CORENERGY INFRASTRUCTURE TRUST, INC., 10-Q filed on 5/10/2013
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2013
Apr. 30, 2013
Document and Entity Information [Abstract]
Entity Registrant Name
CorEnergy Infrastructure Trust, Inc.†
Entity Central Index Key
0001347652†
Document Type
10-Q†
Document Period End Date
Mar. 31, 2013†
Amendment Flag
false†
Document Fiscal Year Focus
2013†
Document Fiscal Period Focus
Q1†
Current Fiscal Year End Date
--12-31†
Entity Filer Category
Accelerated Filer†
Entity Common Stock, Shares Outstanding
24,147,958†
Consolidated Balance Sheets (Unaudited)†(USD $)
Mar. 31, 2013
Dec. 31, 2012
Nov. 30, 2012
Assets
Leased property, net of accumulated depreciation of $4,394,248, $1,131,680, and $1,614,569 at March 31, 2013, November 30, 2012, and December 31, 2012, respectively
$†240,299,030†
$†243,078,709†
$†12,995,169†
Other equity securities, at fair value
21,895,854†
19,707,126†
19,866,621†
Cash and cash equivalents
18,196,151†
17,680,783†
14,333,456†
Trading securities, at fair value
0†
4,318,398†
55,219,411†
Property and equipment, net of accumulated depreciation of $1,825,253, $1,751,202 and $1,774,616 at March 31, 2013, November 30, 2012, and December 31, 2012, respectively
3,529,836†
3,566,030†
3,589,022†
Escrow receivable
698,729†
698,729†
698,729†
Accounts receivable
1,664,265†
922,894†
1,570,257†
Intangible lease asset, net of accumulated amortization of $510,893, $413,580 and $437,908 at March 31, 2013, November 30, 2012, and December 31, 2012, respectively
583,878†
656,863†
681,191†
Deferred debt issuance costs, net of accumulated amortization of $145,005, $0 and $16,530, at March 31, 2013, November 30, 2012, and December 31, 2012, respectively
1,403,348†
1,520,823†
0†
Deferred lease costs, net of accumulated amortization of $17,246, $0 and $1,967 at March 31, 2013, November 30, 2012, and December 31, 2012, respectively
903,216†
912,875†
0†
Prepaid expenses and other assets
462,713†
598,755†
2,477,977†
Total Assets
289,637,020†
293,661,985†
111,431,833†
Liabilities and Equity
Long-term debt
70,000,000†
70,000,000†
0†
Accounts payable and other accrued liabilities
4,064,102†
4,413,420†
2,885,631†
Lease obligation
0†
20,698†
27,522†
Current tax liability
208,931†
3,855,947†
0†
Deferred tax liability
3,131,096†
2,396,043†
7,172,133†
Line of credit
139,397†
0†
120,000†
Unearned income
1,422,457†
2,133,685†
2,370,762†
Total Liabilities
78,965,983†
82,819,793†
12,576,048†
Equity
Warrants, no par value; 945,594 issued and outstanding at March 31, 2013, November 30, 2012, and December 31, 2012 (5,000,000 authorized)
1,370,700†
1,370,700†
1,370,700†
Capital stock, non-convertible, $0.001 par value; 24,147,958 shares issued and outstanding at March 31, 2013, 9,190,667 shares issued and outstanding at November 30, 2012, and 24,147,958 shares issued and outstanding at December 31, 2012 (100,000,000 shares authorized)
24,148†
24,141†
9,191†
Additional paid-in capital
172,288,226†
175,256,675†
91,763,475†
Accumulated retained earnings
6,621,776†
4,209,023†
5,712,419†
Total CorEnergy Equity
180,304,850†
180,860,539†
98,855,785†
Non-controlling Interest
30,366,187†
29,981,653†
0†
Total Equity
210,671,037†
210,842,192†
98,855,785†
Total Liabilities and Equity
$†289,637,020†
$†293,661,985†
$†111,431,833†
Consolidated Balance Sheets (Unaudited) (Parenthetical)†(USD $)
Mar. 31, 2013
Dec. 31, 2012
Nov. 30, 2012
Statement of Financial Position [Abstract]
Accumulated depreciation, leased property
$†4,394,248†
$†1,614,569†
$†1,131,680†
Accumulated depreciation, property and equipment
1,825,253†
1,774,616†
1,751,202†
Accumulated amortization, intangible lease asset
510,893†
437,908†
413,580†
Accumulated amortization, deferred debt
145,005†
16,350†
0†
Accumulated amortization, deferred lease
$†17,246†
$†1,967†
$†0†
Warrants, par value
$†0†
$†0†
$†0†
Warrants, issued
945,594†
945,594†
945,594†
Warrants, outstanding
945,594†
945,594†
945,594†
Warrants, authorized
5,000,000†
5,000,000†
5,000,000†
Capital stock non-convertible, par value
$†0.001†
$†0.001†
$†0.001†
Capital stock non-convertible, shares issued
24,147,958†
24,147,958†
9,190,667†
Capital stock non-convertible, shares outstanding
24,147,958†
24,147,958†
9,190,667†
Capital stock non-convertible, shares authorized
100,000,000†
100,000,000†
100,000,000†
Consolidated Statements of Income (Unaudited)†(USD $)
1 Months Ended 3 Months Ended
Dec. 31, 2012
Mar. 31, 2013
Feb. 29, 2012
Revenue
Lease revenue
$†857,909†
$†5,638,244†
$†638,244†
Sales revenue
868,992†
2,515,573†
2,437,310†
Total Revenue
1,726,901†
8,153,817†
3,075,554†
Expenses
Cost of sales (excluding depreciation expense)
686,976†
2,003,639†
2,004,672†
Management fees, net of expense reimbursements
155,242†
643,814†
247,381†
Asset acquisition expenses
64,733†
31,817†
0†
Professional fees
333,686†
454,183†
108,578†
Depreciation expense
499,357†
2,857,036†
246,805†
Amortization expense
1,967†
15,279†
0†
Operating expenses
48,461†
206,904†
172,641†
Directorsí fees
8,500†
18,000†
14,581†
Other expenses
27,500†
122,706†
57,260†
Total Expenses
1,826,422†
6,353,378†
2,851,918†
Operating Income (Loss)
(99,521)
1,800,439†
223,636†
Other Income (Expense)
Net distributions and dividend income
2,325†
13,124†
85,262†
Net realized and unrealized gain (loss) on trading securities
(1,769,058)
316,063†
2,862,272†
Net realized and unrealized gain (loss) on other equity securities
(159,495)
2,425,986†
6,069,194†
Interest expense
(416,137)
(737,381)
(27,409)
Total Other Income (Expense)
(2,342,365)
2,017,792†
8,989,319†
Income (Loss) before income taxes
(2,441,886)
3,818,231†
9,212,955†
Taxes
Current tax expense
3,855,947†
285,891†
10,000†
Deferred tax expense (benefit)
(4,776,090)
735,053†
3,455,914†
Income tax expense (benefit), net
(920,143)
1,020,944†
3,465,914†
Net Income (Loss)
(1,521,743)
2,797,287†
5,747,041†
Less: Net Income (Loss) attributable to non-controlling interest
(18,347)
384,534†
0†
Net Income (Loss) attributable to CORR Stockholders
$†(1,503,396)
$†2,412,753†
$†5,747,041†
Earnings (Loss) Per Common Share:
Basic and Diluted (in dollars per share)
$†(0.10)
$†0.10†
$†0.63†
Weighted Average Shares of Common Stock Outstanding:
Basic and Diluted (in dollars per share)
15,564,861†
24,141,720†
9,176,889†
Dividends declared per share (in dollars per share)
$†0†
$†0.125†
$†0.110†
Consolidated Statements of Equity (Unaudited)†(USD $)
Total
Capital Stock [Member]
Warrants [Member]
Additional Paid-in Capital [Member]
Retained Earnings (Accumulated Deficit) [Member]
Non-Controlling Interest [Member]
Beginning balance at Nov. 30, 2010
$†95,479,173†
$†9,147†
$†1,370,700†
$†98,444,952†
$†(4,345,626)
$†0†
Beginning balance, shares at Nov. 30, 2010
9,146,506†
Net Income (Loss)
2,922,143†
0†
0†
0†
2,922,143†
0†
Distributions to stockholders sourced as return of capital
(3,755,607)
0†
0†
(3,755,607)
0†
0†
Reinvestment of distributions to stockholders, shares
30,383†
Reinvestment of distributions to stockholders
252,242†
30†
0†
252,212†
0†
0†
Consolidation of wholly-owned subsidiary
(4,471,638)
0†
0†
741,181†
(5,212,819)
0†
Ending balance at Nov. 30, 2011
90,426,313†
9,177†
1,370,700†
95,682,738†
(6,636,302)
0†
Ending balance, shares at Nov. 30, 2011
9,176,889†
Net Income (Loss)
12,348,721†
0†
0†
0†
12,348,721†
0†
Distributions to stockholders sourced as return of capital
(4,040,273)
0†
0†
(4,040,273)
0†
0†
Reinvestment of distributions to stockholders, shares
13,778†
Reinvestment of distributions to stockholders
121,024†
14†
0†
121,010†
0†
0†
Ending balance at Nov. 30, 2012
98,855,785†
9,191†
1,370,700†
91,763,475†
5,712,419†
0†
Ending balance, shares at Nov. 30, 2012
9,190,667†
9,190,667†
Net Income (Loss)
(1,521,743)
0†
0†
0†
(1,503,396)
(18,347)
Net offering proceeds, shares
14,950,000†
14,950,000†
Net offering proceeds
83,508,150†
14,950†
0†
83,493,200†
0†
0†
Non-controlling interest contribution
30,000,000†
0†
0†
0†
0†
30,000,000†
Ending balance at Dec. 31, 2012
210,842,192†
24,141†
1,370,700†
175,256,675†
4,209,023†
29,981,653†
Ending balance, shares at Dec. 31, 2012
24,147,958†
24,140,667†
Net Income (Loss)
2,797,287†
0†
0†
0†
2,412,753†
384,534†
Distributions to stockholders sourced as return of capital
(3,017,583)
0†
0†
(3,017,583)
0†
0†
Reinvestment of distributions to stockholders, shares
7,291†
Reinvestment of distributions to stockholders
49,141†
7†
0†
49,134†
0†
0†
Ending balance at Mar. 31, 2013
$†210,671,037†
$†24,148†
$†1,370,700†
$†172,288,226†
$†6,621,776†
$†30,366,187†
Ending balance, shares at Mar. 31, 2013
24,147,958†
24,147,958†
Consolidated Statements of Cash Flows (Unaudited)†(USD $)
1 Months Ended 3 Months Ended
Dec. 31, 2012
Mar. 31, 2013
Feb. 29, 2012
Net Income (Loss)
$†(1,521,743)
$†2,797,287†
$†5,747,041†
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Distributions received from investment securities
0†
0†
1,053,007†
Deferred income tax, net
(4,776,090)
735,053†
3,455,914†
Depreciation expense
499,357†
2,857,036†
246,805†
Amortization expense
42,826†
216,738†
30,458†
Realized and unrealized (gain) loss on trading securities
1,769,058†
(316,063)
(2,862,272)
Realized and unrealized (gain) loss on other equity securities
159,495†
(2,425,986)
(6,069,194)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable
647,363†
(741,371)
(813,036)
Decrease in lease receivable
0†
0†
(711,229)
(Increase) decrease in prepaid expenses and other assets
1,879,222†
136,042†
(292,105)
Increase (decrease) in accounts payable and other accrued liabilities
1,527,789†
(349,318)
(107,111)
Increase (decrease) in current income tax liability
3,855,947†
(3,647,016)
0†
Decrease in unearned income
(237,077)
(711,228)
0†
Net cash provided by (used in) operating activities
3,846,147†
(1,448,826)
(321,722)
Investing Activities
Proceeds from sale of long-term investment of trading and other equity securities
49,131,955†
4,557,379†
0†
Deferred lease costs
(914,843)
(5,620)
3,076†
Purchases of leased asset property
(230,559,484)
0†
(29,722)
Purchases of property and equipment
(421)
(41,163)
0†
Return of capital on distributions received
0†
314,340†
0†
Net cash provided by (used in) investing activities
(182,342,793)
4,824,936†
(26,646)
Financing Activities
Payments on lease obligation
(6,824)
(20,698)
(19,690)
Debt financing costs
(1,537,353)
(10,999)
0†
Net offering proceeds
83,508,150†
0†
0†
Debt issuance
70,000,000†
0†
0†
Proceeds from non-controlling interest
30,000,000†
0†
0†
Dividends
0†
(3,017,583)
0†
Advances on revolving line of credit
530,000†
139,397†
1,045,000†
Repayments on revolving line of credit
(650,000)
0†
0†
Dividend reinvestment
0†
49,141†
0†
Net cash provided by (used in) financing activities
181,843,973†
(2,860,742)
1,025,310†
Net Change in Cash and Cash Equivalents
3,347,327†
515,368†
676,942†
Cash and Cash Equivalents at beginning of period
14,333,456†
17,680,783†
2,793,326†
Cash and Cash Equivalents at end of period
17,680,783†
18,196,151†
3,470,268†
Supplemental Disclosure of Cash Flow Information
Interest paid
2,765†
531,318†
11,665†
Income taxes paid
0†
3,895,800†
96,000†
Non-Cash Investing Activities
Security proceeds from sale in long-term investment of other equity securities
$†23,046,215†
$†0†
$†0†
Introduction and Basis of Presentation
INTRODUCTION AND BASIS OF PRESENTATION
INTRODUCTION AND BASIS OF PRESENTATION
Introduction
CorEnergy Infrastructure Trust, Inc. ("CorEnergy"), was organized as a Maryland corporation and commenced operations on December 8, 2005. Prior to December 3, 2012, our name was Tortoise Capital Resources Corporation. The Company's 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.

