provided as partial consideration for the purchase of the 49.50 percent interest in Crimson.
Sale of Pinedale LGS
On June 30, 2020, the Pinedale LGS was sold to Ultra Wyoming, the former tenant under the Pinedale Lease Agreement and a wholly-owned subsidiary of Ultra Petroleum Corp, and consequently is not included in our current results.
Crimson Transaction
Effective February 1, 2021, the Company acquired a 49.50 percent interest in Crimson as described elsewhere in this Report.
California Market Update
On October 4, 2021, a pipeline ruptured off the coast of California which caused the oil spill offshore near Huntington Beach, California. The pipeline is not owned by the CorEnergy. The Company does not own or operate any offshore platforms or pipelines.
The Company has historically received barrels transported by the affected pipeline, at an average of approximately 4,600 bpd over the past four months, equating to average monthly revenue of approximately $98 thousand during that time (including the associated pipeline loss allowance). Currently, this production has been shut in and the timing of its return is uncertain. Regardless of the outcome, we do not expect this event to affect our common dividend outlook, which is subject to board approval.
On October 6, 2021, the Kern County Superior Court ordered Kern county to stop issuing new oil and gas drilling permits pending review of a new environmental impact report process.
On October 29, 2021, Phillips 66 confirmed plans to convert its 140,000 barrel per day San Francisco refinery in Rodeo, California to renewable diesel in early 2024. As a result, the refinery will no longer process crude oil. Currently, the refinery sources a significant portion of their crude oil, via a dedicated Phillips 66 pipeline, from the San Joaquin valley which is the same source of volumes for the Company's pipelines. After closure of the refinery, the crude oil being consumed from the San Joaquin valley, by Phillips 66, will need to be transported to another refinery since the Phillips 66 pipeline is only connected to their refinery.
Internalization of the Manager
On July 6, 2021, following stockholder approval at the Company's 2021 Annual Meeting, we completed the Internalization transaction whereby we acquired our manager Corridor InfraTrust Management, LLC. Pursuant to a Contribution Agreement, we issued to the Contributors, based on each Contributor's percentage ownership in Corridor, an aggregate of: (i) 1,153,846 shares of Common Stock, (ii) 683,761 shares of the newly created Class B Common Stock, and (iii) 170,213 depositary shares of the Company’s 7.375% Series A Cumulative Redeemable Preferred Stock.
As a result of the Internalization Transaction, we now (i) own all material assets of Corridor used in the conduct of the business, and (ii) are managed by officers and employees who previously worked for Corridor. Additional information on the Internalization Transaction can be found on our Current Report in Form 8-K filed with the SEC on July 12, 2021.
BASIS OF PRESENTATION
The consolidated financial statements include CorEnergy Infrastructure Trust, Inc., as of September 30, 2021, and its direct and indirect wholly-owned subsidiaries. Effective February 1, 2021, CorEnergy's subsidiaries include a 49.50 percent interest in Crimson with John D. Grier and certain affiliated trusts of Grier (collectively with Grier, the "Grier Members") holding the remaining 50.50 percent interest. Crimson is a VIE as the legal entity is structured with non-substantive voting rights. CorEnergy was determined to be the entity "most closely associated" with the VIE. Therefore, CorEnergy is the primary beneficiary and will consolidate Crimson. After the working capital adjustment and paid-in-kind dividends, the Grier Members' equity ownership interest is 50.62 percent as of September 30, 2021. The Grier Member's 50.62 percent equity ownership interest is reflected as a non-controlling interest in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.
RESULTS OF OPERATIONS
The following table summarizes the financial data and key operating statistics for CorEnergy for the three and nine months ended September 30, 2021 and 2020. We believe the Operating Results detail presented below provides investors with information that will assist them in analyzing our operating performance. The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Part I, Item 1 of this Report. All information in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations," except for balance sheet data as of December 31, 2020, is unaudited.
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For the Three Months Ended
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For the Nine Months Ended
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September 30, 2021
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September 30, 2020
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September 30, 2021
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September 30, 2020
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Revenue
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Transportation and distribution revenue
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$
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34,286,394
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$
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4,573,155
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$
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83,681,876
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$
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14,156,361
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Pipeline loss allowance subsequent sales
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2,124,581
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|
|
—
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|
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6,115,836
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—
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Lease revenue
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32,915
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|
20,126
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1,208,915
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21,320,998
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Deferred rent receivable write-off
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—
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—
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—
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(30,105,820)
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Other revenue
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584,992
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32,099
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1,359,331
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88,319
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Total Revenue
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37,028,882
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4,625,380
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92,365,958
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5,459,858
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Expenses
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Transportation and distribution expenses
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16,089,414
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1,438,443
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41,795,421
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4,035,807
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Pipeline loss allowance subsequent sales cost of revenue
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2,718,038
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—
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5,890,540
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—
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General and administrative
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5,156,087
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2,793,568
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20,374,534
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10,195,635
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Depreciation, amortization and ARO accretion expense
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3,690,856
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2,169,806
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10,337,639
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11,479,799
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Loss on impairment of leased property
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—
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—
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—
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140,268,379
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Loss on impairment and disposal of leased property
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—
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—
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5,811,779
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146,537,547
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Loss on termination of lease
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—
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—
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165,644
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458,297
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Total Expenses
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27,654,395
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6,401,817
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84,375,557
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312,975,464
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Operating Income (loss)
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$
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9,374,487
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$
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(1,776,437)
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$
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7,990,401
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$
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(307,515,606)
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Other Income (expense)
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Other income
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$
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4,040
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$
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29,654
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$
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366,859
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$
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449,512
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Interest expense
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(3,351,967)
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(2,247,643)
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(9,578,677)
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(8,053,650)
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Gain (loss) on extinguishment of debt
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—
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—
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(861,814)
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11,549,968
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Total Other Income (expense)
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(3,347,927)
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(2,217,989)
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(10,073,632)
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3,945,830
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Income (Loss) before income taxes
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6,026,560
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(3,994,426)
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(2,083,231)
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(303,569,776)
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Income tax expense (benefit), net
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106,589
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(75,328)
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263,652
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(173,877)
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Net Income (loss)
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5,919,971
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(3,919,098)
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(2,346,883)
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(303,395,899)
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Less: Net income attributable to non-controlling interest
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3,155,685
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—
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6,775,863
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—
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Net income (loss) attributable to CorEnergy Stockholders
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$
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2,764,286
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$
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(3,919,098)
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$
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(9,122,746)
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$
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(303,395,899)
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Preferred dividend requirements
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2,388,130
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2,309,672
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7,007,474
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6,880,137
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Net income (loss) attributable to Common Stockholders
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$
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376,156
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$
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(6,228,770)
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$
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(16,130,220)
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$
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(310,276,036)
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Other Financial Data (1)
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Adjusted Net Income (loss)
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$
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6,116,491
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$
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(2,972,281)
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$
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11,138,110
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$
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3,566,441
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Cash Available for Distribution
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3,165,203
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(3,823,800)
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(2,513,681)
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8,159,021
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Adjusted EBITDA
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13,265,903
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1,369,840
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$
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31,318,078
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$
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22,926,013
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Capital Expenditures:
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Maintenance Capital
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$
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1,757,350
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$
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—
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$
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5,381,708
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$
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—
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Growth Capital
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638,830
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—
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|
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5,510,019
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—
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Volume:
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Average quarterly volume (bpd) - Crude oil
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191,621
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207,609
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NA
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NA
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(1) Refer to the "Non-GAAP Financial Measures" section that follows for additional details.
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Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020
The financial impacts of the Crimson assets only represent the period from February 1, 2021 to September 30, 2021.
Revenue. Consolidated revenue was $37.0 million for the three months ended September 30, 2021 compared to $4.6 million for the three months ended September 30, 2020, representing an increase of $32.4 million. Transportation and distribution revenue increased $29.7 million primarily due to the acquisition of Crimson, which provided transportation revenue of $29.0 million that included a $2.2 million gain on PLA revenue which should not be considered recurring. Transportation and distribution
revenue for MoGas and Omega increased $0.7 million driven by increased transportation revenue due to new contracts that became effective in the fourth quarter of 2020 and an increase in commodity fees. We also recognized $2.1 million in PLA subsequent sales revenue due to the Crimson acquisition. This represents the revenue on sale of crude oil inventory, which is offset by the PLA subsequent sales cost of revenue of $2.7 million for a net margin of $(0.6) million. The negative margin was due to a reclassification of PLA revenue between revenue line items with no impact to total revenue.
Lease revenue was $33 thousand for the three months ended September 30, 2021 compared to $20 thousand for the three months ended September 30, 2020, resulting in a increase of $13 thousand from the prior-year period.
Transportation and Distribution Expense. Transportation and distribution expenses were $16.1 million and $1.4 million for the three months ended September 30, 2021 and 2020, respectively, representing an increase of $14.7 million which was due to the acquisition of Crimson.
General and Administrative Expense. General and administrative expenses were $5.2 million for the three months ended September 30, 2021 compared to $2.8 million for the three months ended September 30, 2020. The most significant components of the variance from the prior-year period are outlined in the following table and explained below:
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For the Three Months Ended
|
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|
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September 30, 2021
|
|
September 30, 2020
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|
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Management fees and employee-related costs
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$
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2,494,443
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|
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$
|
932,457
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Acquisition and professional fees
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1,980,931
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|
|
1,589,673
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Other expenses
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680,713
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|
|
271,438
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Total
|
$
|
5,156,087
|
|
|
$
|
2,793,568
|
|
|
|
|
|
Management fees and employee-related costs for the three months ended September 30, 2021 were comprised of $1.4 million in Crimson employee-related costs and $1.1 million in Corridor employee compensation and office related expenses as a result of the Internalization which ended the payment of the management fee after January 2021. See Part I, Item 1, Note 9 ("Management Agreement") for additional information.
Acquisition and professional fees for the three months ended September 30, 2021 increased $0.4 million compared to the three months ended September 30, 2020, primarily as a result of (i) a $1.2 million increase in general professional fees, partially offset by (ii) a $0.8 million decrease in acquisition related expenses. Generally, we expect asset acquisition expenses to be repaid over time from income generated by acquisitions.
