Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The following discussion and analysis presents management’s view of our business, financial condition and overall performance and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes in “Financial Statements and Supplementary Data.” This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future. Our discussion and analysis include the following subjects:
• Overview of Business
• Overview of Significant Events
• Liquidity and Capital Resources
• Contractual Obligations
• Results of Operations
• Summary of Critical Accounting Estimates
• Recent Accounting Standards
Overview of Business
NextDecade Corporation engages in construction and development activities related to the liquefaction of natural gas and sale of LNG and the capture and storage of CO 2 emissions. We are constructing and developing a natural gas liquefaction and export facility located in the Rio Grande Valley near Brownsville, Texas (the “Rio Grande LNG Facility”). The Rio Grande LNG Facility has received Federal Energy Regulatory Commission (“FERC”) approval and Department of Energy (“DOE”) FTA and non-FTA authorizations for the construction of up to five liquefaction trains and LNG exports totaling up to 27 million tonnes per annum (“MTPA”). Please see "Rio Grande LNG Facility Activity - Governmental Permits, Approvals and Authorizations" for more information regarding our FERC permit. The Rio Grande LNG Facility has three liquefaction trains and related infrastructure ("Phase 1") under construction and liquefaction trains 4 and 5 are currently being commercialized. We are also developing and beginning the permitting process for expansion trains 6 through 8 at the Rio Grande LNG Facility and developing a potential carbon capture and storage (“CCS”) project at the Rio Grande LNG Facility.
Overview of Significant Events
Significant developments since January 1, 2024 and through the date of this 10-K include the following:
Development and Construction
• Under the EPC contracts with Bechtel, Phase 1 progress is tracked for Train 1, Train 2, and the common facilities on a combined basis and Train 3 on a separate basis. As of January 2025:
◦ The overall project completion percentage for Trains 1 and 2 and the common facilities of the Rio Grande LNG Facility was 38.1%, which is in line with the schedule under the EPC contract. Within this project completion percentage, engineering was 84.9% complete, procurement was 69.2% complete, and construction was 10.6% complete.
◦ The overall project completion percentage for Train 3 of the Rio Grande LNG Facility was 15.3%, which is also in line with the schedule under the EPC contract. Within this project completion percentage, engineering was 33.5% complete, procurement was 32.8% complete, and construction was 0.4% complete.
• In February 2025, the Company provided additional information regarding its development of additional liquefaction capacity at the Rio Grande LNG Facility. beyond Trains 1 through 5. Trains 6 through 8 are wholly owned by NextDecade and are cumulatively expected to increase the Company's total liquefaction capacity by approximately 18 MTPA once constructed and placed into operation.
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◦ Train 6, with expected LNG production capacity of approximately 6 MTPA, is being developed inside the existing levee at the site and adjacent to Trains 1 through 5. A pre-filing application with FERC for Train 6 is expected in 2025, and a full FERC application is expected in early 2026.
◦ Trains 7 and 8, with a total expected LNG production capacity of approximately 12 MTPA, are being developed on the site outside of the existing levee.
Strategic and Commercial
• In May 2024, the Company entered into a 20-year LNG SPA with ADNOC for the sale of 1.9 MTPA of LNG from Train 4 at the Rio Grande LNG Facility for 20 years, on a free on board (“FOB”) basis at a price indexed to Henry Hub, subject to a positive FID on Train 4.
• In June 2024, the Company entered into a non-binding Heads of Agreement (HoA) with Aramco for a 20-year LNG SPA for offtake from Train 4 at the Rio Grande LNG Facility. Under the terms of the HoA, Aramco expects to purchase 1.2 MTPA of LNG for 20 years, on an FOB basis at a price indexed to Henry Hub. Aramco and the Company are in the process of negotiating a binding LNG SPA, and once executed, the SPA will be subject to a positive FID on Train 4.
• In July 2024, the Company appointed Tarik Skeik as Chief Operating Officer. Mr. Skeik has over 20 years of experience delivering complex global mega projects in LNG, oil and petrochemicals across North America, the Middle East, and Asia. He led the completion and start-up of six greenfield assets, and his experience includes the planning and execution through initial operation of projects including the Huizhou Chemicals Complex in China, Gulf Coast Growth Ventures in the U.S., Banyu Urip in Indonesia, Kearl Expansion in Canada, and QatarGas 2 in Qatar.
