Attached files

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EX-12.1 - EXHIBIT 12.1 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS - CorEnergy Infrastructure Trust, Inc.corr-2016630x10qexx121rati.htm
EX-32.1 - EXHIBIT 32.1 SECTION 906 CEO AND CFO CERTIFICATIONS - CorEnergy Infrastructure Trust, Inc.corr-2016630x10qexx321sect.htm
EX-31.2 - EXHIBIT 31.2 SECTION 302 CFO CERTIFICATION - CorEnergy Infrastructure Trust, Inc.corr-2016630x10qexx312sect.htm
EX-31.1 - EXHIBIT 31.1 SECTION 302 CEO CERTIFICATION - CorEnergy Infrastructure Trust, Inc.corr-2016630x10qexx311sect.htm
EX-10.2.6 - EXHIBIT 10.2.6 MANAGEMENT INCENTIVE FEE WAIVER LETTER - CorEnergy Infrastructure Trust, Inc.corr-2016630x10qexx1026man.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
___________________________________________
FORM 10-Q
 ___________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number: 001-33292
_________________________________________________________
CORENERGY INFRASTRUCTURE TRUST, INC.
______________________________________________________________________
(Exact name of registrant as specified in its charter)
Maryland
 
20-3431375
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
1100 Walnut, Ste. 3350
Kansas City, MO
 
64106
(Address of Principal Executive Offices)
 
(Zip Code)

(816) 875-3705
(Registrant’s telephone number, including area code)

n/a
(Former name, former address and former fiscal year, if changed since last report)
___________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)     Yes   ¨    No  x
As of July 31, 2016, the registrant had 11,870,869 common shares outstanding.



CorEnergy Infrastructure Trust, Inc.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2016
TABLE OF CONTENTS
____________________________________________________________________________________________
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

This report should be read in its entirety. No one section of the report deals with all aspects of the subject matter. It should be read in conjunction with the consolidated financial statements, related notes, and with the Management's Discussion & Analysis ("MD&A") included within, as well as provided in the Annual Report on Form 10-K, for the year ended December 31, 2015.

The consolidated unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not

2


include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2016, are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. For further information, refer to the consolidated financial statements and footnotes thereto included in the CorEnergy Infrastructure Trust, Inc. Annual Report on Form 10-K, for the year ended December 31, 2015.

GLOSSARY OF DEFINED TERMS
Certain of the defined terms used in this report are set forth below:
Accretion Expense: the expense recognized when adjusting the present value of the GIGS ARO for the passage of time
Administrative Agreement: the Administrative Agreement dated December 1, 2011, as amended effective August 7, 2012, between the Company and Corridor
Arc Logistics: Arc Logistics Partners LP (NYSE: ARCX)
Arc Terminals: Arc Terminals Holdings LLC, an indirect wholly-owned operating subsidiary of Arc Logistics
ARO: the Asset Retirement Obligation liabilities assumed with the acquisition of GIGS
ASC: Accounting Standards Codification
Bbls: standard barrel containing 42 U.S. gallons
BB Intermediate: Black Bison Intermediate Holdings, LLC, the holding company of Black Bison Water Services
Black Bison Notes: the financing notes between Corridor Bison and CorEnergy BBWS and BBWS
BBWS: Black Bison Water Services, LLC, the borrower of the Black Bison financing notes, as well as all of the other collateral securing the Black Bison Loans
Code: the Internal Revenue Code of 1986, as amended
CorEnergy: CorEnergy Infrastructure Trust, Inc. (NYSE: CORR)
CorEnergy BBWS: CorEnergy BBWS, Inc., a wholly-owned subsidiary of CorEnergy
Convertible Notes: the Company's 7.00% Convertible Senior Notes Due 2020
Corridor: Corridor InfraTrust Management, LLC, the Company's external manager pursuant to the Management Agreement
Corridor Bison: Corridor Bison, LLC a wholly-owned subsidiary of CorEnergy
Corridor MoGas: Corridor MoGas, Inc., a wholly-owned subsidiary of CorEnergy and the holding company of MoGas and United Property Systems
Corridor Private: Corridor Private Holdings, Inc., an indirect wholly-owned subsidiary of CorEnergy
CPI: Consumer Price Index
EIP: the Eastern Interconnect Project, which includes 216 miles of 345-kilovolt transmission lines, towers, easement rights, converters and other grid support components that move electricity across New Mexico between Albuquerque and Clovis
Exchange Act: the Securities Exchange Act of 1934, as amended
Expedition: collectively, Expedition Water Solutions Colorado LLC, Expedition #1 Powder River LLC, Expedition #2 Powder River LLC, Expedition #3 Powder River LLC and EWS #5 DJ Basin LLC
EXXI: Energy XXI Ltd (OTC Pink: EXXIQ)
EXXI Tenant: Energy XXI GIGS Services, LLC, a wholly-owned operating subsidiary of EXXI that is the tenant under Grand Isle Corridor's triple-net lease of the Grand Isle Gathering System

3


GLOSSARY OF DEFINED TERMS (Continued from previous page)
FASB: Financial Accounting Standards Board
Four Wood Corridor: Four Wood Corridor, LLC, a wholly-owned subsidiary of CorEnergy
Four Wood Energy: Four Wood Energy Partners LLC, a wholly-owned subsidiary of Four Wood Capital Partners LLC
Four Wood Notes: the financing notes between Four Wood Corridor and Corridor Private and SWD
GAAP: U.S. generally accepted accounting principles
GIGS: the Grand Isle Gathering System, owned by Grand Isle Corridor, LP and triple-net leased to a wholly-owned subsidiary of Energy XXI Ltd
Grand Isle Corridor: Grand Isle Corridor, LP, an indirect wholly-owned subsidiary of the Company
Grand Isle Gathering System: a subsea midstream pipeline gathering system located in the shallow Gulf of Mexico shelf and storage and onshore processing facilities
Grand Isle Lease Agreement: the June 2015 agreement pursuant to which the Grand Isle Gathering System assets are triple-net leased to EXXI Tenant
Indenture: collectively, that certain Base Indenture, dated June 29, 2015, as supplemented by the related First Supplemental Indenture, dated as of June 29, 2015, between the Company and Computershare Trust Company, N.A., as Trustee for the Convertible Notes
Leeds Path West: Corridor Leads Path West, Inc., a wholly-owned subsidiary of CorEnergy
Lightfoot: collectively, Lightfoot Capital Partners, LP and Lightfoot Capital Partners GP LLC
Management Agreement: the Management Agreement effective July 1, 2013, as amended effective January 1, 2014, between the Company and Corridor
New Management Agreement: the Management Agreement effective May 1, 2015, between the Company and Corridor
MMBTu: Million British Thermal Units, a measurement of natural gas
MoGas: MoGas Pipeline LLC, an indirect wholly-owned subsidiary of CorEnergy
MoGas Pipeline System: an approximately 263-mile interstate natural gas pipeline system in and around St. Louis and extending into central Missouri, owned and operated by MoGas
MoGas Revolver: a $3 million revolving line of credit facility at the MoGas subsidiary level with Regions Bank
Mowood: Mowood, LLC, an indirect wholly-owned subsidiary of CorEnergy and the holding company of Omega Pipeline Company, LLC
Mowood/Omega Revolver: a $1.5 million revolving line of credit facility at the Mowood subsidiary level with Regions Bank
NAREIT: National Association of Real Estate Investment Trusts
Omega: Omega Pipeline Company, LLC, a wholly-owned subsidiary of Mowood, LLC
Omega Pipeline: Omega's natural gas distribution system in south central Missouri
Pinedale Credit Facility: a $70 million secured term credit facility, with the Company and Prudential as current lenders, used by Pinedale Corridor, LP to finance a portion of the acquisition of the Pinedale LGS. See Note 12, Credit Facilities, for a more in-depth discussion of this agreement.
Pinedale LGS: the Pinedale Liquids Gathering System, a system consisting of approximately 150 miles of pipelines and four above-ground central gathering facilities located in the Pinedale Anticline in Wyoming, owned by Pinedale LP and triple-net leased to a wholly-owned subsidiary of Ultra Petroleum

