Mowood is the holding company of Omega Pipeline Company, LLC (“Omega”). CorEnergy provides a revolving line of credit to Mowood, which allows for a maximum principal balance of $5.3 million. At Nov. 30, 2012, the principal balance outstanding was $3.8 million. Omega’s results for the fiscal year 2012 are approximately 15 percent higher than originally expected as the base business realized higher margins. In addition, revenues from several construction projects were recognized in the third and fourth quarters, which made a significant contribution to overall year-to-date results.
2012 Real Property Update
Eastern Interconnect Project
On Nov. 1, 2012, CorEnergy entered into an agreement with Public Service Company of New Mexico (“PNM”) to sell CorEnergy’s 40 percent undivided interest in the Eastern Interconnect Project (“EIP”) upon lease termination on April 1, 2015 for $7.7 million. PNM will also accelerate its remaining lease payments to CorEnergy. Both lease payments due in 2013 were paid upon execution of the definitive Agreement on Nov. 1, 2012. Per the Agreement, PNM also paid $100,000 to compensate the Company for legal costs resulting from filings with the Federal Energy Regulatory Commission. The three remaining lease payments due April 1, 2014, Oct. 1, 2014 and April 1, 2015, will be paid on Jan. 1, 2014 in full.
CorEnergy changed its estimated residual value used to calculate its depreciation of the EIP, which resulted in higher depreciation expenses beginning in Nov. 2012 through the expiration of the lease in April 2015. The incremental depreciation amounts to approximately $393,000 per quarter.
Due to the changes in timing of lease payments, CorEnergy adjusted the impact of future EIP lease payments in its pro forma AFFO calculation. CorEnergy has not made any adjustments to the GAAP treatment of the lease.
CorEnergy purchased its EIP interest on June 30, 2011 for $12.8 million net of debt. As of our Aug. 31, 2012 Form 10-Q filing, the Company anticipated a total of approximately $8.5 million in remaining lease payments. Net of the final debt payment of $905,000 and interest expense of approximately $46,000 received on Oct. 1, 2012, CorEnergy expects to receive gross total lease payments of approximately $7.1 million through April 2015. Combined with the sale price of $7.7 million CorEnergy expects approximately 7% annualized gross return on the investment.