• In August 2024, the Company entered into an EPC contract with Bechtel for Train 4 and related infrastructure. Pricing under the EPC contract for Train 4 and related infrastructure was valid through December 31, 2024, and a pricing refresh is in process and is expected to be completed in 2025.
Financial
• In January 2024, the Company's wholly-owned subsidiary, NextDecade LNG, LLC ("NextDecade LLC"), entered into a credit agreement that provided for a $50 million senior secured revolving credit facility with additional capacity of $12.5 million to cover interest. Borrowings under the revolving credit facility were used for general corporate purposes, including development costs related to Train 4 at the Rio Grande LNG Facility. Borrowings under the revolving credit facility bore interest at SOFR or the base rate plus an applicable margin as defined in the credit agreement. All outstanding borrowings under the revolving credit facility and interest term loan were repaid in December 2024 utilizing proceeds from the senior secured loan issued in December 2024 and described below.
• In February 2024, Rio Grande issued and sold $190 million of senior secured notes in a private placement transaction to finance a portion of Phase 1. The senior secured notes were issued on February 9, 2024, and resulted in a reduction in the commitments outstanding under Rio Grande's existing bank credit facilities for Phase 1. These senior secured notes will be amortized over a period of approximately 18 years beginning in mid-2029, with a final maturity in June 2047. These senior secured notes bear interest at a fixed rate of 6.85% and rank pari passu to Rio Grande's existing senior secured financings.
• In June 2024, Rio Grande issued $1.115 billion of senior secured notes in a private placement, and net proceeds were utilized to reduce outstanding borrowings and commitments under existing Rio Grande bank credit facilities for Phase 1. These senior secured notes will be amortized over a period of 18 years beginning in September 2029, with a final maturity in September 2047. These senior secured notes bear interest at a fixed rate of 6.58% and rank pari passu to Rio Grande's existing senior secured financings. Including this transaction, the Company has
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refinanced a total of over $1.85 billion of the original $11.1 billion Rio Grande term loan facilities since a positive FID was reached on Phase 1 at the Rio Grande LNG Facility in July 2023.
• In December 2024, the Company's wholly-owned subsidiary, Rio Grande LNG Super Holdings, LLC ("Super Holdings"), entered into a credit agreement (the "Corporate Credit Agreement") which provided for a $175 million senior secured loan. Proceeds from the senior secured loan were disbursed at closing on December 31, 2024, and net proceeds were used to repay outstanding borrowings under the NextDecade LLC January 2024 $50 million revolving credit facility and $12.5 million interest term loan, and will be used to fund working capital and general corporate purposes, including development expenses for expansion trains at the Rio Grande LNG Facility. Borrowings under the senior secured loan bear interest at 12.0%, with interest payable quarterly. Interest may be paid in-kind until March 31, 2027 and up to 50% in-kind thereafter. The senior secured loan matures six years from the closing date.
• In conjunction with the closing of the Corporate Credit Agreement, the Company issued warrants in two equal tranches that are exercisable for an aggregate of approximately 7.2 million shares of NextDecade common stock to the lender of the senior secured loan. The warrants are exercisable for five years after the closing date. The first tranche of the warrants are exercisable at $7.15 per share, which represents the 30-day volume weighted average trading price for the 30 trading-day period immediately preceding the closing date, and the second tranche of the warrants are exercisable at $9.30 per share.
Regulatory
• In August 2024, the U.S. Court of Appeals for the D.C. Circuit (the "Court") issued a decision vacating FERC's reauthorization of the Rio Grande LNG Facility on the grounds that FERC should have issued a supplemental Environmental Impact Statement ("EIS") during its reauthorization process.
• On September 13, 2024, FERC issued notice of its intent to prepare a supplemental EIS in response to the Court's decision. The notice set forth a schedule providing for the issuance of a draft of the supplemental EIS in March 2025, the final supplemental EIS by the end of July 2025, and issuance of a final order by November 20, 2025.
• On October 21, 2024, the Company filed a petition for rehearing and rehearing en banc with the Court. On December 9, 2024, petitioners in the case and FERC filed responses to the Company's request for rehearing, and the Court's decision is pending.
• The Court's decision will not be effective until the Court has issued its mandate, which is not expected to occur until after the appeals process has been completed. At this time, construction continues on Phase 1 at the Rio Grande LNG Facility.
