Quarterly report pursuant to Section 13 or 15(d)

Fair Value

v3.5.0.2
Fair Value
9 Months Ended
Sep. 30, 2016
Fair Value Disclosures [Abstract]  
FAIR VALUE
FAIR VALUE
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 September 30, 2016, and December 31, 2015. These assets and liabilities are measured on a recurring basis.
September 30, 2016
 
 
September 30, 2016
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Other equity securities
 
$
9,465,736

 
$

 
$

 
$
9,465,736

Total Assets
 
$
9,465,736

 
$

 
$

 
$
9,465,736

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest Rate Swap Derivative
 
$
49,143

 
$

 
$
49,143

 
$

Total Liabilities
 
$
49,143

 
$

 
$
49,143

 
$

December 31, 2015
 
 
December 31, 2015
 
Fair Value
 
 
 
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 cash flow hedges with a notional amount of $26.3 million concurrent with the assignment of the $70 million Pinedale Credit Facility. The remaining cash flow hedge was de-designated from hedge accounting 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 are recognized in earnings in the period in which the changes occur.
The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the nine months ended September 30, 2016 and 2015, are as follows:
Level 3 Rollforward
For the Nine Months Ended September 30, 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

 
$

 
$

 
$
958,443

 
$
113,610

 
$
9,465,736

 
$
958,443

Total
 
$
8,393,683

 
$

 
$

 
$
958,443

 
$
113,610

 
$
9,465,736

 
$
958,443

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other equity securities
 
$
9,217,181

 
$

 
$

 
$
(842,438
)
 
$
283,325

 
$
8,658,068

 
$
(842,438
)
Warrant Investment
 
355,000

 

 

 
(355,000
)
 

 

 
(355,000
)
Total
 
$
9,572,181

 
$

 
$

 
$
(1,197,438
)
 
$
283,325

 
$
8,658,068

 
$
(1,197,438
)
(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 nine months ended September 30, 2016 and 2015, respectively.
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 were 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 and nine months ended September 30, 2016, approximately $0 and $43 thousand, was included as a gain, respectively, compared to $0 and $282 thousand for the three and nine months ended September 30, 2015, 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.
As of September 30, 2016 and December 31, 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 2.8 percent to 3.5 percent and 11.8 percent to 15.2 percent as of September 30, 2016 and December 31, 2015, and (ii) discounted cash flow analysis using an estimated discount rate of 14.5 percent to 16.5 percent and 14.0 percent to 16.0 percent as of September 30, 2016 and December 31, 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 September 30, 2016 and December 31, 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). The Company holds observation rights on Lightfoot's Board of Directors.
For the three and nine months ended September 30, 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.
Certain condensed combined unaudited financial information of the unconsolidated affiliate, Lightfoot, is presented in the following tables (in thousands):
 
 
September 30, 2016
 
December 31, 2015
 
 
(Unaudited)
 
(Unaudited)
Assets
 
 
 
 
Current assets
 
$
20,504

 
$
24,276

Noncurrent assets
 
700,502

 
696,461

Total Assets
 
$
721,006

 
$
720,737

Liabilities
 
 
 
 
Current liabilities
 
$
14,048

 
$
19,993

Noncurrent liabilities
 
266,609

 
246,808

Total Liabilities
 
$
280,657

 
$
266,801

 
 
 
 
 
Partner's equity
 
440,349

 
453,936

Total liabilities and partner's equity
 
$
721,006

 
$
720,737


 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
(Unaudited)
 
(Unaudited)
 
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Revenues
 
$
26,673

 
$
24,084

 
$
78,983

 
$
56,751

Operating expenses
 
21,287

 
21,526

 
64,171

 
54,194

Income (Loss) from Operations
 
$
5,386

 
$
2,558

 
$
14,812

 
$
2,557

Other income
 
2,207

 
2,683

 
6,950

 
9,837

Net Income
 
$
7,593

 
$
5,241

 
$
21,762

 
$
12,394

Less: Net Income attributable to non-controlling interests
 
(7,551
)
 
(5,206
)
 
(21,630
)
 
(12,269
)
Net Income attributable to Partner's Capital
 
$
42

 
$
35

 
$
132

 
$
125


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 —At December 31, 2015, the fair value of the escrow receivable, which related to the sale of VantaCore, was reflected net of a discount for the potential that the full amount due to the Company would not be realized. On April 1, 2016, the Company recorded a gain when the full value of the escrow receivable was received.
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. Estimates of realizable value are determined based on unobservable inputs, including estimates of future cash flow generation and value of collateral underlying the notes.
Derivative Asset/Liability — The Company uses interest rate swaps to manage interest rate risk. The fair value of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the respective derivative.
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
 
September 30, 2016
 
December 31, 2015
 
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
10,107,754

 
$
10,107,754

 
$
14,618,740

 
$
14,618,740

Escrow receivable
 
Level 2
 
$

 
$

 
$
1,392,917

 
$
1,392,917

Financing notes receivable (Note 4)
 
Level 3
 
$
1,500,000

 
$
1,500,000

 
$
7,675,626

 
$
7,675,626

Derivative asset
 
Level 2
 
$

 
$

 
$
98,259

 
$
98,259

Financial Liabilities:
 
 
 
 
 
 
 
 
Secured Credit Facilities(1)
 
Level 2
 
$
91,698,387

 
$
91,698,387

 
$
105,440,842

 
$
105,440,842

Unsecured convertible senior notes
 
Level 2
 
$
111,048,098

 
$
112,860,000

 
$
111,423,910

 
$
87,622,591

Derivative liability
 
Level 2
 
$
49,143

 
$
49,143

 
$

 
$

(1) Includes current maturities