Our assets are generally leased to energy companies via long-term triple net participating leases. The 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.

Our long-term participating lease structures provide us base rents that are fixed and determinable, with escalators dependent upon increases in the Consumer Price Index. Leases may also include features that allow us to participate in the financial performance and/or value of the energy infrastructure asset.

The assets we own and seek to acquire include pipelines, storage tanks, transmission lines and gathering systems, among others. We intend to acquire assets that are accretive to our shareholders and allow us to become a diversified energy infrastructure real estate investment trust (REIT).
The Company's consolidated financial statements include the Company's direct or indirect wholly-owned subsidiaries. In our December 2012 restructuring, we created taxable REIT subsidiaries to hold our remaining securities portfolio (Corridor Public Holdings, Inc. and its wholly-owned subsidiary Corridor Private Holdings, Inc.) and to hold our operating business (Mowood Corridor, Inc. and its wholly-owned subsidiary, Mowood, LLC ("Mowood"), which is the holding company for Omega Pipeline Company, LLC (“Omega”)). Omega owns and operates a natural gas distribution system in Fort Leonard Wood, Missouri. Omega is responsible for purchasing and coordinating delivery of natural gas to Fort Leonard Wood, as well as performing maintenance and expansion of the pipeline. In addition, Omega provides gas marketing services to local commercial end users. Also consolidated as a wholly-owned subsidiary is Pinedale GP, Inc., owner of the general partner interest in the entity that owns the Pinedale LGS. All significant inter-company balances and transactions have been eliminated in consolidation. The Company's financial statements also present minority interests in the case of entities that are not wholly-owned subsidiaries of the Company.
Change in Fiscal Year End
On February 5, 2013, the Board of Directors of the Company approved a change in the Company's fiscal year end from November 30 to December 31. This change to the calendar year reporting cycle began January 1, 2013. As a result of the change, the Company is reporting a December 2012 fiscal month transition period, which is reported in this Quarterly Report on Form 10-Q for the calendar quarter ending March 31, 2013 and will be in the Company's Annual Report on Form 10-K for the calendar year ending December 31, 2013.
Financial information for the three months ended March 31, 2012 has not been included in this Form 10-Q for the following reasons: (i) the three-month period ended February 29, 2012 provides a meaningful comparison for the three months ended March 31, 2013; (ii) there are no significant factors, seasonal or other, that would impact the comparability of information if the results for the three months ended March 31, 2012 were presented in lieu of results for the three-month period ended February 29, 2012; and (iii) it was not practicable or cost justified to prepare this information.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information 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 interim period presented.
Operating results for the three-month periods ended March 31, 2013 and February 29, 2012 and for the one-month transition period ended December 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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 November 30, 2012 filed with the SEC on February 13, 2013.
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.
Significant Accounting Policies
SIGNIFICANT ACCOUNTING POLICIES
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. Leased Property – The Company includes assets subject to lease arrangements within Leased property, net of accumulated depreciation, in the Consolidated Balance Sheets. Lease payments received are reflected in lease income on the Consolidated Statements of Income, net of amortization of any off market adjustments. Costs in connection with the creation and execution of a lease are capitalized and amortized over the lease term. See Note 4 for further discussion.
C. Cash and Cash Equivalents – The Company maintains cash balances at financial institutions in amounts that regularly exceed FDIC insured limits. The Company’s cash equivalents are comprised of short-term, liquid money market instruments.
D. Long-Lived Assets and Intangibles – Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements, which extend the useful lives of assets, are capitalized and depreciated over the remaining estimated useful life of the asset.
The Company initially records long-lived assets at their acquisition cost, unless the transaction is accounted for as a business combination. If the transaction is accounted for as a business combination, the Company allocates the purchase price to the acquired tangible and intangible assets and liabilities based on their estimated fair values. The Company determines the fair values of assets and liabilities based on discounted cash flow models using current market assumptions, appraisals, recent transactions involving similar assets or liabilities and/or other objective evidence, and depreciates tow he asset values over the estimated remaining useful lives.
The Company may acquire long-lived assets that are subject to an existing lease contract with the seller or other lessee party and the Company may assume outstanding debt of the seller as part of the consideration paid. If, at the time of acquisition, the existing lease or debt contract is not at current market terms, the Company will record an asset or liability at the time of acquisition representing the amount by which the fair value of the lease or debt contract differs from its contractual value. Such amount is then amortized over the remaining contract term as an adjustment to the related lease revenue or interest expense.The Company periodically reviews its long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company’s review involves comparing current and future operating performance of the assets, the most significant of which is undiscounted operating cash flows, to the carrying value of the assets. Based on this analysis, a provision for possible loss is recognized, if any. No impairment write-downs were recognized during the three-month period ended March 31, 2013 and February 29, 2012 or for the one-month transition period ended December 31, 2012.
Costs in connection with the direct acquisition of a new asset are capitalized as a component of the purchase price and depreciated over the life of the asset. See Note 4 for further discussion.
E. Investment Securities – The Company’s investments in securities are classified as either trading or other equity securities:
Trading securities – the Company’s publicly traded equity securities are classified as trading securities and are reported at fair value because the Company intends to sell these securities in order to acquire real asset investments.
Other equity securities – the Company’s other equity securities represent interests in private companies for which the Company has elected to report these at fair value under the fair value option.
Realized and unrealized gains and losses on trading securities and other equity securities – Changes in the fair values of the Company’s securities during the period reported and the gains or losses realized upon sale of securities during the period are reflected as other income or expense within the accompanying Consolidated Statements of Income.
F. Security Transactions and Fair Value – Security transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis.
For equity securities that are freely tradable and listed on a securities exchange or over-the-counter market, the Company values those securities at their last sale price on that exchange or over-the-counter market on the valuation date. If the security is listed on more than one exchange, the Company will use the price from the exchange that it considers to be the principal, which may not necessarily represent the last sale price. If there has been no sale on such exchange or over-the-counter market on such day, the security will be valued at the mean between the last bid price and last ask price on such day.