• The Company expects to take all available legal and regulatory actions, including appellate actions, to ensure that construction on Phase 1 will continue and that necessary regulatory approvals will be maintained to enable a positive final investment decision (FID) on Trains 4 and 5 at the Rio Grande LNG Facility.
Rio Grande LNG Facility Activity
We are constructing the Rio Grande LNG Facility on the north shore of the Brownsville Ship Channel in south Texas through our partially owned subsidiary, Rio Grande. The site is located on 984 acres of land which has been leased long-term and includes 15,000 feet of frontage on the Brownsville Ship Channel. We believe the site is advantaged due to its proximity to abundant natural gas resources in the Permian Basin and Eagle Ford Shale, access to an uncongested waterway for vessel loading, and location in a region that has historically been subject to fewer and less severe weather events relative to other locations along the US Gulf Coast. The Rio Grande LNG Facility has been approved by the FERC and authorized by the DOE to export up to 27 MTPA of LNG from up to five liquefaction trains. Please see "Rio Grande LNG Facility Activity - Governmental Permits, Approvals and Authorizations" for more information regarding our FERC permit. Phase 1 at the Rio Grande LNG Facility is under construction, Trains 4 and 5 are currently being commercialized, and we are developing and beginning the permitting process for Trains 6 through 8.
In July 2023, construction commenced on Phase 1 of the Rio Grande LNG Facility following a positive FID and the closing of project financing by Rio Grande, which owns Phase 1 of the Rio Grande LNG Facility. Phase 1 includes
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three liquefaction trains with a total expected nameplate capacity of approximately 18 MTPA of LNG production, two 180,000 cubic meter full containment LNG storage tanks, two jetty berthing structures designed to load LNG carriers up to 216,000 cubic meters in capacity, and associated site infrastructure and common facilities including feed gas pretreatment facilities, electric and water utilities, two totally enclosed ground flares for the LNG tanks and marine facilities, two ground flares for the liquefaction trains, roads, levees surrounding the development area, and warehouses, administrative, operations control room and maintenance buildings.
As of January 2025, progress on Trains 1 through 3 is in line with the schedule under the EPC contracts. During the fourth quarter and early 2025, the construction team continued steel assembly in the Train 1 area and adjacent pipe racks. Within Train 2, foundations were progressed and steel assembly began. Tank 1 roof panels were set in place, and the first wall concrete pour for Tank 2 was completed. Across the site, Bechtel’s work also continues on installing underground structures, loading berths, piling, concrete foundations, and other siteworks. Bechtel has materially completed purchase orders for critical and high-value items for Phase 1.
Trains 4 and 5 at the Rio Grande LNG Facility are being commercialized, and we expect to make a positive final investment decision and commence construction of Trains 4 and 5 and related infrastructure at the Rio Grande LNG Facility, subject to, among other things, maintaining requisite governmental approvals, finalizing and entering into EPC contracts, entering into appropriate commercial arrangements, and obtaining adequate financing to construct each train and related infrastructure.
The Company is developing and beginning the permitting process for additional liquefaction capacity at the Rio Grande LNG Facility. Trains 6 through 8 are wholly owned by NextDecade and are cumulatively expected to increase the Company's total liquefaction capacity by approximately 18 MTPA once constructed and placed into operation.
Financing Activity
Corporate Credit Facility and Senior Secured Loan
In January 2024, NextDecade LLC entered into a credit agreement that provided for a $50 million senior secured revolving credit facility with additional capacity of $12.5 million to cover interest. Borrowings under the revolving credit facility were used for general corporate purposes, including development costs related to Train 4 at the Rio Grande LNG Facility. Borrowings under the revolving credit facility bore interest at SOFR or the base rate plus an applicable margin as defined in the credit agreement. All outstanding borrowings under the revolving credit facility and interest term loan were repaid in December 2024 utilizing proceeds from the senior secured loan issued in December 2024 and described below.
In December 2024, the Company's wholly-owned subsidiary, Rio Grande LNG Super Holdings, LLC ("Super Holdings"), entered into a credit agreement (the "Corporate Credit Agreement") which provided for a $175 million senior secured loan. Proceeds from the senior secured loan were disbursed at closing on December 31, 2024, and net proceeds were used to repay outstanding borrowings under the NextDecade LLC January 2024 $50 million revolving credit facility and $12.5 million interest term loan, and will be used to fund working capital and general corporate purposes, including development expenses for expansion trains at the Rio Grande LNG Facility. Borrowings under the senior secured loan bear interest at 12.0%, with interest payable quarterly. Interest may be paid in-kind until March 31, 2027 and up to 50% in-kind thereafter. The senior secured loan matures six years from the closing date.
