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

Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Other Securities

Fair Value of Other Securities

6 Months Ended

Jun. 30, 2014

The inputs or methodology used for valuing securities and financial instruments are not necessarily an indication of the risk associated with investing in those securities or financial instruments. The following tables provide the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of June 30, 2014, and December 31, 2013. These assets and liabilities are measured on a recurring basis.



June 30, 2014
	June 30, 2014		Fair Value
	June 30, 2014		Level 1		Level 2		Level 3
Assets:
Other equity securities	$	25,786,785	$	—	$	—	$	25,786,785
Warrant option⁽¹⁾	109,500		—		—		109,500
Total Assets	$	25,896,285	$	—	$	—	$	25,896,285

(1) Located in Prepaid expenses and other assets in the Consolidated Balance Sheets



December 31, 2013
	December 31, 2013		Fair Value
	December 31, 2013		Level 1		Level 2		Level 3
Assets:
Other equity securities	$	23,304,321	$	—	$	—	$	23,304,321
Total Assets	$	23,304,321	$	—	$	—	$	23,304,321

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, 2014 and June 30, 2013 are as follows:



	For the Six Months Ended
	June 30, 2014			June 30, 2013
Fair value beginning balance	$	23,304,321		$	19,707,126
Acquisitions	46,500			—
Total realized and unrealized gains included in net income	3,378,208			2,087,251
Return of capital adjustments impacting cost basis of securities	(832,744		)	(554,442		)
Fair value ending balance	$	25,896,285		$	21,239,935

Changes in unrealized gains, included in net income, relating to securities still held ⁽¹⁾	$	3,378,208		$	2,087,251

(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 and six-month periods ended June 30, 2014 and June 30, 2013.

Valuation Techniques and Unobservable Inputs

An equity security of a publicly traded company acquired in a private placement transaction without registration under the Securities Act of 1933, as amended (the “1933 Act”), is subject to restrictions on resale that can affect the security’s liquidity (and hence its fair value). If the security has a common share counterpart trading in a public market, the Company generally determines an appropriate percentage discount for the security in light of the restrictions that apply to its resale (taking into account, for example, whether the resale restrictions of Rule 144 under the 1933 Act apply). This pricing methodology applies if the Company has Level 2 trading securities.

The Company’s other equity securities, which represent securities issued by private companies, are classified as Level 3 assets. Valuation of these investments is determined by weighting various valuation metrics for each security. 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.

The Company’s investments in private companies are typically valued using one or a combination of the following valuation techniques: (i) analysis of valuations for publicly traded companies in a similar line of business (“public company analysis”), (ii) analysis of valuations for comparable M&A transactions (“M&A analysis”) and (iii) discounted cash flow analysis. The table entitled “Quantitative Table for Valuation Techniques” outlines the valuation technique(s) used for each asset category.

The public company analysis utilizes valuation multiples for publicly traded companies in a similar line of business as the portfolio company to estimate the fair value of such investment. Typically, the Company’s analysis focuses on the ratio of enterprise value to earnings before interest expense, income tax expense, depreciation and amortization (“EBITDA”) which is commonly referred to as an EV/EBITDA multiple. The Company selects a range of multiples given the trading multiples of similar publicly traded companies and applies such multiples to the portfolio company’s EBITDA to estimate the portfolio company’s trailing, proforma, projected or average (as appropriate) EBITDA to estimate the portfolio company’s enterprise value and equity value. The Company also selects a range of trading market yields of similar public companies and applies such yields to the portfolio company’s estimated distributable cash flow. When calculating these values, the Company applies a discount, when applicable, to the portfolio company’s estimated equity value for the size of the company and the lack of liquidity in the portfolio company’s securities.

The M&A analysis utilizes valuation multiples for historical M&A transactions for companies or assets in a similar line of business as the portfolio company to estimate the fair value of such investment. Typically, the Company’s analysis focuses on EV/EBITDA multiples. The Company selects a range of multiples based on EV/EBITDA multiples for similar M&A transactions or similar companies and applies such ranges to the portfolio company’s analytical EBITDA to estimate the portfolio company’s enterprise value.

