Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Lean -
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.34pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.23pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-0.45pp
Lean -
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
bankruptcy+39
loss+16
claims+9
concern+8
critical+5
Positive rising
satisfy+9
able+4
successfully+4
successful+3
success+3
Risk Factors (Item 1A)
18,675 words
ITEM 1A. RISK FACTORS
There are many risks and uncertainties that can affect our future business, financial performance or price of our securities. Many of these are beyond our control. A description follows of some of the important factors that could have a material negative impact. This discussion includes a number of forward-looking statements. You should refer to the description of the qualifications and limitations on forward-looking statements in the first paragraph under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
With the exception of historical information, certain statements contained or incorporated by reference herein may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as those pertaining to our ability to execute on our business strategy, the pursuit of growth opportunities, anticipated transportation volumes, expected rate increases, planned capital expenditures, planned dividend payment levels, capital resources and liquidity, and our planned acts relating thereto, the Chapter 11 Case and our results of operations and financial condition. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of actual events. There is no assurance the events or circumstances reflected in the forward-looking statements will occur. You can identify forward-looking statements by use of words such as "will," "may," "should," "could," "believes," "expects," "anticipates," "estimates," "intends," "projects," "goals," "objectives," "targets," "predicts," "plans," "seeks," or similar expressions or other comparable terms or discussions of strategy, plans or intentions in this Annual Report on Form 10-K.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
bankruptcy+30
restructuring+14
unpaid+8
claims+8
concern+6
Positive rising
effective+5
benefit+4
successfully+2
satisfaction+2
satisfy+1
MD&A (Item 7)
14,122 words
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements included or incorporated by reference in this Annual Report on Form 10-K may be deemed "forward-looking statements" within the meaning of the federal securities laws. In many cases, these forward-looking statements may be identified by the use of words such as "will," "may," "should," "could," "believes," "expects," "anticipates," "estimates," "intends," "projects," "goals," "objectives," "targets," "predicts," "plans," "seeks," or similar expressions. Any forward-looking statement speaks only as of the date on which it is made and is qualified in its entirety by reference to the factors discussed throughout this report.
Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance or results and we can give no assurance that these expectations will be attained. Our actual results may differ materially from those indicated by these forward-looking statements due to a variety of known and unknown risks and uncertainties. Such risks and uncertainties include, without limitation, the risk factors discussed in Part I, Item 1A of this report. We disclaim any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information, except as required by law.
Forward-looking statements necessarily are dependent on assumptions, data or methods that may be incorrect or imprecise. These forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict, which could include risks and uncertainties relating to the Company’s Chapter 11 Case, including but not limited to, the Company’s ability to satisfy all conditions precedent to the effectiveness of the Proposed Plan, to obtain Bankruptcy Court approval with respect to motions in the Chapter 11 Case, the effects of the Chapter 11 Case on the Company and on the interests of various constituents, Bankruptcy Court rulings in the Chapter 11 Case and the outcome of the Chapter 11 Case in general, the length of time the Company will operate under the Chapter 11 Case, risks associated with any third-party motions in the Chapter 11 Case, the potential adverse effects of the Chapter 11 Case on the Company’s liquidity or results of operations and increased legal and other professional costs necessary to execute the Company’s reorganization. For further discussion of these factors see "Summary Risk Factors" below and Item 1A - "Risk Factors" in this Annual Report on Form 10-K. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or the date of any document incorporated by reference herein. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except as required by law, we do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K.
RISK FACTOR SUMMARY
The following is a summary of the most significant risks relating to our business activities that we have identified. If any of these risks actually occur, our business, financial condition or results of operation, including our ability to generate cash and make distributions could be materially adversely affected. For a more complete understanding of our material risk factors, this summary should be read in conjunction with the detailed description of our risk factors that follows this summary.
Risks Related to Our Voluntary Bankruptcy Filing
• The RSA is subject to significant conditions and milestones that may be beyond our control and may be difficult for us to satisfy. If the RSA is terminated, our ability to confirm and consummate the Proposed Plan could be materially and adversely affected.
• We are subject to the risks and uncertainties associated with the Chapter 11 proceedings and may not be able to obtain confirmation of the Proposed Plan as outlined in the RSA.
• Upon emergence from bankruptcy, the composition of our Board of Directors and Officers may change significantly.
• Our historical financial information may not be indicative of our future financial performance.
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• Trading in our securities during the pendency of the Chapter 11 Case is highly speculative and poses substantial risks. It is possible that our equity securities will be cancelled pursuant to the Proposed Plan and holders of any such equity securities will receive only such distributions as set forth in the Proposed Plan, which may result in such holders being unable to recover their investments.
• Negotiating the RSA, and the Chapter 11 proceedings, has and will continue to consume a substantial portion of our management’s time and attention, which may adversely affect us and may increase employee attrition.
• If the RSA is terminated our ability to confirm and consummate the Proposed Plan could be materially and adversely affected.
• We depend on the continued presence of key personnel for critical management decisions.
• Transfers or issuances of equity before, or in connection with, our Chapter 11 proceedings may impair our ability to utilize the existing tax basis in our assets, our federal income tax net operating loss carryforwards and other tax attributes.
• We have determined that there is substantial doubt about our ability to continue as a going concern.
Risks Related to Our Investments in Energy Infrastructure
• Our focus on the energy infrastructure sector will subject us to more concentrated risks than if we were broadly diversified.
• We may be unable to identify and complete acquisitions of real property assets, and the relative illiquidity of our real property and energy infrastructure investments also may interfere with our ability to sell our assets when we desire.
• Energy infrastructure companies are and will be subject to extensive regulation, including numerous environmental regulations, pipeline safety and integrity regulations, revenue and tariff regulations by applicable interstate (FERC) and intrastate authorities, and potential future regulations related to greenhouse gases and climate change. Related compliance costs may adversely affect our business, financial condition and results of operations, as well as those of our customers.
• Our operations, and those of our customers, are subject to operational hazards, and could be affected by extreme weather patterns and other natural phenomena. Any resulting business interruptions not adequately covered by insurance could have a material adverse impact on our operations and financial results.
• We depend on certain key customers for a significant portion of our revenues, which also exposes us to related credit risks. The loss of a key customer, or any failure of our credit risk management, could result in a decline in our business.
• Pandemics, epidemics or disease outbreaks, such as the COVID-19 pandemic, has and may continue to adversely affect local and global economies and our business, operations and financial results.
• The operation of our energy infrastructure assets could be adversely affected if third-party pipelines or other facilities interconnected to our facilities become partially or fully unavailable.
Risks Related to Our Ownership Interest in Crimson
• Our only asset subsequent to the sale of the MoGas and Omega Pipelines is our ownership interest in Crimson, whose operations we do not fully control. We have a right to acquire the remaining ownership interests in Crimson that we do not own, subject to CPUC approval. The CPUC denied an application requesting this approval in December 2022, and there can be no assurances that such approval will be obtained on acceptable terms or at all.
• Crimson's insurance coverage may not be sufficient to cover our losses in the event of an accident, natural disaster or other hazardous event.
• Crimson's results could be adversely affected if third-party pipelines, refineries, and other facilities interconnected to its pipelines close, choose alternative interconnections or become unavailable, or if the volumes Crimson transports and stores are reduced due to any significant decrease in crude oil production in areas in which it operates.
• Crimson's assets were constructed over many decades, which may increase future inspection, maintenance or repair costs, or result in downtime that could have a material adverse effect on our business and results of operations.
• Crimson's pipeline loss allowance exposes us to commodity risk.
Risks Related to Rising Inflation and Interest Rate Increases
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• We may be negatively impacted by rising inflation and recent and future interest rate increases, which could raise our costs, including our financing costs, reduce demand for the use of our energy infrastructure assets and limit our acquisition activities.
Risks Related to Our Indebtedness and Financing Our Business
• The terms of the agreements that govern our indebtedness restrict our current and future operations, particularly our ability to respond to changes or pursue our business strategies.
• Even if our existing indebtedness is restructured, we may not be able to generate sufficient cash to services all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
• Our ability to make scheduled payments pursuant to the Proposed Plan depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive.
• Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Risks Related to Our Capital Stock
• Our Common Stock and Series A Preferred Stock have been delisted from the NYSE and are subject to the risks of trading in an over-the-counter market. Our inability to regain compliance with the NYSE was a fundamental change triggering the repurchase feature under the Indenture governing our Convertible Notes, which we do not have the cash on hand or liquidity to repurchase.
• Our post-bankruptcy capital structure is yet to be determined, and any changes to our capital structure may have a material adverse effect on existing debt and security holders.
• We suspended paying dividends on our Series A Preferred Stock, Common S tock, and Class B Common Stock, and we cannot assure you of our ability to pay dividends in the future or the amount of any dividends.
Risks Related to REIT Qualification and Federal Income Tax Laws
• While we take numerous actions to ensure the Company's qualification as a REIT and have obtained related private letter rulings from the IRS, any failure to so qualify would have significant adverse consequences to the Company and to the value of our capital stock. Further, complying with REIT requirements may affect our profitability and force us to forego otherwise attractive investments.
• We generally must distribute at least 90% of our REIT taxable income to our stockholders annually. As a result, we require additional capital to make new investments, and any failure to make required distributions would subject us to federal corporate income tax.
• Our charter includes ownership limit provisions to protect our REIT status, which may impair the ability of holders to convert our Convertible Notes to Common Stock and could have the effect of delaying, deferring or preventing a transaction or change of control of our Company.
• If we acquire C corporations in the future, we may inherit material tax liabilities and other tax attributes that could require us to distribute earnings and profits.
Risks Related to Our Corporate Structure and Governance
• Our charter and Maryland law may limit the ability of stockholders to control our policies and effect a change of control of our Company.
Risks Related to Terrorism, Armed Conflicts, and Cybersecurity
• Risks associated with security breaches through cyber-attacks or acts of cyber-terrorism, cyber intrusions or otherwise, as well as other significant disruptions of our information technology ("IT") networks and related systems, could materially adversely affect our business, operations or financial results.
• Terrorist attacks and armed conflict, or their impacts on the energy industry served by our infrastructure assets, could have a material adverse effect on our business, financial condition, or results of operations.
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• Some losses related to our real property assets, including, among others, losses related to potential terrorist activities, may not be covered by insurance and would adversely impact distributions to stockholders.
Risks Related to Our Voluntary Bankruptcy Filing
Beginning on February 25, 2024, the Company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of Missouri in order to implement a Chapter 11 plan to recapitalize the Company.
The RSA is subject to significant conditions and milestones that may be beyond our control and may be difficult for us to satisfy. If the RSA is terminated, our ability to confirm and consummate the Proposed Plan could be materially and adversely affected.
The RSA sets forth certain conditions we must satisfy, including the timely satisfaction of milestones in the Chapter 11 Case, such as confirmation of the Proposed Plan and effectiveness of the Proposed Plan. Our ability to timely complete such milestones is subject to risks and uncertainties that may be beyond our control. The RSA gives the Consenting Noteholders the ability to terminate the RSA under certain circumstances, including the failure of certain conditions to be satisfied. Should a termination event occur, all obligations of the parties to the RSA may terminate. A termination of the RSA may result in the loss of support for the Proposed Plan, which could adversely affect our ability to confirm and consummate the Proposed Plan. If the Proposed Plan is not consummated, there can be no assurance that any new plan would be as favorable to holders of claims as the current Proposed Plan and our Chapter 11 proceedings could become protracted, which could significantly and detrimentally impact our relationships with vendors, suppliers, employees, and tenants.
We will be subject to the risks and uncertainties associated with Chapter 11 proceedings.
As a consequence of our filing for relief under Chapter 11 of the Bankruptcy Code, our operations and our ability to develop and execute our business plan, and our continuation as a going concern, will be subject to the risks and uncertainties associated with bankruptcy. These risks include the following:
• our ability to prosecute, confirm and consummate the Proposed Plan or another plan of reorganization with respect to the Chapter 11 proceedings;
• the high costs of bankruptcy proceedings and related fees;
• if required, our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plan post-emergence;
• our ability to maintain our relationships with our suppliers, service providers, employees and other third parties;
• our ability to maintain contracts that are critical to our operations;
• our ability to execute our business plan in the current uncertain economic environment;
• the ability to attract, motivate and retain key employees;
• the ability of third parties to seek and obtain court approval to terminate contracts and other agreements with us;
• the ability of third parties to seek and obtain court approval to convert the Chapter 11 proceedings to Chapter 7 proceedings; and
• the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 proceedings that may be inconsistent with our plans.
These risks and uncertainties could affect our business and operations in various ways. For example, negative events associated with our Chapter 11 proceedings could adversely affect our relationships with our suppliers, service providers, employees, and other third parties, which in turn could adversely affect our operations and financial condition. Also, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with our Chapter 11 proceedings, we cannot accurately predict or quantify the ultimate impact of events that occur during our Chapter 11 proceedings that may be inconsistent with our plans.
We may not be able to obtain confirmation of the Proposed Plan as outlined in the RSA.
There can be no assurance that the Proposed Plan as outlined in the RSA (or any other plan of reorganization) will be approved by the Bankruptcy Court, so we urge caution with respect to existing and future investments in our securities.
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The success of any reorganization will depend on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification of their interests as outlined in the Proposed Plan, and there can be no guarantee of success with respect to the Proposed Plan or any other plan of reorganization. We might receive official objections to confirmation of the Proposed Plan from the various stakeholders in the Chapter 11 proceedings. We cannot predict the impact that any objection might have on the Proposed Plan or on a Bankruptcy Court's decision to confirm the Proposed Plan. Any objection may cause us to devote significant resources in response that could materially and adversely affect our business, financial condition and results of operations.
If the Proposed Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if any, distributions holders of claimsagainst us, including holders of our unsecured debt and equity, would ultimately receive with respect to their claims. There can be no assurance as to whether we will successfully reorganize and emerge from Chapter 11 or, if we do successfully reorganize, as to when we would emerge from Chapter 11. If no plan of reorganization can be confirmed, or if the Bankruptcy Court otherwise finds that it would be in the best interest of holders of claims and interests, the Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code.
Upon emergence from bankruptcy, our historical financial information may not be indicative of our future financial performance.
Our capital structure will be significantly altered under the Proposed Plan. Under fresh-start reporting rules that may apply to us upon the effective date of the Proposed Plan (or any alternative plan of reorganization), our assets and liabilities would be adjusted to fair values and our accumulated deficit would be restated to zero. Accordingly, if fresh-start reporting rules apply, our financial condition and results of operations following our emergence from Chapter 11 would not be comparable to the financial condition and results of operations reflected in our historical financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.
The pursuit of the RSA has consumed, and the Chapter 11 proceedings will continue to consume, a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.
Although the Proposed Plan is designed to minimize the length of our Chapter 11 proceedings, it is impossible to predict with certainty the amount of time that we may spend in bankruptcy or to assure parties in interest that the Proposed Plan will be confirmed. The Chapter 11 proceedings will involve additional expense and our management will be required to spend a significant amount of time and effort focusing on the proceedings. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, on our financial condition and results of operations, particularly if the Chapter 11 proceedings are protracted.
During the pendency of the Chapter 11 proceedings, our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a material adverse effect on our ability to effectively, efficiently and safely conduct our business, and could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations.
If the RSA is terminated, our ability to confirm and consummate the Proposed Plan could be materially and adversely affected.
The RSA contains a number of termination events, upon the occurrence of which certain parties to the RSA may terminate the agreement. If the RSA is terminated as to all parties thereto, each of the parties will be released from its obligations in accordance with the terms of the RSA. Such termination may result in the loss of support for the Proposed Plan by the parties to the RSA, which could adversely affect our ability to confirm and consummate the Proposed Plan. If the Proposed Plan is not consummated, there can be no assurance that any new plan would be as favorable to holders of claimsagainst the Company and its subsidiaries as contemplated by the RSA.
We depend on the continued presence of key personnel for critical management decisions.
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Retaining and understanding historical knowledge from our key personnel is critical to allowing the management team to more effectively progress our business plan. Anytime personnel are replaced, there is a risk that there may be a loss of service, albeit temporary, that could result in an adverse effect on the business.
Upon our emergence from bankruptcy, the composition of our Board of Directors may change significantly.
Under the Proposed Plan, the composition of our Board of Directors may change significantly. Any new directors are likely to have different backgrounds, experiences and perspectives from those individuals who previously served on the Board and, thus, may have different views on the issues that will determine our future. As a result, our future strategy and plans may differ materially from those of the past.
Trading in our securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. It is possible that our equity securities will be cancelled pursuant to the Proposed Plan and holders of any such equity securities will receive only such distributions as set forth in the Proposed Plan, which may result in such holders being unable to recover their investments.