Warrants
In conjunction with the closing of the Corporate Credit Agreement, the Company issued warrants in two equal tranches that are exercisable for an aggregate of approximately 7.2 million shares of NextDecade common stock to the lender of the senior secured loan. The warrants are exercisable for five years after the closing date. The first tranche of the warrants are exercisable at $7.15 per share, which represents the 30-day volume weighted average trading price for the 30 trading-day period immediately preceding the closing date, and the second tranche of the warrants are exercisable at $9.30 per share.
Rio Grande Refinancings
In February 2024, Rio Grande entered into a note purchase agreement through which it sold $190 million of senior secured notes to finance a portion of Phase 1. The senior secured notes were issued on February 9, 2024, and resulted in a reduction in the commitments outstanding under Rio Grande's existing bank credit facilities for Phase 1. These senior secured notes will be amortized over a period of approximately 18 years beginning in mid-2029, with a final maturity in June 2047. These senior secured notes bear interest at a fixed rate of 6.85% and rank pari passu to Rio Grande's existing senior secured financings.
In June 2024, Rio Grande issued $1.115 billion of senior secured notes in a private placement, and net proceeds were utilized to reduce outstanding borrowings and commitments under existing Rio Grande bank credit facilities for Phase
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1. These senior secured notes will be amortized over a period of 18 years beginning in September 2029, with a final maturity in September 2047. These senior secured notes bear interest at a fixed rate of 6.58% and rank pari passu to Rio Grande's existing senior secured financings. Including this transaction, the Company has refinanced a total of over $1.85 billion of the original $11.1 billion Rio Grande term loan facilities since a positive FID was reached on Phase 1 at the Rio Grande LNG Facility in July 2023.
Liquidity and Capital Resources
Following FID of Phase 1 and the project financing obtained by Rio Grande, NextDecade and Rio Grande operate with independent capital structures. Although our sources and uses are presented from a consolidated standpoint, certain restrictions under debt and equity agreements limit the ability of NextDecade and Rio Grande to use and distribute cash. Rio Grande is required to deposit all cash received under its debt agreements into restricted accounts. The usage or withdrawal of such cash is restricted to the payment of obligations related to Phase 1 and other restricted payments, and such cash and capital resources are not available to service the obligations of NextDecade.
Phase 1 FID Rio Grande Financing
In connection with the FID of Phase 1 of the Rio Grande LNG Facility, Rio Grande obtained approximately $6.2 billion in equity capital commitments, inclusive of commitments from NextDecade, entered into senior secured non-recourse bank credit facilities of $11.6 billion, consisting of $11.1 billion in construction term loans and a $500 million working capital facility, and closed a $700 million senior secured non-recourse private notes offering. Rio Grande will utilize these capital resources to fund the approximately $18.0 billion total cost of Phase 1, including EPC cost, owner’s costs and contingencies, dredging for the improvement project at the Brazos Island Harbor Channel, conservation of more than 4,000 acres of wetland and wildlife habitat area and installation of utilities, and interest during construction and other financing costs.
Near Term Liquidity and Capital Resources of NextDecade Corporation
In connection with the FID of Phase 1, the Company, through a wholly owned subsidiary, committed to invest approximately $283 million, including $125 million of pre-FID capital investments, into construction of Phase 1 of the Rio Grande LNG Facility. As of December 31, 2024, the Company had funded its full equity commitment.
Prior to the FID on Phase 1 of the Rio Grande LNG Facility, our primary cash needs historically were funding development activities in support of the Rio Grande LNG Facility and our CCS projects, which included payments of initial direct costs of the Rio Grande site lease and expenses in support of engineering and design activities, regulatory approvals and compliance, commercial and marketing activities and corporate overhead. Following the FID of Phase 1 of the Rio Grande LNG Facility, costs associated with the Phase 1 EPC contracts, Rio Grande site lease, and other Phase 1 related costs are being funded by debt and equity proceeds received by Rio Grande.