4


GLOSSARY OF DEFINED TERMS (Continued from previous page)
Pinedale Lease Agreement: the December 2012 agreement pursuant to which the Pinedale LGS assets are triple-net leased to a wholly owned subsidiary of Ultra Petroleum
Pinedale LP: Pinedale Corridor, LP
Pinedale GP: the general partner of Pinedale LP
Portland Lease Agreement: the January 2014 agreement pursuant to which the Portland Terminal Facility is triple-net leased to Arc Terminals, a wholly owned subsidiary of Arc Logistics Partners LP
Portland Terminal Facility: a petroleum products terminal located in Portland, Oregon
PNM: Public Service Company of New Mexico, a subsidiary of PNM Resources Inc. (NYSE: PNM)
PNM Lease Agreement: a triple net lease agreement for the Eastern Interconnect Project
Prudential: The Prudential Insurance Company of America
QDI: qualified dividend income
Regions Revolver: the Company’s $105 million revolving line of credit facility with Regions Bank
Regions Credit Facility: the Company's $45 million Term Loan, together with the upsized $105 million Regions Revolver and the $3 million MoGas Revolver with Regions Bank
Regions Term Loan: the Company's $45 million term loan with Regions Bank that is part of the Regions Credit Facility
REIT: real estate investment trust
SEC: Securities and Exchange Commission
SWD: SWD Enterprises, LLC, a wholly-owned subsidiary of Four Wood Energy Partners, LLC
TRS: taxable REIT subsidiary
Ultra Petroleum: Ultra Petroleum Corp. (OTC Pink: UPLMQ)
Ultra Wyoming: Ultra Wyoming LGS LLC, an indirect wholly-owned subsidiary of Ultra Petroleum
United Property Systems: United Property Systems, LLC, an indirect wholly-owned subsidiary of CorEnergy, acquired with the MoGas transaction in November 2014
VIE: Variable Interest Entity
VantaCore: VantaCore Partners LP
WTI: West Texas Intermediate, grade of crude oil used for benchmarking price

5


CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this Quarterly Report on Form 10-Q may be deemed “forward-looking statements” within the meaning of the federal securities laws. In many cases, these forward-looking statements may be identified by the use of words such as “will,” “may,” “should,” “could,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “projects,” “goals,” “objectives,” “targets,” “predicts,” “plans,” “seeks,” or similar expressions.
Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance or results and we can give no assurance that these expectations will be attained. Our actual results may differ materially from those indicated by these forward-looking statements due to a variety of known and unknown risks and uncertainties. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
the ability of our tenants and borrowers to make payments under their respective leases and mortgage loans, our reliance on certain major tenants under single tenant leases and our ability to re-lease properties;
changes in economic and business conditions in the energy infrastructure sector where our investments are concentrated, including the financial condition of our tenants or borrowers and general economic conditions in the particular sectors of the energy industry served by each of our infrastructure assets;
the inherent risks associated with owning real estate, including real estate market conditions, governing laws and regulations, including potential liabilities related to environmental matters, and the relative illiquidity of real estate investments;
risks associated with the bankruptcy or default of any of our tenants or borrowers;
the impact of laws and governmental regulations applicable to certain of our infrastructure assets, including additional costs imposed on our business or other adverse impacts as a result of any unfavorable changes in such laws or regulations;
the loss of any member of our management team;
our continued ability to access the debt and equity markets;
our ability to successfully implement our selective acquisition strategy;
our ability to obtain suitable tenants for our properties;
our ability to refinance amounts outstanding under our credit facilities and our convertible notes at maturity on terms favorable to us;
changes in interest rates under our current credit facilities and under any additional variable rate debt arrangements that we may enter into in the future;
our ability to comply with certain debt covenants;
dependence by us and our tenants on key customers for significant revenues, and the risk of defaults by any such tenants or customers;
our or our tenants' ability to secure adequate insurance and risk of potential uninsured losses, including from natural disasters;
the continued availability of third party pipelines, railroads or other facilities interconnected with certain of our infrastructure assets;
risks associated with owning, operating or financing properties for which the tenants', mortgagors' or our operations may be impacted by extreme weather patterns and other natural phenomena;
our ability to sell properties at an attractive price;
market conditions and related price volatility affecting our debt and equity securities;
competitive and regulatory pressures on the revenues of our interstate natural gas transmission business;
changes in federal or state tax rules or regulations that could have adverse tax consequences;
declines in the market value of our investment securities;
our ability to maintain internal controls and processes to ensure all transactions are accounted for properly, all relevant disclosures and filings are timely made in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted or detected;
changes in federal income tax regulations (and applicable interpretations thereof), or in the composition or performance of our assets, that could impact our ability to continue to qualify as a real estate investment trust for federal income tax purposes;

6


risks related to potential terrorist attacks, acts of cyber-terrorism, or similar disruptions that could disrupt access to our information technology systems or result in other significant damage to our business and properties, some of which may not be covered by insurance and all of which could adversely impact distributions to our stockholders.
Forward-looking statements speak only as of the date on which they are made. While we may update these statements from time to time, we are not required to do so other than pursuant to applicable laws. For a further discussion of these and other factors that could impact our future results and performance, see Part I, Item 1A., Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (SEC) on March 14, 2016.

7


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
June 30, 2016
 
December 31, 2015
Assets
 
 
 
Leased property, net of accumulated depreciation of $42,821,737 and $33,869,263
$
500,273,741

 
$
509,226,215

Property and equipment, net of accumulated depreciation of $7,615,837 and $5,948,988
118,335,359

 
119,629,978

Financing notes and related accrued interest receivable, net of reserve of $4,100,000 and $13,784,137
1,500,000

 
7,675,626

Other equity securities, at fair value
8,036,137

 
8,393,683

Cash and cash equivalents
8,116,117

 
14,618,740

Accounts and other receivables
14,658,133

 
10,431,240

Deferred costs, net of accumulated amortization of $1,708,009 and $2,717,609
3,685,192

 
4,187,271

Prepaid expenses and other assets
808,011

 
491,024

Deferred tax asset
1,977,585

 
1,606,976

Goodwill
1,718,868

 
1,718,868

Total Assets
$
659,109,143

 
$
677,979,621

Liabilities and Equity
 
 
 
Current maturities of Term loan – related party
$
668,556

 
$

Current maturities of Term loan
7,890,000

 
66,132,000

Term loan – related party
9,660,629

 

Term loan, net of deferred debt costs
33,260,436

 
39,308,842

Line of credit
44,000,000

 

7.00% Convertible Senior Notes, net of discount and deferred debt costs
110,851,168

 
111,423,910

Asset retirement obligation
13,197,499

 
12,839,042

Accounts payable and other accrued liabilities
2,540,699

 
2,317,774

Management fees payable
1,699,786

 
1,763,747

Unearned revenue
54,094

 

Total Liabilities
$
223,822,867

 
$
233,785,315

Equity
 
 
 
Series A Cumulative Redeemable Preferred Stock 7.375%, $56,250,000 liquidation preference ($2,500 per share, $0.001 par value), 10,000,000 authorized; 22,500 issued and outstanding as of June 30, 2016, and December 31, 2015
$
56,250,000

 
$
56,250,000

Capital stock, non-convertible, $0.001 par value; 11,869,828 and 11,939,697 shares issued and outstanding at June 30, 2016, and December 31, 2015 (100,000,000 shares authorized)
11,870

 
11,940

Additional paid-in capital
352,270,804

 
361,581,507

Accumulated other comprehensive income (loss)
(17,274
)
 
190,797

Total CorEnergy Equity
408,515,400

 
418,034,244

Non-controlling Interest
26,770,876

 
26,160,062

Total Equity
435,286,276

 
444,194,306

Total Liabilities and Equity
$
659,109,143

 
$
677,979,621

See accompanying Notes to Consolidated Financial Statements.

