CorEnergy Infrastructure Trust, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value of Other Securities

Fair Value of Other Securities

12 Months Ended

Dec. 31, 2015

The major components of net realized and unrealized gain or loss on trading securities for the years ended December 31, 2015, 2014 and 2013 are as follows:



Major Components of Net Realized and Unrealized Loss on Trading Securities
	For the Years Ended December 31,
	2015		2014		2013
Net unrealized loss on trading securities	$	—	$	—	$	—
Net realized loss on trading securities	—		—		(251,213		)
Total net realized and unrealized loss on trading securities	$	—	$	—	$	(251,213	)

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 December 31, 2015, and December 31, 2014. These assets and liabilities are measured on a recurring basis.



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
Total Assets	$	8,393,683	$	—	$	—	$	8,393,683



December 31, 2014
	December 31, 2014		Fair Value
	December 31, 2014		Level 1		Level 2		Level 3
Assets:
Other equity securities	$	9,572,181	$	—	$	—	$	9,572,181
Total Assets	$	9,572,181	$	—	$	—	$	9,572,181

The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the years ended December 31, 2015 and 2014, are as follows:



Level 3 Rollforward
For the Year Ended December 31, 2015	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	$	9,217,181	$	—	$	—		$	(1,073,243	)	$	249,745		$	8,393,683	$	(1,073,243	)
Warrant investment	355,000		—		—			(355,000		)	—			—		(355,000		)
Total	$	9,572,181	$	—	$	—		$	(1,428,243	)	$	249,745		$	8,393,683	$	(1,428,243	)

For the Year Ended December 31, 2014
Other equity securities	$	23,304,321	$	—	$	(13,245,379	)	$	139,612		$	(981,373	)	$	9,217,181	$	139,612
Warrant Investment			97,500					257,500						355,000		257,500
Total	$	23,304,321	$	97,500	$	(13,245,379	)	$	397,112		$	(981,373	)	$	9,572,181	$	397,112
(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 years ended December 31, 2015 and 2014.

In accordance with ASC 820, the Company fair values their derivative financial instruments. Please refer to Note 17, Interest Rate Hedge Swaps, for more information. Additionally, the Company had a non-recurring fair value measurement related to the acquisition of an asset retirement obligation, see Note 16, Asset Retirement Obligation, for more information.

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 years ended December 31, 2015 and 2014, approximately $365 thousand and $5 thousand, were 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 year ended December 31, 2014, the Company’s Warrant Investment was valued using a binomial option pricing model. The key assumptions used in the binomial model are 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 does 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 December 31, 2015 due to the current reduction in Black Bison’s business activity that also resulted in the Provision for Loan Loss with respect to the Black Bison Loans discussed in further detail in Note 6.

As of December 31, 2015 and 2014, 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 11.8 percent to 15.2 percent and 17.7 percent to 22.8 percent as of December 31, 2015 and 2014, respectfully, and (ii) discounted cash flow analysis using an estimated discount rate of 14.0 percent to 16.0 percent and 13.0 percent to 15.0 percent as of December 31, 2015 and 2014, 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 December 31, 2015 and 2014, the Company held a 6.6 percent and 1.5 percent equity interest in Lightfoot LP and Lightfoot GP, respectively.

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



	December 31, 2015 (Unaudited)		December 31, 2014 (Unaudited)
Assets
Current assets	$	24,276	$	25,783
Noncurrent assets	696,461		382,957
Total Assets	$	720,737	$	408,740
Liabilities
Current liabilities	$	19,993	$	14,318
Noncurrent liabilities	246,808		113,810
Total Liabilities	$	266,801	$	128,128

Partner's equity	453,936		280,612
Total liabilities and partner's equity	$	720,737	$	408,740



	For the Years Ending December 31, (Unaudited)
	2015			2014
Revenues	$	81,789		$	54,906
Operating expenses	76,755			62,764
Other income (expenses)	12,469			15,459
Income from Operations	$	17,503		$	7,601
Less: Net Income attributable to noncontrolling interests	(8,901		)	(761		)
Net Income attributable to Partner's Capital	$	8,602		$	6,840

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 December 31, 2015, which relates to the sale of VantaCore, is anticipated 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)). The fair value of the escrow receivable is reflected net of a discount for the potential that the full amount due to the Company would not be realized.

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	December 31, 2015				December 31, 2014
	Level within fair value hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and cash equivalents	Level 1	$	14,618,740	$	14,618,740	$	7,578,164	$	7,578,164
Escrow receivable	Level 2	$	1,392,917	$	1,392,917	$	2,438,500	$	2,438,500
Financing notes receivable (Note 6)	Level 2	$	7,675,626	$	7,675,626	$	20,687,962	$	20,687,962
Hedged Derivative Asset (Note 17)	Level 2	$	98,259	$	98,259	$	351,807	$	351,807
Financial Liabilities:
Long-term debt	Level 2	$	217,375,153	$	193,573,834	$	67,060,000	$	67,060,000
Line of credit	Level 2	$	—	$	—	$	32,141,277	$	32,141,277

- 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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