The major components of net realized and unrealized gain or loss on trading securities for the three-month periods ended March 31, 2013 and February 29, 2012 and for the one-month transition period ended December 31, 2012 are as follows:
Major Components of Net Realized and Unrealized Gain (Loss) on Trading Securities
 
 
For the Three Months Ended
 
For the One-Month Transition Period Ended

 
March 31,
2013
 
February 29,
2012
 
December 31,
2012
Net unrealized gain on trading securities
 
$
751,004

 
$

 
$
4,663,211

Net realized gain (loss) on trading securities
 
(434,941
)
 
2,862,272

 
(6,432,269
)
Total net realized and unrealized gain (loss) on trading securities
 
$
316,063

 
$
2,862,272

 
$
(1,769,058
)

The Company holds investments in illiquid securities including debt and equity securities of privately-held companies. 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 of the entire company. 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. An independent valuation firm has been engaged by the Company to provide independent, 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 Investment Committee of the Adviser reviews the valuations and supporting analysis, prior to approving the valuations.
G. Accounts Receivable – Accounts receivable are presented at face value net of an allowance for doubtful accounts. Accounts are considered past due based on the terms of sale with the customers. The Company reviews accounts for collectibility based on an analysis of specific outstanding receivables, current economic conditions and past collection experience. At March 31, 2013, Management determined that an allowance for doubtful accounts related to our leases was not required. Lease payments by our tenants, as discussed within Note 4, have remained timely and without lapse.
H. Derivative Instruments and Hedging Activities - FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company's objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. Accordingly, the Company's derivative liabilities are presented on a gross basis.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
FASB ASC 820, Fair Value Measurements and Disclosure ("ASC 820"), defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.. In accordance with ASC 820, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
I. Fair Value Measurements - Various inputs are used in determining the fair value of the Company’s assets and liabilities. These inputs are summarized in the three broad levels listed below:
Level 1 – quoted prices in active markets for identical investments
Level 2 – other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.)
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)
ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following section describes the valuation methodologies used by the Company for estimating fair value for financial instruments not recorded at fair value, but fair value is included for disclosure purposes only, as required under disclosure guidance related to the fair value of financial instruments.
Cash and Cash Equivalents — The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements approximates fair value.
Escrow Receivable — The escrow receivable due the Company, which relates to the sale of International Resource Partners, LP, is anticipated to be released upon satisfaction of certain post-closing obligations and/or the expiration of certain time periods (the shortest of which was to be 14 months from the April 2011 closing date of the sale). The fair value of the escrow receivable reflects a discount for the potential that the full amount due to the Company will not be realized. No clear agreement has been reached as to the remaining escrow balance and Management anticipates that it may take more than a year to satisfy other post-closing obligations, prior to receiving the approximately $699 thousand escrow balance remaining.
Long-term Debt — The fair value of the Company’s long-term debt is calculated, for disclosure purposes, by discounting future debt service requirements by a rate equal to the Company’s current expected rate for an equivalent transaction.
Line of Credit — The carrying value of the line of credit approximates the fair value due to its short term nature.
J. Revenue Recognition – Specific recognition policies for the Company’s revenue items are as follows:
Sales Revenue – Revenues related to natural gas distribution and performance of management services are recognized in accordance with GAAP upon delivery of natural gas and upon the substantial performance of management and supervision services related to the expansion of the natural gas distribution system. Omega, acting as a principal, provides for transportation services and natural gas supply for its customers on a firm basis. In addition, Omega is 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. Revenues from expansion efforts are recognized in accordance with GAAP using either a completed contract or percentage of completion method based on the level and volume of estimates utilized, as well as the certainty or uncertainty of our ability to collect those revenues.
Lease Revenue – Income related to the Company’s leased property is recognized on a straight-line basis over the term of the lease when collectibility is reasonably assured. Rental payments on the Pinedale LGS leased property are typically received on a monthly basis. Prior to November 1, 2012 rental payments on the EIP leased property were typically received on a semi-annual basis and were included as lease revenue within the accompanying Consolidated Statements of Income. Upon the November 1, 2012 execution of the Purchase Agreement related to the EIP leased property (the "Purchase Agreement"), rental payments on the leased property are to be received in advance and are classified as unearned income and included in liabilities within the Consolidated Balance Sheets. Unearned income is amortized ratably over the lease period as revenue recognition criteria are met.
K. Cost of Sales – Included in the Company’s cost of sales are the amounts paid for gas and propane, along with related transportation, which are delivered to customers, as well as the cost of material and labor related to the expansion of the natural gas distribution system.
L. Asset Acquisition Expenses – Costs in connection with the research of real property acquisitions are expensed as incurred until determination that the acquisition of the real property is probable. Upon the determination, costs in connection with the acquisition of the property are capitalized as described in paragraph (D) above.
M. Offering Costs – Offering costs related to the issuance of common stock are charged to additional paid-in capital when the stock is issued.
N. Debt Issuance Costs – Costs in connection with the issuance of new debt are capitalized and amortized over the debt term. See Note 11 for further discussion.
O. Distributions to Stockholders – The amount of any quarterly distributions to stockholders will be determined by the Board of Directors. Distributions to stockholders are recorded on the ex-dividend date.
P. Other Income Recognition Specific policies for the Company’s other income items are as follows:
Securities Transactions and Investment Income Recognition – Securities transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis. Distributions received from our equity investments generally are comprised of ordinary income, capital gains and distributions received from investment securities from the portfolio company. 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 each portfolio company and/or other industry sources. These estimates may subsequently be revised based on information received from the portfolio companies after their tax reporting periods are concluded, as the actual character of these distributions are not known until after our fiscal year end.
Dividends and distributions from investments – Dividends and distributions 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 generally are 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/or 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/or 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.
Q. Federal and State Income Taxation – We intend to elect to be treated as a REIT for federal income tax purposes (which we refer to as the “REIT Conversion”) for the calendar and tax year ended December 31, 2013. We anticipate that the Company will satisfy the annual income test and the quarterly assets tests necessary for us to qualify and elect to be taxed as a REIT for 2013. Because certain of our assets may not produce REIT-qualifying income or be treated as interests in real property, during the fourth quarter of 2012 we contributed those assets into wholly-owned Taxable REIT Subsidiaries ("TRSs"). This was done in 2012 in order to limit the potential that such assets and income would prevent us from qualifying as a REIT for 2013. Due to the REIT Conversion, we changed our fiscal year end from November 30 to December 31. As a result, the financial statements presented in this Form 10-Q include two periods, a one-month transition period ended December 31, 2012 and a three-month period ended March 31, 2013.
As to the one-month transition period ended December 31, 2012, the Company is treated as a C corporation and is 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. For years ended in 2012 and before, the distributions we made to our stockholders from our earnings and profits were treated as qualified dividend income ("QDI") and return of capital. QDI is taxed to our individual shareholders at the maximum rate for long-term capital gains, which through tax year 2012 was 15 percent and beginning in tax year 2013 will be 20 percent.