8


CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Revenue
 
 
 
 
 
 
 
Lease revenue
$
16,996,072


$
6,799,879

 
$
33,992,144

 
$
14,135,980

Transportation and distribution revenue
5,064,680


3,546,979

 
10,164,131

 
7,196,714

Financing revenue


668,904

 
162,344

 
1,329,296

Sales revenue


1,665,908

 

 
4,007,563

Total Revenue
22,060,752


12,681,670

 
44,318,619

 
26,669,553

Expenses
 
 
 
 
 
 
 
Transportation and distribution expenses
1,378,306


1,272,025

 
2,740,631

 
2,469,993

Cost of Sales


569,958

 

 
1,818,288

General and administrative
2,773,240


1,905,329

 
6,063,092

 
4,473,848

Depreciation, amortization and ARO accretion expense
5,737,025


3,495,986

 
11,033,843

 
7,544,818

Provision for loan loss and disposition
369,278



 
5,014,466



Total Expenses
10,257,849


7,243,298

 
24,852,032


16,306,947

Operating Income
$
11,802,903


$
5,438,372

 
$
19,466,587

 
$
10,362,606

Other Income (Expense)
 
 
 
 
 
 
 
Net distributions and dividend income
$
214,169

 
$
193,410

 
$
589,742

 
$
783,818

Net realized and unrealized gain (loss) on other equity securities
1,199,665

 
43,385

 
(429,087
)
 
493,183

Interest expense
(3,540,812
)
 
(1,126,888
)
 
(7,466,821
)
 
(2,274,160
)
Total Other Income (Expense)
(2,126,978
)
 
(890,093
)
 
(7,306,166
)
 
(997,159
)
Income before income taxes
9,675,925

 
4,548,279

 
12,160,421

 
9,365,447

Taxes
 
 
 
 
 
 
 
Current tax expense (benefit)
203,652

 
104,479

 
(474,079
)
 
540,235

Deferred tax expense (benefit)
206,786

 
(153,342
)
 
(370,609
)
 
(268,733
)
Income tax expense (benefit), net
410,438

 
(48,863
)
 
(844,688
)
 
271,502

Net Income
9,265,487

 
4,597,142

 
13,005,109

 
9,093,945

Less: Net Income attributable to non-controlling interest
310,960

 
412,004

 
659,461

 
822,179

Net Income attributable to CorEnergy Stockholders
$
8,954,527

 
$
4,185,138

 
$
12,345,648

 
$
8,271,766

Preferred dividend requirements
1,037,109

 
1,037,109

 
2,074,218

 
1,774,609

Net Income attributable to Common Stockholders
$
7,917,418

 
$
3,148,029

 
$
10,271,430

 
$
6,497,157

 
 
 
 
 
 
 
 
Net Income
$
9,265,487

 
$
4,597,142

 
$
13,005,109

 
$
9,093,945

Other comprehensive income (loss):
 
 
 
 
 
 
 
Changes in fair value of qualifying hedges attributable to CorEnergy stockholders
3,005

 
18,202

 
(208,071
)
 
(257,905
)
Changes in fair value of qualifying hedges attributable to non-controlling interest
703

 
4,256

 
(48,647
)
 
(60,299
)
Net Change in Other Comprehensive Income (Loss)
$
3,708

 
$
22,458

 
$
(256,718
)
 
$
(318,204
)
Total Comprehensive Income
9,269,195

 
4,619,600

 
12,748,391

 
8,775,741

Less: Comprehensive income attributable to non-controlling interest
311,663

 
416,260

 
610,814

 
761,880

Comprehensive Income attributable to CorEnergy Stockholders
$
8,957,532

 
$
4,203,340

 
$
12,137,577

 
$
8,013,861

Earnings Per Common Share:
 
 
 
 
 
 
 
Basic
$
0.66

 
$
0.33

 
$
0.86

 
$
0.69

Diluted
$
0.66

 
$
0.32

 
$
0.86

 
$
0.68

Weighted Average Shares of Common Stock Outstanding:





 



 
Basic
11,912,030


9,523,753

 
11,927,984


9,423,758

Diluted
15,383,892


9,863,413

 
11,927,984


9,594,526

Dividends declared per share
$
0.750

 
$
0.675

 
$
1.500

 
$
1.325

See accompanying Notes to Consolidated Financial Statements.

9


CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF EQUITY

Capital Stock

Preferred Stock

Additional
Paid-in
Capital

Accumulated Other Comprehensive Income

Retained
Earnings

Non-Controlling
Interest

Total

Shares

Amount

Amount





Balance at December 31, 2014
9,321,010


$
9,321


$


$
309,987,724


$
453,302


$


$
27,090,695


$
337,541,042

Net income










12,319,911


1,617,206


13,937,117

Net change in cash flow hedges








(262,505
)



(61,375
)

(323,880
)
Total comprehensive income (loss)








(262,505
)

12,319,911


1,555,831


13,613,237

Issuance of Series A cumulative redeemable preferred stock, 7.375% - redemption value




56,250,000


(2,039,524
)







54,210,476

Net offering proceeds from issuance of common stock
2,587,500


2,587




73,254,777








73,257,364

Series A preferred stock dividends










(3,503,125
)



(3,503,125
)
Common stock dividends






(20,529,353
)



(8,816,786
)



(29,346,139
)
Common stock issued under director's compensation plan
2,677


3




89,997








90,000

Distributions to non-controlling interest












(2,486,464
)

(2,486,464
)
Reinvestment of dividends paid to common stockholders
28,510


29




817,886








817,915

Balance at December 31, 2015
11,939,697


$
11,940


$
56,250,000


$
361,581,507


$
190,797


$


$
26,160,062


$
444,194,306

Net income

 

 

 

 

 
12,345,648

 
659,461

 
13,005,109

Net change in cash flow hedges

 

 

 

 
(208,071
)
 

 
(48,647
)
 
(256,718
)
Total comprehensive income (loss)

 

 

 

 
(208,071
)
 
12,345,648

 
610,814

 
12,748,391

Repurchase of common stock
(90,613
)
 
(91
)
 

 
(2,041,760
)
 

 

 

 
(2,041,851
)
Series A preferred stock dividends

 

 

 

 

 
(2,074,218
)
 

 
(2,074,218
)
Common stock dividends

 

 

 
(7,630,745
)
 

 
(10,271,430
)
 

 
(17,902,175
)
Common stock issued under director's compensation plan
1,511

 
2

 

 
29,998

 

 

 

 
30,000

Reinvestment of dividends paid to common stockholders
19,233

 
19

 

 
331,804

 

 

 

 
331,823

Balance at June 30, 2016 (Unaudited)
11,869,828

 
$
11,870

 
$
56,250,000

 
$
352,270,804

 
$
(17,274
)
 
$

 
$
26,770,876

 
$
435,286,276

See accompanying Notes to Consolidated Financial Statements.


10


CorEnergy Infrastructure Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Six Months Ended

June 30, 2016

June 30, 2015
Operating Activities



Net Income
$
13,005,109


$
9,093,945

Adjustments to reconcile net income to net cash provided by operating activities:



Deferred income tax, net
(370,609
)

(268,734
)
Depreciation, amortization and ARO accretion
12,149,782


8,216,190

Provision for loan loss
5,014,466



Loss on repurchase of convertible debt
(68,734
)
 

Net distributions and dividend income, including recharacterization of income
(117,004
)

(371,323
)
Net realized and unrealized loss (gain) on other equity securities
429,087


(493,183
)
Unrealized gain on derivative contract
(132,094
)

(34,529
)
Common stock issued under directors compensation plan
30,000


60,000

Changes in assets and liabilities:



(Increase) decrease in accounts and other receivables
(3,733,564
)

22,280

Decrease (increase) in financing note accrued interest receivable
95,114


(342,874
)
Increase in prepaid expenses and other assets
(143,996
)

(198,215
)
(Decrease) increase in management fee payable
(63,961
)

47,959

Decrease in accounts payable and other accrued liabilities
(133,100
)

(702,221
)
Increase in current income tax liability


292,214

Increase (decrease) in unearned revenue
54,094


(711,230
)
Net cash provided by operating activities
$
26,014,590


$
14,610,279

Investing Activities



Proceeds from assets and liabilities held for sale
644,934


7,678,246

Acquisition expenditures


(249,925,974
)
Purchases of property and equipment, net
(372,230
)

(19,820
)
Proceeds from asset foreclosure and sale
223,451



Increase in financing notes receivable
(202,000
)

(39,248
)
Return of capital on distributions received
2,134


55,009

Net cash provided (used) by investing activities
$
296,289


$
(242,251,787
)
Financing Activities



Debt financing costs
(193,000
)

(132,041
)
Net offering proceeds on Series A preferred stock


54,210,476

Net offering proceeds on common stock


73,431,411

Net offering proceeds on convertible debt


111,262,500

Repurchases of common stock
(2,041,851
)
 

Repurchases of convertible debt
(931,266
)
 

Dividends paid on Series A preferred stock
(2,074,218
)

(1,428,906
)
Dividends paid on common stock
(17,570,352
)

(11,952,944
)
Distributions to non-controlling interest


(1,131,356
)
Advances on revolving line of credit
44,000,000


45,072,666

Payments on revolving line of credit


(35,064,018
)
Principal payments on term debt
(1,800,000
)


Principal payments on credit facility
(52,202,815
)

(1,764,000
)
Net cash (used) provided by financing activities
$
(32,813,502
)

$
232,503,788

Net Change in Cash and Cash Equivalents
$
(6,502,623
)

$
4,862,280

Cash and Cash Equivalents at beginning of period
14,618,740


7,578,164

Cash and Cash Equivalents at end of period
$
8,116,117


$
12,440,444

See accompanying Notes to Consolidated Financial Statements.
Supplemental information continued on next page.