A significant amount of our indebtedness is senior to the Common Stock and Series A Preferred Stock in our capital structure. It is possible that these equity interests may be cancelled and extinguished upon the approval of the Bankruptcy Court and the holders thereof would not be entitled to receive, and would not receive or retain, any property or interest in property on account of such equity interests. In the event of a cancellation of these equity interests, amounts invested by such holders in our outstanding equity securities will not be recoverable. Under the Proposed Plan, we expect that each holder of our Common Stock will receive nothing on account of its common stock interest. If holders of our Series A Preferred Stock vote to accept the Proposed Plan, as a class, each holder will receive its pro rata share of 8.25% of the new common stock (subject to dilution). If, however, holders of our Series A Preferred Stock vote to reject the Proposed Plan, as a class, we expect that each holder will receive nothing on account of its preferred stock interest. Further, if our plan of reorganization is not approved, our currently outstanding Common Stock and Series A Preferred Stock may have no value. Trading prices for our equity securities are very volatile and may bear little or no relationship to the actual recovery, if any, by the holders of such securities in the Chapter 11 Case. Accordingly, we urge that extreme caution be exercised with respect to existing and future investments in our equity securities and any of our other securities.
Transfers of our equity, or issuances of equity before in connection with or after our Chapter 11 proceedings, may impair our ability to utilize the existing tax basis in our assets, our federal income tax net operating loss carryforwards and other tax attributes during the current year and in future years.
Under federal income tax law, a corporation is generally permitted to offset net taxable income in a given year with net operating losses carried forward from prior years, and its existing adjusted tax basis in its assets may be used to offset future gains or to generate annual cost recovery deductions. We have significant “net unrealized built-in loss” (NUBIL) (i.e., adjusted tax basis in excess of the fair market value of our assets) and net operating loss carryforwards that are not subject to any Section 382 limitations.
Our ability to utilize future tax deductions, net operating loss carryforwards and other tax attributes to offset future taxable income is subject to certain requirements and restrictions. If we experience an "ownership change," as defined in Section 382 of the Internal Revenue Code, during or in connection with the restructuring process, then our ability to use future tax deductions, net operating loss carryforwards and other tax attributes to offset future taxable income may be substantially limited, which could have a negative impact on our financial position and results of operations.
Generally, there is an "ownership change" if one or more stockholders owning 5% or more of a corporation's common stock have aggregate increases in their ownership of such stock of more than 50 percentage points over a prescribed testing period which is generally over the three-year period preceding the date of an ownership change involving a 5% or greater shareholder. Under Section 382 and Section 383 of the Internal Revenue Code, absent an applicable exception, if a corporation undergoes an "ownership change", certain future tax deductions, net operating loss carryforwards and other tax attributes that may be utilized to offset future taxable income generally are subject to an annual limitation (though “recognized built-in losses” arising from our NUBIL will only be subject to limitation if they are recognized within 5 years of the “ownership change”).
We anticipate that the implementation of our plan of reorganization will result in an "ownership change." However, we anticipate that we will take advantage of the special tax law rules under Section 382(l)(5) of the Internal Revenue Code, which will allow us to use our net operating losses and NUBIL without any section 382 limitations. If we have a change in control within two years of the issuance of shares pursuant to the Chapter 11 Case, we will lose all of our net operating loss carryforwards. Also, as a result of
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section 382(l)(5), our net operating loss carryforwards will be reduced by the amount of interest we deducted on the indebtedness converted to our equity in our Chapter 11 Case.
The loss of our net operating loss carryforwards will likely increase our taxable income. Since the net operating loss deduction is taken into account in determining our distribution obligation in order to retain our REIT status, the loss of the net operating loss deductions may result in an increase in our required distributions. If the distributions increase too substantially, it may adversely affect our ability to continue as a REIT.
We understand that the largest bondholders, who will become our largest shareholders, have entered into a shareholders' agreement in which they have limited their ability to sell our stock in sufficient amounts to result in an "ownership change."
We have determined that there is substantial doubt about our ability to continue as a going concern.
In accordance with the accounting guidance related to the presentation of financial statements, when preparing financial statements for each annual and interim reporting period, management evaluates whether there are conditions or events that, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. In making its assessment, management considered the Company’s current financial condition and liquidity sources, as well as the status of the Chapter 11 Case.
As described in Item 1 under Recent Developments - Chapter 11 Bankruptcy, the Company commenced the Chapter 11 Case under Chapter 11 of the Bankruptcy Code. The filing of the Chapter 11 Case constituted an event of default that resulted in certain monetary obligations becoming immediately due and payable with respect to the Convertible Notes.
Given the acceleration of the Convertible Notes, as well as the inherent risks, unknown results and inherent uncertainties associated with the bankruptcy process and the direct correlation between these matters and our ability to satisfy our financial obligations that may arise, the Company believes that there is substantial doubt that it will continue to operate as a going concern within one year after the date these consolidated financial statements are issued. The Company’s ability to continue as a going concern is contingent upon its ability to successfully implement the Proposed Plan set forth in the RSA, which is pending approval of the Bankruptcy Court. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the consolidated financial statements do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should the Company be unable to continue as a going concern.
Risks Related to our Investments in Energy Infrastructure
Our focus on the energy infrastructure sector will subject us to more risks than if we were broadly diversified.
Because our business strategy is specifically focused on owning and operating assets in the energy infrastructure sector, investments in our securities may present more risks than if we were broadly diversified. A downturn in the U.S. energy infrastructure sector would have a larger impact on our assets and performance compared to a REIT that does not concentrate its investments in one economic sector. The energy infrastructure sector can be significantly affected by the supply and demand for crude oil, natural gas, and other energy commodities; the price of these commodities; exploration, production and other capital expenditures; government regulation; world and regional events, politics and economic conditions.
Production declines and volume decreases that may impact our assets could be caused by various factors, including refinery closures, decreased access to capital (or loss of economic incentive) to drill and complete wells, depletion of natural resources, catastrophic events affecting production of (or demand for) energy commodities, labor difficulties, political events, Organization of the Petroleum Exporting Countries ("OPEC") actions, environmental proceedings, increased regulations, regulatory uncertainty, equipment failures and unexpected maintenance problems, failure to obtain necessary permits, unscheduledoutages, unanticipated expenses, inability to successfully carry out new construction or acquisitions, import or export supply and demand disruptions, or increased competition from alternative energy sources.
We may be unable to identify and complete acquisitions of real property assets on favorable terms, or at all.
Our growth depends on our ability to acquire additional real property assets. Our ability to identify and complete acquisitions of real property assets on favorable terms and conditions is subject to the following risks:
• we may be unable to acquire a desired asset because of competition from other investors with significant capital, including both publicly traded and non-traded REITs and institutional investment funds;
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• competition from other investors may significantly increase the purchase price of a desired asset or result in less favorable terms;
• we may not complete the acquisition of a desired real property asset even if we have signed an acquisition agreement, because such agreements are subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction; and
• we may be unable to finance acquisitions of real property assets on favorable terms or at all.
Energy infrastructure companies are subject to extensive regulation, which could adversely impact the business and financial performance of our customers and the value of our assets.
Companies in the energy infrastructure sector are subject to significant federal, state and local government regulation in virtually every aspect of their operations, including how facilities are constructed, maintained, weatherized or hardened, and operated, environmental and safety controls, and the prices such companies may charge for the products and services they provide. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminalpenalties, including civil fines, injunctions or both. Stricter laws, regulations or enforcement policies could be enacted in the future that would likely increase compliance costs, which could adversely affect the business and financial performance of our customers in the energy infrastructure sector and the value or quality of our assets.
Our Crimson operation is subject to extensive environmental and other regulation, which may adversely affect our income and the Cash Available for Distribution to our stockholders.
In addition to the pipeline safety regulations discussed below, the business operations of Crimson, as well as assets we may acquire and operate in the future, are subject to extensive federal, regional, state and local environmental laws including, but not limited to, the Clean Air Act (CAA), the Clean Water Act (CWA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Resource Conservation and Recovery Act (RCRA), the Oil Pollution Act (OPA), the Occupational Safety and Health Administration (OSHA) and analogous state and local laws. These laws and their implementing regulations may restrict or impact business activities in many ways, such as requiring the acquisition of permits or other approvals to conduct regulated activities, limiting emissions and discharges of pollutants, restricting the manner of waste disposal, requiring remedial action to remove or mitigate contamination, requiring capital expenditures to comply with pollution control or workplace safety requirements, and imposing substantial liabilities for pollution resulting from business operations. In addition, the regulations implementing these laws are constantly evolving, and the potential impact of recent regulatory actions is impossible to predict.
If an operator, such as Crimson, fails to comply with these laws and regulations, it could be subject to a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements and the issuance of orders enjoining future operations. The operator may be unable to recover some or all of the resulting costs through insurance or increased revenues, which could have a material adverse effect on its business, results of operations and financial condition. Additionally, to the extent we acquire and operate storage facilities, pipelines, and oil platforms in reliance on the PLR, we will be exposed to risks similar to those described above (and to which Crimson is exposed).
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the Cash Available for Distribution to our stockholders.
We have invested, and expect to continue to invest, in real property assets in the energy infrastructure, which are subject to laws and regulations relating to the protection of the environment and human health and safety. These laws and regulations generally govern the gathering, storage, handling, and transportation of petroleum and other hazardous substances, the emission and discharge of materials into the environment, including wastewater discharges and air emissions, the operation and removal of underground and above ground storage tanks, the generation, use, storage, treatment, transportation and disposal of solid and hazardous materials and wastes, and the remediation of any contamination associated with such disposals. We own assets related to the storage and distribution of oil and gas, natural gas and natural gas liquids, which are subject to inherent hazards and risks such as fires, pipe and other equipment and system failures, uncontrolled flows of oil or gas, environmental risks and hazards such as gas leaks, oil spills, pipeline ruptures and discharges of toxic gases. Environmental laws and regulations may impose joint and several liability on owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Such liability could be substantial. Moreover, if one or more of these hazards occur, there can be no assurance that a response will be adequate to limit or reduce any resulting damage. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings. We also may be required to comply with various local, state and federal fire, health, life-safety and similar regulations.
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Failure to comply with applicable environmental, health, and safety laws and regulations may result in the assessment of sanctions, including administrative, civil or criminalfines or penalties, permit revocations, and injunctions limiting or prohibiting some or all of the operations at our facilities. Any material compliance expenditures, fines, or damages we must pay could materially and adversely affect our business, assets or results of operations and, consequently, would reduce our ability to make distributions.
Regulation of greenhouse gases and climate change could have a negative impact on our and our customers' businesses.
There has been an increasing focus of local, state, national and international regulatory bodies on greenhouse gas ("GHG") emissions and climate change issues. The U.S. Environmental Protection Agency ("EPA") has adopted rules requiring GHG reporting and permitting, and the United States Congress and EPA may consider additional legislation or regulations that could ultimately require new, modified, and reconstructed facilities, and/or existing facilities, to meet emission standards by installing control technologies, adopting work practices, or otherwise reducing GHG emissions. If we or our customers are unable to recover or pass through a significant level of compliance costs related to any such future climate change and GHG regulatory requirements, it could have a material adverse impact on our or our customers' business, financial condition and results of operations. Further, to the extent financial markets view climate change and GHG emissions as a financial risk, it could negatively impact our cost of, or access to, capital. Climate change and GHG regulation could also reduce the demand for hydrocarbons and, ultimately, demand for utilization of our energy infrastructure assets related to the production and distribution of hydrocarbons.
Pipeline safety integrity programs and repairs may impose significant costs and liabilities on Crimson or other operating assets we may acquire.
Regulations administered by the Federal Office of Pipeline Safety within DOT's PHMSA require pipeline operators to develop integrity management programs to comprehensively evaluate certain areas along their pipelines and to take additional measures to protect certain pipeline segments. As an operator, Crimson, and any other systems or facilities we may acquire and operate in reliance on the PLR are likely to be, required to:
• perform ongoing assessments of pipeline or asset integrity;
• identify and characterize applicable threats to pipeline or asset segments that could impact a high consequence area;
• improve data collection, integration and analysis;
• repair and remediate the pipeline or asset as necessary; and
• implement preventative and mitigating actions.
Crimson is required to maintain pipeline integrity testing programs that are intended to assess pipeline integrity. Any repair, remediation, preventative or mitigating actions could require significant capital and operating expenditures. The regulations implementing these laws are constantly evolving. Compliance with new or more stringent laws or regulations, or stricter enforcement or interpretation of existing laws, could significantly increase compliance costs. Should Crimson fail to comply with the Federal Office of Pipeline Safety's rules and related regulations and orders, we could be subject to significant penalties and fines, which could have a material adverse effect on our business, results of operations and financial condition. PHMSA also may apply to other systems at facilities that we, in reliance on the PLR, may acquire and operate in the future.
Our operations, as well as those of our customers, are subject to operational hazards and unforeseeninterruptions. If a significant accident or event occurs that results in a business interruption or shutdown for which we are not adequately insured, such operations and our financial results could be materially adversely affected.
Our assets are subject to many hazards inherent in the transmission of energy products and the provision of related services, including:
• aging infrastructure, mechanical or other performance problems;
• damage to pipelines, facilities and related equipment caused by tornadoes, hurricanes, floods, fires, extreme weather events, and other natural disasters, explosions and acts of terrorism;
• inadvertentdamage from third parties, including from construction, farm and utility equipment;
• leaks of natural gas and other hydrocarbons or losses of natural gas as a result of the malfunction of equipment or facilities or operator error; and
• environmental hazards, such as natural gas leaks, product and waste spills, pipeline and tank ruptures, and unauthorized discharges of products, wastes and other pollutants into the surface and subsurface environment, resulting in environmental pollution.
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These risks could result in substantial losses due to personal injury and/or loss of life, severedamage or destruction of property and equipment, and pollution or other environmental damage, any of which may result in curtailment or suspension of our related operations or services. A natural disaster or other hazard affecting the areas in which we operate could have a material adverse effect on our operations and the financial results of our business.
We depend on certain key customers for a significant portion of our revenues. The loss of any such key customer, or a reduction in their transported volumes, could result in a decline in our business.
We depend on certain key customers for a significant portion of our revenues, particularly operating revenues from Crimson, related to fees for the transportation of crude oil and natural gas through their respective pipeline systems. The loss of all or even a portion of their volumes or contracts, as a result of competition, creditworthiness, inability to negotiate extensions or replacements of contracts, decisions of refineries to close or alter their crude oil sources or delivery routes, could have a material adverse effect on the business, financial condition and results of our operations.
Pandemics, epidemics or disease outbreaks, such as the COVID-19 pandemic, have, and may continue to adversely affect local and global economies and our business, operations or financial results.
Disruptions caused by pandemics, epidemics or disease outbreaks, in locations in which we operate or globally, could materially adversely affect our business, operations, financial results and forward-looking expectations. The COVID-19 pandemic had caused significant disruption across local, national and global economies and financial markets. As a result, there was a decline in the demand for, and thus also the market prices of, oil and natural gas (and other products of our customers), which adversely impacted our properties, temporarily worsened our estimated future cash flows related to such properties and resulted in substantial impairment charges in 2020 with respect to the affected assets. Although the market for oil and natural gas has improved in recent years, the effects of the COVID-19 pandemic have contributed to a current recessionary environment, rising inflation, higher interest rates and increased volatility in financial markets. The duration and extent of these negative economic effects are impossible to predict and could adversely affect our business, operations and financial results in the future. Additionally, a resurgence of the COVID-19 pandemic, or any other pandemic, epidemic or disease outbreak, may have similar adverse economic effects and could adversely impact our financial results.
We are exposed to the credit risk of our customers and our credit risk management may not be adequate to protect against such risk.
We are subject to the risk of loss resulting from nonpayment and/or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate such credit risk. If we fail to adequately assess the creditworthiness of any customers, unanticipateddeterioration in their creditworthiness and any resulting increase in nonpayment and/or nonperformance by them and inability to re-market the resulting capacity, or re-lease the underlying assets, could have a material adverse effect on our business, financial condition and results of operations. We may not be able to effectively re-market such capacity, or re-lease such assets, during and after bankruptcy or insolvency proceedings involving a customer.
Our assets and operations, as well as those of our customers , can be affected by extreme weather patterns and other natural phenomena.
Our assets and operations, as well as those of our customers and other investees, can be adversely affected by floods, hurricanes, earthquakes, landslides, tornadoes, fires and other natural phenomena and weather conditions, including extreme or unseasonable temperatures, making it more difficult for us to realize the historic rates of return associated with our assets and operations. These events also could result in significant volatility in the supply of energy and power, which might create fluctuations in commodity prices and earnings of companies in the energy infrastructure sector. A significant disruption in our operations or those of our customers, or a significant liability for which we or affected customers are not fully insured, could have a material adverse effect on our business, results of operations, and financial condition. Moreover, extreme weather events could adversely impact the valuation of our energy infrastructure assets.
The operation of our energy infrastructure assets could be adversely affected if third-party pipelines or other facilities interconnected to our facilities become partially or fully unavailable.