The Company's trading securities and 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. The Company'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. Due to the restructuring in December 2012, it is expected that for the three-month period ended March 31, 2013 and future periods, any deferred tax liability or asset will be related entirely to the assets and activities of the Company's TRSs.
In 2013, the Company intends to be taxed as a REIT rather than a C corporation and generally will not pay federal income tax on taxable income that is distributed to our stockholders. As a REIT, our distributions from earnings and profits will be treated as ordinary income and a return of capital, and generally will not qualify as QDI. To the extent that the REIT has accumulated C corporation earnings and profits from the periods prior to 2013, we will distribute such earnings and profits in 2013, which will be treated as QDI.
The restructuring done in December 2012 causes us to hold and operate certain of our assets through one or more wholly-owned taxable REIT subsidiaries. A TRS is a subsidiary of a REIT that is subject to applicable corporate income tax. 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.
If we fail to qualify to be a REIT for 2013, 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.
R. Recent Accounting Pronouncements – In June 2011, the FASB issued ASU No. 2011-05 "Presentation of Comprehensive Income". ASU No. 2011-05 amends FASB ASC Topic 220, Presentation of Comprehensive Income, to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-05 is effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. Management has adopted this amendment and this did not have a material impact on the Company's consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11 "Disclosure about Offsetting Assets and Liabilities". ASU No. 2011-11 amends FASB ASC Topic 210, Balance Sheet, to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-11 is effective for fiscal years beginning after January 1, 2013 and for interim periods within those fiscal years. Management has adopted this amendment and this did not have a material impact on the Company's consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12 "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05". ASU No. 2011-12 amends FASB ASC Topic 220, Presentation of Comprehensive Income, to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments. ASU No. 2011-12 is effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. Management has adopted this amendment and this did not have a material impact on the Company's consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02 "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". ASU No. 2013-02 amends FASB ASC Topic 220, Presentation of Comprehensive Income, to improve the reporting reclassifications out of accumulated other comprehensive income. ASU No. 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. Management has adopted this amendment and this did not have a material impact on the Company's consolidated financial statements.
Leased Properties
LEASED PROPERTIES
LEASED PROPERTIES
Pinedale LGS
On December 20, 2012, our subsidiary, Pinedale Corridor, LP ("Pinedale LP"), closed on a Purchase and Sale Agreement with an indirect wholly-owned subsidiary of Ultra Petroleum Corp. ("Ultra Petroleum"). Pinedale LP acquired a system of gathering, storage, and pipeline facilities (the "Liquids Gathering System" or "Pinedale LGS"), with associated real property rights in the Pinedale Anticline in Wyoming (the "Acquisition") for $205 million in cash and certain investment securities having an approximate market value of $23 million. The asset purchase price was funded in part by the issuance of 13 million shares of common stock with net proceeds of $73.6 million after the underwriters discount.
Physical Assets
Construction of the Pinedale LGS was completed by Ultra Petroleum in 2010. It consists of more than 150 miles of pipelines with 107 receipt points and four above-ground central gathering facilities. The system is used by Ultra Petroleum as a method of separating water, condensate and associated flash gas from a unified stream and subsequently selling or treating and disposing of the separated products. Prior to entering the Pinedale LGS, a commingled hydrocarbon stream is separated into wellhead natural gas and a liquids stream. The wellhead natural gas is transported to market by a third party. The remaining liquids, primarily water, are transported by the LGS to one of its four central gathering facilities where they pass through a three-phase separator which separates condensate, water and associated natural gas. Condensate is a valuable hydrocarbon commodity that is sold by Ultra Petroleum; water is transported to disposal wells or a treatment facility for re-use; and the natural gas is sold or otherwise used by Ultra Petroleum for fueling on-site operational equipment. To date, no major operational issues have been reported with respect to the Pinedale LGS.
The asset is depreciated for book purposes over an estimated useful life of 26 years. The amount of depreciation recognized for the leased property for the three month period ended March 31, 2013, and for the one-month transition period ended December 31, 2012 was $2.2 million and $286 thousand, respectively.
See Note 4 for further information regarding the Pinedale Lease Agreement.
Non-Controlling Interest Partner
Prudential Financial, Inc. ("Prudential") funded a portion of the Acquisition by investing $30 million in cash in Pinedale LP. Pinedale GP, a wholly-owned subsidiary of CorEnergy, funded a portion of the Acquisition by contributing approximately $108.3 million in cash and certain equity securities to Pinedale LP. Those investments were made on December 20, 2012. Prudential holds a limited partner interest in Pinedale LP, and Pinedale GP holds a general partner interest. Prudential holds 18.95 percent of the economic interest in Pinedale LP, while Pinedale GP holds the remaining 81.05 percent of the economic interest.
Debt
On December 20, 2012, Pinedale LP borrowed $70 million pursuant to a secured term credit facility with KeyBank National Association ("KeyBank") serving as a lender and the administrative agent on behalf of other lenders participating in the credit facility. The credit facility will remain in effect through December 2015, with an option to extend through December 2016. The credit facility is secured by the LGS. See Note 11 for further information regarding the credit facility.
Eastern Interconnect Project (EIP)
Physical Assets
The EIP transmission assets move electricity across New Mexico between Albuquerque and Clovis. The physical assets include 216 miles of 345 kilovolts transmission lines, towers, easement rights, converters and other grid support components. Originally, the assets were depreciated for book purposes over an estimated useful life of 20 years.
The amount of depreciation of leased property reflected during the three-month periods ended March 31, 2013 and February 29, 2012 and for the one-month transition period ended December 31, 2012 was $570 thousand, $177 thousand and $190 thousand, respectively. The March 31, 2013 and the December 31, 2012 amounts include three months and one month of incremental depreciation of approximately $393 thousand and $131 thousand, respectively.
See Note 4 for further information regarding the PNM Lease Agreement.
Debt
The Company assumed a note with an outstanding principal balance of $3.4 million. The debt was collateralized by the EIP transmission assets. The note, which accrued interest at an annual rate of 10.25 percent, and had principal and interest payments due on a semi-annual basis, was paid in full on October 1, 2012.
Leases
LEASES
LEASES
As of March 31, 2013 and December 31, 2012 the Company had two significant leases. The table below displays the impact of each lease on total leased properties and total lease revenues for the periods presented.

 
As a Percentage of
 
 
Leased Properties
 
Lease Revenues

 
As of
March 31, 2013
 
As of
December 31, 2012
 
For the Three Months Ended March 31, 2013
 
For the One-Month Transition Period Ended December 31, 2012
Pinedale LGS
 
94.2%
 
94.2%
 
88.7%
 
75.2%
Public Service of New Mexico
 
5.8%
 
5.8%
 
11.3%
 
24.8%

Pinedale LGS
Pinedale LP entered into a long-term triple net Lease Agreement on December 20, 2012, relating to the use of the Pinedale LGS (the “Pinedale Lease Agreement”) with Ultra Wyoming LGS, LLC, another indirect wholly-owned subsidiary of Ultra Petroleum (“Ultra Newco”). Ultra Newco will utilize the Pinedale LGS to gather and transport a commingled stream of oil, natural gas and water, then further utilize the Pinedale LGS to separate this stream into its separate components. Ultra Newco's obligations under the Pinedale Lease Agreement will be guaranteed by Ultra Petroleum and Ultra Petroleum's operating subsidiary, Ultra Resources, Inc. (“Ultra Resources”), pursuant to the terms of a Parent Guaranty (the “Guaranty”). Annual rent for the initial term under the Pinedale Lease Agreement will be a minimum of $20 million (as adjusted annually for changes based on the Consumer Price Index (“CPI”), subject to annual maximum adjustments of 2 percent) and a maximum of $27.5 million, with the exact rental amount determined by the actual volume of the components handled by the Pinedale LGS, subject to Pinedale LP not being in default under the Pinedale Lease Agreement.
As of March 31, 2013, approximately $903 thousand of net deferred lease costs were included in the accompanying Consolidated Balance Sheets. The deferred costs are amortized over the 15 year life of the new Pinedale LGS lease and were included in Amortization expense within the Consolidated Income Statement. Approximately $2.5 million in asset acquisition costs related to the Pinedale LGS acquisition is included in Leased Property within the Consolidated Balance Sheet. The asset acquisition costs will be depreciated over the anticipated 26 year life of the newly acquired asset and will be included in Depreciation expense within the Consolidated Income Statement.