Other expenses for the three months ended September 30, 2021 increased $0.4 million compared to the three months ended September 30, 2020 . The increase in other expenses is primarily due to the Crimson acquisition.
Depreciation, Amortization and ARO Accretion Expense. Depreciation, amortization and ARO accretion expense was $3.7 million and $2.2 million for the three months ended September 30, 2021 and 2020, respectively. This $1.5 million increase was primarily related to depreciation expense, which increased approximately $1.6 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase in depreciation expense was driven by (i) a full quarter reduction in depreciation for the GIGS asset, which was provided as partial consideration in connection with the Crimson Transaction during the first quarter of 2021, partially offset by (ii) depreciation expense for the Crimson acquired assets.
Other Income. Other income was $4 thousand for the three months ended September 30, 2021 compared to $30 thousand for the three months ended September 30, 2020. This decrease was primarily related to the addition of Crimson.
Interest Expense. Interest expense was $3.4 million for the three months ended September 30, 2021, compared to $2.2 million for the three months ended September 30, 2020, primarily due to increased borrowings.
Income Tax Expense (Benefit). Income tax expense was $107 thousand for the three months ended September 30, 2021, as compared to an income tax benefit of $75 thousand for the three months ended September 30, 2020. The income tax expense in the current year period is primarily the result of an increase in income tax expense related to Crimson, partially offset by the generation of net operating loss carryforwards and certain fixed asset activities at the other TRS entities. The income tax benefit recorded in the prior-year period was primarily the result of net operating loss carrybacks allowed under the CARES Act enacted in March of 2020, partially offset by certain fixed asset, deferred contract revenue and refund liability settlement activities.
Net Income (loss). Net income was $5.9 million and net loss was $3.9 million for the three months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021 and 2020, net income (loss) attributable to CorEnergy
stockholders was $2.8 million and $(3.9) million, respectively. After deducting preferred dividend requirements of $2.4 million and $2.3 million for the three months ended September 30, 2021 and 2020, respectively, net income attributable to common stockholders was $0.4 million, or $0.02 per basic and diluted common share as compared to $(6.2) million, or $(0.46) per basic and diluted common share for the prior-year period.
Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
The financial impacts of the Crimson assets only represent the period from February 1, 2021 to September 30, 2021.
Revenue. Consolidated revenue was $92.4 million for the nine months ended September 30, 2021 compared to $5.5 million for the nine months ended September 30, 2020, representing an increase of $86.9 million. Transportation and distribution revenue increased $69.5 million primarily due to the acquisition of Crimson, which provided transportation revenue of $67.6 million. The $2.2 million gain on PLA in third quarter of 2021 was largely offset with losses on PLA in the first half of 2021. Transportation and distribution revenue for MoGas and Omega increased $2.0 million primarily driven by increased transportation revenue due to new contracts that became effective in the fourth quarter of 2020 and an increase in commodity fees. We also recognized $6.1 million in PLA subsequent sales revenue due to the Crimson acquisition. This represents the revenue on sale of crude oil inventory, which is offset by the PLA subsequent sales cost of revenue of $5.9 million for a net margin of $0.2 million.
Lease revenue was $1.2 million for the nine months ended September 30, 2021 compared to $21.3 million for the nine months ended September 30, 2020, resulting in a decrease of approximately $20.1 million. The decrease in lease revenue was a result of the sale Grand Isle Gathering System during the first quarter of 2021 and Pinedale LGS in second quarter 2020. Lease revenue in the current period is primarily related to a Crimson storage lease; however, the storage contract expired June 30, 2021 and was not renewed. The revenue from that contract from February 1 to June 30 of 2021 was $1.1 million. During the nine months ended September 30, 2020, we recorded a non-cash deferred rent receivable write-off of $30.1 million for the Grand Isle Lease Agreement as the receivable was no longer probable of collection.
Transportation and Distribution Expense. Transportation and distribution expenses were $41.8 million and $4.0 million for the nine months ended September 30, 2021 and 2020, respectively, representing an increase of $37.8 million. The Crimson Transaction resulted in an $37.3 million increase for the period.
General and Administrative Expense. General and administrative expenses were $20.4 million for the nine months ended September 30, 2021 compared to $10.2 million for the nine months ended September 30, 2020. The most significant components of the variance from the prior-year period are outlined in the following table and explained below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
September 30, 2021
|
|
September 30, 2020
|
|
Management fees and employee-related costs
|
|
|
|
|
$
|
7,528,705
|
|
|
$
|
4,139,721
|
|
|
Acquisition and professional fees
|
|
|
|
|
10,823,995
|
|
|
5,076,904
|
|
|
Other expenses
|
|
|
|
|
2,021,834
|
|
|
979,010
|
|
|
Total
|
|
|
|
|
$
|
20,374,534
|
|
|
$
|
10,195,635
|
|
Management fees and employee-related costs for the nine months ended September 30, 2021 is comprised of i) $1.0 million transaction bonus outlined in the Contribution Agreement related to the Internalization, (ii) $3.6 million in Crimson employee-related costs, (iii) $2.6 million in Corridor employee compensation and office related expenses incurred since February 1, 2021, and (iv) $0.3 million in management fees for January. Due to stockholder approval at the Annual Meeting on June 29, 2021, we will no longer be subject to the management fee after February 1, 2021 but will incur, on a go-forward basis, the employee compensation and office related costs. See Part I, Item 1, Note 9 ("Management Agreement") for additional information. The transaction bonus discussed above is reflected as an addback to Adjusted Net Income and Adjusted EBITDA for the nine months ended September 30, 2021. Refer to the "Non-GAAP Financial Measures" section for a reconciliation of Net loss to Adjusted Net Income and Net loss to Adjusted EBITDA.
Acquisition and professional fees for the nine months ended September 30, 2021 increased $5.7 million compared to the nine months ended September 30, 2020, primarily as a result of (i) a $4.5 million increase in asset acquisition expenses primarily related to the Crimson and Internalization transactions and (ii) a $1.3 million increase in accounting, legal and consulting services. Generally, we expect asset acquisition expenses to be repaid over time from income generated by acquisitions. As a result, asset acquisition expenses of $5.6 million for the nine months ended September 30, 2021 are reflected as an addback to Adjusted Net Income and Adjusted EBITDA. Refer to the "Non-GAAP Financial Measures" section for a reconciliation of Net loss to Adjusted Net Income and Net loss to Adjusted EBITDA.
Other expenses for the nine months ended September 30, 2021 increased $1.0 million from the prior-year period. The increase in other expenses is primarily due to the Crimson acquisition.
Depreciation, Amortization and ARO Accretion Expense. Depreciation, amortization and ARO accretion expense was $10.3 million and $11.5 million for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $1.2 million. This decrease was primarily related to depreciation expense, which decreased approximately $0.9 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease in depreciation expense was driven by (i) a two quarter reduction in depreciation for the Pinedale LGS as a result of the sale of the asset to Ultra Wyoming at the end of the second quarter of 2020 and (ii) a reduction in depreciation for the GIGS asset which was sold February 4, 2021, partially offset by (iii) depreciation expense for the Crimson acquired assets. Accretion expense decreased $305 thousand as a result of the sales of the GIGS asset.
Loss on Impairment of Leased Property. For the nine months ended September 30, 2020, we recognized a $140.3 million loss on impairment of leased property related to our GIGS asset. The impairment analysis was triggered by the impacts of the COVID-19 pandemic and significant decline in the global energy markets, which adversely impacted the tenant under the Grand Isle Lease Agreement.
Loss on Impairment and Disposal of Leased Property. In connection with the Crimson Transaction, we contributed the GIGS asset as partial consideration to acquire our 49.50 percent interest in Crimson. The net book value of the GIGS asset was $63.5 million and the carrying value of the asset retirement obligation was $8.8 million or a net carrying value of $54.7 million for the GIGS Disposal Group. The GIGS asset had a fair value of $48.9 million upon closing of the Crimson Transaction resulting in a loss on impairment and disposal of leased property of approximately $5.8 million for the nine months ended September 30, 2021. Refer to Part I, Item 1, Note 5 ("Leased Properties And Leases") for further details.
Loss on Termination of Lease. In connection with the contribution of the GIGS asset as partial consideration to acquire our 49.50 percent interest in Crimson, we reached a settlement agreement with the tenant under the Grand Isle Lease Agreement and terminated the lease. For the nine months ended September 30, 2021, the Company recorded a write-off of the remaining deferred lease costs of $166 thousand associated with the termination of the lease.
Other Income. Other income was $367 thousand for the nine months ended September 30, 2021 compared to $450 thousand for the nine months ended September 30, 2020. This decrease was primarily related to interest income, which decreased approximately $445 thousand from the prior-year period due to a reduction in cash nine months ended September 30, 2021, partially offset by other income for an insurance recovery of $58 thousand and $288 thousand for the addition of Crimson for the nine months ended September 30, 2021.
Interest Expense. For the nine months ended September 30, 2021 and 2020, interest expense was $9.6 million and $8.1 million, respectively, the increase is primarily due to increased borrowings.
Loss on Extinguishment of Debt. During the nine months ended September 30, 2021, in connection with the Crimson acquisition, the Company terminated the CorEnergy Credit Facility with Regions Bank and eliminated the associated deferred debt issuance costs of $862 thousand. For additional information, see Part I, Item 1, Note 12 ("Debt"). For the nine months ended September 30, 2020, a gain on extinguishment of debt of $11.5 million was recognized for the (i) release agreement entered into with Prudential for the Amended Pinedale Term Credit Facility in connection with the sale of the Pinedale LGS on June 30, 2020 ($11.0 million) and (ii) the repurchase of the 5.875% Convertible Notes completed in April of 2020 ($576 thousand). For additional information, see Part I, Item 1, Note 12 ("Debt").