Because our businesses and assets are under construction or in development, we have not historically generated significant cash flow from operations, nor do we expect to do so until liquefaction trains at the Rio Grande LNG Facility begin operating or until we develop and install CCS projects. We intend to fund development activities for the foreseeable future with cash and cash equivalents on hand and through the sale of additional equity, equity-based or debt securities in us or in our subsidiaries. There can be no assurance that we will succeed in selling equity or equity-based securities or, if successful, that the capital we raise will not be expensive or dilutive to stockholders.
Our capital raising activities since January 1, 2024 have included the following:
• In January 2024, NextDecade LLC executed a credit agreement that provided for a $50 million revolving credit facility that may be used for general corporate purposes and working capital requirements of NextDecade LLC and its subsidiaries, including development costs related to Train 4 and related common facilities at the Rio Grande LNG Facility. All outstanding borrowings under the revolving credit facility and interest term loan were repaid in December 2024 utilizing proceeds from the senior secured loan issued in December 2024.
• In December 2024, Rio Grande LNG Super Holdings, LLC executed the Corporate Credit Agreement, which provided for a $175 million senior secured loan that was used to repay outstanding borrowings under the Company's January 2024 $50 million revolving credit facility and $12.5 million interest term loan and may be used to fund working capital and general corporate purposes, including development expenses for expansion trains at the Rio Grande LNG Facility.
Long Term Liquidity and Capital Resources of NextDecade Corporation
We will not receive significant cash flows from Phase 1 of the Rio Grande LNG Facility until it is operational, and the commercial operation date for the first train of Phase 1 is expected to occur in late 2027 based on the schedule under
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the EPC contracts. Any future phases of development at the Rio Grande LNG Facility and CCS projects will similarly take an extended period of time to develop, construct and become operational and will require significant capital deployment.
We currently expect that the long-term capital requirements for future phases of development at the Rio Grande LNG Facility and any CCS projects will be financed predominantly through the proceeds from future debt, equity-based, and equity offerings by us or our subsidiaries. As a result, our business success will depend, to a significant extent, upon our ability to obtain financing required to fund future phases of development and construction at the Rio Grande LNG Facility and any CCS projects, to bring them into operation on a commercially viable basis and to finance any required increases in staffing, operating and expansion costs during that process. There can be no assurance that we will succeed in securing additional debt and/or equity financing in the future to fund future phases of development and construction at the Rio Grande LNG Facility or complete any CCS projects or, if successful, that the capital we raise will not be expensive or dilutive to stockholders. Additionally, if these types of financing are not available, we will be required to seek alternative sources of financing, which may not be available on terms acceptable to us, if at all.
Sources and Uses of Cash
The following table summarizes the sources and uses of our cash for the periods presented (in thousands):
Year Ended December 31,
2024 2023
Operating cash flows $ (95,585) $ (73,620)
Investing cash flows (2,574,205) (1,752,800)
Financing cash flows 2,768,074 2,058,109
Net increase in cash, cash equivalents and restricted cash 98,284 231,689
Cash, cash equivalents and restricted cash – beginning of period 294,478 62,789
Cash, cash equivalents and restricted cash – end of period $ 392,762 $ 294,478
Operating Cash Flows
Operating cash outflows during the years ended December 31, 2024 and 2023 were $95.6 million and $73.6 million, respectively. The increase in operating cash outflows in 2024 compared to 2023 was primarily due to an increase in employee costs and professional fees after achieving a positive FID in Phase 1 of the Rio Grande LNG Facility in July 2023, as we prepare for operations.
Investing Cash Flows
Investing cash outflows during the years ended December 31, 2024 and 2023 were $2,574.2 million and $1,752.8 million, respectively. Investing cash outflows primarily consist of cash used in the construction of Phase 1 of the Rio Grande LNG Facility. The increase in investing cash outflows in 2024 compared to 2023 was primarily due to positive FID in Phase 1 of the Rio Grande LNG Facility, the mobilization of the Bechtel workforce that began in July 2023 and subsequent progress payments made to Bechtel.
Financing Cash Flows
Financing cash inflows during the years ended December 31, 2024 and 2023 were $2,768.1 million and $2,058.1 million, respectively. Financing cash inflows during 2024 are primarily comprised of proceeds from the issuance of debt of $3,523.2 million and proceeds from receipt of equity contributions throughout 2024 of $676.0 million The cash inflows for 2024 were partially offset by debt and equity issuances costs of $72.8 million, repayment of debt of $1,338.2 million, costs associated with repayment of debt of $13.4 million and shares repurchased related to share-based compensation of $6.7 million.