The discounted cash flow ("DCF") analysis is used to estimate the equity value for the portfolio company based on estimated DCF of such portfolio company. Such cash flows include an estimate of terminal value for the portfolio company. A present value of these cash flows is determined by using estimated discount rates (based on the Company’s estimate for weighted average cost of capital for such portfolio company).

Under all of these valuation techniques, the Company estimates operating results of its portfolio companies (including EBITDA). These estimates utilize unobservable inputs such as historical operating results, which may be unaudited, and projected operating results, which will be based on expected operating assumptions for such portfolio company. The Company also consults with management of the portfolio companies to develop these financial projections. These estimates will be sensitive to changes in assumptions specific to such portfolio company as well as general assumptions for the industry. Other unobservable inputs utilized in the valuation techniques outlined above include: possible discounts for lack of marketability, selection of publicly-traded companies, selection of similar M&A transactions, selected ranges for valuation multiples, selected range of yields and expected required rates of return and weighted average cost of capital. The various inputs will be weighted as appropriate, and other factors may be weighted into the valuation, including recent capital transactions of the Company.

Changes in EBITDA multiples, or discount rates may change the fair value of the Company’s portfolio investments. Generally, a decrease in EBITDA multiples or DCF multiples, or an increase in discount rates, when applicable, may result in a decrease in the fair value of the Company’s portfolio investments.

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 investments may fluctuate from period to period. Additionally, the fair value of the Company’s investments may differ from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize.

As of both June 30, 2014 and June 30, 2013, the Company held a 6.7 percent equity interest in Lightfoot Capital Partners LP ("Lightfoot") and an 11.1 percent equity interest in VantaCore Partners LP ("VantaCore"). The following table summarizes the significant unobservable inputs that the Company used to value its portfolio investments categorized as Level 3 as of June 30, 2014. Please see the Asset Portfolio and Related Developments section of Management's Discussion and Analysis for more detail.

Quantitative Table for Valuation Techniques

Significant Unobservable Inputs Used To Value Portfolio Investments

Unobservable Inputs

Range

Weighted Average

Assets at Fair Value

Fair Value

Valuation Technique

Low

High

Other equity securities, at fair value

25,786,785

Public company historical EBITDA analysis

Historical EBITDA Valuation Multiples

10.0x

11.0x

10.5x

Public company projected EBITDA analysis

Projected EBITDA Valuation Multiples

9.0x

10.0x

9.5x

M&A company analysis

EV/LTM 2012 EBITDA

8.3x

9.3x

8.8x

Discounted cash flow

Weighted Average Cost of Capital

9.5%

14.0%

11.8%

Certain condensed combined financial information of the unconsolidated affiliates, Lightfoot and VantaCore, is presented in the following tables.



Assets	June 30, 2014		December 31, 2013
Current assets	$	57,298,543	$	49,195,626
Noncurrent assets	$	554,482,086	$	554,402,885
Total Assets	$611,780,629		$603,598,511
Liabilities
Current liabilities	$	30,885,158	$	31,860,653
Noncurrent liabilities	193,710,004		182,639,103
Total Liabilities	224,595,162		214,499,756

Partner's equity	387,185,467		389,098,755
Total liabilities and partner's equity	$611,780,629		$603,598,511



	For the three Months Ending						For the six Months Ending
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Revenues	$	45,216,000		$	38,524,000		$	76,438,000		$	65,632,000
Operating expenses	33,928,000			27,427,000			60,868,000			48,709,000
EBITDA	$	11,288,000		$	11,097,000		$	15,570,000		$	16,923,000
Other income (expenses)	(748,000		)	(3,812,000		)	(1,879,000		)	4,425,000
Net income	$	10,540,000		$	7,285,000		$	13,691,000		$	21,348,000

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 Note Receivable — Based on the interest rates for similar financial instruments, the carrying value of the financing note receivable is considered to approximate fair 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 Company’s current expected 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	June 30, 2014				December 31, 2013
	Level within fair value hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and cash equivalents	Level 1	$	18,986,616	$	18,986,616	$	17,963,266	$	17,963,266
Financing note receivable	Level 2	$	4,299,356	$	4,299,356	$	—	$	—
Financial Liabilities:
Long-term debt	Level 2	$	68,824,000	$	68,824,000	$	70,000,000	$	70,000,000
Line of credit	Level 1	$	—	$	—	$	81,935	$	81,935

- 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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