Income Tax Expense (Benefit). Income tax expense was $264 thousand for the nine months ended September 30, 2021, as compared to an income tax benefit of $174 thousand for the nine months ended September 30, 2020. The income tax expense in the current year period is primarily the result of an increase in income tax expense related to Crimson, partially offset by the generation of net operating loss carryforwards and certain fixed asset activities at the TRS entities. The income tax benefit recorded in the prior-year period was primarily the result of net operating loss carrybacks allowed under the CARES Act enacted in March of 2020, partially offset by certain fixed asset, deferred contract revenue and refund liability settlement activities.
Net Loss. Net loss was $2.3 million and $303.4 million for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, net loss attributable to CorEnergy stockholders was $9.1 million and $303.4 million, respectively. After deducting $7.0 million and $6.9 million for the portion of preferred dividends that are allocable to the nine months ended September 30, 2021 and 2020, respectively, net loss attributable to common stockholders for the nine months ended September 30, 2021 was $16.1 million or $(1.13) per basic and diluted common share as compared to $310.3 million, or $(22.73) per basic and diluted common share for the prior-year period.
NON-GAAP FINANCIAL MEASURES
We use certain financial measures that are not recognized under GAAP. The non-GAAP financial measures used in this Report include Adjusted Net Income, CAD, and Adjusted EBITDA. These supplemental measures are used by our management team and are presented because we believe they help investors understand our business, performance and ability to earn and distribute cash to our stockholders, provide for debt repayments, provide for future capital expenditures and provide for repurchases or redemptions of any series of our preferred stock by providing perspectives not immediately apparent from net income (loss).
We offer these measures to assist the users of our financial statements in assessing our operating performance under U.S. GAAP, but these measures are non-GAAP measures and should not be considered measures of liquidity, alternatives to net income (loss) or indicators of any other performance measure determined in accordance with GAAP. Our method of calculating these measures may be different from methods used by other companies and, accordingly, may not be comparable to similar measures as calculated by other companies. Investors should not rely on these measures as a substitute for any GAAP measure, including net income (loss), cash flows from operating activities or revenues. Management compensates for the limitations of Adjusted Net Income, CAD, and Adjusted EBITDA as analytical tools by reviewing the comparable GAAP measures, understanding the differences between non-GAAP measures compared to (as applicable) operating income (loss), net income (loss) and net cash provided by operating activities, and incorporating this knowledge into its decision-making processes. We believe that investors benefit from having access to the same financial measures that our management considers in evaluating our operating results. The financial impacts of the Crimson assets are only included for the period from February 1, 2021 to September 30, 2021 for the non-GAAP measurements outlined below.
Adjusted Net Income and Cash Available for Distribution
We believe Adjusted Net Income is an important performance measure of our profitability as compared to other midstream infrastructure owners and operators. Our presentation of Adjusted Net Income represents net income (loss) adjusted for loss on impairment of leased property; loss on impairment and disposal of leased property; loss on termination of lease; deferred rent receivable write-off; loss (gain) on extinguishment of debt; gain on sale of equipment and transaction-related costs. Adjusted Net Income presented by other companies may not be comparable to our presentation, since each company may define these terms differently.
Management considers CAD an appropriate metric for assessing capital discipline, cost efficiency and balance sheet strength. Although CAD is the metric used to assess our ability to make dividends to stockholders and distributions to non-controlling interest holders, this measure should not be viewed as indicative of the actual amount of cash that is available for distributions or planned for distributions for a given period. Instead, CAD should be considered indicative of the amount of cash that is available for distributions after mandatory debt repayments and other general corporate purposes. Our presentation of CAD represents Adjusted Net Income adjusted for depreciation, amortization and ARO accretion (cash flows) and deferred tax expense (benefit) less transaction-related costs; maintenance capital expenditures; preferred dividend requirements and mandatory debt amortization.
Adjusted Net Income and CAD should not be considered a measure of liquidity and should not be considered as an alternative to operating income (loss), net income (loss), cash flows from operations or other indicators of performance determined in accordance with GAAP. The following table presents a reconciliation of Net Income (Loss), as reported in the Consolidated Statements of Operations, to Adjusted Net Income and CAD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30, 2021
|
|
September 30, 2020
|
|
September 30, 2021
|
|
September 30, 2020
|
|
Net Income (loss)
|
$
|
5,919,971
|
|
|
$
|
(3,919,098)
|
|
|
$
|
(2,346,883)
|
|
|
$
|
(303,395,899)
|
|
|
Add:
|
|
|
|
|
|
|
|
|
Loss on impairment of leased property
|
—
|
|
|
—
|
|
|
—
|
|
|
140,268,379
|
|
|
Loss on impairment and disposal of leased property
|
—
|
|
|
—
|
|
|
5,811,779
|
|
|
146,537,547
|
|
|
Loss on termination of lease
|
—
|
|
|
—
|
|
|
165,644
|
|
|
458,297
|
|
|
Deferred rent receivable write-off
|
—
|
|
|
—
|
|
|
—
|
|
|
30,105,820
|
|
|
Loss (gain) on extinguishment of debt
|
—
|
|
|
—
|
|
|
861,814
|
|
|
(11,549,968)
|
|
|
|
|
|
|
|
|
|
|
|
Gain on the sale of equipment
|
(16,508)
|
|
|
—
|
|
|
(16,508)
|
|
|
(3,542)
|
|
|
Transaction costs
|
213,028
|
|
|
946,817
|
|
|
5,625,772
|
|
|
1,145,807
|
|
|
Transaction bonus
|
—
|
|
|
—
|
|
|
1,036,492
|
|
|
—
|
|
|
Adjusted Net Income (Loss), excluding special items
|
$
|
6,116,491
|
|
|
$
|
(2,972,281)
|
|
|
$
|
11,138,110
|
|
|
$
|
3,566,441
|
|
|
Add:
|
|
|
|
|
|
|
|
|
Depreciation, amortization and ARO accretion (Cash Flows)
|
4,102,916
|
|
|
2,477,867
|
|
|
11,530,460
|
|
|
12,441,775
|
|
|
Deferred tax expense (benefit)
|
113,516
|
|
|
(72,897)
|
|
|
222,339
|
|
|
225,628
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Transaction costs
|
213,028
|
|
|
946,817
|
|
|
5,625,772
|
|
|
1,145,807
|
|
|
Transaction bonus
|
—
|
|
|
—
|
|
|
1,036,492
|
|
|
—
|
|
|
Maintenance capital expenditures
|
1,757,350
|
|
|
—
|
|
|
5,381,708
|
|
|
—
|
|
|
Preferred dividend requirements - Series A
|
2,388,130
|
|
|
2,309,672
|
|
|
7,033,626
|
|
|
6,929,016
|
|
|
Preferred dividend requirements - Non-controlling interest
|
809,212
|
|
|
—
|
|
|
2,326,992
|
|
|
—
|
|
|
Mandatory debt amortization
|
2,000,000
|
|
|
—
|
|
|
4,000,000
|
|
|
—
|
|
|
Cash Available for Distribution (CAD)
|
$
|
3,165,203
|
|
|
$
|
(3,823,800)
|
|
|
$
|
(2,513,681)
|
|
|
$
|
8,159,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The financial impacts of the Crimson assets only represent the period from February 1, 2021 to September 30, 2021.
The following table reconciles net cash provided by (used in) operating activities, as reported in the Consolidated Statements of Cash Flow to CAD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30, 2021
|
|
September 30, 2020
|
|
September 30, 2021
|
|
September 30, 2020
|
|
Net cash provided by (used in) operating activities
|
$
|
7,879,944
|
|
|
$
|
(5,699,427)
|
|
|
$
|
12,238,286
|
|
|
$
|
10,722,374
|
|
|
Changes in working capital
|
2,174,551
|
|
|
4,185,299
|
|
|
4,364,204
|
|
|
4,365,663
|
|
|
Non-cash lease expense
|
65,400
|
|
|
—
|
|
|
(373,846)
|
|
|
—
|
|
|
Maintenance capital expenditures
|
(1,757,350)
|
|
|
—
|
|
|
(5,381,708)
|
|
|
—
|
|
|
Preferred dividend requirements
|
(2,388,130)
|
|
|
(2,309,672)
|
|
|
(7,033,626)
|
|
|
(6,929,016)
|
|
|
Preferred dividend requirements - non-controlling interest
|
(809,212)
|
|
|
—
|
|
|
(2,326,991)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Mandatory debt amortization included in financing activities
|
(2,000,000)
|
|
|
—
|
|
|
(4,000,000)
|
|
|
—
|
|
|
Cash Available for Distribution (CAD)
|
$
|
3,165,203
|
|
|
$
|
(3,823,800)
|
|
|
$
|
(2,513,681)
|
|
|
$
|
8,159,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Special Items:
|
|
|
|
|
|
|
|
|
Transaction costs
|
$
|
213,028
|
|
|
$
|
946,817
|
|
|
$
|
5,625,772
|
|
|
$
|
1,145,807
|
|
|
Transaction bonus
|
—
|
|
|
—
|
|
|
1,036,492
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Other Cash Flow Information:
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
$
|
(4,708,954)
|
|
|
$
|
(800,567)
|
|
|
$
|
(82,776,171)
|
|
|
$
|
(834,878)
|
|
|
Net cash used in financing activities
|
(5,774,491)
|
|
|
(2,992,248)
|
|
|
(13,967,065)
|
|
|
(26,529,735)
|
|
The financial impacts of the Crimson assets only represent the period from February 1, 2021 to September 30, 2021.
Adjusted EBITDA
We believe the presentation of Adjusted EBITDA provides information useful to investors in assessing our financial condition and results of operations and that Adjusted EBITDA is a widely accepted financial indicator of a company's ability to incur and service debt, fund capital expenditures, and make dividends and distributions. Adjusted EBITDA is a supplemental financial measure that management and external users of our consolidated financial statements, such as industry analysts, investors, and commercial banks use, among other measures, to assess the following:
•our operating performance as compared to other midstream infrastructure owners and operators, without regard to financing methods, capital structure, or historical cost basis;
•the ability of our assets to generate cash flow to make distributions; and
•the viability of acquisitions and capital expenditures and the returns on investment of various investment opportunities.