The assets which comprise the LGS include real property and land rights to which the purchase consideration was allocated based on relative fair values and equaled $122.3 million and $105.7 million, respectively.   The land rights are being amortized over the life of the related land lease and amortization expense is expected to be approximately $8.8 million for each of the next five years.  
In view of the fact that Ultra Petroleum leases a substantial portion of the Company's net leased property, which is a significant source of revenues and operating income, its financial condition and ability and willingness to satisfy its obligations under its lease with the Company, are expected to have a considerable impact on the results of operation going forward.
Ultra Petroleum is currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 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 Ultra Petroleum can be found on the SEC's website at www.sec.gov. 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 not to believe 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. Summary Consolidated Balance Sheets and Consolidated Statements of Income for Ultra Petroleum are provided below.
Ultra Petroleum
Summary Consolidated Balance Sheets (Unaudited)
(in thousands)

 
March 31, 2013
 
December 31, 2012
Current assets
 
$
129,063

 
$
125,848

Non-current assets
 
1,906,320

 
1,881,497

Total Assets
 
$
2,035,383

 
$
2,007,345

 
 
 
 
 
Current liabilities
 
422,094

 
514,092

Non-current liabilities
 
2,175,481

 
2,071,120

Total Liabilities
 
$
2,597,575

 
$
2,585,212

 
 
 
 
 
Shareholder's equity (deficit)
 
(562,192
)
 
(577,867
)
Total Liabilities and Shareholder's Equity
 
$
2,035,383

 
$
2,007,345

 
 
 
 
 
 
 
 
 
 
Ultra Petroleum
Summary Consolidated Statements of Income (Unaudited)
(in thousands)

 
For the Three Months Ended
 
 
March 31, 2013
 
March 31, 2012
Revenues
 
$
225,626

 
$
226,143

Expenses
 
139,994

 
193,539

Operating Income
 
85,632

 
32,604

Other Income (Expense), net
 
(67,831
)
 
97,147

Income before income tax provision
 
17,801

 
129,751

Income tax provision
 
1,368

 
45,489

Net Income
 
$
16,433

 
$
84,262


Public Service Company of New Mexico ("PNM")
EIP is leased on a triple net basis through April 1, 2015 (the "PNM Lease Agreement") to PNM, an independent electric utility company serving approximately 500 thousand customers in New Mexico. PNM is a subsidiary of PNM Resources Inc. (NYSE: PNM) ("PNM Resources"). Per the PNM Lease Agreement, at the time of expiration of the PNM Lease Agreement, the Company could choose to renew the PNM Lease Agreement with the lessee, the lessee could offer to repurchase the EIP, or the PNM Lease Agreement could be allowed to expire and the Company could find another lessee. Under the terms of the PNM Lease Agreement, the Company was to receive semi-annual lease payments.
At the time of acquisition, the rate of the PNM Lease Agreement was determined to be above market rates for similar leased assets and the Company recorded an intangible asset of $1.1 million for this premium which is being amortized as a reduction to lease revenue over the remaining lease term. See Note 10 below for further information as to the intangible asset.
Upon the execution of the Purchase Agreement on November 1, 2012, the schedule of the rental payments under the Lease Agreement was changed so that the last scheduled semi-annual lease payment was received by the Company on October 1, 2012. In accordance with the Purchase Agreement, PNM's remaining basic rent payments due to the Company were accelerated. The semi-annual payments of approximately $1.4 million that were originally scheduled to be due on April 1, and October 1, 2013, respectively, were received by the Company on November 1, 2012. Therefore, as of March 31, 2013, November 30, 2012 and December 31, 2012, PNM had paid $1.4 million, $2.4 million and $2.1 million in future minimum rental payments in advance. The amount is reported as an unearned income liability within the Consolidated Balance Sheets.
In view of the fact that the PNM leases a substantial portion of the Company's net leased property, which is a significant source of revenues and operating income, its financial condition and ability and willingness to satisfy its obligations under its lease with the Company, have a considerable impact on the results of operation.
On November 1, 2012 the Company entered into the definitive Purchase Agreement with PNM to sell the Company’s 40 percent undivided interest in the EIP upon termination of the Lease Agreement on April 1, 2015 for $7.68 million. Per the Purchase Agreement, PNM also accelerated its remaining lease payments to the Company. Both lease payments due in 2013 were paid to the Company upon execution of the Purchase Agreement on November 1, 2012. In addition, per the Purchase Agreement, PNM paid $100 thousand during the fourth quarter to compensate the Company for legal costs resulting from its filings with the Federal Energy Regulatory Commission ("FERC"). The three remaining lease payments due April 1, 2014, October 1, 2014 and April 1, 2015 will be paid in full on January 1, 2014.
The Company reevaluated the residual value used to calculate its depreciation of the EIP, and determined that a change in estimate was necessary. The change in estimate resulted in higher depreciation expenses beginning in November of 2012 through the expiration of the lease in April 2015. The incremental depreciation amounts to approximately $393 thousand per quarter.
PNM Resources is currently subject to the reporting requirements of the 1934 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 PNM Resources can be found on the SEC's website at www.sec.gov. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of PNM Resources but has no reason not to believe the accuracy or completeness of such information. In addition, PNM Resources 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 PNM Resources that are filed with the SEC is incorporated by reference into, or in any way, form a part of this filing.

The future contracted minimum rental receipts for all net leases as of March 31, 2013 are as follows:
Future Minimum Lease Rentals
Years Ending December 31,
 
Amount
2013
 
$
15,000,000

2014
 
24,267,371

2015
 
20,000,000

2016
 
20,000,000

2017
 
20,000,000

Thereafter
 
199,354,839

Total
 
$
298,622,210

Income Taxes
INCOME TAXES
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 March 31, 2013,
November 30, 2012 and December 31, 2012 are as follows:
Deferred Tax Assets and Liabilities

 
March 31, 2013
 
November 30, 2012
 
December 31, 2012
Deferred Tax Assets:
 
 
 
 
 

Organization costs
 
$

 
$
(17,668
)
 
$
(27,188
)
Net operating loss carryforwards
 

 
(6,411,230
)
 

Net unrealized loss on investment securities
 

 

 
(143,822
)
Cost recovery of leased assets
 

 
(36,443
)
 

Asset acquisition costs
 

 
(134,415
)
 
(158,535
)
AMT and State of Kansas credit
 

 
(196,197
)
 

Sub-total
 
$

 
$
(6,795,953
)
 
$
(329,545
)
Deferred Tax Liabilities:
 
 
 
 
 

Basis reduction of investment in partnerships
 
$
2,090,696

 
$
11,655,817

 
$
2,675,142

Net unrealized gain on investment securities
 
1,040,400

 
2,312,269

 

Cost recovery of leased assets
 

 

 
50,446

Sub-total
 
3,131,096

 
13,968,086

 
2,725,588

Total net deferred tax liability
 
$
3,131,096

 
$
7,172,133

 
$
2,396,043


For the period ended March 31, 2013, all deferred tax liability presented above relates to assets held in the Company's Taxable REIT Subsidiaries. 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. As of March 31, 2013, the Company had no uncertain tax positions and no penalties and interest were accrued. Tax years subsequent to the year ending November 30, 2006 remain open to examination by federal and state tax authorities.
Total income tax expense differs from the amount computed by applying the federal statutory income tax rates of 35 percent for the three-month periods ended March 31, 2013, February 29, 2012 and for the one-month transition period ended December 31, 2012 to income (loss) from operations and other income (expense) for the years presented, as follows:
Income Tax Expense (Benefit)
 
 
For the Three-Month Periods Ended
 
For the One-Month
Transition Period Ended
December 31, 2012

 
March 31, 2013
 
February 29, 2012
 
Application of statutory income tax rate
 
$
1,201,795

 
$
3,224,535

 
$
(848,239
)
State income taxes, net of federal tax benefit
 
62,270

 
241,379

 
(64,771
)
Dividends received deduction
 

 

 
(7,133
)
Income of Real Estate Investment Trust
 
(243,121
)
 

 

Total income tax expense (benefit)
 
$
1,020,944

 
$
3,465,914

 
$
(920,143
)

Total income taxes are computed by applying the federal statutory rate of 35 percent plus a blended state income tax rate, which was approximately 2.26 percent for the periods presented above. The restructuring done in December 2012 causes us to hold and operate certain of our assets through one or more Taxable REIT Subsidiaries (“TRSs”). A TRS is a subsidiary of a REIT that is subject to applicable corporate income tax. For the period ended March 31, 2013, all of the income tax expense presented above relates to the assets and activities held in the Company's TRSs. The components of income tax expense include the following for the periods presented:
Components of Income Tax Expense (Benefit)
 
 
For the Three-Month Periods Ended
 
For the One-Month
Transition Period Ended December 31, 2012

 
March 31, 2013
 
February 29, 2012
 
Current tax expense
 
 
 
 
 
 
Federal
 
$
268,205

 
$

 
$
3,610,165

State (net of federal tax benefit)
 
17,686

 

 
245,782

AMT expense
 

 
10,000

 

Total current tax expense
 
285,891

 
10,000

 
3,855,947

Deferred tax expense (benefit)
 
 
 
 
 
 
Federal
 
690,468

 
3,215,230

 
(4,465,104
)
State (net of federal tax benefit)
 
44,585

 
240,684

 
(310,986
)
Total deferred tax expense (benefit)
 