Our facilities connect to other pipelines or facilities owned by third parties. We depend upon third-party pipelines and other facilities that provide delivery options to and from such facilities. For example, our Crimson operation includes four rate regulated pipeline systems that provide critical link between California crude oil production and California refineries. Because we do not own these third-party facilities, their continuing operation is not within our control. Accordingly, these pipelines and other facilities may become unavailable, or available only at a reduced capacity, due to factors such as repairs, damage, lack of capacity, governmental permitting issues or many other reasons outside of our control. If these pipeline connections were to become unavailable to us for current or future volumes of products, our ability, to operate efficiently and continue shipping products to end markets could be restricted, thereby reducing revenues. Likewise, if any of these third-party pipelines or facilities
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becomes unable to transport any products distributed or transported through our facilities, our business, results of operations and financial condition could be adversely affected, which could adversely affect our ability to make cash distributions to our stockholders.
The relative illiquidity of our real property and energy infrastructure asset investments may interfere with our ability to sell our assets when we desire.
Investments in real property and energy infrastructure assets are relatively illiquid compared to other investments. Accordingly, we may not be able to sell such assets when we desire or at prices acceptable to us in response to changes in economic or other conditions. This could substantially reduce the funds available for satisfying our obligations and for distribution to our stockholders.
Risks Related to Our Ownership Interest in Crimson
Our only asset subsequent to the sale of the MoGas and Omega Pipelines is our ownership interest in Crimson, whose operations we do not fully control.
Following the sale of the Omega and MoGas assets, our ownership interest in Crimson that includes crude oil pipelines is our only remaining operation. As a result, our ability to make distributions to our stockholders will wholly depend on the performance of this entity and its ability to distribute funds to us.
We own 49.50% of the voting membership interests in Crimson. John D. Grier and certain affiliated trusts of Mr. Grier (collectively, the "Grier Members") hold the remaining interests in Crimson. Our ability to influence decisions with respect to the operation of Crimson is subject to the terms of its Third Amended and Restated Operating Agreement, which requires supermajority board approval of distributions to us and the Grier Members, and gives Mr. Grier effective control over operating decisions relating to the majority of Crimson's assets. We have the right to acquire the remaining 50.50% of the voting membership interests in Crimson, subject to CPUC approval. As previously announced, in December 2022, the CPUC published its decision denying the application of Mr. Grier for authority to sell and transfer these remaining interests to us. We are evaluating the options for ultimately obtaining this approval; however, there can be no assurances that such approval will be obtained on acceptable terms or at all.
Crimson's insurance coverage may not be sufficient to cover our losses in the event of an accident, natural disaster or other hazardous event.
Crimson's operations are subject to many hazards inherent to our industry. Such assets may experience physical damage as a result of an accident or natural disaster. These hazards may also cause personal injury and loss of life, severedamage to and destruction of property and equipment, pollution or environmental damage, and suspension of operations. We maintain a comprehensive insurance program for us, our subsidiaries and certain of our affiliates to mitigate the financial impacts arising from these hazards. This program includes insurance coverage in types and amounts and with terms and conditions that are generally consistent with coverage customary for our industry; however, insurance does not cover all events in all circumstances.
In the unlikely event that multiple insurable incidents occur within the same insurance period that, in the aggregate, exceed coverage limits, the total insurance coverage will be allocated among our entities on an equitable basis based on an insurance allocation agreement among us and our subsidiaries. Additionally, even with insurance, if any natural disaster or other hazardous event leads to a catastrophicinterruption in operations, we may not be able to restore operations without significant interruption.
If third-party pipelines, refineries, and other facilities interconnected to Crimson's pipelines, become unavailable to transport, produce, or store crude oil, Crimson's revenue and available cash could be adversely affected.
Crimson depends upon third-party pipelines, refineries, and other facilities that provide delivery options to and from its pipelines and terminal facilities. Their continuing operation is not within Crimson's control. For example, wildfires in California may require exploration and production facilities and refineries to shut down. These shutdowns could cause a reduction of future volumes of crude oil, damage to the facility, lack of capacity, shut-in by regulators or any other reason, leaks, or require shut-in due to regulatory action or changes in law, all of which could negatively impact Crimson's ability to operate efficiently thereby reducing revenue. Disruptions at refineries that use Crimson's pipelines, such as from strikes or other disruptions can also have an adverse impact on the volume of products Crimson ships. Any temporary or permanent interruption at any key pipeline or terminal interconnect, any termination of any material connection agreement, or adverse change in the terms and conditions of service, could have a material adverse effect on Crimson's business, results of operations, financial condition or cash flows, including Crimson's ability to make cash distributions to us that help fund distributions to our stockholders.
Any significant decrease in production of crude oil in areas in which Crimson operates could reduce the volumes of crude oil Crimson transports and stores, which could adversely affect our revenue and available cash.
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Crimson's crude oil pipelines and terminal system depend on the continued availability of crude oil production and reserves. Low prices for crude oil could adversely affect development of additional reserves and continued production from existing reserves that are accessible by Crimson's assets.
California crude oil prices have fluctuated significantly over the past few years, often with drastic moves in relatively short periods of time. The current global, geopolitical, domestic policy and economic uncertainty may contribute to future volatility in financial and commodity markets in the near to medium term.
In general terms, the prices of crude oil and other hydrocarbon products fluctuate in response to changes in supply and demand, market uncertainty, permitting for new wells and a variety of additional factors that are beyond our control. Such factors include worldwide economic conditions; weather conditions and seasonal trends; the levels of domestic production and consumer demand; the availability of imported crude oil; the availability of transportation systems with adequate capacity; actions by OPEC and other oil producing nations; the effect of energy conservation measures; the strength of the U.S. dollar; the nature and extent of governmental regulation and taxation; and the anticipated future prices of crude oil and other commodities.
While we saw an increase in both the demand for and price of crude oil in 2022 and 2023, continuing into 2024, there remains continued volatility. Such volatility has had and may continue to have a negative impact on exploration, development and production activity, particularly in the continental United States. If lower prices return and are sustained, it could lead to a material decrease in such activity. Sustained reductions in exploration or production activity in our areas of operation could lead to reduced utilization of Crimson's pipelines. Any such reduction in demand or less attractive terms could have a material adverse effect on our results of operations, financial position and ability to make or increase cash distributions to our stockholders.
In addition, production from existing areas with access to Crimson's pipeline and terminal systems will naturally decline over time. The amount of crude oil reserves underlying wells in these areas may also be less than anticipated, and the rate at which production from these reserves declines may be greater than anticipated. Accordingly, to maintain or increase the volume of crude oil transported, or throughput, on Crimson's pipelines, or stored in its terminal system, and cash flows associated with the transportation and storage of crude oil, Crimson's customers must continually obtain new supplies of crude oil.
Crimson does not own all of the land on which its assets are located, which could result in disruptions to Crimson's operations.
Crimson does not own all of the land on which its assets are located, and is, therefore, subject to the possibility of unfavorable terms and increased costs to retain necessary land use if Crimson does not have valid leases or rights-of-way, or if such leases or rights-of-way lapse or terminate. Crimson obtains the rights to construct and operate its assets on land owned by third parties, and some of these agreements may grant Crimson such rights for only a specific period of time. Crimson's loss of these or similar rights, through the inability to renew leases, right-of-way contracts or otherwise, or inability to obtain easements at reasonable costs could have a material adverse effect on Crimson's business, results of operations, financial condition and cash flows, including Crimson's ability to make cash distributions to us that help fund distributions to our stockholders.
Crimson's assets were constructed over many decades, which may cause its inspection, maintenance or repair costs to increase in the future. In addition, there could be service interruptions due to unknown events or conditions or increased downtime associated with Crimson's pipelines that could have a material adverse effect on our business and results of operations .
Crimson's pipelines and storage terminals were constructed over many decades. Pipelines and storage terminals are generally long-lived assets, and construction and coating techniques have varied over time. Depending on the era of construction, some assets will require more frequent inspections, which could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our business, results of operations, financial condition or cash flows.
Crimson’s financial results primarily depend on the outcomes of regulatory and ratemaking proceedings and Crimson may not be able to manage its operating expenses and capital expenditures so that it is able to earn its authorized rate of return in a timely manner or at all.
As a regulated entity, Crimson's tariffs are set by the CPUC on a prospective basis and are generally designed to allow Crimson to collect sufficient revenues to recover reasonable costs of providing service, including a return on its capital investments. Crimson's financial results could be materially affected if the CPUC does not authorize sufficient revenues for Crimson to safely and reliably serve its customers and earn its authorized return of equity. The outcome of Crimson's ratemaking proceedings may be affected by many factors, including the level of opposition by intervening parties; potential rate impacts; increasing levels of regulatory review; changes in the political, regulatory, or legislative environments; and the opinions of Crimson's regulators,
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consumer and other stakeholder organizations, and customers, about Crimson's ability to provide safe and reliable oil transportation pipeline transportation.
In addition to the amount of authorized revenues, Crimson's financial results could be materially affected if Crimson's actual costs to safely and reliably serve its customers differ from authorized or forecast costs. Crimson may incur additional costs for many reasons including changing market circumstances, unanticipated events (such as wildfires, storms, earthquakes, accidents, or catastrophic or other events affecting Crimson's operations), or compliance with new state laws or policies. Although Crimson may be allowed to recover some or all of the additional costs, there may be a substantial delay between when Crimson incurs the costs and when Crimson is authorized to collect revenues to recover such costs. Alternatively, the CPUC may disallow costs that they determine were not reasonably or prudently incurred by Crimson.
Some of our directors and officers may have conflicts of interest with respect to certain other business interests related to the Crimson Transaction.
The Grier Members hold certain limited liability company interests in Crimson, which were received in connection with the Crimson Transaction and relate to their prior equity interests in certain pre-transaction properties of Crimson. Prior to any later exchange of these limited liability company interests for common or preferred stock of the Company, the Grier Members will have tax consequences that differ from those of the Company and the Company's public stockholders upon the sale of, or certain changes to the debt encumbering, any of these properties. Accordingly, the Company, on the one hand, and the Grier Members, on the other hand, may have different objectives regarding the terms of any such future transactions related to such properties. Under the terms of Crimson's Third Amended and Restated Operating Agreement, the approval of any action, or of a failure to take any action, that could impact the Company's ability to continue to qualify as a REIT, requires the approval of a supermajority of the members of Crimson's Board of Managers (consisting of the Crimson Managers, John D. Grier and Robert L Waldron, and the CorEnergy Managers, David J. Schulte and Todd Banks).
Crimson's pipeline loss allowance exposes us to commodity risk.
Crimson's transportation agreements and tariffs for crude oil shipments include a pipeline loss allowance. Crimson collects pipeline loss allowance to reduce its exposure to differences in crude oil measurement between origin and destination meters, which can fluctuate. This arrangement exposes us to risk of financial loss in some circumstances, including when the crude oil is received from the connecting carrier using different measurement techniques, or resulting from solids and water produced from the crude oil. It is not always possible for us to completely mitigate the measurement differential. If the measurement differential exceeds the loss allowance, the pipeline must make the customer whole for the difference in measured crude oil. Additionally, Crimson takes title to any excess product that it transports when product losses are within the allowed levels, and regularly sell that product at prevailing market prices. This allowance oil revenue is subject to more volatility than transportation revenue, as it is directly dependent on Crimson's measurement capability and prevailing commodity prices.
Our forecasted assumptions may not materialize as expected on Crimson's expansion projects, acquisitions and divestitures.
We and Crimson evaluate expansion projects, acquisitions and divestitures on an ongoing basis. Planning and investment analysis is highly dependent on accurate forecasting assumptions and to the extent that these assumptions do not materialize, financial performance may be lower or more volatile than expected. Volatility and unpredictability in the economy, both locally and globally, a change in both expected volume flows and cost estimates, project scoping and risk assessment could result in a loss of our profits.
Our business requires the retention and recruitment of a skilled workforce, and difficulties recruiting and retaining our workforce could result in a failure to implement our business plans.
The operations and management of both Crimson and the Company's other assets require the retention and recruitment of a skilled workforce, including engineers, technical personnel and other professionals. We and our affiliates compete with other companies in the energy industry for this skilled workforce. If we are unable to retain current employees and/or recruit new employees of comparable knowledge and experience, our business could be negatively impacted. In addition, we could experience increased costs to retain and recruit these professionals.
Risks Related to Rising Inflation and Interest Rate Increases
We may be negatively impacted by rising inflation and interest rate increases, which will likely increase our costs for labor, material and services, and increase our interest expense on current and future indebtedness.
Inflation has risen substantially in recent years. Increases in inflation, as well as any resulting governmental policies, may have an adverse effect on us. Current and future inflationary effects may be driven by, among other things, supply chain disruptions and
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governmental stimulus or fiscal policies. Continuing increases in inflation could impact interest rates and the commodity markets generally, the overall demand for the use of our energy infrastructure assets, and our costs for labor, material and services, all of which could have an adverse impact on our business, financial position, results of operations and cash flows.
Interest rates have also increased significantly in recent years. The U.S. Federal Reserve raised the benchmark interest rate multiple times during 2022 and 2023, and there can be no assurances that the rate will not further increase in the future. Rising interest rates will cause us to pay higher interest rates upon financing or refinancing, resulting in higher interest expense related to our existing variable rate indebtedness, and new borrowings we undertake to finance investments and acquisitions. Such cost increases could limit our investment and acquisition activities, and would have an adverse impact on our financial performance and ability to service debt and make distributions.
Risks Related to Our Indebtedness and Financing Our Business
The terms of the agreements that govern our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies.
Following the sale of the MoGas and Omega assets in which we used the proceeds to repay and cancel the Crimson Credit Facility, we had outstanding consolidated indebtedness of approximately $118.1 million. Our leverage could have important consequences. For example, it could:
• result in the acceleration of a significant amount of debt for non-compliance with the terms of such debt or, if such debt contains cross-default or cross-acceleration provisions, other debt;
• materially impair our ability to borrow undrawn amounts under existing financing arrangements or to obtain additional financing or refinancing on favorable terms or at all;
• limit our ability to pay distributions by restricting cash flow from some of our subsidiaries unless certain conditions are satisfied, including without limitation, no default or event of default, compliance with financial covenants, minimum undrawn availability under certain revolving credit facilities, and available free cash flow;
• require us to dedicate a substantial portion of our cash flow to paying principal and interest on our indebtedness, thereby reducing the cash flow available to fund our business, to pay distributions, including those necessary to maintain REIT qualification, or to use for other purposes;
• increase our vulnerability to economic downturns;
• limit our ability to withstand competitive pressures; or
• reduce our flexibility to respond to changing business and economic conditions.
A breach of the covenants under the agreements that govern the terms of any of our indebtedness could result in an event of default under the applicable indebtedness, permitting our creditors to exercise various remedies. Although the commencement of the Chapter 11 Case itself constituted an event of default under substantially all of our existing indebtedness and any efforts to exercise remedies in respect of our indebtedness are automatically stayed as a result of the Chapter 11 Case, the RSA contemplates the reinstatement of certain of our existing indebtedness through the Proposed Plan.
Moreover, we expect that any new indebtedness following our emergence from bankruptcy will be subject to covenants.
As a result of these restrictions, we may be:
• limited in how we conduct our business;
• unable to raise additional debt or equity financing to operate during general economic or business downturns; or
• unable to compete effectively, execute our growth strategy or take advantage of new business opportunities.
These restrictions may affect our ability to grow in accordance with our plans.
Even if our existing indebtedness is restructured, we may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
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Even if our existing indebtedness is reduced or discharged in part through the Proposed Plan, our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources following emergence from bankruptcy are insufficient to fund our debt service obligations and other cash requirements, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. The agreements governing our existing indebtedness restrict (and we expect that any agreement governing our remaining indebtedness upon emergence from bankruptcy will restrict) (a) our ability to dispose of assets and use the proceeds from any such dispositions and (b) our ability to raise debt capital to be used to repay our indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
Our inability to generate sufficient cash flows following emergence from bankruptcy to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations.
If we cannot make scheduled payments on our debt following emergence from bankruptcy, we will be in default and, as a result, lenders under any of our then-outstanding indebtedness could declare essentially all outstanding principal and interest to be due and payable, our secured lenders could forecloseagainst the assets securing such borrowings and we could be forced to return to
bankruptcy or into liquidation.
We may still incur substantially more debt or take other actions, which would intensify the risks discussed above.
We may be able to incur substantial additional indebtedness in the future. Although agreements governing our post-emergence indebtedness are expected to restrict the incurrence of additional indebtedness, these restrictions are and will be subject to a number of qualifications and exceptions and the additional indebtedness incurred in compliance with these restrictions could be substantial. Applicable Bankruptcy Court orders in the Chapter 11 Case may also permit the incurrence of additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could intensify.
We face risks associated with our dependence on external sources of capital.
In order to qualify as a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income each year, and we will be subject to tax on our income to the extent it is not distributed. Because of this distribution requirement, we may not be able to fund all future capital needs from cash retained from operations. As a result, to fund capital needs, we must rely on third-party sources of capital, which we may not be able to obtain on favorable terms, if at all. Our access to third-party sources of capital depends upon a number of factors, including (i) general market conditions; (ii) the market's perception of our growth potential; (iii) our current and potential future earnings and cash distributions; and (iv) the market price of our Common Stock or value of our other capital stock. As noted above, the current recessionary economic environment, increased inflation and rising interest rates may increase the costs of, and limit our ability to obtain, capital. Additional debt financing may substantially increase our debt-to-total capitalization ratio. Additional equity issuances may dilute the holdings of our current stockholders.