Our presentation of Adjusted EBITDA represents net income (loss) adjusted for items such as loss on impairment of leased property; loss on impairment and disposal of leased property; loss on termination of lease; deferred rent receivable write-off; loss (gain) on extinguishment of debt; gain on sale of equipment and transaction-related costs. Adjusted EBITDA is further adjusted for depreciation, amortization and ARO accretion expense; income tax expense (benefit) and interest expense. Adjusted EBITDA presented by other companies may not be comparable to our presentation, since each company may define these terms differently. Adjusted EBITDA should not be considered a measure of liquidity and should not be considered as an alternative to operating income (loss), net income (loss) or other indicators of performance determined in accordance with GAAP. The following table presents a reconciliation of Net Income (loss), as reported in the Consolidated Statements of Operations, to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30, 2021
|
|
September 30, 2020
|
|
September 30, 2021
|
|
September 30, 2020
|
|
Net Income (loss)
|
$
|
5,919,971
|
|
|
$
|
(3,919,098)
|
|
|
$
|
(2,346,883)
|
|
|
$
|
(303,395,899)
|
|
|
Add:
|
|
|
|
|
|
|
|
|
Loss on impairment of leased property
|
—
|
|
|
—
|
|
|
—
|
|
|
140,268,379
|
|
|
Loss on impairment and disposal of leased property
|
—
|
|
|
—
|
|
|
5,811,779
|
|
|
146,537,547
|
|
|
Loss on termination of lease
|
—
|
|
|
—
|
|
|
165,644
|
|
|
458,297
|
|
|
Deferred rent receivable write-off
|
—
|
|
|
—
|
|
|
—
|
|
|
30,105,820
|
|
|
Loss (gain) on extinguishment of debt
|
—
|
|
|
—
|
|
|
861,814
|
|
|
(11,549,968)
|
|
|
Gain on the sale of equipment
|
(16,508)
|
|
|
—
|
|
|
(16,508)
|
|
|
(3,542)
|
|
|
Transaction costs
|
213,028
|
|
|
946,817
|
|
|
5,625,772
|
|
|
1,145,807
|
|
|
Transaction bonus
|
—
|
|
|
—
|
|
|
1,036,492
|
|
|
—
|
|
|
Depreciation, amortization and ARO accretion expense
|
3,690,856
|
|
|
2,169,806
|
|
|
10,337,639
|
|
|
11,479,799
|
|
|
Income tax expense (benefit), net
|
106,589
|
|
|
(75,328)
|
|
|
263,652
|
|
|
(173,877)
|
|
|
Interest expense, net
|
3,351,967
|
|
|
2,247,643
|
|
|
9,578,677
|
|
|
8,053,650
|
|
|
Adjusted EBITDA
|
$
|
13,265,903
|
|
|
$
|
1,369,840
|
|
|
$
|
31,318,078
|
|
|
$
|
22,926,013
|
|
The financial impacts of the Crimson assets only represent the period from February 1, 2021 to September 30, 2021.
NON-GAAP FINANCIAL MEASURES APPLICABLE TO REITS
We also present earnings before interest, taxes, depreciation and amortization as defined by the National Association of Real Estate Investment Trusts ("EBITDAre") and NAREIT funds from operations ("NAREIT FFO"). The presentation of EBITDAre and NAREIT FFO are not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP nor are they indicative of funds available to fund our cash needs, including capital expenditures, to make payments on our indebtedness or to make distributions.
EBITDAre
EBITDAre is a non-GAAP financial measure that management and external users of our consolidated financial statements, such as industry analysts, investors and lenders may use to evaluate our ongoing operating results, including (i) the performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets and (ii) the overall rates of return on alternative investment opportunities. EBITDAre, as established by NAREIT, is defined as net income (loss) (calculated in accordance with GAAP) excluding interest expense, income tax, depreciation and amortization, gains or losses on disposition of depreciated property (including gains or losses on change of control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate, and adjustments to reflect the entity's pro rata share of EBITDAre of unconsolidated affiliates.
We believe that the presentation of EBITDAre provides useful information to investors in assessing our financial condition and results of operations. Our presentation of EBITDAre is calculated in accordance with standards established by NAREIT, which may not be comparable to measures calculated by other companies that do not use the NAREIT definition of EBITDAre. In addition, although EBITDAre is a useful measure when comparing our results to other REITs, it may not be helpful to investors when comparing to non-REITs. EBITDAre should not be considered a measure of liquidity and should not be considered as an alternative to operating income (loss), net income (loss) or other indicators of performance determined in accordance with GAAP.
The following table presents a reconciliation of Net Income (Loss) Attributable to Common Stockholders, as reported in the Consolidated Statements of Operations, to EBITDAre:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30, 2021
|
|
September 30, 2020
|
|
September 30, 2021
|
|
September 30, 2020
|
|
Net Income (Loss) Attributable to Common Stockholders
|
$
|
376,156
|
|
|
$
|
(6,228,770)
|
|
|
$
|
(16,130,220)
|
|
|
$
|
(310,276,036)
|
|
|
Add:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
3,351,967
|
|
|
2,247,643
|
|
|
9,578,677
|
|
|
8,053,650
|
|
|
Depreciation, amortization, and ARO accretion
|
3,690,856
|
|
|
2,169,806
|
|
|
10,337,639
|
|
|
11,479,799
|
|
|
Loss on impairment of leased property
|
—
|
|
|
—
|
|
|
—
|
|
|
140,268,379
|
|
|
Loss on impairment and disposal of leased property
|
—
|
|
|
—
|
|
|
5,811,779
|
|
|
146,537,547
|
|
|
Loss on termination of lease
|
—
|
|
|
—
|
|
|
165,644
|
|
|
458,297
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
(106,589)
|
|
|
75,328
|
|
|
(263,652)
|
|
|
173,877
|
|
|
Less: Net income attributable to non-controlling interest
|
3,155,685
|
|
|
—
|
|
|
6,775,863
|
|
|
—
|
|
|
EBITDAre
|
$
|
4,369,883
|
|
|
$
|
(1,886,649)
|
|
|
$
|
3,251,308
|
|
|
$
|
(3,652,241)
|
|
The financial impacts of the Crimson assets only represent the period from February 1, 2021 to September 30, 2021.
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 NAREIT, NAREIT FFO represents net income (loss) (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 other 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 stockholders may differ from methods used by other REITs and, as such, may not be comparable.
We present NAREIT FFO 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 we use in assessing performance and in making resource allocation decisions.
NAREIT FFO is 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 certain of the energy infrastructure assets in which we invest. NAREIT FFO excludes depreciation and amortization unique to real estate and gains and losses from property dispositions and extraordinary items. As such, these performance measures provide a perspective not immediately apparent from net income (loss) when compared to prior-year periods. These metrics reflect the impact to operations from trends in company revenues, operating costs, development activities, and interest costs.
We calculate NAREIT FFO in accordance with standards established over time by the Board of Governors of the National Association of Real Estate Investment Trusts, as restated and approved in a December 2018 White Paper. NAREIT FFO does 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 should not be considered as an alternative to net income (loss) (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.
For completeness, the following table sets forth a reconciliation of our net income (loss) attributable to CorEnergy stockholders as determined in accordance with GAAP and our calculations of NAREIT FFO for the three and nine months ended September 30, 2021 and 2020. 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
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30, 2021
|
|
September 30, 2020
|
|
September 30, 2021
|
|
September 30, 2020
|
|
Net Income (loss) attributable to CorEnergy Stockholders
|
$
|
2,764,286
|
|
|
$
|
(3,919,098)
|
|
|
$
|
(9,122,746)
|
|
|
$
|
(303,395,899)
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Preferred Dividend Requirements
|
2,388,130
|
|
|
2,309,672
|
|
|
7,007,474
|
|
|
6,880,137
|
|
|
Net Income (loss) attributable to Common Stockholders
|
$
|
376,156
|
|
|
$
|
(6,228,770)
|
|
|
$
|
(16,130,220)
|
|
|
$
|
(310,276,036)
|
|
|
Add:
|
|
|
|
|
|
|
|
|
Depreciation
|
3,690,856
|
|
|
2,169,806
|
|
|
10,337,639
|
|
|
11,479,799
|
|
|
Amortization of deferred lease costs
|
—
|
|
|
7,641
|
|
|
2,547
|
|
|
53,607
|
|
|
Loss on impairment of leased property
|
—
|
|
|
—
|
|
|
—
|
|
|
140,268,379
|
|
|
Loss on impairment and disposal of leased property
|
—
|
|
|
—
|
|
|
5,811,779
|
|
|
146,537,547
|
|
|
Loss on termination of lease
|
—
|
|
|
—
|
|
|
165,644
|
|
|
458,297
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Non-controlling interests attributable to NAREIT FFO reconciling items
|
2,026,838
|
|
|
—
|
|
|
5,388,590
|
|
—
|
|
|
NAREIT funds from operations (NAREIT FFO)
|
$
|
2,040,174
|
|
|
$
|
(4,051,323)
|
|
|
$
|
(5,201,201)
|
|
|
$
|
(11,478,407)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares of Common Stock Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
15,426,226
|
|
|
13,651,521
|
|
|
14,252,305
|
|
13,650,449
|
|
Diluted
|
15,426,226
|
|
|
13,651,521
|
|
|
14,252,305
|
|
13,650,449
|
|
NAREIT FFO attributable to Common Stockholders
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.13
|
|
|
$
|
(0.30)
|
|
|
$
|
(0.36)
|
|
|
$
|
(0.84)
|
|
|
Diluted (1)
|
$
|
0.13
|
|
|
$
|
(0.30)
|
|
|
$
|
(0.36)
|
|
|
$
|
(0.84)
|
|
|
(1) For the three and nine months ended September 30, 2021 and 2020 diluted per share calculations exclude dilutive adjustments for convertible note interest expense, discount amortization and deferred debt issuance amortization because such impact is antidilutive. For periods presented without per share dilution, the number of weighted average diluted shares is equal to the number of weighted average basic shares presented. Refer to the Convertible Note Interest Expense table in Part I, Item 1, Note 12 ("Debt") for additional details.
|
The financial impacts of the Crimson assets only represent the period from February 1, 2021 to September 30, 2021.