11


CorEnergy Infrastructure Trust, Inc. (Continued from previous page)
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended

June 30, 2016

June 30, 2015
Supplemental Disclosure of Cash Flow Information



Interest paid
$
6,758,715


$
1,734,846

Income taxes paid (net of refunds)
$
3,437


$
(2,999
)




Non-Cash Operating Activities



Change in accounts payable and accrued expenses related to prepaid assets and other expense
$


$
16,248





Non-Cash Investing Activities



Change in accounts and other receivables
$
(450,000
)

$

Change in accounts payable and accrued expenses related to intangibles and deferred costs
$


$
297,831

Change in accounts payable and accrued expenses related to acquisition expenditures
$


$
(51,699
)
Change in accounts payable and accrued expenses related to issuance of financing and other notes receivable
$


$
(39,248
)
Net change in Assets Held for Sale, Property and equipment, Prepaid expenses and other assets, Accounts payable and other accrued liabilities and Liabilities held for sale
$
(1,776,549
)

$

 
 
 
 
Non-Cash Financing Activities





Change in accounts payable and accrued expenses related to the issuance of common equity
$


$
176,338

Change in accounts payable and accrued expenses related to debt financing costs
$


$
157,059

Reinvestment of distributions by common stockholders in additional common shares
$
331,823


$
400,532

See accompanying Notes to Consolidated Financial Statements.

12



CorEnergy Infrastructure Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2016
1. INTRODUCTION AND BASIS OF PRESENTATION
Introduction
CorEnergy Infrastructure Trust, Inc. ("CorEnergy"), was organized as a Maryland corporation and commenced operations on December 8, 2005. The Company's common shares are listed on the New York Stock Exchange under the symbol “CORR.” As used in this report, the terms "we", "us", "our" and the "Company" refer to CorEnergy and its subsidiaries.
We are primarily focused on acquiring and financing midstream and downstream real estate assets within the U.S. energy infrastructure sector and concurrently entering into long-term triple-net participating leases with energy companies. We also may provide other types of capital, including loans secured by energy infrastructure assets. Targeted assets include pipelines, storage tanks, transmission lines, and gathering systems, among others. These sale-leaseback or real property mortgage transactions provide the energy company with a source of capital that is an alternative to sources such as corporate borrowing, bond offerings, or equity offerings. Many of our leases contain participation features in the financial performance or value of the underlying infrastructure real property asset. The triple-net lease structure requires that the tenant pay all operating expenses of the business conducted by the tenant, including real estate taxes, insurance, utilities, and expenses of maintaining the asset in good working order. We consider our investments in these energy infrastructure assets to be a single business segment and report them accordingly in our financial statements.
Taxable REIT subsidiaries hold our securities portfolio, operating businesses and certain financing notes receivable as follows:
Corridor Public Holdings, Inc. and its wholly-owned subsidiary Corridor Private Holdings, Inc, hold our securities portfolio.
Mowood Corridor, Inc. and its wholly-owned subsidiary, Mowood, LLC, which is the holding company for our operating company, Omega Pipeline Company, LLC.
Corridor MoGas, Inc. holds the operating companies, MoGas Pipeline, LLC ("MoGas") and United Property Systems, LLC.
CorEnergy BBWS, Inc., Corridor Private, and Corridor Leeds Path West, Inc. may, from time to time, hold financing notes receivable.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) set forth in the Accounting Standards Codification ("ASC"), as published by the Financial Accounting Standards Board ("FASB"), and with the Securities and Exchange Commission (“SEC”) instructions to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. There were no adjustments that, in the opinion of management, were not of a normal and recurring nature. All intercompany transactions and balances have been eliminated in consolidation, and our net earnings are reduced by the portion of net earnings attributable to non-controlling interests.
Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These consolidated financial statements and Management's Discussion and Analysis of the Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K, for the year ended December 31, 2015, filed with the SEC on March 14, 2016.
The financial statements included in this report are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management's most difficult, complex, or subjective judgments. Note 2 to the Consolidated Financial Statements, included in this report, further details information related to our significant accounting policies.

13


2. SIGNIFICANT ACCOUNTING POLICIES
A. Use of Estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, recognition of distribution income and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
B. Earnings Per Share – Basic earnings per share ("EPS") is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive common equivalent shares issuable upon conversion of the convertible notes calculated using the if-converted method. Diluted EPS is not reported for a period when it is anti-dilutive.
C. Investment Securities – The Company’s investments in securities are classified as other equity securities and represent interests in private companies which the Company has elected to report at fair value under the fair value option.
These investments generally are subject to restrictions on resale, have no established trading market, and are valued on a quarterly basis. Because of the inherent uncertainty of valuation, the fair values of such investments, which are determined in accordance with procedures approved by the Company’s Board of Directors, may differ materially from the values that would have been used had a ready market existed for the investments.
The Company determines fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has determined the principal market, or the market in which the Company exits its private portfolio investments with the greatest volume and level of activity, to be the private secondary market. Typically, private companies are bought and sold based on multiples of EBITDA, cash flows, net income, revenues, or in limited cases, book value.
For private company investments, value is often realized through a liquidity event. Therefore, the value of the Company as a whole (enterprise value) at the reporting date often provides the best evidence of the value of the investment and is the initial step for valuing the Company’s privately issued securities. For any one company, enterprise value may best be expressed as a range of fair values, from which a single estimate of fair value will be derived. In determining the enterprise value of a portfolio company, an analysis is prepared consisting of traditional valuation methodologies including market and income approaches. The Company considers some or all of the traditional valuation methods based on the individual circumstances of the portfolio company in order to derive its estimate of enterprise value.
The fair value of investments in private portfolio companies is determined based on various factors, including enterprise value, observable market transactions, such as recent offers to purchase a company, recent transactions involving the purchase or sale of the equity securities of the company, or other liquidation events. The determined equity values may be discounted when the Company has a minority position, or is subject to restrictions on resale, has specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other comparable factors exist.
The Company undertakes a multi-step valuation process each quarter in connection with determining the fair value of private investments. We have retained an independent valuation firm to provide third party valuation consulting services based on procedures that the Company has identified and may ask them to perform from time to time on all or a selection of private investments as determined by the Company. The multi-step valuation process is specific to the level of assurance that the Company requests from the independent valuation firm. For positive assurance, the process is as follows:
The independent valuation firm prepares the valuations and the supporting analysis.
The valuation report is reviewed and approved by senior management.
The Audit Committee of the Board of Directors reviews the supporting analysis and accepts the valuations.
D. Financing Notes Receivable - Financing notes receivable are presented at face value plus accrued interest receivable, deferred loan origination costs, and net of related direct loan origination income. Each quarter the Company reviews its financing notes receivable to determine if the balances are realizable based on factors affecting the collectability of those balances. Factors may include credit quality, timeliness of required periodic payments, past due status, and management discussions with obligors. The Company evaluates the collectability of both interest and principal of each of its loans to determine if an allowance is needed. An allowance will be recorded when based on current information and events, the Company determines it is probable that it will be unable to collect all amounts due according to the existing contractual terms. If the Company does determine an allowance is necessary, the amount deemed uncollectable is expensed in the period of determination. An insignificant delay or shortfall in the amount of payments does not necessarily result in the recording of an allowance. Generally, when interest and/or principal payments