Risks Related to Our Convertible Notes
The NYSE delisting and the filing of the Chapter 11 Case is a “fundamental change” constituting an event of default under the Indenture that requires us to repurchase the Convertible Notes, which we do not have the cash on hand necessary to do.
Both the NYSE delisting our Common Stock and Series A Preferred Stock and the filing of the Chapter 11 Case constitute an event of default that accelerated obligations under the indenture for the Convertible Notes. As set forth in the Indentures, upon the occurrence of a fundamental change, holders of the Convertible Notes have the right, at their option, to require us to repurchase for cash all of their Convertible Notes, or any portion of the principal thereof that is equal to $1,000, or a multiple of $1,000, at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest, thereon to (but excluding) the fundamental change repurchase date. As a result of the Chapter 11 Case, the principal amount together with accrued and unpaid interest thereon shall be immediately due and payable.
However, any efforts to enforce such payment obligations under the indenture against the Company are automatically stayed as a result of the filing of the Chapter 11 Case, and the creditors’ rights of enforcement in respect of such obligations are subject to the
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applicable provisions of the Bankruptcy Code. Additionally, in connection with the Chapter 11 Case, the Company has incurred, and expects to continue to incur, significant professional fees and other costs. There can be no assurance that the Company’s current liquidity is sufficient to allow it to satisfy its obligations related to the Chapter 11 Case or to pursue confirmation of the Proposed Plan.
Our indebtedness and provisions of the RSA restructuring the Convertible Notes could discourage an acquisition of us by a third party.
Our indebtedness and certain provisions of the RSA restructuring the Convertible Notes could make it more difficult or more expensive for a third party to acquire us. Under the RSA, in exchange for the Convertible Notes, each holder thereof will receive, among other things, its pro rata share of the principal amount of Takeback Debt (as defined below) and 88.96% of the shares of the New Common Stock (subject to dilution). In addition, the Proposed Plan includes a term sheet pursuant to which the holders of the Convertible Notes will provide the reorganized Company with a five-year secured term loan in the principal amount of $45.0 million (the "Takeback Debt"). The term sheet also provides that certain holders of the Convertible Notes and other lenders will provide the reorganized Company with a one-year $10.0 million revolving credit facility.
In addition, the Proposed Plan also provides that the reorganized Company will adopt new governance documents and securityholder agreements with the Consenting Noteholders governing, among other things, stockholder approval rights with respect to certain corporate actions, information rights, stock transfer restrictions, tag-along and drag-along rights, preemptive rights and registration rights. The large percentage of New Common Stock issued to the holders of the Convertible Notes together with the new governance documents and indebtedness owed by the Company to such holders will provide such holders with a significant degree of control of the Company post-emergence, which may make a potential acquisition of us less attractive to a third party.
Risks Related to Our Capital Stock
Our Common Stock and Series A Preferred Stock have been delisted from the New York Stock Exchange and are subject to the risks of trading in an over-the-counter market.
As previously disclosed, on December 1, 2023, the Company received a written notice from the staff of NYSE Regulation notifying us that NYSE Regulation reached its decision to suspend our Common Stock and Series A Preferred Stock pursuant to Section 802.01B of the NYSE’s Listed Company Manual because we had fallen below the NYSE’s continued listing standard requiring listed companies to maintain an average common stock global market capitalization over a consecutive 30 trading day period of at least $15.0 million. We subsequently appealed the decision. However, on February 26, 2024, we notified the NYSE that we withdrew our appeal. The NYSE formally delisted our Common Stock and Series A Preferred Stock on March 11, 2024.
On December 4, 2023, our Common Stock and Series A Preferred Stock commenced trading on the OTC Markets Group Inc.'s Pink Open Market marketplace for trading of over-the-counter stocks. We are under no obligation to develop or maintain a market in the common stock or preferred stock. We cannot provide assurance that our Common Stock and Series A Preferred Stock will continue to trade on the Pink Open Market, that brokers will continue to provide public quotes of our Common Stock or Series A Preferred Stock, that a market for our Common Stock and Series A Preferred Stock will develop or be maintained, or that the trading volume of our Common Stock and Series A Preferred Stock will be sufficient enough to generate an efficient trading market. Holders of our Common Stock and Series A Preferred Stock may not be able to sell or otherwise transfer such common stock and preferred stock.
In addition, on February 27, 2024 and March 11, 2024, we filed post-effective amendments to various outstanding registration statements on Form S-3, and post-effective amendments to various outstanding registration statements on Form S-8, each to remove and withdraw from registration the securities that were registered but remained unsold thereunder. We can provide no assurance that our Common Stock and Series A Preferred Stock will continue to trade on the OTC market, whether broker-dealers will continue to provide public quotes of Common Stock and Series A Preferred Stock on this market, whether the trading volume of our Common Stock and Series A Preferred Stock will be sufficient to provide for an efficient trading market or whether quotes for our Common Stock and Series A Preferred Stock will continue on this market in the future, which could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our Common Stock and Series A Preferred Stock. Furthermore, because of the limited market and generally low volume of trading in our Common Stock and Series A Preferred Stock, the price of our Common Stock and Series A Preferred Stock could be more likely to be affected by broad market fluctuations, general market conditions, and changes in the markets’ perception of our capital stock.
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Our post-bankruptcy capital structure is yet to be determined, and any changes to our capital structure may have a material adverse effect on existing debt and security holders.
Our post-bankruptcy capital structure has yet to be determined and will likely be set pursuant to a Chapter 11 plan that requires Bankruptcy Court approval. The reorganization of our capital structure may include exchanges of new debt or equity securities for our existing debt, equity securities, and claimsagainst us. Such new debt may be issued at interest rates, payment schedules and maturities different than our existing debt securities. Existing equity securities are subject to a high risk of being cancelled or replaced with new equity securities representing a significantly reduced equity interest in our Company following completion of the reorganization. The success of a reorganization through any such exchanges or modifications will depend on approval by the Bankruptcy Court and the willingness of sufficient numbers of existing debt and security holders holding sufficient amounts of debt to agree to the exchange or modification, subject to the provisions of the Bankruptcy Code, and there can be no guarantee of success. If such exchanges or modifications are successful, holders of our debt or of other claimsagainst us may find their holdings no longer have any value or are materially reduced in value, or they may be converted to equity and be diluted or may be modified or replaced by debt with a principal amount that is less than the outstanding principal amount, longer maturities and reduced interest rates. Holders of our Common Stock and Series A Preferred Stock may also find that their holdings no longer have any value and face highly uncertain or no recoveries under a plan. There can be no assurance that any new debt or equity securities will maintain their value at the time of issuance. If existing debt or equity holders are adversely affected by a reorganization, it may adversely affect our ability to issue new debt or equity in the future. Although we cannot predict how the claims and interests of stakeholders in the Chapter 11 Case, including holders of Common Stock and Series A Preferred Stock, will ultimately be resolved, we expect that Common Stock holders will not receive a recovery through any Chapter 11 plan unless the holders of more senior claims and interests, such as our unsecured indebtedness (which indebtedness is currently trading at a significant discount), are paid in full. Consequently, there is a significant risk that the holders of our Common Stock would receive no recovery in the Chapter 11 Case and that our Common Stock will be worthless. In addition, if holders of our Series A Preferred Stock vote to accept the Proposed Plan, as a class, each holder will receive its pro rata share of 8.25% of the new common stock (subject to dilution). If, however, holders of our Series A Preferred Stock vote to reject the Proposed Plan, as a class, we expect that each holder will receive nothing on account of its preferred stock interest.
We have suspended paying dividends on our Series A Preferred Stock, Common Stock, and Class B Common Stock, and we cannot assure you of our ability to pay dividends in the future or the amount of any dividends.
Prior to the commencement of the Chapter 11 Case, our Board determined to suspend paying a dividend on our Series A Preferred Stock, Common Stock, and Class B Common Stock in February 2023 because of a combination of declining volumes and increased costs in our California systems and near-term debt maturities. In making this determination, our Board considered a variety of relevant factors, including, without limitation, REIT minimum distribution requirements, the amount of Cash Available for Distribution, restrictions under Maryland law, capital expenditures and reserve requirements and general operational requirements. We cannot assure you that we will be able to make distributions in the future. The Series A Preferred Stock will accrue dividends during any period in which dividends are not paid, and any such accrued dividends must be paid prior to the Company resuming dividend payments on its Common Stock or Class B Common Stock. We do not expect to pay any further dividends with respect to the Company’s outstanding Common Stock and Series A Preferred Stock prior to the conclusion of our reorganization pursuant to the pending Chapter 11 Case. We also expect our Chapter 11 reorganization to extinguish all claims related to the unpaid Series A Preferred Stock dividends (including the currently stayed rights preferred stockholders otherwise would have to elect two additional directors to our Board if preferred dividends are in arrears for six or more quarterly periods). Even if we successfully complete such reorganization, we cannot assure you that we will be able to make distributions in the future with respect to new equity securities issued pursuant to the Chapter 11 Cases. All of the foregoing could adversely affect the market price of our publicly traded securities, even following our pending Chapter 11 reorganization.
Risks Related to REIT Qualification and Federal Income Tax Laws
We have elected to be taxed as a REIT for fiscal 2013 and subsequent years, but the IRS may challenge our qualification as a REIT.
We have elected to be a REIT for federal income tax purposes. In order to qualify as a REIT, a substantial percentage of our income must be derived from, and our assets must consist of, real estate assets and, in certain cases, other investment property. We have acquired and managed investments which satisfy the REIT tests. Whether a particular investment is considered a real estate asset for such purposes depends upon the facts and circumstances of the investment. Due to the factual nature of the determination, the IRS may challenge whether any particular investment will qualify as a real estate asset or realize income which satisfies the REIT income tests. In determining whether an investment is a real property asset, we will look at the Code and the IRS's interpretation of the Code in regulations, published rulings, private letter rulings and other guidance. In the case of a private letter ruling issued to another taxpayer, we would not be able to bind the IRS to the holding of such ruling. We have received private letter rulings from the IRS with respect to certain issues relevant to our qualification as a REIT. In general, the rulings
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provide, subject to the terms and conditions contained therein, that we may treat certain of our assets as qualifying REIT assets and certain income that we receive as rents from interests in real property. Although we may generally rely upon the rulings, no assurance can be given that the IRS will not challenge our qualification as a REIT on the basis of other issues or facts outside the scope of the rulings. If the IRS successfullychallenges our qualification as a REIT, we may not be able to achieve our objectives and the value of our stock may decline. As a REIT, our distributions from earnings and profits will be treated as ordinary income, and generally will not qualify as qualified dividend income ("QDI").
Fluctuations in the fair market value of the assets that we own and that are owned by our taxable REIT subsidiaries may adversely affect our continued qualification as a REIT.
We have to satisfy the REIT asset tests at the end of each quarter. Although fluctuations in the fair market value of our assets should not adversely affect our qualification as a REIT, we must satisfy the asset tests immediately after effecting the REIT acquisition of any asset. Thus, we may be limited in our ability to purchase certain assets depending upon the potential fluctuations in the fair market value of our direct and indirect assets. Because fair market value determinations are factual, risks exist as to the fair market determination.
Failure to qualify as a REIT would have significant adverse consequences to us and the value of our capital stock.
Beginning with our fiscal year ended December 31, 2013, we believe our income and investments have allowed us to meet the income and asset tests necessary for us to qualify for REIT status and we have elected to be taxed as a REIT for fiscal years 2013 through 2023. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code as to which there may only be limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification. Accordingly, we cannot assure our stockholders that we will be organized or will operate to qualify as a REIT for future fiscal years. If, with respect to any taxable year, we fail to qualify as a REIT, we would not be allowed to deduct distributions to stockholders in computing our taxable income. After our initial election and qualification as a REIT, if we later failed to so qualify and we were not entitled to relief under the relevant statutory provisions, we would also be disqualified from treatment as a REIT for four subsequent taxable years. If we fail to qualify as a REIT, corporate-level income tax would apply to our taxable income at regular corporate rates. As a result, the amount available for distribution to holders of equity securities could be reduced for the year or years involved, and we would no longer be required to make distributions. In addition, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it could adversely affect the value of our capital stock.
As a REIT, failure to make required distributions would subject us to federal corporate income tax.
In order to remain qualified for taxation as a REIT, we also are generally required to distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gain) each year, or in limited circumstances, the following year, to our stockholders. Beginning with our fiscal year ended December 31, 2013, we believe we have satisfied these requirements. Our bank covenants limit the amount of cash that may be distributed to our stockholders. If our Cash Available for Distribution is insufficient, we may be unable to maintain distributions that approximate our REIT taxable income and may fail to remain qualified for taxation as a REIT. In addition, our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the payment of expenses and the recognition of income and expenses for federal income tax purposes, or the effect of nondeductible expenditures, such as capital expenditures, payments of compensation for which Section 162(m) of the Code denies a deduction, interest expense deductions limited by Section 163(j) of the Code, the creation of reserves or required debt service or amortization payments.
To the extent that we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal and state corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax on our undistributed taxable income to the extent the actual amount that we distribute to our stockholders for a calendar year is less than the minimum distribution amount specified under the Code.
Ownership limitation provisions in our charter may delay or prevent certain transactions in our shares, and could have the effect of delaying, deferring or preventing a transaction or change of control of our Company.
To maintain our qualification as a REIT for U.S. federal income tax purposes, among other purposes, our charter includes provisions designed to ensure that not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals (as defined in the Internal Revenue Code to include certain entities such as private foundations) at any time during the last half of any taxable year. Subject to the exceptions described below, our charter generally prohibits any person (as defined under the Internal Revenue Code to include certain entities) from actually owning or being deemed to own by virtue of the applicable constructive ownership provisions of the Internal Revenue Code, (i) more than 9.8% (in value or in
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number of shares, whichever is more restrictive) of the issued and outstanding shares of our Common Stock or (ii) more than 9.8% in value of the aggregate of the outstanding shares of all classes and series of our stock, in each case, excluding any shares of our stock not treated as outstanding for federal income tax purposes. We refer to these restrictions as the "ownership limitation provisions." Our charter further prohibits any person from beneficially or constructively owning shares of our Common Stock that would result in us being "closely held" under Section 856(h) of the Code or otherwise failing to qualify as a REIT. Our charter also provides that any transfer of shares of our Common Stock which would, if effective, result in our Common Stock being beneficially owned by fewer than 100 persons (as determined pursuant to the Internal Revenue Code) shall be void ab initio and the intended transferee shall acquire no rights in such shares. These ownership limitation provisions may prevent or delay individual transactions in our stock that would trigger such provisions, and also could have the effect of delaying, deferring or preventing a change in control and, as a result, could adversely affect our stockholders' ability to realize a premium for their shares of capital stock. However, our Board may waive the ownership limitation provisions with respect to a particular stockholder and establish different ownership limitation provisions for such stockholder. In granting such waiver, our Board may also require the stockholder receiving such waiver to make certain representations, warranties and covenants related to our ability to qualify as a REIT.
Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.
To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. We may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We may also be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to sell assets in adverse market conditions, borrow on unfavorable terms or distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements could materially and adversely affect us.
As a REIT, we are required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our REIT taxable income in order to deduct distributions to our stockholders. As a result, we will continue to need additional capital to make new investments. If additional funds are unavailable or not available on favorable terms, our ability to make new investments will be impaired.
As a REIT, we are required to distribute at least 90% of our REIT taxable income in order to deduct distributions to our stockholders, and as such we expect to continue to require additional capital to make new investments or carry existing investments. We may acquire additional capital from the issuance of securities senior to our Common Stock or Class B Common Stock, including additional borrowings or other indebtedness or the issuance of additional securities. We may also acquire additional capital through the issuance of additional equity. However, we may not be able to raise additional capital in the future on favorable terms or at all. Unfavorable economic conditions, such as rising interest rates and the current recessionary economic environment, could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We may issue debt securities, other instruments of indebtedness or preferred stock, and we may borrow money from banks or other financial institutions, which we refer to collectively as "senior securities." As a result of issuing senior securities, we will also be exposed to typical risks associated with leverage, including increased risk of loss. If we issue preferred securities which will rank "senior" to our Common Stock or Class B Common Stock in our capital structure, the holders of such preferred securities may have separate voting rights and other rights, preferences or privileges more favorable than those of our Common Stock or Class B Common Stock, and the issuance of such preferred securities could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for security holders or otherwise be in our best interest.
To the extent our ability to issue debt or other senior securities is constrained, we will depend on issuances of additional Common Stock to finance new investments. If we raise additional funds by issuing more of our Common Stock or senior securities convertible into, or exchangeable for, our Common Stock, the percentage ownership of our stockholders at that time would decrease, and our stockholders may experience dilution.
