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

6 Months Ended

Jun. 30, 2017

The following tables set forth the Company's assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of June 30, 2017 and December 31, 2016.



	June 30, 2017
			Fair Value
	Total		Level 1		Level 2		Level 3
Assets:
Other equity securities	$	9,147,158	$	—	$	—	$	9,147,158
Interest Rate Swap Derivative	43,777		—		43,777		—
Total Assets	$	9,190,935	$	—	$	43,777	$	9,147,158



	December 31, 2016
			Fair Value
	Total		Level 1		Level 2		Level 3
Assets:
Other equity securities	$	9,287,209	$	—	$	—	$	9,287,209
Interest Rate Swap Derivative	19,950		—		19,950		—
Total Assets	$	9,307,159	$	—	$	19,950	$	9,287,209

At June 30, 2017, the only assets and liabilities measured at fair value on a recurring basis were the Company's derivatives and its equity securities. 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 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 measurement. Subsequent to de-designation, changes in the fair value are recognized in earnings in the period in which the changes occur.

The valuation of the interest rate swaps are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. The inputs used to value the derivatives fall primarily within Level 2 of the value hierarchy.

The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the six months ended June 30, 2017 and 2016 are as follows:



Level 3 Rollforward
For the Six Months Ended June 30, 2017	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	$	9,287,209	$	—	$	—	$	70,426		$	(210,477	)	$	9,147,158	$	70,426
Total	$	9,287,209	$	—	$	—	$	70,426		$	(210,477	)	$	9,147,158	$	70,426

For the Six Months Ended June 30, 2016
Other equity securities	$	8,393,683	$	—	$	—	$	(472,416	)	$	114,869		$	8,036,136	$	(472,416	)
Total	$	8,393,683	$	—	$	—	$	(472,416	)	$	114,869		$	8,036,136	$	(472,416	)
(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 six months ended June 30, 2017 and 2016.

Valuation Techniques and Unobservable Inputs

The Company’s other equity securities, which represent securities issued by private companies, are classified as Level 3 assets and the Company has elected to report at fair value under the fair value option. Significant judgment is required in selecting the assumptions used to determine the fair values of these investments.

As of June 30, 2017 and December 31, 2016, the Company’s investment in 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, and (ii) discounted cash flow analysis using an estimated discount rate of 15.7 percent to 17.7 percent and 15.3 percent to 17.3 percent as of June 30, 2017 and December 31, 2016, 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 June 30, 2017 and December 31, 2016, 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.

Certain condensed combined unaudited financial information of the unconsolidated affiliate, Lightfoot, is presented in the following tables:



	June 30, 2017		December 31, 2016
	(Unaudited)
	(in thousands)
Assets
Current assets	$	17,787	$	20,412
Noncurrent assets	693,156		698,745
Total Assets	$	710,943	$	719,157
Liabilities
Current liabilities	$	14,902	$	14,718
Noncurrent liabilities	271,320		268,805
Total Liabilities	$	286,222	$	283,523

Partner's equity	424,721		435,634
Total liabilities and partner's equity	$	710,943	$	719,157



	For the Three Months Ended						For the Six Months Ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
	(Unaudited)
	(in thousands)
Revenues	$	26,586		$	26,243		$	52,511		$	52,310
Operating expenses	22,803			20,812			45,274			42,884
Income (Loss) from Operations	$	3,783		$	5,431		$	7,237		$	9,426
Other income	1,860			2,369			3,770			4,743
Net Income	$	5,643		$	7,800		$	11,007		$	14,169
Less: Net Income attributable to non-controlling interests	(1,977		)	(5,070		)	(5,107		)	(9,077		)
Net Income attributable to Partner's Capital	$	3,666		$	2,730		$	5,900		$	5,092

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.

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.

Secured Credit Facilities — The fair value of the Company’s long-term variable-rate debt under its secured credit facilities approximates carrying value.

Unsecured Convertible Senior Notes — The fair value of the unsecured convertible senior notes is estimated using quoted market prices.



Carrying and Fair Value Amounts
	Level within fair value hierarchy	June 30, 2017				December 31, 2016
	Level within fair value hierarchy	Carrying Amount ⁽¹⁾		Fair Value		Carrying Amount ⁽¹⁾		Fair Value
Financial Assets:
Cash and cash equivalents	Level 1	$	37,280,689	$	37,280,689	$	7,895,084	$	7,895,084
Financing notes receivable (Note 4)	Level 3	$	1,500,000	$	1,500,000	$	1,500,000	$	1,500,000
Financial Liabilities:
Secured Credit Facilities	Level 2	$	41,035,695	$	41,035,695	$	89,387,985	$	89,387,985
Unsecured convertible senior notes	Level 1	$	111,638,489	$	127,821,360	$	111,244,895	$	129,527,940
(1) The carrying value of debt balances are presented net of unamortized original issuance discount and debt issuance costs.

- 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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