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Contractual Obligations
We are committed to make cash payments in the future pursuant to certain of our contracts. The following table summarizes certain contractual obligations (in thousands) in place as of December 31, 2024:
Total 2025 2026 - 2027 2028 - 2029 Thereafter
Operating lease obligations $ 235,547 $ 7,608 $ 19,087 $ 19,263 $ 189,589
Operating lease obligations relate to the Rio Grande site lease and our office spaces in Houston, Texas and Singapore. A discussion of these obligations can be found at Note 5 — Leases of our Notes to Consolidated Financial Statements.
Results of Operations
The following table summarizes costs, expenses and other income for the years ended December 31, 2024 and 2023 (in thousands):
Year Ended December 31,
2024 2023 Change
Revenues $ — $ — $ —
General and administrative expense 150,109 111,468 38,641
Development expense 8,260 4,891 3,369
Lease expense 10,775 6,141 4,634
Depreciation expense 1,931 168 1,763
Operating loss (171,075) (122,668) (48,407)
Derivative gain (loss), net 586,541 (44,803) 631,344
Interest expense, net of capitalized interest (87,539) (50,285) (37,254)
Loss on debt extinguishment (49,314) (9,531) (39,783)
Other (expense) income, net (1,166) 5,647 (6,813)
Net loss attributable to NextDecade Corporation 277,447 (221,640) 499,087
Less: net income (loss) attributable to non-controlling interest 339,198 (59,379) 398,577
Less: preferred stock dividends — 20,484 (20,484)
Net loss attributable to common stockholders $ (61,751) $ (182,745) $ 120,994
Net loss attributable to common stockholders was approximately $61.8 million, or $(0.24) per common share (basic and diluted) for the year ended December 31, 2024 compared to a net loss of approximately $182.7 million, or $(0.94) per common share (basic and diluted), for the year ended December 31, 2023. The approximately $121.0 million decrease was primarily a result of the following:
• General and administrative expenses during the year ended December 31, 2024 increased approximately $38.6 million compared to the same period in 2023 primarily due to an increase in professional fees and employee costs, partially offset by a decrease in share-based compensation expense.
• Derivative gains during the year ended December 31, 2024 increased approximately $631.3 million compared to the same period in 2023 primarily due to an increase in forward SOFR rates when compared to the prior period.
• Interest expense, net of capitalized interest during the year ended December 31, 2024 increased approximately $37.3 million compared to the same period in 2023 primarily due to an approximate $178.7 million increase in total interest costs, partially offset by a $141.4 million increase in capitalized interest.
• Loss on debt extinguishment during the year ended December 31, 2024 increased approximately $39.8 million compared to the same period in 2023 due to approximately $1,338.2 million in debt repayments compared to approximately $233.0 million in the prior year.
• Due to the changes in derivatives, interest expense, net of capitalized interest and loss on debt extinguishment described above, net income attributable to non-controlling interest during the year ended December 31, 2024 increased approximately $398.6 million as those activities are a component of Intermediate Holdings net income and loss.
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Summary of Critical Accounting Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make certain estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying notes. Management evaluates its estimates and related assumptions regularly, including those related to the value of properties, plant, and equipment, share-based compensation, common stock warrant liabilities, and income taxes. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. Management considers the following to be its most critical accounting estimates that involve significant judgment.
Derivative Instruments
All derivative instruments, other than those that satisfy specific exceptions, are recorded at fair value. We record changes in the fair value of our derivative positions based on the value for which the derivative instrument could be exchanged between willing parties. If market quotes are not available to estimate fair value, management's best estimate of fair value is based on the quoted market price of derivatives with similar characteristics or determined through industry-standard valuation approaches. Such evaluation may involve significant judgment and the results are based on expected future events or conditions, particularly for those valuations using inputs unobservable in the market.
Our derivative instruments primarily consist of interest rate swaps. We value our interest rate swaps using observable inputs including interest rate curves, risk adjusted discount rates, credit spreads and other relevant data.
Gains and losses on derivative instruments are recognized in earnings. The ultimate fair value of our derivative instruments is uncertain, and we believe that it is reasonably possible that a change in the estimated fair value could occur in the near future as interest rates change.
Recent Accounting Standards
The Company does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our Consolidated Financial Statements or related disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information under this item.
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