14


on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing financing revenue on that loan until all principal and interest have been brought current. Interest income recognition is resumed if and when the previously reserved-for financing notes become contractually current and performance has been demonstrated. Payments received subsequent to the recording of an allowance will be recorded as a reduction to principal. During the six months ended June 30, 2016 and 2015, the Company recorded $5.0 million and $0, respectively, in provision for loan losses. The Company's financing notes receivable are discussed more fully in Note 4.
E. Revenue Recognition – Specific recognition policies for the Company’s revenue items are as follows:
Lease revenue – Base rent related to the Company’s leased property is recognized on a straight-line basis over the term of the lease when collectability is reasonably assured. Contingent rent is recognized when it is earned, based on the achievement of specified performance criteria. Rental payments received in advance are classified as unearned revenue and included as a liability within the Consolidated Balance Sheets. Unearned revenue is amortized ratably over the lease period as revenue recognition criteria are met. Rental payments received in arrears are accrued and classified as Lease Receivable and included in accounts and other receivables within the Consolidated Balance Sheets.
Transportation and distribution revenue – This represents revenue related to natural gas transportation, distribution, and supply. Transportation revenues are recognized by MoGas on firm contracted capacity over the contract period regardless of whether the contracted capacity is used. For interruptible or volumetric based transportation, revenue is recognized when physical deliveries of natural gas are made at the delivery point agreed upon by both parties. Distribution revenue is recognized by Omega based on agreed upon contractual terms over each annual period during the terms of the contract. Beginning February 1, 2016, under a new contract with the Department of Defense ("DOD"), gas sales and cost of (gas) sales are presented on a net basis in the Transportation and distribution revenue line.
Omega is also paid fees for the operation and maintenance of its natural gas distribution system, including any necessary expansion of the distribution system. Omega is responsible for the coordination, supervision, and quality of the expansions while actual construction is generally performed by third party contractors. Under the new DOD contract, the annual contracted amount for pipeline expansion is invoiced monthly by Omega on a straight-line basis. Revenues from expansion efforts are recognized using either a completed contract, percentage of completion, or cost-plus method based on the level and volume of estimates utilized, as well as the certainty or uncertainty of our ability to collect those revenues. Amounts invoiced in excess of earned revenue are classified as unearned revenue and included as a liability within the Consolidated Balance Sheets.
Sales revenue – Revenues related to natural gas and propane are recognized upon delivery of natural gas and propane. Omega, acting as a principal, provides natural gas and propane supply for its customers. Beginning February 1, 2016, under a new contract with the Department of Defense ("DOD"), Omega is no longer the primary obligor of product sales and as such net presentation has been determined to be appropriate, therefore gas sales and cost of (gas) sales are presented on a net basis. Prior to the new contract, Sales revenue represented amounts earned by Omega for gas and propane product sales to customers and the costs of the gas and propane were presented as cost of sales.
Financing revenue – Our financing notes receivable are considered a core product offering and therefore the related interest income is presented as a component of operating income. For increasing rate loans, base interest income is recorded ratably over the life of the loan, using the effective interest rate. The net amount of deferred loan origination income and costs are amortized on a straight-line basis over the life of the loan and reported as an adjustment to yield in financing revenue. Participating financing revenues are recorded when specific performance criteria have been met.
F. Transportation and distribution expense Included here are both MoGas's costs of operating and maintaining the natural gas transmission line, and Omega's costs of operating and maintaining the natural gas distribution system, including any necessary expansion of the distribution system. These costs are incurred both internally and externally. The internal costs relate to system control, pipeline operations, maintenance, insurance, and taxes. Other internal costs include payroll for employees associated with gas control, field employees, and management. The external costs consist of professional services such as audit and accounting, legal and regulatory, and engineering.
Historically, Omega's amounts paid for gas and propane delivered to customers were presented as cost of sales. Beginning February 1, 2016, under a new contract with the Department of Defense, amounts paid by Omega for gas and propane are netted against sales and are presented in the transportation and distribution revenue line. See paragraph (E) above.
G. Debt Issuance Costs – Costs incurred for the issuance of new debt are capitalized and reported as a direct deduction to the carrying value of the related debt except for capitalized costs related to our revolving line of credit which are presented as an asset within Deferred costs, net of accumulated amortization. Amortization of these costs is reported as interest expense over the debt term. See Note 10 for further discussion.

15


H. Other Income Recognition Specific policies for the Company’s other income items are as follows:
Net distributions and dividend income from investments – Distributions and dividends from investments are recorded on their ex-dates and are reflected as other income within the accompanying Consolidated Statements of Income. Distributions received from the Company’s investments are generally characterized as ordinary income, capital gains, and distributions received from investment securities. The portion characterized as return of capital is paid by our investees from their cash flow from operations. The Company records investment income, capital gains, and distributions received from investment securities based on estimates made at the time such distributions are received. Such estimates are based on information available from each company and other industry sources. These estimates may subsequently be revised based on information received from the entities after their tax reporting periods are concluded, as the actual character of these distributions is not known until after the fiscal year end of the Company.
Net realized and unrealized gain (loss) from investments – Securities transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses are reported on an identified cost basis. The Company records investment income and return of capital based on estimates made at the time such distributions are received. Such estimates are based on information available from the portfolio company and other industry sources. These estimates may subsequently be revised based on information received from the portfolio company after their tax reporting periods are concluded, as the actual character of these distributions are not known until after our fiscal year end.
I. Federal and State Income Taxation – In 2013 we qualified, and in March 2014 elected (effective as of January 1, 2013), to be treated as a REIT for federal income tax purposes. Because certain of our assets may not produce REIT-qualifying income or be treated as interests in real property, those assets are held in wholly-owned Taxable REIT Subsidiaries ("TRSs") in order to limit the potential that such assets and income could prevent us from qualifying as a REIT.
As a REIT, the Company holds and operates certain of our assets through one or more wholly-owned TRSs. Our use of TRSs enables us to continue to engage in certain businesses while complying with REIT qualification requirements and also allows us to retain income generated by these businesses for reinvestment without the requirement of distributing those earnings. In the future, we may elect to reorganize and transfer certain assets or operations from our TRSs to the Company or other subsidiaries, including qualified REIT subsidiaries.
The Company's other equity securities are limited partnerships or limited liability companies which are treated as partnerships for federal and state income tax purposes. As a limited partner, the Company reports its allocable share of taxable income in computing its own taxable income. To the extent held by a TRS, the TRS's tax expense or benefit is included in the Consolidated Statements of Income based on the component of income or gains and losses to which such expense or benefit relates. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. It is expected that for the six months ended June 30, 2016, and future periods, any deferred tax liability or asset generated will be related entirely to the assets and activities of the Company's TRSs.
If we cease to qualify as a REIT, the Company, as a C corporation, would be obligated to pay federal and state income tax on its taxable income. Currently, the highest regular marginal federal income tax rate for a corporation is 35 percent. The Company may be subject to a 20 percent federal alternative minimum tax on its federal alternative minimum taxable income to the extent that its alternative minimum tax exceeds its regular federal income tax.
J. Recent Accounting Pronouncements – In August 2014, the FASB issued ASU No. 2014-15 "Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern", that will require management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management will be required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. ASU No. 2014-15 becomes effective for annual periods beginning in 2016 and for interim reporting periods starting in the first quarter of 2017. The Company does not expect the adoption of this amendment to have a material impact on its consolidated financial statements.
In August 2015, the FASB issued ASU No. 2015-14 "Revenue from Contracts with Customers - Deferral of the Effective Date." The amendments in this update defer the effective date of ASU No. 2014-09 "Revenue from Contracts with Customers", for all entities by one year. ASU No. 2014-09 adds to the FASB ASC by requiring entities to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers and provide additional disclosures. Additionally, in March 2016, the FASB issued ASU No. 2016-08 "Revenue from Contracts with Customers

16


(Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)". ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. Then in April 2016, the FASB issued ASU No. 2016-10 "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing", which clarifies the guidance related to identifying performance obligations and licensing implementation guidance. ASU 2016-10 reduces the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The effective date for ASU 2016-10 is the same as ASU 2014-09. In May 2016, ASU No. 2016-12 "Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients" was issued to address implementation issues and provide additional practical expedients. The effective date for ASU 2016-12 is the same as ASU 2014-09. As amended, the effective date for ASU 2014-09 for public entities is annual reporting periods beginning after December 15, 2017 and interim periods therein. As such, we will be required to adopt the standard in the first quarter of fiscal year 2018. Early adoption is not permitted before the first quarter of fiscal year 2017. ASC 606 may be adopted using either the "full retrospective" approach, in which the standard is applied to all of the periods presented, or a "modified retrospective" approach. The Company is currently evaluating which transition method to use and the potential future impact, if any, the standard will have on the Company's consolidated financial statements and related disclosures. However, we do not expect its adoption to have a significant impact on our consolidated financial statements, as a substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09.
In April 2015, the FASB issued ASU No. 2015-03 "Interest-Imputation of Interest" to simplify presentation of debt issuance costs. The amendments in this update require debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In June 2015, the FASB issued ASU No. 2015-15 "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" to clarify that ASU No. 2015-03 does not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. As a result, an entity may present debt issuance costs related to line-of-credit arrangements as an asset instead of a direct deduction from the carrying amount of the debt. We adopted the accounting standards update as of January 1, 2016 with retrospective application to our December 31, 2015 Consolidated Balance Sheets. The effect of the adoption was to reclassify $510 thousand of debt issuance costs at December 31, 2015 from intangibles and deferred costs, net of accumulated amortization, to long-term debt.
In January 2016, the Company adopted ASU No. 2015-02 "Consolidation (Topic 810), Amendments to the Consolidation Analysis." Among other changes, the new standard specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. Generally, only a single limited partner that is able to exercise substantive kick-out rights will consolidate. While adoption of this standard did not result in any changes to conclusions about consolidated or unconsolidated entities, the Company has determined that Pinedale LP now qualifies as a variable interest entity and therefore requires additional disclosures.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," which will require entities to measure their investments at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. The practicability exception will be available for equity investments that do not have readily determinable fair values. The guidance will be effective for us beginning with the first quarter of 2018. We are currently evaluating the impact that adopting the new standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 "Leases" which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 is effective for fiscal years and interim periods beginning after December 31, 2018. Early adoption is permitted. The new leases standard requires adoption using a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. Management is still in the process of evaluating this amendment.
In March 2016, the FASB issued ASU 2016-05 "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships." This ASU clarifies that a change in the counterparty of a derivative contract (i.e., a novation) in a hedge accounting relationship does not, in and of itself, require de-designation of the hedge accounting relationship. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods therein. The Company is evaluating the impact of this ASU on its financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. The new model, referred to as the current expected credit losses ("CECL model"), will apply to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. This ASU will be effective for us during the fiscal year beginning after December 15,