735,053

 
3,455,914

 
(4,776,090
)
Total income tax expense (benefit)
 
$
1,020,944

 
$
3,465,914

 
$
(920,143
)

As of November 30, 2012, the Company had a net operating loss for federal income tax purposes of approximately $17.2 million. The net operating loss may be carried forward for 20 years. If not utilized, this net operating loss will expire as follows: $8 thousand, $4.0 million , $3.4 million , $24 thousand and $9.8 million in the years ending November 30, 2028, 2029, 2030, 2031 and 2032 respectively. In the period ending December 31, 2012, all Net Operating Losses of the Company were utilized to reduce the Company's current tax liability. No Net Operating Losses remain at March 31, 2013. As of November 30, 2012, an alternative minimum tax credit of $194 thousand was available, which was fully utilized as of December 31, 2012.
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

 
March 31, 2013
 
November 30, 2012
 
December 31, 2012
Aggregate cost for federal income tax purposes
 
$
19,734,837

 
$
41,995,195

 
$
22,007,069

Gross unrealized appreciation
 
2,161,017

 
33,892,176

 
2,018,455

Gross unrealized depreciation
 

 
(801,340
)
 

Net unrealized appreciation
 
$
2,161,017

 
$
33,090,836

 
$
2,018,455

Property and Equipment
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Property and Equipment

 
March 31, 2013
 
November 30, 2012
 
December 31, 2012
Natural gas pipeline
 
$
5,215,424

 
$
5,215,424

 
$
5,215,424

Vehicles and trailers
 
125,117

 
110,782

 
110,783

Computers
 
14,548

 
14,018

 
14,439

Gross property and equipment
 
5,355,089

 
5,340,224

 
5,340,646

Less: accumulated depreciation
 
(1,825,253
)
 
(1,751,202
)
 
(1,774,616
)
Net property and equipment
 
$
3,529,836

 
$
3,589,022

 
$
3,566,030



The amounts of depreciation of property and equipment recognized for the three-month periods ended March 31, 2013 and February 29, 2012 and for the one-month transition period ended December 31, 2012 were $71 thousand, $70 thousand, and $23 thousand, respectively.
Concentrations
CONCENTRATIONS
CONCENTRATIONS
The Company has historically invested in securities of privately-held and publicly-traded companies in the midstream and downstream segments of the U.S. energy infrastructure sector. As of March 31, 2013, investments in securities of energy infrastructure companies represented approximately 7.56 percent of the Company’s total assets. The Company is now focused on identifying and acquiring real property assets in the U.S. energy infrastructure sector that are REIT qualified.
Mowood, the Company’s wholly-owned subsidiary, has a ten-year contract, expiring in 2015, with the Department of Defense (“DOD”) to provide natural gas and gas distribution services to Fort Leonard Wood. Revenue related to the DOD contract accounted for 89 percent, 82 percent, and 84 percent of sales revenue for the three-month periods ended March 31, 2013 and February 29, 2012, and for the one-month transition period ended December 31, 2012, respectively. Mowood, through its wholly-owned subsidiary Omega, performs management and supervision services related to the expansion of the natural gas distribution system used by the DOD. The amount due from the DOD accounts for 89 percent, 87 percent, and 79 percent of the consolidated accounts receivable balances at March 31, 2013, February 29, 2012 and December 31, 2012, respectively.
Mowood’s contracts for its supply of natural gas are concentrated among select providers. Payments to its largest supplier of natural gas accounted for 73 percent, 87 percent, and 91 percent of cost of sales for the three-month periods ended March 31, 2013 and February 29, 2012 and for the one-month transition period ended December 31, 2012, respectively.
Management's Agreements
MANAGEMENT AGREEMENT
MANAGEMENT AGREEMENT
On December 1, 2011, the Company executed a Management Agreement with Corridor InfraTrust Management, LLC (“Corridor”). The Management Agreement has a current expiration date of June 30, 2013. The terms of the Management Agreement include a quarterly management fee equal to 0.25 percent (1.00 percent annualized) of the value of the Company’s average monthly Managed Assets for such quarter. For purposes of the Management Agreement, “Managed Assets” means all of the securities of the Company and all of the real property assets of the Company (including any securities or real property assets purchased with or attributable to any borrowed funds) minus all of the accrued liabilities other than (1) deferred taxes and (2) debt entered into for the purpose of leverage. For purposes of the definition of Managed Assets, “securities” includes the Company’s security portfolio, valued at then current market value. For purposes of the definition of Managed Assets, “real property assets” includes the assets of the Company invested, directly or indirectly, in equity interests in or loans secured by real estate and personal property owned in connection with such real estate (including acquisition related costs and acquisition costs that may be allocated to intangibles or are unallocated, valued at the aggregate historical cost, before reserves for depreciation, amortization, impairment charges or bad debts or other similar noncash reserves.) The Management Agreement also includes a quarterly incentive fee of 10 percent of the increase in distributions paid over a threshold distribution equal to $0.125 per share per quarter. The Management Agreement also requires at least half of any incentive fees to be reinvested in the Company’s common stock.
During the fourth quarter of 2012, Corridor assumed the Company’s Administrative Agreement, retroactive to August 7, 2012. Tortoise Capital Advisors, L.L.C. (“TCA”) served as the Company’s administrator until that date. The Company pays the administrator a fee equal to an annual rate of 0.04 percent of aggregate average daily managed assets, with a minimum annual fee of $30 thousand.
On December 1, 2011, we entered into an Advisory Agreement by and among the Company, TCA and Corridor, under which TCA provided certain securities focused investment services necessary to evaluate, monitor and liquidate the Company’s remaining securities portfolio (“Designated Advisory Services”), and also provide the Company with certain operational (i.e. non-investment) services (“Designated Operational Services”). Effective December 21, 2012, that agreement was replaced by an Amended Advisory Agreement pursuant to which TCA provides investment services related to the monitoring and disposition of our current securities portfolio.
U.S. Bancorp Fund Services, LLC serves as the Company’s fund accounting services provider. The Company pays the provider a monthly fee computed at an annual rate of $24 thousand on the first $50 million of the Company’s Net Assets, 0.0125 percent on the next $200 million of Net Assets, 0.0075 percent on the next $250 million of Net Assets and 0.0025 percent on the balance of the Company’s Net Assets.
Fair Value of Other Securities
FAIR VALUE OF OTHER SECURITIES
FAIR VALUE OF OTHER SECURITIES
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 March 31, 2013, November 30, 2012 and December 31, 2012. These assets and liabilities are measured on a recurring basis.
March 31, 2013
 
 
 
 
Fair Value

 
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
Investments:
 
 
 
 
 
 
 
 
Trading securities
 
$

 
$

 
$

 
$

Other equity securities
 
21,895,854

 

 

 
21,895,854

Total Assets
 
$
21,895,854

 
$

 
$

 
$
21,895,854

November 30, 2012
 
 
November 30, 2012
 
Fair Value

 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Trading securities
 
$
55,219,411

 
$
27,480,191

 
$
27,739,220

 
$

Other equity securities
 
19,866,621

 

 

 
19,866,621

Total Assets
 
$
75,086,032

 
$
27,480,191

 
$
27,739,220

 
$
19,866,621

December 31, 2012
 
 
December 31, 2012
 
Fair Value

 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Trading securities
 
$
4,318,398

 
$
4,318,398

 
$

 
$

Other equity securities
 
19,707,126

 

 

 
19,707,126

Total Assets
 
$
24,025,524

 
$
4,318,398

 
$

 
$
19,707,126


The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the three-month periods ended March 31, 2013 and February 29, 2012 and for the one-month transition period ended December 31, 2012 are as follows:
 
For the Three-Month Periods Ended
 
For the One-Month Transition Period Ended December 31, 2012

March 31, 2013
 
February 29, 2012
 
Fair value beginning balance
$
19,707,126

 
$
41,856,730

 
$
19,866,621

Total realized and unrealized gains (losses) included in net income
2,425,986

 
6,069,194

 
(159,495
)
Return of capital adjustments impacting cost basis of securities
(237,258
)
 
(656,195
)
 

Fair value ending balance
$
21,895,854

 
$
47,269,729

 
$
19,707,126

Changes in unrealized gains (losses), included in net income, relating to securities still held (1)
$
2,425,986

 
$
6,069,194

 
$
(159,495
)
(1) Located in Net realized and unrealized gain (loss) on other equity securities in the Statements of Income