DIVIDENDS
Our portfolio of energy infrastructure real property assets generates cash flow from which we pay distributions to stockholders. We pay dividends based on what we believe is the median to long-term cash generating ability of our assets adjusted for special items. Quarterly, we plan on distributing our CAD less appropriate reserves established at the discretion of our Board of Directors which could include, but are not limited to:
•providing for the proper conduct of our business including reserves for future capital expenditures;
•providing for additional debt repayment beyond mandatory amortization;
•providing for repurchases or redemptions of any series of our preferred stock or securities convertible into preferred stock;
•compliance with applicable law or any loan agreement, security agreement, debt instrument or other agreement or obligation; or
•providing additional reserves as determined appropriate by the Board.
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. Dividend payouts may be affected by cash flow requirements and remain subject to other risks and uncertainties.
The Grier Members hold an economic interest in Crimson via the issuance, at the closing of the Crimson Transaction, of Class A-1, Class A-2 and Class A-3 Units. Upon CPUC approval the Grier Members have the right to convert their A-1, A-2 and A-3 Units into our unregistered securities. As of September 30, 2021, each of these securities are convertible as follows: Class A-1 Units into depositary shares representing the Company's 7.375% Series A Cumulative Redeemable Preferred Stock, rather than shares of the Company's 9.00% Series C Preferred Stock as originally provided (due to the Stock Exchange Agreement that was effective as of June 30, 2021), the Class A-2 Units into the Company's Class B Common Stock rather than shares of the Company's 4.00% Series B Redeemable Preferred Stock as originally provided (due to shareholder approval on June 29, 2021) and the Class A-3 Units into the Company's Class B Common Stock. However, prior to conversion, the A-1, A-2 and A-3 Units pay distributions as if they were the corresponding Company securities. The Class A-1, Class A-2 and Class A-3 Units dividend rights, redemption rights, voting rights, exchange rights and conversion rights are provided below.
9.00% Series C Exchangeable Preferred Stock
Dividends. Under the Series C Preferred Articles Supplementary, holders of the Series C Preferred are entitled to receive cumulative dividends before any dividends are paid to the holders of Common Stock or Class B Common Stock at the rate per share of 9.0% of the stated liquidation preference of $25.00 per annum, or $2.25 per annum, payable quarterly in arrears. Upon any liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary, the holders of the Series C Preferred shall be entitled to receive out of the assets of the Company legally available for distribution to stockholders a liquidation preference of $25.00 per share, plus an amount equal to accrued and unpaid dividends thereon, whether or not declared, to the date of payment, before any distribution or payment shall be made to the holders of any junior securities, including the Common Stock or Class B Common Stock.
Redemption. The Company may, at its option, redeem the Series C Preferred at any time in whole, or from time to time in part, for cash at a price per share equal to the liquidation preference of $25.00 per share, plus any accrued and unpaid dividends thereon to, but not including, the date of redemption. In addition, to the extent the Series C Preferred has not previously been redeemed, the Company will redeem the Series C Preferred on the seventh anniversary of the date that the Series C Preferred is first issued and sold. If the Company exercises any of its redemption rights relating to the Series C Preferred, the holders of such redeemed shares will have the exchange rights described below.
Voting Rights. Holders of shares of the Series C Preferred generally do not have any voting rights, except for limited matters directly impacting the Series C Preferred.
Exchange. Each holder of Series C Preferred may exchange, at such holder’s option, any or all of such holder’s shares of Series C Preferred into an equal number of depositary shares representing the Company’s Series A Preferred. If at any time the volume weighted average price per depositary share representing Series A Preferred is greater than $23.50 for at least thirty (30) consecutive trading days, then the Company may elect to exchange all outstanding shares of the Series C Preferred into a number of depositary shares representing Series A Preferred equal to the number of shares of Series C Preferred to be
exchanged multiplied by $25.00 and then dividing that product by $23.50. The Company will pay all accrued and unpaid dividends to, but not including, the date of the exchange in cash or additional depositary shares representing Series A Preferred.
Conversion of Right to Receive Series C Preferred Stock
On June 29, 2021, the Board of the Company authorized management to enter into an agreement to convert the right that the holders of Crimson Class A-1 Units would have had to exchange such units for shares of the Company’s 9.0% Series C Preferred Stock into a a right to exchange Class A-1 Units (following CPUC approval) for depositary shares representing the Company's 7.375% Series A Cumulative Redeemable Preferred Stock.
CorEnergy had the right to convert the Series C Preferred to depositary shares representing Series A Preferred, based on valuing the Series A Preferred at $23.50 per depositary shares as opposed to the $25.00 per share stated value, at any time when the depositary shares' volume weighted daily average trading price exceeded $23.50 for 30 consecutive trading days. The depositary shares traded above that threshold from June 4, 2021 through the conversion date. This action resulted in the early conversion of the exchange right for the Crimson Class A-1 Units as described above. The Board of the Company believed the early conversion was beneficial since it lowered the dividend rate and also simplified the capital structure.
4.00% Series B Redeemable Preferred Stock
Dividends. Under the Series B Preferred Articles Supplementary, holders of Series B Preferred Stock are entitled to receive cumulative dividends before any dividends are paid to the holders of Common Stock or Class B Common Stock at the rate per share of 4.0% of the stated liquidation preference of $25.00 per annum, or $1.00 per annum, payable quarterly in arrears. The Company may elect to pay such dividend by issuing additional shares of Series B Preferred. Upon any liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary, the holders of the Series B Preferred Stock shall be entitled to receive out of the assets of the Company legally available for distribution to stockholders a liquidation preference of $25.00 per share, plus an amount equal to accrued and unpaid dividends thereon, whether or not declared, to the date of payment, before any distribution or payment shall be made to the holders of any junior securities, including the Common Stock or Class B Common Stock. If existing stockholders of the Company had not approved the convertibility of the Series B Preferred to Class B Common Stock by February 3, 2022, then the dividend rate would have increased to 11.00% per annum.
Redemption. The Company may, at its option, redeem the Series B Preferred at any time in whole, or from time to time in part, for cash at a price per share equal to the liquidation preference of $25.00 per share, plus any accrued and unpaid dividends thereon to, but not including, the date of redemption. In addition, to the extent the Series B Preferred has not previously been redeemed, the Company will redeem the Series B Preferred on the seventh anniversary of the date that the Series B Preferred is first issued and sold. If the Company exercises any of its redemption rights relating to the Series B Preferred, the holders of such redeemed shares will have the conversion rights described below.
Voting Rights. Holders of shares of the Series B Preferred generally do not have any voting rights, except for limited matters directly impacting the Series B Preferred.
Conversion of Right to Receive Series B Redeemable Preferred Stock
At the Company's Annual Meeting on June 29, 2021, the existing holders of the Company's Common Stock approved the conversion of the Series B Preferred into Class B Common Stock in accordance with the NYSE rules. On July 7, 2021 pursuant to the terms of the Series B Preferred, the securities converted into a number of shares of the Company’s Class B Common Stock, per share of Series B Preferred, equal to the quotient obtained by dividing (i) the sum of the $25.00 liquidation preference plus the amount of any accrued and unpaid dividends to, but not including, the date fixed for conversion by (ii) the product of (A) 90% times (B) $7.80, provided that if the conversion would cause the Company’s status as a REIT to be materially and adversely affected, the Company may elect to settle the conversion in cash. As a result, effective July 7, 2021, the right that the holders of Crimson Class A-2 Units would have had to exchange such units for shares of Series B Preferred Stock became converted into a right to exchange Class A-2 Units (following CPUC approval) for up to 8,762,158 shares of the Company's Class B Common Stock.
Class B Common Stock
The Class B Common Stock Articles Supplementary establish the terms of the Class B Common Stock, which are substantially similar to the Company’s Common Stock, including voting rights, except that the Class B Common Stock will be subordinated
to the Common Stock with respect to dividends and liquidation and will automatically convert into Common Stock under certain circumstances. The Company does not intend to list the Class B Common Stock on any exchange.
Voting Rights. Class B Common Stock will vote together with the holders of Common Stock, voting as a single class, with respect to all matters on which holders of the Common Stock are entitled to vote. The Company may not authorize or issue any additional shares of Class B Common Stock beyond the number authorized in the Class B Common Stock Articles Supplementary without the affirmative vote of at least 66-2/3% of the outstanding shares of Class B Common Stock. Any amendment to the Company’s charter that would alter the rights of the Class B Common Stock must be approved by the affirmative vote of the majority of the outstanding Class B Common Stock.
Dividends. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, holders of the Class B Common Stock will be entitled to receive dividends to the extent authorized by the Company’s Board of Directors and declared by the Company pursuant to a formula based on the amount of dividends declared on the Company’s Common Stock. For each fiscal quarter ending June 30, 2021 through and including the fiscal quarter ending March 30, 2024, each share of Class B Common Stock will be entitled to receive dividends (the "Class B Common Stock Dividends"), subject to Board approval, equal to the quotient of (i) difference of (A) CAFD of the most recently completed quarter and (B) 1.25 multiplied by the Common Stock Base Dividend, divided by (ii) shares of Class B Common Stock issued and outstanding multiplied by 1.25. In no event will the Class B Common Stock Dividend per share be greater than any dividends per share authorized by the Board of Directors and declared with respect to the Common Stock during the same quarter and no Class B Common Stock Dividend will accrue until after April 1, 2021. As is the case for Common Stock, Class B Common Stock Dividends will not be cumulative.
For the fiscal quarters of the Company ending June 30, 2021, September 30, 2021, December 31, 2021 and March 30, 2022, the Common Stock Base Dividend Per Share shall equal $0.05 per share per quarter. For the fiscal quarters of the Company ending June 30, 2022, September 30, 2022, December 31, 2022 and March 30, 2023, the Common Stock Base Dividend Per Share shall equal $0.055 per share per quarter. For fiscal quarters of the Company ending June 30, 2023, September 30, 2023, December 31, 2023 and March 30, 2024, the Common Stock Base Dividend Per Share shall equal $0.06 per share per quarter. The Class B Common Stock dividend is subordinated based on a distribution formula.