17


2019, including interim periods within that fiscal year. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact that adopting the new standard will have on our consolidated financial statements.
3. LEASED PROPERTIES AND LEASES
As of June 30, 2016, we had three significant leased properties located in Oregon, Wyoming, Louisiana, and the Gulf of Mexico, which are leased on a triple-net basis to our major tenants, described in the table below. These major tenants are responsible for the payment of all taxes, maintenance, repairs, insurance, and other operating expenses relating to the leased properties. Our long-term, triple-net leases generally have an initial term of 11 to 15 years with options for renewals. Lease revenues are scheduled to increase at varying intervals during the initial terms of our leases. The following table summarizes our significant leased properties, major tenants and lease terms:
Summary of Leased Properties, Major Tenants and Lease Terms
Property
Grand Isle Gathering System
Pinedale LGS(1)
Portland Terminal Facility
Location
Gulf of Mexico/Louisiana
Pinedale, WY
Portland, OR
Tenant
Energy XXI GIGS Services, LLC
Ultra Wyoming LGS, LLC
Arc Terminals Holdings LLC
Asset Description
Approximately 153 miles of offshore pipeline with total capacity of 120 thousand Bbls/d, including a 16-acre onshore terminal and saltwater disposal system
Approximately 150 miles of pipelines and four central storage facilities
A 42-acre rail and marine facility property adjacent to the Willamette River with 84 tanks and total storage capacity of approximately 1.5 million barrels
Date Acquired
June 2015
December 2012
January 2014
Initial Lease Term
11 years
15 years
15 years
Renewal Option
equal to the lesser of 9-years or 75 percent of the remaining useful life
5-year terms
5-year terms
Current Monthly Rent Payments
7/1/15 - 7/30/16: $2,625,417
7/1/16 - 7/30/17: $2,826,250
$1,723,833
$513,355
Initial Estimated
Useful Life
30 years
26 years
30 years
(1) Non-Controlling Interest Partner - Prudential funded a portion of the Pinedale LGS acquisition and, as a limited partner, holds 18.95 percent of the economic interest in Pinedale LP. The general partner, Pinedale GP, a wholly-owned subsidiary of the Company, holds the remaining 81.05 percent of the economic interest.
The future contracted minimum rental receipts for all leases as of June 30, 2016, are as follows:
Future Minimum Lease Receipts
Years Ending December 31,
 
Amount
2016
 
$
30,393,548

2017
 
60,931,762

2018
 
61,139,762

2019
 
63,468,195

2020
 
70,629,654

Thereafter
 
451,794,133

Total
 
$
738,357,054

The table below displays the Company's individually significant leases as a percentage of total leased properties and total lease revenues for the periods presented:
 
 
As a Percentage of (1)
 
 
Leased Properties
 
Lease Revenues
 
 
As of
 
As of
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30, 2016
 
December 31, 2015
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Pinedale LGS
 
39.8%
 
40.0%
 
30.4%
 
75.9%
 
30.4%
 
73.0%
Grand Isle Gathering System
 
50.1%
 
50.1%
 
59.8%
 
 
59.8%
 
Portland Terminal Facility
 
9.8%
 
9.6%
 
9.7%
 
23.8%
 
9.7%
 
22.2%
Public Service of New Mexico(2)
 
 
 
 
 
 
4.5%
(1) Insignificant leases are not presented; thus percentages may not sum to 100%.
(2) The Public Service of New Mexico lease terminated on April 1, 2015.

18


The following table reflects the depreciation and amortization included in the accompanying Consolidated Statements of Income associated with our leases and leased properties:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Depreciation Expense
 
 
 
 
 
 
 
GIGS
$
2,153,928

 
$

 
$
4,297,650

 
$

Pinedale
2,217,360

 
2,217,360

 
4,434,720

 
4,434,720

Portland Terminal Facility
318,915

 
422,403

 
205,256

 
829,236

Eastern Interconnect Project

 

 

 
569,670

United Property Systems
7,425

 
7,425

 
14,850

 
14,850

Total Depreciation Expense
$
4,697,628

 
$
2,647,188

 
$
8,952,476

 
$
5,848,476

Amortization Expense - Deferred Lease Costs
 
 
 
 
 
 
 
GIGS
$
7,641

 
$

 
$
15,282

 
$

Pinedale
15,342

 
15,342

 
30,684

 
30,684

Total Amortization Expense - Deferred Lease Costs
$
22,983

 
$
15,342

 
$
45,966

 
$
30,684

The following table reflects the deferred costs that are included in the accompanying Consolidated Balance Sheets associated with our leased properties:
 
June 30, 2016
 
December 31, 2015
Net Deferred Lease Costs
 
 
 
GIGS
$
305,729

 
$
321,011

Pinedale
703,770

 
734,454

Total Deferred Lease Costs, net
$
1,009,499

 
$
1,055,465

Substantially all of our tenants' financial results depend on the sale of refined petroleum products. As a result, our tenants' financial results are highly dependent on the performance of the petroleum marketing industry, which is highly competitive and subject to volatility. During the terms of our leases, we monitor credit quality of our tenants by reviewing their published credit ratings, if available, reviewing publicly available financial statements, or reviewing financial or other operating statements, monitoring news reports regarding our tenants and their respective businesses, and monitoring the timeliness of lease payments and the performance of other financial covenants under their leases.
Ultra Petroleum
On April 29, 2016 Ultra Petroleum, filed a voluntary petition to reorganize under Chapter 11. The filing includes Ultra Wyoming LGS, LLC, the operator of the Pinedale LGS and tenant of the Pinedale Lease Agreement. The bankruptcy filing of both the guarantor, Ultra Petroleum, and the tenant and circumstances prompting the filing constitute defaults under the terms of the Pinedale Lease Agreement. The bankruptcy filing serves as a stay of the Company's ability to exercise remedies for certain of those defaults. However, Section 365 of the Bankruptcy Code requires Ultra Wyoming to comply on a timely basis with many provisions of the Pinedale Lease Agreement, including the payment provisions. The only exception to that requirement is if Ultra Wyoming takes specific action to reject the Pinedale Lease Agreement. Ultra Wyoming has not filed a motion to reject the Pinedale Lease. All scheduled lease payments are current. For additional information, please refer to the Company's Current Report on Form 8-K filed with the SEC on May 3, 2016.
Ultra Petroleum is currently subject to the reporting requirements under the Exchange Act and is required to file with the SEC annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. While the SEC, under certain circumstances, may accept reporting on a modified basis from an issuer involved in a bankruptcy proceeding, the Company currently has no indication that Ultra Petroleum has requested or intends to request such relief. Its stock is currently trading on the OTC Markets (OTC Pink: UPLMQ). Other SEC filings can be found at www.sec.gov (UPLMQ) or at www.otcmarkets.com (UPLMQ). The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of Ultra Petroleum, but has no reason to doubt the accuracy or completeness of such information. In addition, Ultra Petroleum has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information.
EXXI
On April 14, 2016, Energy XXI and substantially all of its directly and indirectly owned subsidiaries filed a voluntary petition to reorganize under Chapter 11, after reaching an agreement with certain creditors to provide support for a restructuring of its debt.