If we acquire C corporations in the future, we may inherit material tax liabilities and other tax attributes from such acquired corporations, and we may be required to distribute earnings and profits.
From time to time we may acquire C corporations or assets of C corporations in transactions in which the basis of the corporations' assets in our hands is determined by reference to the basis of the assets in the hands of the acquired corporations.
In the case of assets we acquire from a C corporation in a conversion transaction, which the Treasury regulations define as the qualification of a C corporation as a REIT or the transfer of property owned by a C corporation to a REIT, if we dispose of any
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such asset in a taxable transaction (including by deed in lieu of foreclosure) during the five-year period beginning on the date of the conversion transaction, then we generally will be required to pay tax at the highest regular corporate tax rate on the gain recognized to the extent of the excess of (1) the fair market value of the asset over (2) our adjusted tax basis in the asset, in each case determined as of the date of the conversion transaction, with certain REIT modifications, provided deemed sale treatment is not elected or certain exceptions under the Treasury regulations do not apply. Any taxes we pay as a result of such gain would reduce the amount available for distribution to our stockholders. The imposition of such tax may require us to forgo an otherwise attractive disposition of any assets we acquire from a C corporation in a conversion transaction, and as a result may reduce the liquidity of our portfolio of investments. In addition, in such a conversion transaction, we could potentially succeed to any tax liabilities and earnings and profits of any acquired C corporation. To qualify as a REIT, we must distribute any non-REIT earnings and profits by the close of the taxable year in which such transaction occurs. If the IRS were to determine that we acquired non-REIT earnings and profits from a corporation that we failed to distribute prior to the end of the taxable year in which the conversion transaction occurred, we could avoid disqualification as a REIT by paying a "deficiency dividend." Under these procedures, we generally would be required to distribute any such non-REIT earnings and profits to our stockholders within 90 days of the determination and pay a statutory interest charge at a specified rate to the IRS. Such a distribution would be in addition to the distribution of REIT taxable income necessary to satisfy the REIT distribution requirement and may require that we borrow funds to make the distribution even if the then-prevailing market conditions are not favorable for borrowings. In addition, payment of the statutory interest charge could materially and adversely affect us.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect our investors or us. Although we are not aware of any pending tax legislation that would adversely affect our ability to qualify as a REIT, we cannot predict how future changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the income tax consequences of such qualification.
Risks Related to Our Corporate Structure and Governance
In addition to the ownership limit provisions discussed above, certain provisions of our charter and of Maryland law may limit the ability of stockholders to control our policies and effect a change of control of our Company.
Our charter authorizes our Board to amend our charter to increase or decrease the aggregate number of authorized shares of stock, to authorize us to issue additional shares of our Common Stock or preferred stock and to classify or reclassify unissued shares of our Common Stock or preferred stock and thereafter to authorize us to issue such classified or reclassified shares of stock. We believe that these provisions in our charter provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise. The additional classes or series, as well as the additional authorized shares of stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our Board does not currently intend to do so, it could authorize us to issue a class or series of stock containing rights that could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our Common Stock or Class B Common Stock or that such holders otherwise believe to be in their best interests.
Provisions of the Maryland General Corporation Law and our charter and bylaws could deter takeover attempts and have an adverse impact on the price or value of our capital stock.
The following considerations related to provisions of Maryland General Corporation Law, and of our charter and bylaws, may have the effect of discouraging, delaying or making difficult a change in control of our Company or the removal of our incumbent directors:
• We are subject to the Business Combination Act of the Maryland General Corporation Law. However, pursuant to the statute, our Board has adopted a resolution exempting us from the Maryland Business Combination Act for any business combination between us and any person to the extent that such business combination receives the prior approval of our Board. This resolution, however, may be altered or repealed in whole or in part at any time by our Board. If this resolution is repealed, or our Board does not otherwise approve a business combination with a person, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
• Our bylaws exempt acquisitions of stock by any person from the Maryland Control Share Acquisition Act. If we amend our bylaws to repeal the exemption from the Maryland Control Share Acquisition Act, the Maryland Control Share Acquisition Act also may make it more difficult to obtain control of our Company.
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• As described above, our charter includes a share ownership limit and other restrictions on ownership and transfer of shares, in each such case designed, among other purposes, to preserve our status as a REIT, which may have the effect of precluding an acquisition of control of us without the approval of our Board.
• Under our charter, our Board is divided into three classes serving staggered terms, which may make it more difficult for a hostile bidder to acquire control of us.
• Our charter contains a provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the Maryland General Corporation Law relating to the filling of vacancies on our Board. Further, through provisions in our charter and bylaws unrelated to Subtitle 8, we (1) require a two-thirds vote for the removal of any director from the Board, which removal must be for cause, (2) vest in the Board the exclusive power to fix the number of directors, subject to limitations set forth in our charter and bylaws, (3) have a classified Board and (4) require that, unless a special meeting of stockholders is called by the chairman of our Board, our chief executive officer, our president or our Board, such a special meeting may be called to consider and vote on any matter that may properly be considered at a meeting of stockholders only at the request of stockholders entitled to cast not less than a majority of all votes entitled to be cast on a matter at such meeting.
• In addition, as discussed above, our Board may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including preferred stock. Our Board also may, without stockholder action, amend our charter to increase the number of shares of stock of any class or series that we have authority to issue.
• Our bylaws include advance notice provisions, governing stockholders' director nominations or proposal of other business to be considered at an annual meeting of our stockholders, requiring the continuous ownership by the stockholder(s) putting forth any such nominee or proposal of at least 1% of our outstanding shares for a minimum period of at least three years prior to the date of such nomination or proposal and through the date of the related annual meeting (including any adjournment or postponement thereof), each as specified in the bylaws.
• Our bylaws designate certain Maryland courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' ability to obtain a judicial forum that our stockholders believe is favorable for disputes with us or our directors, officers or employees.
The existence of these provisions, among others, may have a negative impact on the price or value of our capital stock and may discourage third-party bids for ownership of our Company. These provisions may prevent any premiums being offered for our capital stock.
Risk Related to Terrorism, Armed Conflicts, and Cybersecurity
A terrorist attack, act of cyber-terrorism or armed conflict could harm our business.
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the U.S., whether or not targeted at our assets or those of customers, could adversely affect the U.S. and global economies and could prevent us from meeting our financial and other obligations. Both we and our investees could experience loss of business, delays or defaults in payments from customers or disruptions of supplies and markets if domestic and global utilities or other energy infrastructure companies are direct targets or indirect casualties of an act of terror or war. Additionally, both we and other investees rely on financial and operational computer systems to process information critically important for conducting various elements of our respective businesses. Any act of cyber-terrorism or other cyber-attack resulting in a failure of our computer systems, or those of our customers, suppliers or others with whom we do business, could materially disrupt our ability to operate our respective businesses and could result in a financial loss to the Company and possibly do harm to our reputation. Accordingly, terrorist activities and the threat of potential terrorist activities (including cyber-terrorism) and any resulting economic downturn could adversely affect our business, financial condition and results of operations. Any such events also might result in increased volatility in national and international financial markets, which could limit our access to capital or increase our cost of obtaining capital.
Terrorist attacks and armed conflict, or their impacts on the energy industry served by our infrastructure assets, could have a material adverse effect on our business, financial condition, or results of operations.
Terrorist attacks and armed conflict may significantly affect the energy industry, including our operations and those of our current and potential customers, as well as general economic conditions, consumer confidence and spending, and market liquidity. Strategic targets, such as energy-related assets, may be at greater risk of future attacks than other targets in the United States. Our insurance may not protect against such occurrences. Furthermore, commodity markets are currently also subject to heightened levels of uncertainty related to the Russian military incursion into Ukraine, which could give rise to regional instability and result in heightened economic sanctions by the U.S. and the international community that, in turn, could increase uncertainty with respect to global financial markets and production output from the OPEC and other oil producing nations. Consequently, it is possible that any of these occurrences, or a combination of them, could adversely impact the energy markets served by our
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infrastructure assets which could, in turn, have a material adverse effect on our business, financial condition, and results of operations.
We face risks associated with security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our IT networks and related systems.
We rely on information technology systems and network infrastructure, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and maintenance of records. Our business is dependent upon information systems and other digital technologies for controlling our plants, pipelines and other assets, processing transactions and summarizing and reporting results of operations. The secure processing, maintenance and transmission of information is critical to our operations. A security breach of our network or systems, or the network or systems of our third-party vendors, could result in improper operation of our assets, potentially including delays in the delivery or availability of our customers’ products, contamination or degradation of the products we transport, store or distribute, or releases of hydrocarbon products for which we could be held liable. Furthermore, we and some of our vendors collect and store sensitive data in the ordinary course of our business, including personal identification information of our employees as well as our proprietary business information.
Cybersecurity risks have increased in recent years as a result of the proliferation of new technologies and the increased sophistication, magnitude and frequency of cyber-attacks and data security breaches. Because of the critical nature of our infrastructure and our use of information systems and other digital technologies to control our assets, we face a heightened risk of cyber-attacks. Cyber-attacks targeting our infrastructure could result in a full or partial disruption of our operations, as well as those of our customers. Likewise, cyber-attacks in the form of "social engineering" (manipulating recipients into performing actions, or divulging information, by impersonating members of Company management, customers or others) aimed at our company, our employees, our customers, or others could result in operational disruption, financial loss and reputational harm. Although we make efforts to maintain the security and integrity of our data, IT networks and related systems, and we have implemented various measures to minimize and/or manage the risk of a security breach or disruption, we cannot guarantee that our security efforts and measures will be effective at preventing or detecting any attempted or actual security incidents, or that disruptions caused by any such incidents or attempted incidents will not be successful or damaging to us or others.
During the normal course of business, we have experienced and expect to continue to experience attempts to gainunauthorized access to, or to compromise, our information systems or to disrupt our operations through cyber-attacks or security breaches, although none to our knowledge have had a material adverse effect on our business, operations or financial results. Despite our security measures, our information systems, or those of our vendors, may become the target of further cyber-attacks (including hacking, viruses or acts of terrorism) or security breaches (including employee error, malfeasance or other breaches), which could compromise and disrupt the proper functioning of our network or systems, or those of our vendors, affect our ability to correctly record, process and report transactions or financial information, or result in the release or loss of the information stored therein, misappropriation of assets, misstated financial reports, violations of loan covenants and/or missed reporting deadlines, inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT, disruption to our operations or damage to our facilities. As a result of a cyber-attack or security breach, we could also be liable under laws that protect the privacy of personal information, subject to regulatory penalties, experience damage to our reputation or a loss of consumer confidence in our products and services, or incur additional costs for remediation and modification or enhancement of our information systems, and require significant management attention and resources, to prevent future occurrences or other costs or be subject to increased regulation or litigation, all of which could materially adversely affect our reputation, business, operations or financial results.
RECENT DEVELOPMENTS
Chapter 11 Bankruptcy
On the Petition Date, CorEnergy Infrastructure Trust, Inc. commenced the filing of the Chapter 11 Case. Neither Crimson, in which CorEnergy consolidates, nor any other CorEnergy subsidiary has filed for bankruptcy. Both the Company and Crimson expect to have sufficient liquidity to continue operating without interruption during and after the Company's restructuring process being implemented through the Chapter 11 Case.
The Chapter 11 Case is being administered under the caption "In re: CorEnergy Infrastructure Trust, Inc." Additional information about the Chapter 11 Case, including access to Bankruptcy Court documents, is available online at https://cases.stretto.com/corenergy, a website administered by Stretto, a third-party bankruptcyclaims and noticing agent. The documents and other information on this website are not part of this Annual Report on Form 10-K and shall not be incorporated by reference herein.
The Company is currently operating its business as a "debtor in possession" in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. After the Company commenced the Chapter 11 Case, the Bankruptcy Court granted certain relief requested by the Company enabling it to operate in the ordinary course of business and minimize the effect of the bankruptcy on the Company's business, including, among other things, authorizing the Company to pay employee wages and benefits, maintain existing banking practices and additional customary operational and administrative relief.
Subject to certain exceptions, under the Bankruptcy Code, the filing of the Chapter 11 Case automatically enjoined, or stayed, the continuation of most judicial and administrative proceedings or filings of other actions against the Company or its property to recover, collect or secure a claim arising prior to the Petition Date. Accordingly, although the filing of the Chapter 11 Case triggered a default that accelerated obligations under the Indenture for the Convertible Notes, creditors are stayed from taking any actions against the Company as a result of such default, subject to certain limited exceptions permitted by the Bankruptcy Code. Absent an order of the Bankruptcy Court, substantially all of the Company's prepetition liabilities are subject to settlement under the Bankruptcy Code. However, as discussed below, the Plan of Reorganization contemplates that certain liabilities would be reinstated or paid in full in the ordinary course of business if the Plan of Reorganization is approved by the Bankruptcy Court.
As further described in the Company's Current Report on Form 8-K filed with the SEC on February 26, 2024, on February 25, 2024, prior to the commencement of the Chapter 11 Case, the Company entered into the Restructuring Support Agreement with the Consenting Noteholders. Under the RSA, the Consenting Noteholders have agreed, subject to certain terms and conditions, to support a financial and operational restructuring of the existing debt of, existing equity interests in, and certain obligations of the Company pursuant to the proposed Plan of Reorganization, substantially in the form attached as an exhibit to the RSA, to be implemented through the Chapter 11 Case.
On March 19, 2024, the Bankruptcy Court entered an order conditionally approving the disclosure statement and approving certain voting and solicitation procedures relating to the Chapter 11 Case.
The RSA requires the Company to seek to have the Plan of Reorganization confirmed by the Bankruptcy Court no later than 105 calendar days after the Petition Date and the Plan of Reorganization become effective no later than 30 days after such confirmation date. Before the Bankruptcy Court will confirm the Plan of Reorganization, the Bankruptcy Code requires at least one "impaired" class of claims votes to accept the Plan of Reorganization. A class of claims votes to "accept" the Plan of
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Reorganization if voting creditors that hold a majority in number and two-thirds in amount of claims in that class approve the Plan of Reorganization. The RSA requires the Consenting Noteholders vote in favor of and support the Plan of Reorganization. On April 30, 2024, the Company filed its declaration regarding the results of voting indicating that all three of the voting classes had voted to accept the Plan of Reorganization.
The Plan of Reorganization contemplates treatment of the claims of the Company's stakeholders as set forth below:
• Each secured claim will be reinstated or paid in full (or otherwise treated such that it will remain unimpaired in accordance with Section 1124 of the Bankruptcy Code).
• Each other priority claim (each claim as defined in Section 101(5) of the Bankruptcy Code entitled to prior in right of payment under Section 507(a) of the Bankruptcy Code, but excluding certain administrative and tax claims), will be reinstated or paid in full in the ordinary course of business (or otherwise treated consistent with Section 1129(a)(9) of the Bankruptcy Code).
• Each unsecured claim will be reinstated or paid in full in the ordinary course of business in accordance with the terms and conditions of the particular transaction giving rise to such claim.
• Each holder of Convertible Notes will receive its pro rata share of the following in exchange for the Convertible Notes: (i) $23.6 million (subject to adjustment upwards based on the amount of Excess Effective Date Cash); (ii) the principal amount of Takeback Debt; (iii) 88.96% of the shares of New Common Stock of the reorganized Company (subject to dilution by the Management Incentive Plan and further subject to adjustment downwards based on the amount of Excess Effective Date Cash, subject to a cap); and (iv) Excess Effective Date Cash (defined as the amount of cash held by the Company on the effective date of the Plan of Reorganization in excess of $12.0 million capped at $8.5 million).
• If the holders of the Company's Series Preferred Stock approve the Plan of Reorganization, each holder will receive such holder's pro rata share of 8.25% of the New Common Stock (subject to dilution by the Management Incentive Plan and further subject to adjustment upwards based on the amount of Excess Effective Date Cash, subject to a cap) in exchange for the Preferred Stock. If the holders of the Series A Preferred Stock do not approve the Plan of Reorganization, (i) each holder will receive such holder's pro rata share of the Company's liquidation value as set forth in the disclosure statement, which amount is estimated to be $0.00 and the Series A Preferred Stock will be cancelled and (ii) the percentage of New Common Stock that would have been allocated to the holders of the Series A Preferred Stock will be reallocated to the holders of Convertible Notes and holders of Crimson Class A-1 Units.
• Each holder of the Company's Common Stock will receive such holder's pro rata share of the Company's liquidation value as set forth in the disclosure statement, which amount is estimated to be $0.00 and the Common Stock will be cancelled.
• With respect to all Crimson Class A-1 Units, the holders thereof will receive the right to exchange such units into 2.79% of the New Common Stock in substitution for their right to exchange such units into the Series A Preferred Stock (subject to dilution by the Management Incentive Plan and further subject to adjustment upwards based on the amount of Excess Effective Date Cash, subject to a cap) and any tracking dividend or liquidation rights that existed with respect to the Series A Preferred Stock, will now track to the percentage interest in the New Common Stock. With respect to all Class A-2 and Class A-3 Units of Crimson, the holders thereof will have their rights to exchange such units into shares of Common Stock of the Company cancelled.