Conversion. The shares of Class B Common Stock will convert to Common Stock on a one-for-one basis upon the first to occur of the following:
•the Board of Directors authorizes and the Company declares a quarterly dividend per share of outstanding Common Stock in excess of the then-applicable Common Base Dividend;
•the issuance of additional shares of Common Stock other than in connection with: (i) any director or management compensation plan or equity award, (ii) the Company’s Dividend Reinvestment Plan, (iii) any conversion rights of the Company’s existing 5.875% Convertible Senior Notes due 2025 or Series A Preferred, (iv) any exchange for fair value for the issuance of Common Stock (as determined by the Company’s Board of Directors), or (v) any stock split, reverse stock split, stock dividend or similar transaction in which the shares of Class B Common Stock share equally; or
•the Board of Directors authorizes and the Company declares a quarterly dividend per share to the Class B Common Stock equal to the then-applicable Common Base Dividend for any four consecutive fiscal quarters beginning with the fiscal quarter ending June 30, 2022 through the fiscal quarter ending March 31, 2024.
To the extent no conversion occurs as described above, then the Class B Common Stock will convert to Common Stock on February 4, 2024 at a ratio equal to the quotient obtained by dividing (i) (A) the quotient of the then-applicable last twelve months CAFD divided by the product of (x) 1.25 and (y) four (4) times the then-applicable Common Base Dividend per share, less (B) the number of then-outstanding shares of Common Stock by (ii) the number of then-outstanding shares of Class B Common Stock; provided, however, that the ratio shall not be less than 0.6800 shares of Common Stock per share of Class B Common Stock or greater than 1.000 shares of Common Stock per share of Class B Common Stock.
Dividend Declarations
On February 26, 2021, we paid dividends of $0.05 per share of Common Stock and $0.4609375 per depositary share for our 7.375% Series A Preferred Stock.
On April 28, 2021, the Company's Board of Directors also authorized the reinstatement of the operation of the Company's DRIP.
On May 28, 2021, we paid dividends of $0.05 per share of Common Stock and $0.4609375 per depositary share for our 7.375% Series A Preferred Stock.
On April 28, 2021, the Company's Board of Directors authorized the declaration of dividends on the Company's Series B Preferred of $0.25 per share (paid in kind) and on the Company's Series C Preferred Securities of $0.5625 per share (paid in cash), as if such securities had been outstanding, in accordance with the terms of the Crimson Third LLC Agreement.
On July 28, 2021, the Company’s Board of Directors authorized the declaration of dividends of $0.05 per share of Common Stock and $0.4609375 per depositary share for our 7.375% Series A Preferred Stock. Additionally, the Company's Board of Directors authorized the declaration of dividends on the Company's Series B Preferred of $0.25 per share and Series C Preferred of $0.5625 per share, as if such securities had been outstanding, in accordance with the terms of the Crimson Third LLC Agreement. Both dividends will be prorated for the period May 31, 2021 to June 30, 2021. For dividend purposes, June 30, 2021 was the final day each security earned dividends before conversion. The prorated dividend on the Series C Preferred will be paid in cash while the Series B Preferred prorated dividend will be paid in kind.
•the Board of Directors’ authorization of deemed dividends on the Series B Preferred will entitle the holders of Crimson's outstanding Class A-2 Units to receive, from Crimson, a distribution of $0.25 per unit (prorated through the June 30, 2021 conversion date), which will be paid in kind as described in the Article Supplementary. An aggregate of 24,414 additional Class A-2 Units to such holders, based on a stated value of $25.00 per unit, for all declared dividends through the conversion date; and
•the Board of Directors' authorization of deemed dividends on the Series C Preferred will entitle the holders of Crimson's outstanding Class A-1 Units to receive, from Crimson, a cash distribution of $0.5625 per unit (prorated through the June 30, 2021 conversion date).
On October 27, 2021, the Company’s Board of Directors authorized the declaration of dividends of $0.05 per share of Common Stock and $0.4609375 per depositary share for our 7.375% Series A Preferred Stock.
Class A-1 Units
On October 27, 2021, the Company's Board of Directors authorized the declaration of dividends of $0.4609375 per depositary share for its 7.375% Series A Preferred Stock payable in cash. Pursuant to the terms of Crimson's Third LLC Agreement, this determination by the Company's Board of Directors will entitle the holders of Crimson's Class A-1 Units to receive, from Crimson, a cash distribution of $0.4609375 per unit.
Class A-2 Units Distribution
On October 27, 2021, the Board decided not to declare a dividend on Class B Common Stock. Pursuant to the terms of Crimson's Third LLC Agreement, this determination by the Company's Board of Directors will result in no distribution to the holders of Crimson's Class A-2 Units.
Class A-3 Units Distribution
On October 27, 2021, the Board decided not to declare a dividend on Class B Common Stock. Pursuant to the terms of Crimson's Third LLC Agreement, this determination by the Company's Board of Directors will result in no distribution to the holders of Crimson's Class A-3 Units.
The Company anticipates that all dividends paid in 2021 will be a return of capital.
ASSET PORTFOLIO AND RELATED DEVELOPMENTS
For detailed descriptions of our asset portfolio and related operations, please refer to Part I, Item 2 "Properties" in our Annual Report on Form 10-K for the year ended December 31, 2020, and to Part I, Item 1, Note 3 ("Acquisitions"), Note 4 ("Transportation And Distribution Revenue"), Note 5 ("Leased Properties And Leases") and Note 6 ("Financing Notes Receivable") included in this Report. This section provides additional information concerning material developments related to our asset portfolio that occurred during and subsequent to the period ended September 30, 2021.
Crimson Midstream Holdings
Effective February 1, 2021, the Company completed the acquisition of a 49.50 percent interest in Crimson (which includes a 49.50 percent voting interest and the right to 100.0 percent of the economic benefit of Crimson's business, after satisfying the distribution rights of the remaining equity holders) for total consideration with a fair value of $343.8 million after giving effect to the final working capital adjustments and with the right to acquire the remaining 50.50 percent, subject to CPUC approval. After giving effect to the initial working capital adjustments, the consideration consisted of a combination of cash on hand of $74.6 million, commitments to issue new common and preferred equity valued at $115.3 million, contribution of the GIGS asset with a fair value of $48.9 million to the sellers and $105.0 million in new term loan and revolver borrowings, all as detailed further below. The consideration was subject to a final working capital adjustment. Crimson is a CPUC regulated crude oil pipeline owner and operator, and its assets include four critical infrastructure pipeline systems spanning approximately 2,000 miles (including 1,300 active miles) across northern, central and southern California, connecting California crude production to in-state refineries. The acquired assets qualify for REIT treatment under established IRS regulations and the Company’s Private Letter Ruling ("PLR").
The assets acquired in the Crimson Transaction include the following:
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Asset
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Location
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Asset Description
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Sol Cal Pipeline
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Southern California
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~760 miles of pipe (including ~610 active miles); 7 separate pipeline systems; 8 tanks and 6 pump stations. Transports crude oil from Los Angeles and Ventura basins to Los Angeles refineries.
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KLM Pipeline
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San Joaquin Valley to Northern California
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~620 miles of pipe (including ~290 active miles); 5 tanks and 7 pump stations. Transports crude oil from San Joaquin Valley to Bay Area refineries.
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San Pablo Bay Pipeline
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San Joaquin Valley to Northern California
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~540 miles of heated pipe from San Joaquin Valley to Northern California (including ~380 active miles); ~2.3Mbbls tank capacity. Transports crude oil from San Joaquin Valley to Bay Area refineries.
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Proprietary Pipeline
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South of Bakersfield
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~100 miles of pipe (including ~45 active miles); Connects Crimson system to rail volumes and supports other in-basin crude oil movements.
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In June 2021, the final working capital adjustment was made for the Crimson Transaction, which resulted in an increase in the assets acquired of $1.8 million. This resulted in 37,043 additional Class A-1 Units being issued to Grier Members for their 50.50 percent ownership interest and $908 thousand of additional cash paid for the 49.50 percent ownership interest CorEnergy purchased. The newly issued units resulted in an increase in the aggregate value of non-controlling interest of $883 thousand and increased the total number of Class A-1 Units issued to the Grier Members to 1,650,245. See Note 3 ("Acquisition") for additional details. After the working capital adjustment and paid-in-kind dividends, the Grier Members' equity ownership interest is 50.62 percent as of September 30, 2021.
MoGas Pipeline
During the fourth quarter of 2020, MoGas entered into a new long-term firm transportation services agreement with Spire, its largest customer. Upon completion of the STL Interconnect project in mid-December 2020, the agreement increased Spire's firm capacity from 62,800 dekatherms per day to 145,600 dekatherms per day through October 2030 and replaced the previous firm transportation agreement. MoGas has also entered into an additional ten-year firm transportation services agreement with Ameren Energy, an existing customer. The new agreements started providing incremental revenue for MoGas in the fourth quarter of 2020.
MoGas has also entered into an additional 5 month transportation services agreement with Spire, an existing customer. The new agreement will provide incremental revenue for MoGas beginning in the fourth quarter of 2021 and is expected to generate approximately $400 thousand of incremental revenue over the 5 month period.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual payment obligations as of September 30, 2021:
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Contractual Obligations
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Notional Value
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Less than 1 year
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2-3 years
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4-5 years
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More than 5 years
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5.875% Convertible Debt
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$
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118,050,000
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$
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—
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$
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—
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$
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118,050,000
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$
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—
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5.875% Convertible Interest
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—
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6,935,438
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13,870,875
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6,954,703
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—
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Crimson Term Loan
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76,000,000
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8,000,000
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68,000,000
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—
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—
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Crimson Term Loan Interest
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3,580,833
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6,183,750
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—
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—
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Crimson Revolver
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28,000,000
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—
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28,000,000
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—
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—
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Crimson Revolver Interest(1)
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1,273,706
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2,024,701
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—
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—
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Operating Leases
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9,058,653
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1,776,760
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2,379,495
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2,324,244
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2,578,154
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Total
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$
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21,566,737
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$
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120,458,821
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$
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127,328,947
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$
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2,578,154
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(1) The interest payments under the Crimson Revolver assume the borrowings will be outstanding until maturity on February 4, 2024. Actual borrowings and repayments will fluctuate based on the Company's working capital requirements.
