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

9 Months Ended

Sep. 30, 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 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
	September 30, 2016		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
	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 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
	Level within fair value hierarchy	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

- 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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