The Plan of Reorganization includes a term sheet for Takeback Debt under which the holders of the Convertible Notes will provide the reorganized Company with a five-year secured term loan in the principal amount of $45.0 million bearing interest at 12% per annum with interest starting to accrue on April 4, 2024, and payable on a quarterly basis. The term sheet also provides that certain holders of the Convertible Notes and other lenders will provide the reorganized Company with a one-year $10.0 million revolving credit facility the proceeds of which will be limited to certain specified emergency uses. Amounts drawn under the revolving credit facility will bear interest at one-month SOFR plus 3% per annum with interest payable on a quarterly basis.
The Plan of Reorganization provides that the reorganized Company will adopt a Management Incentive Plan on the effective date of the plan. All grants under the Management Incentive Plan will ratably dilute all New Common Stock issued pursuant to the Plan of Reorganization. The Management Incentive Plan will reserve exclusively for participants a pool of stock-based awards in the reorganized Company in the form of (i) warrants for 5.0% of New Common Stock and (b) 5.0% of New Common Stock, both
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determined on a fully diluted and fully distributed basis, which shall be reserved for distribution in accordance with the Management Incentive Plan. The reorganized Company will assume all of the Company's existing employment agreements.
The Plan of Reorganization also provides that the reorganized Company will adopt new governance documents, each in a form to be included in a supplement to the plan. On April 11, 2024, the Company filed its plan supplement consisting of, among other items, the Credit Agreement, Security Agreement, Pledge and Security Agreement, Guaranty Agreement, Stockholder’s Agreement with the Consenting Noteholders, Articles of Amendment and Restatement, Fourth Amended and Restated Bylaws, and Omnibus Equity Plan. The new governance documents filed with the plan supplement govern among other things, the composition of the reorganized Company's board of directors, board and stockholder approval rights with respect to certain corporate actions, information rights, stock transfer restrictions, tag-along and drag-along rights, preemptive rights and registration rights.
The Company cannot predict the ultimate outcome of the Chapter 11 Case at this time. For the duration of the Chapter 11 proceedings, the Company's operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process. As a result of these risks and uncertainties, the amount and composition of the Company's assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 proceeding, and the description of the Company's operations, properties and liquidity and capital resources included in this Annual Report on Form 10-K may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process.
Going Concern Uncertainty
Given the event of default and acceleration of the Convertible Notes, as well as the inherent risks, unknown results and inherent uncertainties associated with the bankruptcy process and the direct correlation between these matters and our ability to satisfy our financial obligations that may arise, the Company believes that there is substantial doubt that it will continue to operate as a going concern within one year after the date its consolidated financial statements are issued. The Company's ability to continue as a going concern is contingent upon its ability to successfully implement the Plan of Reorganization set forth in the RSA, which is pending approval of the Bankruptcy Court. Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the consolidated financial statements do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should the Company be unable to continue as a going concern.
Delisting of Common Stock and Series A Preferred Stock
As previously disclosed, on December 1, 2023, the Company received a written notice from the staff of NYSE notifying the Company that the NYSE had determined to commence proceedings to delist the Company's Common Stock and Series A Preferred Stock from the NYSE. NYSE reached this decision pursuant to Section 802.01B of the NYSE’s listed company manual because the Company had fallen below the NYSE’s continued listing standard requiring listed companies to maintain an average common stock global market capitalization over a consecutive 30 trading day period of at least $15.0 million. The NYSE indicated that it would apply to the SEC to delist the Company's Common Stock and Series A Preferred Stock upon completion of all applicable procedures, including any appeal by the Company of the NYSE staff’s decision. The Company subsequently appealed the decision.
On February 26, 2024, the Company notified the NYSE that it was withdrawing its appeal. On February 27, 2024, the NYSE filed a Form 25 with the SEC to delist the Company's Common Stock and Series A Preferred Stock from the NYSE. The delisting became effective on March 11, 2024. The deregistration of the Company's Common Stock and Series A Preferred Stock under Section 12(b) of the Exchange Act will be effective 90 days, or such shorter period as the SEC may determine, after the filing date of the Form 25. The Company's Common Stock and Series A Preferred Stock currently trade on the OTC Pink Marketplace under the symbols "CORRQ" AND "CORLQ," respectively. While the Company intends to apply for the New Common Stock to be quoted on the OTC market and to make available to stockholders financial and other information concerning the Company in accordance with applicable OTC rules following the Company's emergence from bankruptcy, there can be no assurance as to the development or liquidity of any market for the New Common Stock.
Sale of MoGas and Omega Pipeline Systems
On January 19, 2024, CorEnergy closed the sale of its MoGas and Omega pipeline systems to Spire Midstream, a subsidiary of Spire Inc. (NYSE: SR), in an all-cash transaction for $175.0 million, plus post close working capital adjustments of $1.1 million. At closing, CorEnergy repaid and canceled the Crimson Credit Facility, for a total of $108.5 million and subsequent to closing the
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Company will make additional payments of approximately $7.3 million for taxes and other transaction related fees, which will result in net proceeds of $60.3 million. Subsequent to this transaction, Crimson is the sole remaining operation of CorEnergy.
OVERVIEW AND BUSINESS OBJECTIVE
We are a publicly traded REIT focused on energy infrastructure. Our business strategy is to own and operate critical energy midstream infrastructure connecting the upstream and downstream sectors within the industry. Prior to the closing of the sale of MoGas and Omega Pipelines, on January 19, 2024, we generated revenue from the transportation, via pipeline systems, of crude oil and natural gas for our customers in California and Missouri, respectively. These pipelines, consisting of our Crimson, MoGas, and Omega Pipeline Systems, 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 value of our regulated pipelines is supported by revenue derived from a 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. We also believe that our strengths in the hydrocarbon midstream industry can be leveraged to participate in energy transition, such as CO 2 transportation for sequestration projects.
SUMMARY OF 2023 RESULTS AND KEY EVENTS
A summary of results and key events for the fiscal year ended December 31, 2023 and relevant 2024 developments is as follows:
• Generated consolidated revenue of $131.6 million.
• Generated net loss of $272.8 million.
• Generated Adjusted EBITDA (a non-GAAP financial measure) of $23.9 million.
• Transported an annual average of 156,029 bpd of crude oil.
• Advanced proposed cost-of-service based tariff increases as a result of volume shortfalls, including:
◦ A 36% tariff increase on Crimson's SPB system, of which 10% and 21% were effective as of March 2023 and March 2024, respectively. This rate case is pending regulatory approval.
◦ A 128% tariff increase on Crimson’s KLM system, of which 21% was effective in October 2023. This rate case is pending regulatory approval.
◦ On May 9, 2024, the CPUC approved Crimson's Southern California rate case that, among other things, approved 22% of the total 35% rate increase originally requested and allowed for retroactive charge and collection of the rate beginning in January 2023. The amount and timing associated with the collection of these charges is uncertain at the time of this filing and the Company is required to file an Advice Letter prior to the completion of the recovery.
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 System
Our Crimson Pipeline System is an approximately 2,000-mile crude oil transportation pipeline system, which includes approximately 1,100 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. Although the majority of our Crimson pipeline volumes are not contractually
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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, economical, and environmentally sustainable 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 such producers and our customers, which are the refineries we serve.
MoGas Pipeline and Omega Pipeline Systems - Held-For-Sale
On January 19, 2024, CorEnergy closed the sale of its MoGas and Omega pipeline systems to Spire Midstream, a subsidiary of Spire Inc. (NYSE: SR), in an all-cash transaction for $175.0 million, plus post close working capital adjustments of $1.1 million. At closing, CorEnergy repaid and canceled the Crimson Credit Facility, for a total of $108.5 million and subsequent to closing the Company will make additional payments of approximately $7.3 million for taxes and other transaction related fees, which will result in net proceeds of $60.3 million. Subsequent to this transaction, Crimson is the sole remaining operation of CorEnergy.
The MoGas Pipeline System is a 263-mile interstate natural gas pipeline regulated by the FERC. The Omega Pipeline System is a 75-mile natural gas distribution system providing unregulated service primarily to the U.S. Army’s Fort Leonard Wood military post. The MoGas and Omega Pipeline Systems are part of a broader system that provides the critical link between natural gas-producing regions and local customers in Missouri. The MoGas Pipeline System sources natural gas from three major interstate pipelines, Panhandle Eastern pipeline, Rockies Express pipeline and Mississippi River Transmission pipeline. The MoGas Pipeline System 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 System. The MoGas Pipeline System 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.
The MoGas Pipeline System generates the majority of its revenue from take-or-pay transportation contracts with investment-grade customers. The majority of the system's revenue is under a long-term contract with a remaining term of approximately seven years. Omega Pipeline System’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 two years. Given the nature of the MoGas and Omega Pipeline Systems' 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 PLA); (iii) total operating and maintenance expenses (including maintenance capital expenses); (iv) Adjusted Net Income (a non-GAAP financial measure); (v) Cash Available for Distribution (a non-GAAP financial measure); and (vi) Adjusted EBITDA (a non-GAAP financial measure). For the definitions and further details on the calculations of non-GAAP financial measures used in this report, see the section below titled "Non-GAAP Financial Measures."
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 System
The amount of revenue generated by our Crimson Pipeline System depends on the volume of crude oil transported through our pipelines multiplied by the fixed-fee tariff, or transportation rate, applicable for the specific movement. These volumes are dependent on crude oil production in California because our assets are not directly connected to crude oil import facilities. Volumes may also be impacted by individual refinery decisions regarding 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 that provides long term support for our revenue.
In addition to the fixed-fee tariff, we also earn PLA for the majority of the crude oil volume we transport. As is common in the pipeline transportation industry, as crude oil is transported, Crimson receives as PLA between 0.1% and 0.25% of the majority of crude oil volume transported in order to offset any measurement uncertainty or actual volumes lost in transit. We receive payments either in-kind or in 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 the PLA volumes into inventory. The inventory is subsequently sold, typically within one to two months, and recognized as PLA subsequent sales revenue with an offsetting expense of PLA subsequent sales cost of revenue.
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Tariff Rate Cases and Volumes
We have pending applications with the CPUC to raise tariffs on our San Pablo Bay and KLM pipelines by 36% and 128%, respectively. All applications are being protested by at least one shipper. As a result, the full increases are currently not effective. However, in accordance with CPUC rules, we increased tariffs by 10% on the San Pablo pipelines on March 1, 2023 and again on March 1, 2024. We increased tariffs by 10% on KLM on October 1, 2023. These increases are subject to refund if the CPUC determines that they were not justified. On May 9, 2024, the CPUC approved Crimson's Southern California rate case that, among other things, approved 22% of the total 35% rate increase originally requested and allowed for retroactive charge and collection of the rate beginning in January 2023. The amount and timing associated with the collection of these charges is uncertain at the time of this filing and the Company is required to file an Advice Letter prior to the completion of the recovery. For the year ended December 31, 2023, average throughput volumes on the San Pablo, Southern California and KLM pipelines were 75,470 bpd, 50,652 bpd, and 10,909 bpd, respectively. During the year ended December 31, 2023, average rates per barrel of throughput on the San Pablo, Southern California and KLM pipelines were $1.74, $1.44, and $1.85, respectively. There can be no assurances as to the ultimate outcome of these pending tariff rate cases.
MoGas and Omega Pipeline Systems
The amount of revenue generated by the MoGas and Omega Pipeline Systems 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 that fluctuates based on throughput volumes and also fluctuates based on commodity prices.
Basis of Presentation
The consolidated financial statements for the year ended December 31, 2023 include CorEnergy Infrastructure Trust, Inc. its direct and indirect wholly-owned subsidiaries, and consolidated VIEs for which CorEnergy is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation, and our net earnings have been reduced by the portion of net earnings attributable to non-controlling interests, when applicable.
RESULTS OF OPERATIONS
The following table summarizes the financial data and key operating statistics for CorEnergy for the years ended December 31, 2023 and 2022. We believe the operating results detail presented below provide 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 IV, Item 15 of this report.
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The following table and discussion are a summary of our results of operations for the years ended December 31, 2023 and 2022:
For the Years Ended December 31,
Revenue
Transportation and distribution
Pipeline loss allowance subsequent sales
Lease and other
Total Revenue
Expenses
Transportation and distribution
Pipeline loss allowance subsequent sales cost of revenue
General and administrative
Depreciation and amortization
Loss on impairment of goodwill
Loss on impairment of long-lived assets
Total Expenses
Operating Income (loss)
Interest expense
Other income
Income tax benefit (expense), net
Net Loss
Other Financial Data (1)
Adjusted EBITDA
Adjusted Net Income (Loss)
Cash Available for Distribution
Capital Expenditures
Maintenance Capital
Expansion Capital
Volume
Average Volume (bpd) - Crude Oil
(1) Refer to the "Non-GAAP Financial Measures" section that follows for additional details, including reconciliation to the corresponding GAAP measure.
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Revenue.
Transportation and Distribution . Transportation and distribution revenue decreased by $3.9 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to lower crude oil transportation volume and lower earned PLA, partially offset by higher average transportation rates. Crude oil transportation volumes for the year ended December 31, 2023 were 156,029 bpd as compared to 166,009 bpd for the year ended December 31, 2022, which contributed $5.5 million to the decrease. The decrease in crude oil transportation volume was primarily due to third-party operational issues that benefited the Company during 2022, but were alleviated during the first quarter of 2023. Those third-party operational issues altered the sourcing patterns of the refineries served by the Company beginning in the second quarter of 2022 and lasted through January of 2023. The weighted average transportation rate increased from $1.44 to $1.51 due to the impact of rate increases on all pipelines, offset by weighting of volumes transported on lower tariff pipelines. The increase in weighted average transportation rates offset the decrease in revenue by $4.0 million. Additionally, earned PLA decreased $2.4 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to lower commodity prices associated with earned PLA. MoGas and Omega transportation and distribution revenues rely on fixed-payment contracts with our customers and did not materially change during the referenced periods.
Pipeline Loss Allowance Subsequent Sales. Pipeline loss allowance subsequent sales revenue, which represents the revenue on sale of crude oil inventory increased by $1.9 million during the year ended December 31, 2023, compared to the year ended December 31, 2022. This is primarily due to an increase in PLA sales volumes, offset by lower realized sales prices. Sales volumes for the year ended December 31, 2023 were 161,850 bbls compared to 111,000 bbls for the year ended December 31, 2022, which contributed $4.0 million to the increase. Additionally, average sales prices for the year ended December 31, 2023 were $78 per bbl, compared to an average of $97 per bbl during the year ended December 31, 2022, which contributed $2.0 million negatively to the change.
Expenses.
Transportation and Distribution. Transportation and distribution expenses increased by $11.3 million during the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase is primarily due to higher management restructuring costs of $1.1 million related to the reorganization of Crimson management, higher asset maintenance expense of $4.7 million, higher utilities cost of $1.0 million, higher regulatory compliance and non-recurring pipeline release costs of $1.8 million, higher outside service costs of $1.0 million and higher right-of-way costs of $500 thousand.
Pipeline Loss Allowance Subsequent Sales Cost of Revenue. Pipeline loss allowance subsequent sales cost of revenue expense increased $3.1 million during the year ended December 31, 2023, compared to the year ended December 31, 2022 primarily due to an increase in PLA sales volumes, offset by lower cost of inventory. Sales volumes for the year ended December 31, 2023 were 161,850 bbls compared to 111,000 bbls during the year ended December 31, 2022, which contributed $3.9 million in higher costs to the change. Additionally, the cost of inventory for the year ended December 31, 2023 was $77 per bbl, compared to $84 per bbl during the year ended December 31, 2022, which contributed $851 thousand in lower costs to the change.
General and Administrative. General and administrative expenses increased $5.5 million during the year ended December 31, 2023, as compared to the year ended December 31, 2022.
Employee-related costs for the year ended December 31, 2023 increased $1.1 million compared to the year ended December 31, 2022, primarily due to higher management restructuring costs of $887 thousand and higher contract labor costs of $450 thousand.
Professional services costs for the year ended December 31, 2023 increased $4.0 million compared to the year ended December 31, 2022, primarily due to higher costs associated with legal services, the MoGas and Omega asset sale and the Company's ongoing change of control application.
Other general costs for the year ended December 31, 2023 increased approximately $400 thousand compared to the year ended December 31, 2022. The increase in other expenses is due to various cost categories, including system and IT related items, office expenses and certain shared office expense reimbursements that Crimson received in 2022 but did not recur in 2023.
Loss on Impairment of Goodwill. Loss on impairment of Goodwill expense decreased $16.2 million during the year ended December 31, 2023 due to no impairment charges recorded during the current period. Refer to a full discussion of the goodwill impairment within Part I, Item I. Note 9 ("Goodwill").