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SEASONALITY
MoGas and Omega generally 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.
We expect Crimson Pipeline will have stable revenues throughout the year. Maintenance activities can be performed at any time during the year and are planned to avoid large quarterly fluctuations. Our San Pablo Bay pipeline has a seasonal minimum volume required to be operated as a batched system delivering heavy crude oil to its customers. The minimum volume is required as heavy crude oil must be heated to be transported via the pipeline. The lowest allowed minimum volume typically occurs in the months from July to September. The highest allowed minimum volume typically occurs from December to March. The actual effective periods are dependent on the ground temperature. The historical average quarterly crude oil volumes for Crimson are provided in the table below.
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Crimson Average Crude Oil Volume for Quarter Ended (bpd):
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September 30, 2020
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December 31, 2020
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March 31, 2021
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June 30, 2021
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September 30, 2021
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Crude oil volume
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207,609
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201,732
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197,764
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188,634
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191,621
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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.
IMPACT OF INFLATION AND DEFLATION
Higher inflation will likely result in higher expenses including interest expense. However, as a primarily regulated asset operator, these higher costs should translate into our ability to increase revenue to offset the higher expenses.
LIQUIDITY AND CAPITAL RESOURCES
Overview
At September 30, 2021, we had liquidity of approximately $37.1 million comprised of cash of $15.1 million plus revolver availability of $22.0 million. We use cash flows generated from our operations to fund current obligations, projected working capital requirements, debt service payments and dividend payments. We believe that cash generated from these sources will be sufficient to meet our ongoing working capital, operational expenditure requirements and to make quarterly cash distributions at current levels for the next 12 months.
Cash Flows - Operating, Investing, and Financing Activities
The following table presents our consolidated cash flows for the periods indicated below:
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For the Nine Months Ended
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September 30, 2021
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September 30, 2020
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(Unaudited)
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Net cash provided by (used in):
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Operating activities
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$
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12,238,286
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$
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10,722,374
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Investing activities
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(82,776,171)
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(834,878)
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Financing activities
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(13,967,065)
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(26,529,735)
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Net change in cash and cash equivalents
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$
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(84,504,950)
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$
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(16,642,239)
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Cash Flows from Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2021 was driven by (i) $41.5 million in net contributions from our operating subsidiaries, including Crimson, MoGas and Omega, (ii) $6.1 million in PLA subsequent sales revenue, partially offset by (iii) $20.4 million in general and administrative expenses, (iv) cash paid for interest of $10.2 million, and (v) PLA subsequent sales of $5.9 million.
Net cash flows provided by operating activities for the nine months ended September 30, 2020 were primarily attributable to (i) lease receipts of $21.1 million ($21.3 million lease revenue, plus $245 thousand of variable rent recognized in the prior year and collected in the current year period, offset by $493 thousand of straight-line rent accrued during the current year period, which was written-off at the end of the first quarter of 2020 in conjunction with the impairment of the deferred rent receivable), (ii) $9.7 million in net contributions from our operating subsidiaries MoGas and Omega and (iii) $466 thousand of income tax refunds, net, partially offset by (iv) $10.2 million in general and administrative expenses, (v) $9.1 million in cash paid for interest, (vi) a $1.0 million cash payment accounted for as an incremental cost to obtain a transportation contract.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2021 was primarily attributable to (i) $69.0 million of cash utilized to acquire our 49.50 percent interest in Crimson, net of cash acquired and (ii) purchases of property and equipment of $15.0 million.
Net cash flows used in investing activities for the nine months ended September 30, 2020 were primarily attributed to approximately $886 thousand of property and equipment purchases related to the STL interconnect construction project at MoGas.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2021 was primarily attributed to (i) common and preferred dividends paid of $1.8 million and $7.0 million, respectively, (ii) cash paid for debt financing costs of $2.7 million for the Crimson Credit Facility, (iii) advances on the Crimson Revolver of $19.0 million, offset by payments on the Crimson Revolver of $16.0 million. and (iv) principal payments of $4.0 million on the Crimson secured credit facility.
Net cash flows used in financing activities for the nine months ended September 30, 2020 were primarily attributable to (i) common and preferred dividends paid of $11.6 million and $6.9 million, respectively, (ii) cash paid for the settlement of the Amended Pinedale Term Credit Facility of $3.1 million, (iii) principal payments of $1.8 million on our secured credit facilities, (iv) cash paid for the maturity of the 7.00% Convertible Notes of $1.7 million and (v) cash paid for the extinguishment of the 5.875% Convertible Notes of $1.3 million.
Capital Expenditures
Crimson's operations can be capital intensive, requiring investments to maintain, expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Crimson's capital requirements consist of maintenance capital expenditures and growth capital expenditures. Examples of maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of Crimson's assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows. In contrast, growth capital expenditures are those made to acquire additional assets to grow Crimson's business, to expand and upgrade Crimson's systems and facilities and to construct or acquire new systems or facilities. Crimson may incur substantial amounts of capital expenditures in certain periods in connection with large maintenance projects that are intended to only maintain its
assets. For the nine months ended September 30, 2021, the Company incurred $5.4 million in maintenance capital expenditures. Crimson expects to incur maintenance capital expenditures in a range of $9.0 million to $10.0 million in 2021.
Crimson Credit Facility
On February 4, 2021, in connection with the Crimson Transaction, Crimson Midstream Operating and Corridor MoGas, (collectively, the "Borrowers"), together with Crimson, MoGas Debt Holdco LLC, MoGas, CorEnergy Pipeline Company, LLC, United Property Systems, Crimson Pipeline, LLC and Cardinal Pipeline, L.P. (collectively, the "Guarantors") entered into the Crimson Credit Facility with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as Administrative Agent for such lenders, Swingline Lender and Issuing Bank. The Crimson Credit Facility provides borrowing capacity of up to $155.0 million, consisting of: a $50.0 million revolving credit facility (the "Crimson Revolver"), an $80.0 million term loan (the "Crimson Term Loan") and an uncommitted incremental facility of $25.0 million. Upon closing of the Crimson Transaction, the Borrowers drew the $80.0 million Crimson Term Loan and $25.0 million on the Crimson Revolver. Subsequent to the initial closing, on March 25, 2021, Crimson contributed all of its equity interests in Crimson Midstream Services, LLC and Crimson Midstream I Corporation to Crimson Midstream Operating, and, effective as of May 4, 2021, such subsidiaries have become additional Guarantors pursuant to the Amended and Restated Guaranty Agreement and parties to the Amended and Restated Security Agreement and (in the case of Crimson Midstream I Corporation) the Amended and Restated Pledge Agreement.
The loans under the Crimson Credit Facility mature on February 4, 2024. The Crimson Term Loan requires quarterly payments of $2.0 million in arrears on the last business day of March, June, September and December, commencing on June 30, 2021. Subject to certain conditions, all loans made under the Credit Agreement shall, at the option of the Borrowers, bear interest at either (a) LIBOR plus a spread of 325 to 450 basis points, or (b) a rate equal to the highest of (i) the prime rate established by the Administrative Agent, (ii) the federal funds rate plus 0.5%, or (iii) the one-month LIBOR rate plus 1.0%, plus a spread of 225 to 350 basis points. The applicable spread for each interest rate is based on the Total Leverage Ratio (as defined in the Crimson Credit Facility).
Outstanding balances under the facility are guaranteed by the Guarantors pursuant to the Amended and Restated Guaranty Agreement and secured by all assets of the Borrowers and Guarantors (including the equity in such parties), other than any assets regulated by the CPUC and other customary excluded assets, pursuant to an Amended and Restated Pledge Agreement and an Amended and Restated Security Agreement. Under the terms of the Crimson Credit Facility, we are subject to certain financial covenants for the Borrowers and their restricted subsidiaries as follows (i): the total leverage ratio shall not be greater than: (a) 3.00 to 1.00 commencing with the fiscal quarter ending June 30, 2021 through and including the fiscal quarter ending December 31, 2021; (b) 2.75 to 1.00 commencing with the fiscal quarter ending March 31, 2022 through and including the fiscal quarter ending December 31, 2022; and (c) 2.50 to 1.00 commencing with the fiscal quarter ending March 31, 2023 and for each fiscal quarter thereafter and (ii) the debt service coverage ratio, shall not be less than 2.00 to 1.00.
Cash distributions to us from the Borrowers are subject to certain restrictions, including without limitation, no default or event of default, compliance with financial covenants, minimum undrawn availability and available free cash flow. The Borrowers and their restricted subsidiaries are also subject to certain additional affirmative and negative covenants customary for credit transactions of this type. The Crimson Credit Facility contains default and cross-default provisions (with applicable customary grace or cure periods) customary for transactions of this type. Upon the occurrence of an event of default, payment of all amounts outstanding under the Crimson Credit Facility may become immediately due and payable at the election of the Required Lenders (as defined in the Crimson Credit Facility).
We also had approximately $22.0 million of available borrowing capacity on the Crimson Revolver at September 30, 2021. For a summary of the additional material terms of the Crimson Credit Facility, please refer to Part IV, Item 15, Note 11 ("Debt") included in our Annual Report on Form 10-K for the year ended December 31, 2020, and Part I, Item 1, Note 12 ("Debt") included in this Report.
5.875% Convertible Notes
On August 12, 2019, we completed a private placement offering of $120.0 million aggregate principal amount of 5.875% Convertible Senior Notes due 2025 to the initial purchasers of such notes for cash in reliance on an exemption from registration provided by Section 4(a)(2) of the Securities Act. The initial purchasers then resold the 5.875% Convertible Notes for cash equal to 100% of the aggregate principal amount thereof to qualified institutional buyers, as defined in Rule 144A under the Securities Act, in reliance on an exemption from registration provided by Rule 144A. The 5.875% Convertible Notes mature on August 15, 2025 and bear interest at a rate of 5.875 percent per annum, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020.