As of February 29, 2012, the Company’s other equity securities, which represented equity interests in private companies, and were classified as Level 3 assets, included High Sierra Energy, LP. On June 19, 2012, NGL Energy Partners, LP and certain of its affiliates (collectively “NGL”) acquired High Sierra Energy, LP and High Sierra Energy GP, LLC (collectively “High Sierra”) pursuant to which NGL, a New York Stock Exchange listed company, paid to the limited partners of High Sierra approximately $9.4 million in cash and approximately 1.2 million newly issued units of NGL. A realized gain of $15.8 million was recognized during the third quarter of 2012 upon the sale. These NGL units are classified as a Level 2 Trading security above as of November 30, 2012.
The Company utilizes the beginning of reporting period method for determining transfers between levels. There were no transfers between levels 1, 2 or 3 for the three-month periods ended March 31, 2013 and February 29, 2012, respectively. For the one-month transition period ended December 31, 2012 there were transfers out of Level 2 assets in the amount of $4.32 million, which represents the value of the Company's equity interest in NGL. There were no transfers between Level 1 and Level 3 for the one-month transition period ended December 31, 2012.
Valuation Techniques and Unobservable Inputs
An equity security of a publicly traded company acquired in a private placement transaction without registration under the Securities Act of 1933, as amended (the “1933 Act”), is subject to restrictions on resale that can affect the security’s liquidity (and hence its fair value). If the security has a common share counterpart trading in a public market, the Company generally determines an appropriate percentage discount for the security in light of the restrictions that apply to its resale (taking into account, for example, whether the resale restrictions of Rule 144 under the 1933 Act apply). This pricing methodology applies to the Company’s Level 2 trading securities.
The Company’s other equity securities, which represent securities issued by private companies, are classified as Level 3 assets. Valuation of these investments is determined by weighting various valuation metrics for each security. Significant judgment is required in selecting the assumptions used to determine the fair values of these investments. See Note 2, Significant Accounting Policies.
The Company’s investments in private companies are typically valued using one of or a combination of the following valuation techniques: (i) analysis of valuations for publicly traded companies in a similar line of business (“public company analysis”), (ii) analysis of valuations for comparable M&A transactions (“M&A analysis”) and (iii) discounted cash flow analysis. The table entitled “Quantitative Table for Valuation Techniques” outlines the valuation technique(s) used for each asset category.
The public company analysis utilizes valuation multiples for publicly traded companies in a similar line of business as the portfolio company to estimate the fair value of such investment. Typically, the Company’s analysis focuses on the ratio of enterprise value to earnings before interest expense, income tax expense, depreciation and amortization (“EBITDA”) which is commonly referred to as an EV/EBITDA multiple. The Company selects a range of multiples given the trading multiples of similar publicly traded companies and applies such multiples to the portfolio company’s EBITDA to estimate the portfolio company’s trailing, proforma, projected or average (as appropriate) EBITDA to estimate the portfolio company’s enterprise value and equity value. The Company also selects a range of trading market yields of similar public companies and applies such yields to the portfolio company’s estimated distributable cash flow. When calculating these values, the Company applies a discount, when applicable, to the portfolio company’s estimated equity value for the size of the company and the lack of liquidity in the portfolio company’s securities.
The M&A analysis utilizes valuation multiples for historical M&A transactions for companies or assets in a similar line of business as the portfolio company to estimate the fair value of such investment. Typically, the Company’s analysis focuses on EV/EBITDA multiples. The Company selects a range of multiples based on EV/EBITDA multiples for similar M&A transactions or similar companies and applies such ranges to the portfolio company’s analytical EBITDA to estimate the portfolio company’s enterprise value.
The discounted cash flow ("DCF") analysis is used to estimate the equity value for the portfolio company based on estimated DCF of such portfolio company. Such cash flows include an estimate of terminal value for the portfolio company. A present value of these cash flows is determined by using estimated discount rates (based on the Company’s estimate for weighted average cost of capital for such portfolio company).
Under all of these valuation techniques, the Company estimates operating results of its portfolio companies (including EBITDA). These estimates utilize unobservable inputs such as historical operating results, which may be unaudited, and projected operating results, which will be based on expected operating assumptions for such portfolio company. The Company also consults with management of the portfolio companies to develop these financial projections. These estimates will be sensitive to changes in assumptions specific to such portfolio company as well as general assumptions for the industry. Other unobservable inputs utilized in the valuation techniques outlined above include: possible discounts for lack of marketability, selection of publicly-traded companies, selection of similar M&A transactions, selected ranges for valuation multiples, selected range of yields and expected required rates of return and weighted average cost of capital. The various inputs will be weighted as appropriate, and other factors may be weighted into the valuation, including recent capital transactions of the Company.
Changes in EBITDA multiples, or discount rates may change the fair value of the Company’s portfolio investments. Generally, a decrease in EBITDA multiples or DCF multiples, or an increase in discount rates, when applicable, may result in a decrease in the fair value of the Company’s portfolio investments.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of the Company’s investments may differ from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize.
The following table summarizes the significant unobservable inputs that the Company uses to value its portfolio investments categorized as Level 3 as of March 31, 2013.
Quantitative Table for Valuation Techniques 
Significant Unobservable Inputs Used To Value Portfolio Investments
 
 
 
 
 
 
Unobservable Inputs
 
Range
 
Weighted Average
Assets at Fair Value
 
Fair Value
 
Valuation Technique
 
 
Low
 
High
 
Other equity securities, at fair value
 
$
21,895,854

 
Public company historical EBITDA analysis
 
Historical EBITDA Valuation Multiples
 
9.0x
 
12.3x
 
10.7x
 
 
 
 
Public company projected EBITDA analysis
 
Projected EBITDA Valuation Multiples
 
8.8x
 
11.4x
 
10.1x
 
 
 
 
M&A company analysis
 
EV/LTM 2012 EBITDA
 
9.0x
 
10.3x
 
9.7x
 
 
 
 
Discounted cash flow
 
Weighted Average Cost of Capital
 
9.5%
 
14.0%
 
11.8%

 
As of March 31, 2013, December 31, 2012 and November 30, 2012, the Company held a 6.7% equity interest in Lightfoot Capital Partners LP and an 11.1% equity interest in VantaCore Partners LP.

The following section describes the valuation methodologies used by the Company for estimating fair value for financial instruments not recorded at fair value, but fair value is included for disclosure purposes only, as required under disclosure guidance related to the fair value of financial instruments.
Cash and Cash Equivalents — The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements approximates fair value.

Escrow Receivable — The escrow receivable due the Company, which relates to the sale of International Resource Partners, LP, is anticipated to be released upon satisfaction of certain post-closing obligations and/or the expiration of certain time periods (the shortest of which was to be 14 months from the April 2011 closing date of the sale). The fair value of the escrow receivable reflects a discount for the potential that the full amount due to the Company will not be realized. No clear agreement has been reached as to the remaining escrow balance and Management anticipates that it may take more than a year to satisfy other post-closing obligations, prior to receiving the approximately $699 thousand escrow balance remaining.
Long-term Debt — The fair value of the Company’s long-term debt is calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the Company’s current expected rate for an equivalent transaction.
Line of Credit — The carrying value of the line of credit approximates the fair value due to its short term nature.
Carrying and Fair Value Amounts
 
 
Level within fair value hierarchy
 
March 31, 2013
 
November 30, 2012
 
December 31, 2012
 
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
18,196,151

 
$
18,196,151

 
$
14,333,456

 
$
14,333,456

 
$
17,680,783

 
$
17,680,783

Escrow receivable
 
Level 2
 
$
698,729

 
$
698,729

 
$
698,729

 
$
698,729

 
$
698,729

 
$
698,729

Financial Liabilities:
 

 

 

 

 

 

Long-term debt
 
Level 2
 
$
70,000,000

 
$
70,000,000

 
$

 
$

 
$
70,000,000

 
$
70,000,000

Line of credit
 
Level 1
 
$
139,397

 
$
139,397

 
$
120,000

 
$
120,000

 
$

 
$

Intangibles
INTANGIBLES
INTANGIBLES
The Company has recorded an intangible lease asset, related to the PNM lease, for the fair value of the amount by which the remaining contractual lease payments exceed market lease rates at the time of acquisition. The intangible lease asset is being amortized on a straight-line basis over the life of the lease term, which expires on April 1, 2015. Amortization of the intangible lease asset is reflected in the accompanying Consolidated Statements of Income as a reduction to lease income.
Intangible Lease Asset

 
March 31, 2013
 
November 30, 2012
 
December 31, 2012
Intangible lease asset
 
$
1,094,771

 
$
1,094,771

 
$
1,094,771

Accumulated amortization
 
(510,893
)
 
(413,580
)
 