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Loss on impairment of long-lived assets. During the preparation of the 2023 annual consolidated financial statements, the Company re-assessed and ultimately shortened the useful lives of the Crimson assets. This assessment included an evaluation of the continued declining volumes transported and increasing expenses on the Crimson system, as well as the challenges associated with the implementation of the Company’s tariff rate cases. As a result of these factors, the Company determined the carrying value of certain of its long-lived assets were not recoverable and the carrying value was greater than the fair value and accordingly recorded a loss on impairment of long-lived assets of $258.3 million.
Interest Expense . Interest expense increased $4.2 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to higher interest rates.
For the comparison of our results of operations for the years ended December 31, 2022 and December 31, 2021 and discussion of our operating activities, investing activities and financing activities for these years, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 29, 2023.
ASSET PORTFOLIO AND RELATED DEVELOPMENTS
Descriptions of our asset portfolio and related operations, are included in Part I, Item 2, "Properties" and in Part IV, Item 15, Note 5 ("Leased Properties And Leases"), Note 4 ("Transportation And Distribution Revenue") and Note 6 ("Financing Notes Receivable") included in this report. This section provides additional information concerning material developments related to our asset portfolio during the year ended December 31, 2023 and through the date of this report.
Crimson Pipeline System
Oil volumes transported on our San Pablo Bay and KLM pipelines in 2022 and early 2023 were unusual compared to historical patterns due to factors beyond the Company’s control, resulting in revenue swings from quarter to quarter. Since the first quarter of 2023, volumes on these pipelines have remained lower but relatively consistent. Similar volumes are included in our 2024 forecast, as well as in our applications with the CPUC to raise tariffs on our San Pablo Bay, KLM and Southern California pipelines.
Kern County’s ability to issue oil and gas drilling permits continues to be suspended, which is affecting crude oil volumes produced in California. The suspension was upheld by the California Court of Appeals on March 7, 2024, due to deficiencies in the County's Environmental Impact Report. As a result, oil production may continue to decline and could accelerate the decline in volumes on our KLM and San Pablo Bay pipelines.
On April 1, 2024, Phillips 66 announced its 140,000 bpd San Francisco refinery in Rodeo, California had ceased processing all petroleum feedstocks and has been processing only renewable feedstocks at the facility since that time. A significant portion of the refinery’s crude oil was historically sourced via a dedicated Phillips 66 pipeline system from the San Joaquin Valley, the same source of volumes for the Company's pipelines. The crude oil previously consumed by Phillips 66 from the San Joaquin Valley is now being transported elsewhere, though volumes delivered on Crimson pipelines have not changed significantly or consistently during this period.
On August 31, 2022, the California State Legislature passed SB 1137, which would prohibit any oil and gas permits from being issued within 3,200 feet of “sensitive receptors,” including homes and schools, amongst other named facilities. California state law allows any bill passed by the Legislature to be put to a vote if sufficient signatures are collected within 90 days of passage. Sufficient signatures were collected, resulting in the bill being put on the November 2024 ballot as a referendum. The bill cannot be put into effect until after the election. Should it pass, volumes on the Company’s Southern California pipelines may decline at a faster than historical rate.
On January 24, 2023, the Los Angeles County Board of Supervisors passed an ordinance that would ban all new oil and gas drilling and phase out current production over a 20-year period. The ordinance was scheduled to take effect 30 days after passage but legal challenges were raised, which may delay or stop implementation. Should the ordinance pass, volumes on the Company’s Southern California pipelines may decline at a faster than historical rate.
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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 (Loss), CAD, and Adjusted EBITDA. These supplemental measures are used by our management team and are presented herein 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 our preferred stock. We have discontinueddisclosing certain non-GAAP financial measures applicable to REITs as this information is not utilized by management in evaluating operations.
We offer these measures to assist the users of our financial statements in assessing our operating performance under 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 used by other companies. Investors should not rely on these measures as a substitute for any GAAP measure, including net income (loss) and cash flows from operating activities or revenues. Management compensates for the limitations of Adjusted Net Income (Loss), 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, net 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.
Adjusted Net Income (Loss) and Cash Available for Distribution
We believe Adjusted Net Income (Loss) is an important performance measure of our profitability as compared to other midstream infrastructure owners and operators. Our presentation of Adjusted Net Income (Loss) represents net income (loss) adjusted for loss on impairment of goodwill, loss on impairment of long-lived assets, transaction costs and restructuring costs, less gain on the sale of equipment. Adjusted Net Income (Loss) 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 distributions, this measure should not be viewed as indicative of the actual amount of cash available for distributions or planned for distributions for a given period. Instead, CAD should be considered indicative of the amount of cash available for distributions after mandatory debt repayments and other general corporate purposes. Our presentation of CAD represents Adjusted Net Income (Loss) adjusted for depreciation and amortization, amortization of debt issuance costs, stock-based compensation, and deferred tax expense (benefit), less transaction costs, restructuring costs, maintenance capital expenditures, preferred dividend requirements, and mandatory debt amortization.
Adjusted Net Income (Loss) and CAD should not be considered measures of liquidity and should not be considered alternatives to operating income, 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 Loss, as reported in the Consolidated Statements of Operations, to Adjusted Net Income (Loss) and CAD:
Mandatory debt amortization included in financing activities
Cash Available for Distribution (CAD)
Other Special Items:
Transaction costs
Restructuring costs
Other Cash Flow Information:
Net cash used in investing activities
Net cash provided by (used in) financing activities
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, along with other measures, can be used by management and external users of our consolidated financial statements, such as industry analysts, investors, and commercial banks, to assess the following:
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• 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 goodwill, loss on impairment of long-lived assets, transaction costs, and restructuring costs. Adjusted EBITDA is further adjusted for depreciation and amortization, stock-based compensation, income tax (benefit) expense, and interest expense, less gain on the sale of equipment. 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, net loss or other indicators of performance determined in accordance with GAAP. The following table presents a reconciliation of Net Loss, as reported in the Consolidated Statements of Operations, to Adjusted EBITDA:
For the Year's Ended December 31,
Net Loss
Add:
Loss on impairment of goodwill
Loss on impairment of long-lived assets
Transaction costs
Restructuring costs
Depreciation and amortization
Stock-based compensation
Income tax (benefit) expense, net
Interest expense, net
Less:
Gain on sale of equipment
Adjusted EBITDA
DIVIDENDS
Our portfolio of energy infrastructure real property assets generates cash flow from which, if sufficient, allows us to pay distributions to stockholders. Historically, we have paid dividends based on what we believe was the median long-term cash-generating ability of our assets, adjusted for special items. The primary sources of our stockholder distributions have historically included transportation and distribution revenue from our Crimson, MoGas and Omega Pipeline Systems.
Deterioration in the expected cash flows from our Crimson Pipeline System has impacted our ability to fund distributions to stockholders and on February 6, 2023, we announced the suspension of all dividends due to a combination of declining volumes and increased costs in our California systems.
Distributions to common stockholders are recorded on the ex-dividend date and distributions to preferred stockholders are recorded when declared by our Board. The dividends on our Series A Preferred Stock are cumulative, and any accumulated unpaid dividends must be paid before resuming dividends to the common stockholders. The characterization of any distribution for federal income tax purposes will not be determined until after the end of the taxable year.
A REIT is generally required to distribute during the taxable year an amount equal to at least 90% of the REIT taxable income (determined under 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 Company's Board 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 of Crimson Class A-1, Class A-2 and Class A-3 Units at the closing of the Crimson Transaction. Upon CPUC approval, the Grier Members have the right to convert their Crimson Class A-1, Class A-2 and Class A-3 Units into our securities.
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During February 2023, the Board suspended dividends on all securities. Accordingly, the Crimson Class A-2 and Class A-3 Units will not be eligible for dividends. Dividends will accumulate in the amount of $0.4609375 quarterly, per depositary share, for our Series A Preferred Stock and the Crimson Class A-1 Units.
As of December 31, 2023, each of these securities are convertible as follows: the Crimson Class A-1 Units are convertible into depositary shares representing the Company's 7.375% Series A Cumulative Redeemable Preferred Stock, the Crimson Class A-2 and Class A-3 Units are convertible into the Company's Class B Common Stock. However, prior to conversion, the Crimson Class A-1, Class A-2 and Class A-3 Units receive distributions as if they were the corresponding Company securities. For a description of the dividend rights, redemption rights, voting rights, and exchange and conversion rights of the Crimson Class A-1, Class A-2 and Class A-3 Units see Note 15 ("Stockholders' Equity").
We do not expect to pay any further dividends with respect to the Company’s outstanding Common Stock and Series A Preferred Stock, or any distributions with respect to any other outstanding securities of the Company or Crimson, prior to the conclusion of our reorganization pursuant to the pending Chapter 11 Case, which reorganization we also expect will extinguish all claims related to the unpaid Series A Preferred Stock dividends discussed above. If we successfully complete such reorganization, in connection with future dividend distributions with respect to new equity securities issued pursuant to the Chapter 11 Case, we will review taxable income on a regular basis and take measures, if necessary, to ensure that we meet the minimum distribution requirements to maintain our status as a REIT.
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 is subordinated to the Common Stock with respect to dividends and liquidation preferences 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 are entitled to receive dividends to the extent authorized by the Company’s Board 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) the difference of (A) CAD (a non-GAAP financial measure) for 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 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 are not cumulative.
Conversion. Pursuant to the terms of the Articles Supplementary, the Class B Common Stock was converted to Common Stock on February 4, 2024 at a ratio of 0.68:1.00, resulting in 464,957 new shares of Common Stock and zero shares of Class B Common Stock outstanding.
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The following table sets forth Common Stock distributions for the years ended December 31, 2023 and 2022. Distributions are shown in the period in which they were declared.
Common Stock Dividends
Amount
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
The following table sets forth preferred stock distributions for the years ended December 31, 2023 and 2022:
Preferred Dividends
Amount
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Crimson Dividend Declarations
Class A-1 Units (1)
Amount
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
(1) The Company's Board 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 entitled the holders of Crimson's Class A-1 Units to receive, from Crimson, a cash distribution of $0.4609375 per unit.
FEDERAL AND STATE INCOME TAXATION
In 2013 we qualified, and in March 2014 we elected (effective as of January 1, 2013), to be treated as a REIT for federal income tax purposes. Because certain of our assets may not produce REIT-qualifying income or be treated as interests in real property, those assets are held in wholly-owned TRSs in order to limit the potential that such assets and income could prevent us from qualifying as a REIT.
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We elected to be taxed as a REIT for 2013 and subsequent years and generally will not pay federal income tax on taxable income of the REIT that is distributed to our stockholders. As a REIT, our distributions from earnings and profits will be treated as ordinary income, and generally will not qualify as QDI. To the extent that the REIT had accumulated C corporation earnings and profits from the periods prior to 2013, we distributed such earnings and profits in 2013. In addition, to the extent we receive taxable distributions from our TRSs, or the REIT received distributions of C corporation earnings and profits, such portion of our distribution is generally treated as QDI. While regular REIT dividends are not eligible for the reduced QDI tax rates, with respect to taxable years beginning after December 31, 2017 and before January 1, 2026, Section 199A of the Code typically permits a 20% deduction against taxable income for noncorporate taxpayers for qualified business income, which includes dividends from a REIT received during the tax year that is not a capital gain dividend or a dividend qualifying for the QDI rate, subject to certain income and holding period limitations.
As a REIT, we hold and operate certain of our assets through one or more wholly-owned TRSs. Our use of TRSs enables us to continue to engage in certain businesses while complying with REIT qualification requirements and also allows us to retain income generated by these businesses for reinvestment without the requirement of distributing those earnings. As was done with our subsidiary Omega in 2017, and as warranted in the future, we may elect to reorganize and transfer certain assets or operations from our TRSs to our C corporation or other subsidiaries, including qualified REIT subsidiaries.
If we cease to qualify as a REIT, we, as a C corporation, would be obligated to pay federal and state income tax on our taxable income. For 2023, the federal income tax rate for a corporation was 21%.
IMPACT OF INFLATION AND RISING INTEREST RATES
We have experienced significant increases in interest rates, and the cost of energy, transportation, and distribution. The Company's effective interest rate on the Crimson Credit facility was approximately 8.41% for the year ended December 31, 2022, and 10.18% at the year ended December 31, 2023. We repaid and canceled the Crimson Credit Facility on January 19, 2024 as a part of the sale of the MoGas and Omega Pipelines.
SEASONALITY
Volumes transported by Crimson have been generally declining since 2021, with high levels of volatility on a quarterly basis. We expect that volatility to continue in 2024. Maintenance activities can be performed at any time during the year, however, we may have certain quarters where maintenance expenditures are materially higher than other quarters in the year. Currently, our San Pablo Bay pipeline is operating in blended service, where heavy crude oil is mixed with lighter crude oil. Historically, however, it has also operated as a batched system, which would include a seasonal minimum volume. The minimum volume is required because heavy crude oil must be heated to be transported via the pipeline, with the lowest allowed minimum volume typically occurring in the months from July to September and the highest allowed minimum volume typically occurring from December to March, with the actual effective periods dependent on the ground temperature. The historical average quarterly crude oil volumes by pipeline for Crimson are provided in the table below.
Crimson Midstream Holdings
Average Crude Oil Volume for Quarter Ended (bpd):
San Pablo Bay
KLM
Southern
California
Cardinal
Total (bpd):
March 31, 2022
June 30, 2022
September 30, 2022
December 31, 2022
March 31, 2023
June 30, 2023
September 30, 2023
December 31, 2023
The MoGas and Omega Pipeline Systems generally have stable revenues throughout the year and 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. The MoGas and Omega Pipeline Systems were sold to Spire on January 19, 2024.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
At December 31, 2023, we had liquidity of $13.5 million, comprised of cash. This cash position was supplemented as a result of the sale of MoGas and Omega on January 19, 2024, which generated $60.3 million in proceeds to the Company after taxes, transaction-related costs and repayment of the $108.5 million due associated with the Company's Crimson Credit Facility, which was fully repaid and terminated contemporaneously with the MoGas and Omega Pipelines sale. We use cash flows generated from MoGas and Omega operations and cash flows generated from our interest in Crimson's operations that are distributed to us, to fund current obligations, projected working capital requirements, debt service payments and dividend payments. Prior to the repayment and cancellation of the Crimson Credit Facility, distributions from MoGas, Omega, and Crimson were subject to certain limitations as discussed under the "Crimson Credit Facility" below. Those restrictions did not affect the ability of the Company to meet its cash obligations.
Under the RSA, we have agreed to not incur any material indebtedness outside the ordinary course of business, including seeking bankruptcy court approval to incur indebtedness without the express written consent of the Consenting Noteholders.
As discussed above, on March 11, 2024, the NYSE delisted the Company's Common Stock and Series A Preferred Stock from the NYSE. The delisting constituted a "fundamental change" under the Indenture governing the Convertible Notes, which required the Company to make an offer to repurchase all of the outstanding Convertible Notes. The Company does not have sufficient cash on hand or liquidity to repurchase all of the outstanding Convertible Notes, and the failure to make or complete the repurchase offer would result in a default under the Indenture. Furthermore, as discussed above, the filing of the Chapter 11 Case constituted an event of default that accelerated obligations under the Indenture. We anticipate restructuring the Convertible Notes through the Chapter 11 bankruptcy filing.
Given the event of default and acceleration of the Convertible Notes, as well as the inherent risks, unknown results and inherent uncertainties associated with the bankruptcy process and the direct correlation between these matters and our ability to satisfy our financial obligations that may arise, the Company believes that there is substantial doubt that it will continue to operate as a going concern within one year after the date its consolidated financial statements are issued.
Cash Flows - Operating, Investing, and Financing Activities
The following table presents our consolidated cash flows for the periods indicated below:
For the Years Ended December 31,
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
Cash Flows from Operating Activities
Net cash flows provided by operating activities for the year ended December 31, 2023 were primarily attributable to $272.8 million in net loss, partially offset by (i) impairment of long-lived assets of $258.3 million, (ii) $14.1 million in depreciation and amortization, and (iii) $5.9 million in positive working capital changes.
Net cash flows provided by operating activities for the year ended December 31, 2022 were primarily attributable to $9.5 million in net loss, offset by i) $16.1 million in depreciation and amortization, ii) $16.2 million loss on impairment of goodwill and iii) $3.4 million in positive working capital changes.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2023 was primarily attributable to (i) $16.5 million of cash utilized to acquire property and equipment, offset by (ii) $1.2 million proceeds from reimbursable projects.
Net cash used in investing activities for the year ended December 31, 2022 was primarily attributable to (i) $13.9 million of cash utilized to acquire property and equipment, offset by (ii) $2.5 million proceeds from reimbursable projects.
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Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2023 was primarily attributed to principal payments of $10.0 million on the Crimson Credit Facility, offset by i) net advances on the Crimson Revolver of $15.0 million, and (ii) net proceeds from financing arrangements of $898 thousand.