19


The bankruptcy filing of Energy XXI, the guarantor of the Grand Isle Lease Agreement, and its failure to make interest payments to its creditors within the applicable cure period, would have constituted defaults under the terms of the Grand Isle Lease Agreement. However, to facilitate post-filing financing arrangements between the EXXI Debtor Group and its lenders, the Company provided a conditional waiver to certain remedies available to it as a result of these non-monetary defaults. EXXI Tenant, has not filed for bankruptcy. Therefore, its obligations under the Grand Isle Lease Agreement are currently not subject to the proceedings affecting the EXXI Debtor Group. The Company has not compromised any remedies available to it for any default by EXXI Tenant under the Grand Isle Lease Agreement. All scheduled lease payments are current. For additional information, please refer to the Company's Current Report on Form 8-K filed with the SEC on April 14, 2016.
EXXI is currently subject to the reporting requirements under the Exchange Act and is required to file with the SEC annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. While the SEC, under certain circumstances, may accept reporting on a modified basis from an issuer involved in a bankruptcy proceeding, the Company currently has no indication that EXXI has requested or intends to request such relief. Its stock is currently trading on the OTC Markets (OTC Pink: EXXIQ). Other SEC filings can be found at www.sec.gov (EXXI) or at www.otcmarkets.com (EXXIQ). The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of EXXI, but has no reason to doubt the accuracy or completeness of such information. In addition, EXXI has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information.
Arc Logistics
Arc Logistics is currently subject to the reporting requirements of the Exchange Act and is required to file with the SEC annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. The audited financial statements and unaudited financial statements of Arc Logistics can be found on the SEC's web site at www.sec.gov (NYSE: ARCX). The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of Arc Logistics but has no reason to doubt the accuracy or completeness of such information. In addition, Arc Logistics has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information. None of the information in the public reports of Arc Logistics that are filed with the SEC is incorporated by reference into, or in any way form, a part of this filing.
4. FINANCING NOTES RECEIVABLE
Black Bison Financing Notes
The Company did not record any financing revenue related to the Black Bison Loans for the three- or six-month periods ended June 30, 2016. These notes were considered by the Company to be on non-accrual status and have been reflected as such in the financial statements. On February 29, 2016, the Company foreclosed on 100 percent of the equity of BB Intermediate, the borrower of the Black Bison financing notes, as well as all of the other collateral securing the Black Bison Loans. The foreclosure was accepted in satisfaction of $2.0 million of the total outstanding loan balance. As of June 30, 2016, the net note receivable from BBWS is valued at $0. The real property assets were sold or disposed of, as further described in Note 7, Property and Equipment. The remaining working capital assets and liabilities acquired as a result of the foreclosure are presented in appropriate categories within the Company's Consolidated Balance Sheet at June 30, 2016.
Four Wood Financing Note Receivable
As a result of the decreased economic activity by SWD, the Company recorded a provision for loan loss with respect to the SWD Loans. The 2016 income statement reflects a Provision for Loan Loss of $3.5 million, which includes $71 thousand of deferred origination income and $98 thousand of interest accrued under the original loan agreements. The balance of the note, net of the reserve for loan loss, represents the amount expected to be realized as of June 30, 2016. Our note with SWD is secured by physical assets owned by SWD. We have valued the enterprise value of SWD, and thus the value of the collateral supporting the Four Wood Notes, at $1.5 million as of June 30, 2016.
5. VARIABLE INTEREST ENTITIES
The Company examines specific criteria and uses its judgment when determining if the Company is the primary beneficiary of a VIE and is therefore required to consolidate the investments. Factors considered in determining whether the Company is the primary beneficiary include risk-and-reward sharing, experience and financial condition of the other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE's executive committee or Board of Directors, whether or not the Company has the power to direct the activities of the VIE that most significantly impact the VIE's economic

20


performance, existence of unilateral kick-out rights or voting rights, and the level of economic disproportionality between the Company and the other partner(s).
Consolidated VIEs
The Company adopted ASU 2015-02, Amendments to the Consolidation Analysis. This standard amends certain guidance applicable to the consolidation of various legal entities, including variable interest entities (“VIE”). Among the changes, the new standard specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. Generally, only a single limited partner that is able to exercise substantive kick-out rights will consolidate. While adoption of this standard did not result in any changes to conclusions about consolidated or unconsolidated entities, the Company has determined that Pinedale LP and Grand Isle Corridor qualify as variable interest entities as of June 30, 2016.
6. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes. Components of the Company’s deferred tax assets and liabilities as of June 30, 2016, and December 31, 2015, are as follows:
Deferred Tax Assets and Liabilities
 
 
June 30, 2016
 
December 31, 2015
Deferred Tax Assets:
 
 
 
 
Net operating loss carryforwards
 
$
1,069,948

 
$
543,116

Net unrealized loss on investment securities
 
534,009

 
251,539

Loan Loss Provision
 
605,107

 
1,257,436

Other loss carryforwards
 
2,554,620

 
1,833,240

Sub-total
 
$
4,763,684

 
$
3,885,331

Deferred Tax Liabilities:
 
 
 
 
Basis reduction of investment in partnerships
 
$
(2,106,042
)
 
$
(2,159,058
)
Cost recovery of leased and fixed assets
 
(680,057
)
 
(119,297
)
Sub-total
 
$
(2,786,099
)
 
$
(2,278,355
)
Total net deferred tax asset
 
$
1,977,585

 
$
1,606,976

For the six months ended June 30, 2016, the total deferred tax asset presented above relates to the Company's TRSs. The Company recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. The Company’s policy is to record interest and penalties on uncertain tax positions as part of tax expense. Tax years subsequent to the year ending November 30, 2007, remain open to examination by federal and state tax authorities.
Total income tax expense/(benefit) differs from the amount computed by applying the federal statutory income tax rate of 35 percent for the three and six months ended June 30, 2016 and 2015, to income or loss from operations and other income and expense for the years presented, as follows:
Income Tax Expense (Benefit)
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Application of statutory income tax rate
 
$
3,277,737

 
$
1,436,710

 
$
4,025,336

 
$
2,990,144

State income taxes, net of federal tax (benefit)
 
25,234

 
(8,988
)
 
(58,026
)
 
28,063

Federal Tax Attributable to Income of Real Estate Investment Trust
 
(2,892,533
)
 
(1,476,585
)
 
(4,811,998
)
 
(2,746,705
)
Total income tax expense (benefit)
 
$
410,438

 
$
(48,863
)
 
$
(844,688
)
 
$
271,502

Total income taxes are computed by applying the federal statutory rate of 35 percent plus a blended state income tax rate. Corridor Public Holdings, Inc. and Corridor Private Holdings, Inc. had a blended state rate of approximately 2.82 percent for the three and six months ended June 30, 2016 and 3.92 percent for the three and six months ended June 30, 2015. CorEnergy BBWS, Inc. does not record a provision for state income taxes because it operates only in Wyoming, which does not have state income tax. Because Mowood Corridor, Inc. and Corridor MoGas, Inc. primarily only operate in the state of Missouri, a blended state income tax rate of 5 percent was used for the operations of both TRSs for the three and six months ended June 30, 2016 and 2015. For the three

21


and six months ended June 30, 2016, all of the income tax benefit presented above relates to the assets and activities held in the Company's TRSs. The components of income tax expense/(benefit) include the following for the periods presented:
Components of Income Tax Expense (Benefit)
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Current tax expense (benefit)
 
 
 
 
 
 
 
 
Federal
 
$
188,467

 
$
94,312

 
$
(438,730
)
 
$
486,258

State (net of federal tax benefit)
 
15,185

 
10,167

 
(35,349
)
 
53,977

Total current tax expense (benefit)
 
$
203,652

 
$
104,479

 
$
(474,079
)
 
$
540,235

Deferred tax expense (benefit)
 
 
 
 
 
 
 

Federal
 
$
196,737

 
$
(134,187
)
 
$
(347,932
)
 
$
(242,819
)
State (net of federal tax benefit)
 
10,049

 
(19,155
)
 
(22,677
)
 
(25,914
)
Total deferred tax expense (benefit)
 
$
206,786

 
$
(153,342
)
 
$
(370,609
)
 
$
(268,733
)
Total income tax expense (benefit), net
 
$
410,438

 
$
(48,863
)
 
$
(844,688
)
 