Holders may convert all or any portion of their 5.875% Convertible Notes into shares of our Common Stock at their option at any time prior to the close of business on the business day immediately preceding the maturity date. The initial conversion rate for the 5.875% Convertible Notes is 20.0 shares of Common Stock per $1,000 principal amount of the 5.875% Convertible Notes, equivalent to an initial conversion price of $50.00 per share of our Common Stock. Such conversion rate will be subject to adjustment in certain events as specified in the Indenture.
The Indenture for the 5.875% Convertible Notes specifies events of default, including default by the Company or any of its subsidiaries with respect to any debt agreements under which there may be outstanding, or by which there may be secured or evidenced, any debt in excess of $25.0 million in the aggregate of the Company and/or any such subsidiary, resulting in such indebtedness becoming or being declared due and payable prior to its stated maturity.
Refer to Part IV, Item 15, Note 11 ("Debt") included in our Annual Report on Form 10-K for the year ended December 31, 2020 and Part I, Item 1, Note 12 ("Debt") included in this Report for additional information concerning the 5.875% Convertible Notes.
Shelf Registration Statements
On October 30, 2018, we filed a shelf registration statement with the SEC, pursuant to which we registered 1,000,000 shares of Common Stock for issuance under our dividend reinvestment plan. As of September 30, 2021, we have issued 80,036 shares of Common Stock under our dividend reinvestment plan ("DRIP") pursuant to the shelf resulting in remaining availability of approximately 919,964 shares of Common Stock.
On November 9, 2018, we had a new shelf registration statement declared effective by the SEC replacing our previously filed shelf registration statement, pursuant to which we may publicly offer additional debt or equity securities with an aggregate offering price of up to $600.0 million. As previously disclosed in our Annual Report on Form 10-K filed on March 4, 2021, we did not expect to be able to use this shelf registration statement or the shelf registration statement filed for our DRIP, at least until we were able to file certain financial statement information as required by SEC Regulation S-X. On April 29, 2021, we announced that our Board of Directors has authorized the reinstatement of the operation of the DRIP. The Board of Directors made this determination in light of the fact that the staff of the SEC has advised us that we can resume the use of our previously filed and effective shelf registration statements. On November 3, 2021, we filed a new shelf registration statement, which will replace the Current Shelf Registration Statement once it is declared effective by the SEC, pursuant to which the Company also would be able to publicly offer additional debt or equity securities with an aggregate offering price of up to $600 million.
On September 16, 2021, the Company had a resale shelf registration statement declared effective by the SEC, pursuant to which it registered the following securities that were issued in connection with the Internalization for resale by the Contributors: 1,837,607 shares of Common Stock (including both (i) 1,153,846 shares of Common Stock issued at the closing of the Internalization and (ii) up to 683,761 additional shares of Common Stock which may be acquired by the Contributors upon the conversion of outstanding shares of our unlisted Class B Common Stock issued at the closing of the Internalization) and 170,213 depositary shares each representing 1/100th fractional interest of a share of 7.375% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share issued at the closing of the Internalization.
Liquidity and Capitalization
Our principal investing activities are acquiring and financing assets within the U.S. energy infrastructure sector. These investing activities have often been financed from the proceeds of our public equity and debt offerings as well as our credit facilities mentioned above. We are also expanding our business development efforts to include other REIT qualifying revenue sources. Continued growth of our asset portfolio will depend in part on our continued ability to access funds through additional borrowings and securities offerings. Additionally, our liquidity and capitalization may be impacted by the optional redemption of the Series A Preferred Stock. The depositary shares are currently eligible to be redeemed, at our option, in whole or in part, at the $25.00 liquidation preference plus all accrued and unpaid dividends to, but not including, the date of redemption.
The following is our liquidity and capitalization as of September 30, 2021 and December 31, 2020:
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Liquidity and Capitalization
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September 30, 2021
|
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December 31, 2020
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Cash and cash equivalents
|
$
|
15,091,957
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|
|
$
|
99,596,907
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|
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Revolver availability
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$
|
22,000,000
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|
|
$
|
—
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|
|
|
|
|
|
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Revolving credit facility
|
$
|
28,000,000
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|
|
$
|
—
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|
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Long-term debt (including current maturities)(1)
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190,073,737
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|
|
115,008,130
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|
|
Stockholders' equity:
|
|
|
|
|
Series A Preferred Stock 7.375%, $0.001 par value
|
129,525,675
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125,270,350
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Common Stock, non-convertible, $0.001 par value
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14,866
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|
|
13,652
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Class B Common Stock, $0.001 par value
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684
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|
|
—
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|
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Additional paid-in capital
|
341,331,070
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|
|
339,742,380
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Retained deficit
|
(324,749,301)
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|
|
(315,626,555)
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|
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Total CorEnergy Equity
|
146,122,994
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|
|
149,399,827
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Non-controlling interest (Crimson)
|
121,534,724
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|
|
—
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|
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Total equity
|
267,657,718
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|
|
149,399,827
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|
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Total capitalization
|
$
|
485,731,455
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|
|
$
|
264,407,957
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(1) Long-term debt is presented net of discount and deferred financing costs.
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The above table does not give effect to the conversion of the non-controlling interest into our securities, which are subject to CPUC approval and will be elective by the holder(s) of the non-controlling interest. It is our intent to treat distributions with respect to the non-controlling interest, representing the A-1, A-2 and A-3 Units at Crimson, with the same relative priority and amount as our underlying securities that they may be converted into. Below is a prospective forward-looking capitalization table that adjusts for conversion of the non-controlling interest into our securities that they are expected to ultimately convert into at the election of the holder(s).
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|
|
Prospective Forward-Looking Capitalization Table
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|
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Adjustments
|
|
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|
Prospective for Non-Controlling Interest Reorganization
|
|
|
September 30, 2021 Actual(1)
|
|
Non-Controlling Interest Reorganization(2)
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
$
|
15,091,957
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
15,091,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
28,000,000
|
|
|
—
|
|
|
|
|
|
|
28,000,000
|
|
|
Long-Term Debt (including current maturities)(3)
|
190,073,737
|
|
|
—
|
|
|
|
|
|
|
190,073,737
|
|
|
Total Debt
|
218,073,737
|
|
|
—
|
|
|
|
|
|
|
218,073,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
$
|
129,525,675
|
|
|
43,889,475
|
|
|
|
|
|
|
173,415,150
|
|
|
Total
|
129,525,675
|
|
|
43,889,475
|
|
|
|
|
|
|
173,415,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
14,866
|
|
|
—
|
|
|
|
|
|
|
14,866
|
|
|
Class B Common Stock
|
684
|
|
|
11,212
|
|
|
|
|
|
|
11,896
|
|
|
Additional Paid-In Capital
|
341,331,070
|
|
|
54,816,935
|
|
|
|
|
|
|
396,148,005
|
|
|
Retained Deficit
|
(324,749,301)
|
|
|
—
|
|
|
|
|
|
|
(324,749,301)
|
|
|
Total
|
16,597,319
|
|
|
54,828,147
|
|
|
|
|
|
|
71,425,466
|
|
|
Non-controlling interest
|
121,534,724
|
|
|
(121,534,724)
|
|
|
|
|
|
|
—
|
|
|
Total Stockholders' Equity
|
$
|
267,657,718
|
|
|
$
|
(22,817,102)
|
|
|
|
|
|
|
$
|
244,840,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization
|
$
|
485,731,455
|
|
|
|
|
|
|
|
|
$
|
462,914,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
14,866,799
|
|
|
—
|
|
|
|
|
|
|
14,866,799
|
|
|
Class B Common Stock
|
683,761
|
|
|
11,212,300
|
|
|
|
|
|
|
11,896,061
|
|
|
Total Shares Outstanding
|
15,550,560
|
|
|
11,212,300
|
|
|
|
|
|
|
26,762,860
|
|
|
(1) The non-controlling interest reflects the Grier Members' equity consideration for the A-1, A-2 and A-3 Units representing a 50.62% interest in Crimson. Subject to CPUC regulatory approval, these units are convertible into certain CorEnergy securities as illustrated in the prospective adjustments above.
|
|
(2) The prospective adjustments reflect the Grier Members' exchange of the non-controlling interest presently represented by their A-1, A-2 and A-3 Units into depositary shares representing Series A Preferred Stock for the A-1 Units and Class B Common Stock both A-2 and A-3 Units. On June 29, 2021, shareholders approved the conversion of the Series B Preferred into Class B Common Stock. Such exchanges are subject to receiving CPUC approval. Further, we do not expect the holders to exercise their exchange rights all at once due to the income tax consequences arising from such exchanges. We cannot predict when the holders will elect to exchange or if they will elect to exchange at all. Refer to Part I, Item 1, Note 13 ("Stockholders' Equity") for further details on the non-controlling interest.
|
|
(3) Long-term debt is presented net of discount and deferred financing costs.
|
|
(4) Common Stock and Class B Common Stock valued at $4.89/share (November 1, 2021 closing price for the publicly traded Common Stock on the NYSE) for the NCI Reorganization .
|
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 GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, recognition of income, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
A discussion of our critical accounting estimates is presented under the heading "Critical Accounting Estimates" in Part II, 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, 2020, as previously filed with the SEC. No material modifications have been made to our critical accounting estimates except as noted below.
Business Combinations
We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date, with any remaining difference recorded as goodwill or gain from a bargain purchase. For all material acquisitions, we engage an independent valuation specialist to assist with the determination of the fair value of the assets acquired, liabilities assumed, non-controlling interests, if any, and goodwill based on recognized valuation methodologies. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition, and not later than one year from the acquisition date, we will record any material adjustments to the initial estimate in the reporting period in which the adjustment amounts are determined based on facts and circumstances that existed as of the acquisition date, as applicable. An income, market or cost valuation method may be utilized to estimate the fair value of the assets acquired or liabilities assumed in a business combination. The income valuation method represents the present value of future cash flows over the life of the asset using: (i) discrete financial forecasts, which rely on management's estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) appropriate discount rates. The market valuation method uses prices paid for a reasonably similar asset by other purchasers in the market, with adjustments relating to any differences between the assets. The cost valuation method is based on the replacement cost of a comparable asset at prices at the time of the acquisition reduced for depreciation of the asset. We expense acquisition-related costs as incurred in connection with each business combination.