Net cash used in financing activities for the year ended December 31, 2022 was primarily attributed to (i) common dividends paid of $2.2 million, (ii) preferred stock dividends paid of $9.6 million, (iii) distributions paid to non-controlling interests of $3.2 million, (iv) principal payments of $8.0 million on the Crimson Credit Facility, offset by net advances on the Crimson Revolver of $8.0 million, and net proceeds from financing arrangements of $2.5 million.
Tariff Rate Cases and Volumes
We have pending applications with the CPUC to raise tariffs on our San Pablo Bay and KLM pipelines by 36% and 128%, respectively. All applications are being protested by at least one shipper. As a result, the full increases are currently not effective. However, in accordance with CPUC rules, we increased tariffs by 10% on the San Pablo pipelines on March 1, 2023 and again on March 1, 2024. We increased tariffs by 10% on KLM on October 1, 2023. These increases are subject to refund if the CPUC determines that they were not justified. On May 9, 2024, the CPUC approved Crimson's Southern California rate case that, among other things, approved 22% of the total 35% rate increase originally requested and allowed for retroactive charge and collection of the rate beginning in January 2023. The amount and timing associated with the collection of these charges is uncertain at the time of this filing and the Company is required to file an Advice Letter prior to the completion of the recovery. For the year ended December 31, 2023, average throughput volumes on the San Pablo, Southern California and KLM pipelines were 75,470 bpd, 50,652 bpd, and 10,909 bpd, respectively. During the year ended December 31, 2023, average rates per barrel of throughput on the San Pablo, Southern California and KLM pipelines were $1.74, $1.44, and $1.85, respectively. There can be no assurances as to the ultimate outcome of these pending tariff rate cases.
Cumulative Unpaid Dividends
The Company currently has cumulative unpaid dividends on our Series A Preferred Stock of $9.6 million and the Crimson A-1 Units of $3.2 million. As discussed above, we expect that the Chapter 11 reorganization will extinguish all claims related to the unpaid dividends discussed above.
Asset Maintenance Expense and Capital Expenditures
Crude oil pipeline operations require significant expenditures to maintain, expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Expenditures on pipeline maintenance are either expensed as incurred or capitalized and depreciated. The expensed activities are included in operating expense while the capitalizable expenditures are shown as maintenance capital and deducted when calculating CAD (a non-GAAP financial measure). Examples of expensed activities include in-line pipeline inspections and tank integrity inspections. Examples of maintenance capital expenditures are those made to maintain the existing operating capacity of Crimson's assets and to extend their useful lives or other capital expenditures incurred in maintaining existing system volumes and related cash flows. In contrast, expansion 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 easements, systems or facilities.
The pipeline regulatory environment in California is one of the most stringent in the world, which generally results in additional operating and maintenance expenditures compared to other regions. The California regulators have increased their activity level in overseeing the pipeline activities in the state. This increased activity level has resulted in additional maintenance expenditures and may continue to increase in the future, but the additional specific financial impact is currently not known. We will continue to work closely with all regulators to ensure compliance with all rules and regulations, both new and existing.
In October 2015, the Governor of California signed the Oil Spill Response: Environmentally and Ecologically Sensitive Areas Bill ("AB-864") which requires new and existing pipelines located near environmentally and ecologically-sensitive areas connected to or located in the coastal zone to use best available technologies to reduce the amount of oil released in an oil spill to protect state waters and wildlife. The California Office of the State Fire Marshal has developed the regulations required by AB-864. The Company submitted recommendations for pipeline segment improvements in December 2021, which were subsequently accepted by the California Office of the State Fire Marshal in 2022. All expenditures are recoverable under the cost-of-service framework. The Company has begun the process of making the recommended modifications and the expenditures will continue into 2024. The Company submitted a filing with the CPUC to implement a surcharge on existing tariffs to recover the costs associated with the regulation. However, at least one shipper protested the filing so the surcharge could not be implemented until the case was ruled on by the CPUC. The Company previously submitted a filing with the CPUC to implement a surcharge on existing tariffs to recover the costs associated with the AB-864 regulations, however, on May 9, 2024 the CPUC finalized the
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Company's Southern California rate case that, among other things, denied the Company's request to implement a surcharge to recover AB-864 costs, but did approve inclusion of those costs in the Southern California approved tariff.
Crimson may incur substantial amounts of capital expenditures in certain periods in connection with large maintenance projects. In 2024, Crimson expects to incur asset maintenance expenses of approximately $22.0 million and maintenance capital expenditures of approximately $2.0 million.
Maintenance Expenditures
Three Months Ended
Expense
Capital
March 31, 2021 (1)
June 30, 2021
September 30, 2021
December 31, 2021
March 31, 2022
June 30, 2022
September 30, 2022
December 31, 2022
March 31, 2023
June 30, 2023
September 30, 2023
December 31, 2023
(1) Activity associated with the Crimson assets represent the period from January 1, 2021 to March 31, 2021.
Material Cash Requirements
The following table summarizes our material cash requirements and other obligations as of December 31, 2023:
Principal
Less than 1 year
2-3 years
4-5 years
More than 5 years
Crimson Term Loan (1)
Interest payments on Crimson Term Loan (2)
Crimson Revolver (1)
Interest payments on Crimson Revolver (2)
5.875% Convertible Debt (1)
Interest payments on 5.875% Convertible Debt (1)
Leases (3)(4)
Notes payable (4)
Series A Preferred Stock dividend requirements (5)
Distributions on Crimson Class A-1 Units (6)
Totals
(1) As of the bankruptcy filing date of February 25, 2024, the Convertible Notes are in default and callable. See Part IV, Item 15, Note 14 ("Debt")
(2) As noted in Part IV, Item 15, Note 14 ("Debt"), the Company repaid the Crimson Credit Facility in January 2024. These amounts represent actual interest payments made in 2024 through the repayment and termination of the Crimson Credit Facility.
(3) See Part IV, Item 15, Note 5 ("Leased Properties and Leases")
(4) Notes payable is included in Accounts Payable and other accrued liabilities on the Consolidated Balance Sheet.
(5) During the first quarter of 2023, the Company suspended dividend payments on the Series A Preferred Stock, which will accrue dividends annually at $1.84375 per share. Any accumulated Series A Preferred Stock dividends must be paid prior to the Company resuming common dividend payments. As of December 31, 2023, the accumulated $9.6 million in unpaid dividends has not been included in this table as we cannot reasonably determine when or if we will reinstate those dividend payments.
(6) Based on the suspension of dividend payments on the Company's Series A Preferred Stock, the Crimson Class A-1 Units will not receive dividends. As of December 31, 2023, the Grier Members have an unpaid distribution of $3.2 million that has not been included in this table as we cannot reasonably determine when or if we will declare dividends on the Company's Series A Preferred Stock, such that the Crimson Class A-1 units may be eligible for dividends again. Additionally, in connection with the Chapter 11 Case, the Company has incurred, and expects to continue to incur, significant professional fees and other costs.
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Capital Requirements
Capital spending for our business consists primarily of:
• Maintenance capital expenditures, which include costs required to maintain equipment reliability and safety and to address environmental and other regulatory requirements rather than to generate incremental CAD (a non-GAAP financial measure); and
• Expansion capital expenditures, which are undertaken primarily to generate incremental CAD (a non-GAAP financial measure) and include costs to acquire additional assets to grow our business and to expand or upgrade our existing facilities and to construct new assets, which we refer to collectively as organic growth projects. Organic growth projects include, for example, capital expenditures that increase storage or throughput volumes or develop pipeline connections to new supply sources.
During 2023, our maintenance capital spending was $10.9 million and our expansion capital spending was $1.8 million.
Revolving and Term Credit Facilities
Crimson Credit Facility
Crimson Midstream Operating and Corridor MoGas, as borrowers, together with certain subsidiary guarantors, were a party to that certain Crimson Credit Facility with the agents and lenders from time to time party thereto. The Crimson Credit Facility provided borrowing capacity of up to $155.0 million, consisting of: the $50.0 million Crimson Revolver, the $80.0 million Crimson Term Loan and an uncommitted incremental facility of $25.0 million.
Outstanding balances under the facility were guaranteed by certain subsidiary guarantors 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 customarily excluded assets. Under certain circumstances, the proceeds from specified asset sales were required to be used to repay the term loan and revolving credit facility after which the borrowing availability under the revolving credit facility will be reduced to $30.0 million. Additionally, no distributions could be made from the borrowers to their parent until the proceeds of specified asset sales have been used to repay the loans and other financial conditions have been met. The Company's total leverage ratio of 2.80 for the second quarter of 2023 violated the 2.75 covenant requirement and the Company utilized an equity cure as allowed by the original terms of the Amended and Restated Credit Agreement to remedy the violation. In August 2023, the parties entered into an amended the facility to change the applicable total leverage ratio in the third and fourth quarters of 2023 from 2.50 to 3.75, which was intended to prevent any additional covenant violations before the completion of the sale of the MoGas and Omega assets. The Company did not calculate or report its fourth quarter covenants due to the repayment of the Crimson Credit Facility in January of 2024.
The Crimson Term Loan required quarterly payments of $2.0 million in arrears on the last business day of March, June, September and December, commencing on June 30, 2021 and increasing to $3.0 million per quarter beginning September 30, 2023. Subject to certain conditions, all loans made under the facility beared interest at the option of the borrowers at either (a) Adjusted SOFR 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 Adjusted SOFR rate plus 1.0%, plus a spread of 225 to 350 basis points. The applicable spread for each interest rate was based on the Total Leverage Ratio (as defined in the Crimson Credit Facility). As of December 31, 2023, the applicable interest rate for the Crimson Term Loan was 10.20%.
We had no available borrowing capacity on the Crimson Revolver at December 31, 2023. The loans under the Crimson Credit Facility were scheduled to mature on May 3, 2024. In conjunction with the closing of the sale of the MoGas and Omega Pipelines on January 19, 2024, CorEnergy repaid and canceled the Crimson Credit Facility, for a total of $108.5 million. For a summary of the additional material terms of the Crimson Credit Facility, please refer to Part IV, Item 15, Note 14 ("Debt") included in this report.
Convertible Notes
On August 12, 2019, we issued an aggregate $120.0 million principal amount of Convertible Notes. The Convertible Notes mature on August 15, 2025 and bear interest at a rate of 5.875% per annum, payable semiannually 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 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 Convertible Notes is 20.0 shares of Common Stock per $1,000 principal amount of the 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.
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As discussed above, on March 11, 2024, the NYSE delisted the Company's Common Stock and Series A Preferred Stock from the NYSE. The delisting constituted a "fundamental change" under the Indenture governing the Convertible Notes, which required the Company to make an offer to repurchase all of the outstanding Convertible Notes. The Company does not have sufficient cash on hand or liquidity to repurchase all of the outstanding Convertible Notes, and the failure to make or complete the repurchase offer would result in a default under the Indenture. Furthermore, as discussed above, the filing of the Chapter 11 Case constituted an event of default that accelerated obligations under the Indenture. We anticipate restructuring the Convertible Notes through the Chapter 11 bankruptcy filing. Refer to Part IV, Item 15, Note 14 ("Debt") included in this report for additional information concerning the Convertible Notes.
Shelf Registration Statements
On February 27, 2024 and March 11, 2024, the Company terminated all offerings of securities pursuant to its prior registration statements and terminated the effectiveness of such registration statements following commencement of the Chapter 11 Case.
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 the term and 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. The Plan of Reorganization contemplates financing in the form of the take back debt and a revolving credit facility. The availability and terms of any such financing will depend upon Bankruptcy Court approval of the Plan of Reorganization and the availability and terms of any future financing will depend on market and other conditions, as well as our compliance with debt covenants in our credit facilities. However, there can be no assurance that additional financing or capital will be available, or that terms will be acceptable or advantageous to us.
The following table presents our liquidity and capitalization as of December 31, 2023 and 2022:
Liquidity and Capitalization
December 31, 2023
December 31, 2022
Cash and cash equivalents
Revolver availability
Revolving credit facility
Long-term debt (including current maturities) (1)
Stockholders' equity:
Series A Cumulative Redeemable Preferred Stock 7.375%, $0.001 par value
Common Stock, non-convertible, $0.001 par value
Class B Common Stock, $0.001 par value
Additional paid-in capital
Retained deficit
Non-controlling interest
Total CorEnergy equity
Total CorEnergy capitalization
(1) Long-term debt is presented net of discount and deferred financing costs.
(2) Excludes $9.6 million of cumulative unpaid dividends related to the Series A Preferred Stock. The table also excludes $3.2 million of cumulative unpaid dividends related to the Crimson A-1 Units.
The above table does not give effect to the conversion of the non-controlling interest, representing the Crimson Class A-1, Class A-2, and Class A-3 Units, into our securities. Such conversion is subject to CPUC approval and will be elective by the holder(s) of the non-controlling interest.
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Glossary of Defined Terms
Prospective Capitalization Table
Adjustments
Prospective for Non-Controlling Interest Reorganization and Class B Conversion
December 31, 2023 Actual (1)
Non-Controlling Interest Reorganization Class B Conversion (2)(3)
Cash and Cash Equivalents
Debt
Revolving Credit Facility
Long-Term Debt (including current maturities) (4)
Total Debt
Stockholders' Equity
Preferred Stock
Series A Preferred Stock
Total
Common Stock
Class B Common Stock
Additional Paid-In Capital
Retained Deficit
Total Equity to Common Shareholders
Non-controlling interest (4)
Total Equity
Total Capitalization
Shares Outstanding
Common Stock
Class B Common Stock
Total Shares Outstanding
Book Value of Outstanding Shares
(1) The non-controlling interest reflects the Grier Members' equity consideration for the Class A-1, Class A-2, and Class A-3 Units representing the equity 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 Class A-1, Class A-2, and A-3 Units into depositary shares representing Series A Preferred Stock for the Class A-1 Units and Class B Common Stock for both Class A-2 and Class A-3 Units. 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 IV, Item 15, Note 15 ("Stockholders' Equity") for further details on the non-controlling interest.
(3) The prospective adjustments also reflect the conversion of the Class B Common Stock into Common stock at the lower 0.68:1.00 ratio. The Crimson Class A-2 and Class A-3 Units were initially recorded in non-controlling interest at a fair value of $77.0 million, which assumed a 1:1 conversion ratio and would represent an initial fair value of $53.0 million assuming the lower 0.68:1.00 conversion ratio.
(4) Long-term debt is presented net of discount and deferred financing costs.
SUBSEQUENT EVENTS
For additional information regarding transactions that occurred subsequent to December 31, 2023, see Part IV, Item 15, Note 19 ("Subsequent Events") included in this Annual Report on Form 10-K.
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Glossary of Defined Terms
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 revenues and expenses, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates. During the year ended December 31, 2023, there were no significant changes to our critical accounting policies and estimates, other than the change in useful lives of our crude oil pipelines and related equipment as described in Part IV, Item 15, Note 2 ("Significant Accounting Policies").
Impairment of Long-Lived Assets
Our long-lived assets consist primarily of crude oil and natural gas pipelines that have been obtained through business combinations and asset acquisitions. Depreciation is computed using the straight-line method over the estimated useful life of the asset. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements, which extend the useful lives of our assets, are capitalized and depreciated over the remaining estimated useful life of the asset.
We continually monitor our business, the business environment, and performance of our operations to determine if an event has occurred that indicates that the carrying value of a long-lived asset group may be impaired. When a triggering event occurs, which is a determination that involves judgment, we utilize cash flow projections to assess the ability to recover the carrying value of our asset groups based on our long-lived assets' ability to generate future cash flows on an undiscounted basis over the remaining useful life of the primary asset.
The projected cash flows of long-lived asset groups are primarily based on cash flows that extend many years into the future. If those cash flow projections indicate that the long-lived asset's carrying value is not recoverable, we record an impairment charge for the excess of carrying value of the asset group over its fair value. The estimate of fair value considers a number of factors, including the potential value that would be received if the asset were sold, discount rates, and projected cash flows. Due to the imprecise nature of these projections and assumptions, actual results can differ from our estimates.
During the preparation of the 2023 annual consolidated financial statements, the Company re-assessed and ultimately shortened the useful lives of the Crimson assets effective December 1, 2023. This assessment included an evaluation of the continued declining volumes transported and increasing expenses on the Crimson system, as well as the challenges associated with the implementation of the Company’s tariff rate cases. The Company considered the large impairments recorded by California oil producers, as well as the lack of active permitting in the state, as factors in assessing the assumptions utilized in its analysis. As a result of these factors, the Company determined the carrying value of the Crimson asset groups were not recoverable and the carrying value was greater than the fair value and accordingly recorded a loss on impairment of long-lived assets of $258.3 million. If the underlying assumptions in management’s estimate changed the fair value of the Crimson asset groups by 10% from our estimated fair value at December 31, 2023, the financial impact would have been approximately $8.2 million or 3.0% of loss before income taxes for the year ended December 31, 2023. See Note 8 “Property and Equipment” to the Consolidated Financial Statements for further information on the impairment of our assets.
There was no impairment of long-lived assets recorded during the year ended December 31, 2022. For the year ended December 31, 2021, we recognized a loss on impairment and disposal of $5.8 million for the GIGS asset.