$
271,502

As of December 31, 2015, the TRSs incurred an aggregate net operating loss of $1.4 million. The net operating loss may be carried forward for 20 years. If not utilized, this net operating loss will expire as follows: $90 thousand, $804 thousand and $478 thousand in the years ending December 31, 2033, 2034, and 2035 respectively. The amount of deferred tax asset for net operating losses as of June 30, 2016, includes amounts for the six months ended June 30, 2016. The aggregate cost of securities for federal income tax purposes and securities with unrealized appreciation and depreciation, were as follows:
Aggregate Cost of Securities for Income Tax Purposes (Unaudited)
 
 
June 30, 2016
 
December 31, 2015
Aggregate cost for federal income tax purposes
 
$
4,329,517

 
$
4,750,252

Gross unrealized appreciation
 
4,156,619

 
5,133,908

Gross unrealized depreciation
 

 
(97,500
)
Net unrealized appreciation
 
$
4,156,619

 
$
5,036,408

7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Property and Equipment
 
 
June 30, 2016
 
December 31, 2015
Land
 
$
580,000

 
$
580,000

Natural gas pipeline
 
124,713,233

 
124,386,349

Vehicles and trailers
 
570,267

 
524,921

Office equipment and computers
 
87,696

 
87,696

Gross property and equipment
 
$
125,951,196

 
$
125,578,966

Less: accumulated depreciation
 
(7,615,837
)
 
(5,948,988
)
Net property and equipment
 
$
118,335,359

 
$
119,629,978


Depreciation of property and equipment is as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Depreciation Expense
$
842,040

 
$
833,456

 
$
1,676,945

 
$
1,665,658

Assets and Liabilities Held for Sale
Effective February 29, 2016, the Company foreclosed on 100 percent of the equity of BB Intermediate, the holding company of BBWS, the borrower of the Black Bison financing notes. On June 16, 2016 the Company entered into an asset sale agreement with Expedition Water Solutions for the sale of specified disposal wells and related equipment as outlined in the sale agreement. Consideration received by the company included $748 thousand cash, net of fees, and the future right to cash payments totaling $6.5 million, which was fair valued at $450 thousand and is included in Accounts and other receivables within the Consolidated Balance Sheet at June 30, 2016. The rights to future cash payments are tied to the future volumes of water disposed in each of the

22


wells sold. Also as a result of the sale, the Company recognized a loss of approximately $369 thousand which has been included in the Provision for loan losses within the Consolidated Statement of Income.
On June 30, 2016, assets acquired by BBWS in a seller-financed transaction prior to the Company's foreclosure on BB Intermediate, were returned to the seller in full satisfaction of the remaining note balance of approximately $439 thousand.
There were no assets or liabilities held for sale at June 30, 2016 or December 31, 2015.
8. MANAGEMENT AGREEMENT
The Company pays Corridor as the Company's Manager pursuant to a Management Agreement described in detail in Note 11, Management Agreement, in the Notes to Consolidated Financial Statements in the Company's annual report on Form 10-K for the year ended December 31, 2015, as previously filed with the SEC. In light of the provisions for loan losses recognized by the Company on certain of its energy infrastructure financing investments (collectively, the "Underperforming Loans") during 2015 and the first quarter of 2016, the Manager voluntarily recommended, and the Company agreed, that effective on and after the Company's March 31, 2016 balance sheet date, solely for the purpose of computing the value of the Company’s Managed Assets in calculating the quarterly management fee under the terms of the Management Agreement, that portion of the Management Fee attributable to the Company’s investment in the Underperforming Loans shall be based on the estimated net realizable value of such loans, which shall not exceed the amount invested in the Underperforming Loans as of the end of the quarter for which the Management Fee is to be calculated. This agreement superseded a prior agreement between the Company and the Manager, which was effective as of September 30, 2015, concerning valuation of the Black Bison Loans for purposes of calculating the Management Fee.
Effective June 30, 2016, the Manager voluntarily recommended, and the Company agreed, that the Manager would waive $54,305 of the total $149,123 incentive fee that would otherwise be payable under the provisions of the Management Agreement with respect to dividends paid on the Company's common stock during the three months ended June 30, 2016.
Fees incurred under the Management Agreement for the three and six months ended June 30, 2016 were $1.6 million and $3.5 million, respectively, compared to $1.2 million and $2.3 million, respectively, for the three and six months ended June 30, 2015. Fees incurred under the Management Agreement are reported in the General and Administrative line item on the income statement.
The Company pays Corridor, as the Company's Administrator pursuant to an Administrative Agreement. Fees incurred under the Administrative Agreement for the three and six months ended June 30, 2016 were $65 thousand and $132 thousand, respectively, compared to $45 thousand and $91 thousand, respectively, for the three and six months ended June 30, 2015. Fees incurred under the Administrative Agreement are reported in the General and Administrative line item on the income statement.

23


9. 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 June 30, 2016, and December 31, 2015. These assets and liabilities are measured on a recurring basis.
June 30, 2016
 
 
June 30, 2016
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Other equity securities
 
$
8,036,137

 
$

 
$

 
$
8,036,137

Total Assets
 
$
8,036,137

 
$

 
$

 
$
8,036,137

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest Rate Swap Derivative
 
$
124,624

 
$

 
$
124,624

 
$

Total Liabilities
 
$
124,624

 
$

 
$
124,624

 
$

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 $26.3 million cash flow hedges concurrent with the assignment of the $70 million secured term credit facility. The remaining cash flow hedge was de-designated 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 will be 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 six months ended June 30, 2016 and 2015, are as follows:
Level 3 Rollforward
For the Six Months Ended June 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

 
$

 
$

 
$
(472,416
)
 
$
114,869

 
$
8,036,136

 
$
(472,416
)
Total
 
$
8,393,683

 
$

 
$

 
$
(472,416
)
 
$
114,869

 
$
8,036,136

 
$
(472,416
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other equity securities
 
$
9,217,181

 
$

 
$

 
$
451,311

 
$
316,313

 
$
9,984,805

 
$
451,311

Warrant Investment
 
355,000

 

 

 
(240,000
)
 

 
115,000

 
(240,000
)
Total
 
$
9,572,181

 
$

 
$

 
$
211,311

 
$
316,313

 
$
10,099,805

 
$
211,311

(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, 2016 and 2015.
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

24


three and six months ended June 30, 2016, approximately $0 and $43 thousand, was included as an unrealized gain, respectively, compared to $282 thousand for the three and six months ended June 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. See Note 2, Significant Accounting Policies, for additional discussion.
For the three months and six months ended June 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.
As of June 30, 2016 and 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 7.9 percent to 8.9 percent and 16.6 percent to 21.3 percent as of June 30, 2016 and 2015, respectively, and (ii) discounted cash flow analysis using an estimated discount rate of 15.0 percent to 17.0 percent and 12.0 percent to 14.0 percent as of June 30, 2016 and 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 June 30, 2016 and 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). We hold 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 (in thousands).
 
 
June 30, 2016
(Unaudited)
 
December 31, 2015
(Unaudited)
Assets
 
 
 
 
Current assets
 
$
23,828

 
$
24,276

Noncurrent assets
 
701,202

 
696,461

Total Assets
 
$
725,030

 
$
720,737

Liabilities
 
 
 
 
Current liabilities
 
$
17,578

 
$
19,993

Noncurrent liabilities
 
264,338

 
246,808

Total Liabilities
 
$
281,916

 
$
266,801

 
 
 
 
 
Partner's equity
 
443,114

 
453,936

Total liabilities and partner's equity
 
$
725,030

 
$
720,737


25


 
 
For the Three Months Ending
(Unaudited)
 
For the Six Months Ending
(Unaudited)
 
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Revenues
 
$
26,243

 
$
19,110

 
$
52,310

 
$
32,667

Operating expenses
 
20,812

 
17,540

 
42,884

 
32,668

Income (Loss) from Operations
 
$
5,431

 
$
1,570

 
$
9,426

 
$
(1
)
Other income
 
2,369

 
3,320

 
4,743

 
7,154

Net Income
 
$
7,800

 
$
4,890

 
$
14,169

 
$
7,153

Less: Net Income attributable to non-controlling interests
 
(7,786
)
 
(4,837
)
 
(14,079
)
 
(7,063
)
Net Income attributable to Partner's Capital
 
$
14

 
$
53

 
$
90

 
$
90

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.
Hedged 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
 
June 30, 2016
 
December 31, 2015
 
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
8,116,117

 
$
8,116,117

 
$
14,618,740

 
$
14,618,740

Escrow receivable
 
Level 2
 
$

 
$

 
$
1,392,917

 
$