CorEnergy Infrastructure Trust, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value

Fair Value

3 Months Ended

Mar. 31, 2016

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables provide the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of March 31, 2016, and December 31, 2015. These assets and liabilities are measured on a recurring basis.



March 31, 2016
	March 31, 2016		Fair Value
	March 31, 2016		Level 1		Level 2		Level 3
Assets:
Other equity securities	$	6,837,442	$	—	$	—	$	6,837,442
Total Assets	$	6,837,442	$	—	$	—	$	6,837,442

Liabilities:
Interest Rate Swap Derivative	$	90,804	$	—	$	90,804	$	—
Total Liabilities	$	90,804	$	—	$	90,804	$	—



December 31, 2015
	December 31, 2015		Fair Value
	December 31, 2015		Level 1		Level 2		Level 3
Assets:
Other equity securities	$	8,393,683	$	—	$	—	$	8,393,683
Interest Rate Swap Derivative	98,259		—		98,259		—
Total Assets	$	8,491,942	$	—	$	98,259	$	8,393,683

On March 30, 2016, the Company terminated one of the $26.3 million cash flow hedges concurrent with the assignment of the $70 million secured term credit facility. The remaining cash flow hedge was de-designated as of March 30, 2016, and continues to be valued using a consistent methodology and therefore is classified as a Level 2 investment. Subsequent to de-designation, changes in the fair value will be recognized in earnings in the period in which the changes occur.

The net assets and liabilities received as a result of foreclosing on the the equity of Black Bison on February 29, 2016, were determined to have a fair value of $2.0 million, which approximated the fair value of the collateral securing the notes as of December 31, 2015. A portion of the assets and liabilities acquired have been classified as held for sale and have been marked to a fair value of $1.8 million and $439 thousand, respectively as of March 31, 2016. The foreclosure and held-for-sale date fair values of the assets and liabilities, were determined using Level 1, Level 2, and Level 3 inputs. The company uses data on its existing portfolio of investments as well as similar market data from third party sources, when available, in determining these Level 3 inputs.

The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the three months ended March 31, 2016 and 2015, are as follows:



Level 3 Rollforward
For the Three Months Ended March 31, 2016	Fair Value Beginning Balance		Acquisitions		Disposals		Total Realized and Unrealized Gains/(Losses) Included in Net Income			Return of Capital Adjustments Impacting Cost Basis of Securities		Fair Value Ending Balance		Changes in Unrealized Losses, Included In Net Income, Relating to Securities Still Held ⁽¹⁾
Other equity securities	$	8,393,683	$	—	$	—	$	(1,672,081	)	$	115,840	$	6,837,442	$	(1,672,081	)
Total	$	8,393,683	$	—	$	—	$	(1,672,081	)	$	115,840	$	6,837,442	$	(1,672,081	)

For the Three Months Ended March 31, 2015
Other equity securities	$	9,217,181	$	—	$	—	$	679,798		$	341,459	$	10,238,438	$	679,798
Warrant Investment	355,000		—		—		(230,000		)	—		125,000		(230,000		)
Total	$	9,572,181	$	—	$	—	$	449,798		$	341,459	$	10,363,438	$	449,798
(1) Located in Net realized and unrealized gain on other equity securities in the Consolidated Statements of Income

The Company utilizes the beginning of reporting period method for determining transfers between levels. There were no transfers between levels 1, 2 or 3 for the three months ended March 31, 2016 and 2015.

In connection with the October 2014 sale of the Company's shares in VantaCore, a portion of the proceeds were placed in escrow and a receivable was recorded. Changes in the fair value of the escrow receivable are recorded as a net realized or unrealized gain or loss on other equity securities included within the Consolidated Statements of Income and Comprehensive Income. For the three months ended March 31, 2016 and 2015, approximately $43 thousand and $0, was included as an unrealized gain, respectively.

Valuation Techniques and Unobservable Inputs

The Company’s other equity securities, which represent securities issued by private companies, are classified as Level 3 assets. Significant judgment is required in selecting the assumptions used to determine the fair values of these investments. See Note 2, Significant Accounting Policies, for additional discussion.

For the three months ended March 31, 2015, the Company’s Warrant Investment was valued using a binomial option pricing model. The key assumptions used in the binomial model were the fair value of equity of the underlying business; the Warrant's strike price; the expected volatility of equity; the time to the Warrant's expiry; the risk-free rate, and the expected dividend yields. Due to the inherent uncertainty of determining the fair value of the Warrant Investment, which did not have a readily available market, the assumptions used the binomial model to value the Company’s Warrant Investment were based on Level 2 and Level 3 inputs. The Company’s Warrant Investment was valued at $0 at March 31, 2016 due to the foreclosure on Black Bison, discussed in further detail in Note 5.

As of March 31, 2016 and 2015, the Company’s investment in Lightfoot Capital Partners, LP and Lightfoot Capital Partners GP LLC, collectively, ("Lightfoot") is its only remaining significant private company investment. Lightfoot in turn owns a combination of public and private investments. Therefore, Lightfoot was valued using a combination of the following valuation techniques: (i) public share price of private companies' investments discounted for a lack of marketability, with the discount estimated at 12.5 percent to 13.9 percent and 16.6 percent to 21.3 percent as of March 31, 2016 and 2015, respectively, and (ii) discounted cash flow analysis using an estimated discount rate of 15.0 percent to 17.0 percent and 12.0 percent to 14.0 percent as of March 31, 2016 and 2015, respectively. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investment may fluctuate from period to period. Additionally, the fair value of the Company’s investment may differ from the values that would have been used had a ready market existed for such investment and may differ materially from the values that the Company may ultimately realize.

As of both March 31, 2016 and 2015, the Company held a 6.6 percent and 1.5 percent equity interest in Lightfoot LP and Lightfoot GP, respectively. Lightfoot’s assets include an ownership interest in Gulf LNG, a 1.5 billion cubic feet per day (“bcf/d”) receiving, storage, and regasification terminal in Pascagoula, Mississippi, and common units and subordinated units representing an approximately 40 percent aggregate limited partner interest, and a noneconomic general partner interest, in Arc Logistics Partners LP (NYSE: ARCX). We hold observation rights on Lightfoot's Board of Directors.

Certain condensed combined unaudited financial information of the unconsolidated affiliate, Lightfoot, is presented in the following tables (in thousands).



	March 31, 2016 (Unaudited)		December 31, 2015 (Unaudited)
Assets
Current assets	$	22,303	$	24,276
Noncurrent assets	701,805		696,461
Total Assets	$	724,108	$	720,737
Liabilities
Current liabilities	$	15,995	$	19,993
Noncurrent liabilities	261,723		246,808
Total Liabilities	$	277,718	$	266,801

Partner's equity	446,390		453,936
Total liabilities and partner's equity	$	724,108	$	720,737



	For the Three Months Ending March 31, (Unaudited)
	2016			2015
Revenues	$	26,067		$	13,557
Operating expenses	22,072			15,128
Income (Loss) from Operations	$	3,995		$	(1,571	)
Other income	2,374			3,834
Net Income	$	6,369		$	2,263
Less: Net Income attributable to non-controlling interests	(6,293		)	(2,226		)
Net Income attributable to Partner's Capital	$	76		$	37

The following section describes the valuation methodologies used by the Company for estimating fair value for financial instruments not recorded at fair value, but fair value is included for disclosure purposes only, as required under disclosure guidance related to the fair value of financial instruments.

Cash and Cash Equivalents — The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements approximates fair value.

Escrow Receivable — The escrow receivable due to the Company as of March 31, 2016, which relates to the sale of VantaCore, is to be released upon satisfaction of certain post-closing obligations and the expiration of certain time periods (50 percent was released 12 months after the October 1, 2014 closing date (i.e. October 1, 2015), and the other 50 percent to be released 18 months after close (i.e. April 1, 2016)). At December 31, 2015, the fair value of the escrow receivable was reflected net of a discount for the potential that the full amount due to the Company would not be realized. At March 31, 2016, the fair value of the escrow receivable was based on the actual cash received in settlement of the escrow on April 1, 2016. See Note 16. Subsequent Events for additional information regarding the remaining funds held in escrow at March 31, 2016.

Financing Notes Receivable — The financing notes receivable are valued on a non-recurring basis. The financing notes receivable are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Financing Notes with carrying values that are not expected to be recovered through future cash flows are written-down to their estimated net realizable value.

Long-term Debt — The fair value of the Company’s long-term debt is calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the expected market rate for an equivalent transaction.

Line of Credit — The carrying value of the line of credit approximates the fair value due to its short-term nature.



Carrying and Fair Value Amounts
	Level within fair value hierarchy	March 31, 2016				December 31, 2015
	Level within fair value hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and cash equivalents	Level 1	$	12,849,652	$	12,849,652	$	14,618,740	$	14,618,740
Escrow receivable	Level 2	$	1,436,246	$	1,436,246	$	1,392,917	$	1,392,917
Financing notes receivable (Note 5)	Level 2	$	1,500,000	$	1,500,000	$	7,675,626	$	7,675,626
Hedged Derivative Asset	Level 2	$	—	$	—	$	98,259	$	98,259
Financial Liabilities:
Long-term debt	Level 2	$	164,738,323	$	141,456,935	$	217,375,153	$	193,573,834
Line of credit	Level 2	$	44,000,000	$	44,000,000	$	—	$	—
Hedged Derivative Liability	Level 2	$	90,804	$	90,804	$	—	$	—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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