(437,908
)
Net intangible lease asset
 
$
583,878


$
681,191

 
$
656,863



Remaining Estimated Amortization On Intangibles
Year ending December 31,
 
Amount
2013
 
$
218,954

2014
 
291,939

2015
 
72,985

Total
 
$
583,878

Credit Facilities
CREDIT FACILITIES
CREDIT FACILITIES
On December 20, 2012, Pinedale LP closed on a $70 million secured term credit facility with KeyBank serving as a lender and as administrative agent on behalf of other lenders participating in the credit facility. Funding of the credit facility was conditioned on our contribution of the proceeds of the stock issuance to Pinedale LP and the receipt by Pinedale LP of the $30 million co-investment funds from Prudential. Outstanding balances under the credit facility will generally accrue interest at a variable annual rate equal to LIBOR plus 3.25 percent. The credit facility will remain in effect through December 2015, with an option to extend through December 2016. The credit facility is secured by the Pinedale LGS. Pinedale LP is obligated to pay all accrued interest quarterly and is further obligated to pay monthly, beginning March 7, 2014, 0.42 percent of the amount outstanding on the loan on March 1, 2014. The credit agreement contains, among other restrictions, specific financial covenants including the maintenance of certain financial coverage ratios and a minimum net worth requirement. As of March 31, 2013, Pinedale LP was in compliance with all of the financial covenants of the secured term credit facility.
As of March 31, 2013 and December 31, 2012 approximately $1.5 million in debt issuance costs are included in the accompanying Consolidated Balance Sheets. The deferred costs will be amortized over the anticipated three-year term of the newly acquired debt and are included in interest expense within the accompanying Consolidated Statements of Income.
We have executed interest rate swap derivatives to add stability to our interest expense and to manage our exposure to interest rate movements on our LIBOR based borrowings. Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. See Note 12 for further information regarding interest rate swap derivatives.
On October 29, 2010, Mowood entered into a Revolving Note Payable Agreement (“Note Payable Agreement”) with a financial institution with a maximum borrowing base of $1.3 million. The Note Payable Agreement was amended and restated on October 29, 2011 and was again amended and restated on October 29, 2012. Borrowings on the Note Payable are secured by all of Mowood’s assets. Interest accrues at LIBOR, plus 4 percent (4.20 percent at March 31, 2013), is payable monthly, with all outstanding principal and accrued interest payable on the termination date of October 29, 2013. As of March 31, 2013 the outstanding borrowings under this Note Payable Agreement totaled approximately $139 thousand. The Note Payable Agreement contains various restrictive covenants, with the most significant relating to minimum consolidated fixed charge ratio, the incidence of additional indebtedness, member distributions, extension of guaranties, future investments in other subsidiaries and change in ownership. Mowood was in compliance with the various covenants of the Note Payable Agreement as of March 31, 2013.
On November 30, 2011, the Company entered into a 180-day rolling evergreen Margin Loan Facility Agreement (“Margin Loan Agreement”) with Bank of America, N.A. The terms of the Margin Loan Agreement provide for a $10 million facility that is secured by certain of the Company’s assets. Outstanding balances generally will accrue interest at a variable rate equal to one-month LIBOR plus 0.75 percent and unused portions of the facility will accrue a fee equal to an annual rate of 0.25 percent. In December of 2012, the assets which secured this facility were sold, and as a result, this Margin Loan Agreement was terminated effective December 20, 2012.
Interest Rate Hedge Swaps
INTEREST RATE HEDGE SWAPS
INTEREST RATE HEDGE SWAPS
Derivative financial instruments
Currently, the Company uses interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts.  The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate forward curves.
To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB's fair value measurement guidance in ASC 820, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The table below presents the Company's assets and liabilities measured at fair value on a recurring basis as well as their classification on the Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall. Hedges that are valued as receivable by the Company are considered Asset Derivatives and those that are valued as payable by the Company are considered Liability Derivatives. There were no outstanding derivative financial instruments as of November 30, 2012.
Derivative Financial Instruments Measured At Fair Value on a Recurring Basis
 
 
Balance Sheet
Classification
 
 
Fair Value Hierarchy
Balance Sheet Line Item
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
March 31, 2013
Prepaid expenses and other assets
 
Assets
 
 
$

 
$

 
$

Accounts payable and other accrued liabilities
 
Liabilities
 
 
$

 
$
266,880

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
Prepaid expenses and other assets
 
Assets
 
 
$

 
$

 
$

Accounts payable and other accrued liabilities
 
Liabilities
 
 
$

 
$
316,756

 
$

 
 
 
 
 
 
 
 
 
 
Level 1 – quoted prices in active markets for identical investments
Level 2 – other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.)
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)

Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments principally related to the Company's investments and borrowings.
Non-Designated Hedges
Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks. As of March 31, 2013, the Company has elected not to designate its derivatives in hedging relationships. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and were equal to a net loss of $3 thousand and $317 thousand for the quarter ended March 31, 2013 and the one-month transition period ended December 31, 2012, respectively.
There were no outstanding derivatives as of November 30, 2012. As of March 31, 2013, and December 31, 2012 the Company had the following outstanding derivatives, none of which were designated as hedges in qualifying hedging relationships:

Outstanding Derivatives Not Designated as Hedges in a Qualifying Hedging Relationship
Interest Rate Derivative
 
Number of Instruments
 
Notional Amount Outstanding
 
 
 
 
 
Floating Rate Received
 
Fixed Rate Paid
 
 
 
Effective Date
 
Termination Date
 
 
Interest Rate Swap
 
2
 
$52,500,000
 
February 5, 2013
 
December 5, 2017
 
1-month US Dollar LIBOR
 
0.865%

    
Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
The table below presents the effect of the Company's derivative financial instruments on the Income Statement for the quarters ended March 31, 2013 and February 29, 2012, and for the one-month transition period ended December 31, 2012.
Effect of Derivative Financial Instruments on Income Statement
Derivatives Not Designated as Hedging Instruments
 
Location of
Gain (Loss) Recognized in Income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivative *
 
 
For the Three Months Ended
 
For the One-Month Transition Period Ended
December 31, 2012
 
 
March 31, 2013
 
February 29, 2012
 
Interest rate contracts
 
Interest Expense
 
$
(3,350
)
 
$

 
$
(316,756
)
* The gain or (loss) recognized in income on derivatives includes changes in fair value of the derivatives as
    well as the periodic cash settlements and interest accruals for derivatives not designated as hedging
    instruments
Credit-Risk Related Contingent Features
The Company has agreements with some of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the company could also be declared in default on its derivative obligations.
As of March 31, 2013, the fair value of derivatives in a net liability position, which includes an adjustment for nonperformance risk but excludes any accrued interest, related to these agreements was $267 thousand. As of March 31, 2013, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions as of March 31, 2013, it could have been required to settle its obligations under the agreements at their termination value of $267 thousand.
CorEnergy Historical Summary Financial
CORENERGY HISTORICAL FINANCIALS
CORENERGY HISTORICAL FINANCIALS

Summary Balance Sheets and Statements of Income for the one-month transition periods ending December 31, 2012 and December 31, 2011 are presented below for comparative purposes. For further information please refer to the section with Management's Discussion and Analysis.

CorEnergy Historical Summary Consolidated Balance Sheets
 
December 31, 2012
(Unaudited)
 
December 31, 2011
(Unaudited)
Current assets
$
19,202,432

 
$
5,307,970

Non-current assets
274,459,553

 
90,623,108

Total Assets
$
293,661,985

 
$
95,931,078

 
 
 
 
Current liabilities
$
8,290,065

 
$
1,552,281

Non-current liabilities
74,529,728

 
2,894,200

Total Liabilities
82,819,793

 
4,446,481

Shareholder's equity
210,842,192

 
91,484,597

Total Liabilities and Shareholder's Equity
$
293,661,985

 
$
95,931,078

 
 
 
 

CorEnergy Historical Summary Consolidated Statements of Income

For the One-
Month Transition Period Ended December 31, 2012
(Unaudited)
 
For the One-
Month Transition Period Ended December 31, 2011
(Unaudited)
Revenues
$
1,726,901

 
$
1,079,612

Expenses
1,826,422

 
993,919

Operating Income (Loss)
(99,521
)
 
85,693

Other Income (Expense), net
(2,342,365
)
 
1,601,084

Income (Loss) before income tax benefit (provision)
(2,441,886
)
 
1,686,777

Income tax benefit (provision)
920,143

 
(628,493
)
Net Income (Loss)
(1,521,743
)
 
1,058,284

Less: Net Income (Loss) attributable to non-controlling interest
(18,347
)
 

Net Income (Loss) attributable to CORR Stockholders
$
(1,503,396
)
 
$
1,058,284

Warrants
WARRANTS
WARRANTS
At March 31, 2013 and February 29, 2012, the Company had 945,594 warrants issued and outstanding. The warrants were issued to stockholders that invested in the Company’s initial private placements and became exercisable on February 7, 2007 (the closing date of the Company’s initial public offering of common shares), subject to a lock-up period with respect to the underlying common shares. As of November 30, 2012, each warrant entitles the holder to purchase one common share at the exercise price of $11.41 per common share. Warrants were issued as separate instruments from the common shares and are permitted to be transferred independently from the common shares. The warrants have no voting rights and the common shares underlying the unexercised warrants have no voting rights until such common shares are received upon exercise of the warrants. All warrants expire on February 6, 2014.
Earnings Per Share
EARNINGS PER SHARE
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Earnings Per Share
 
For the Three-Month Periods Ended
 
For the One-Month Transition Period Ended December 31, 2012

March 31, 2013
 
February 29, 2012
 
Net income attributable to CORR Stockholders
$
2,412,753

 
$
5,747,041

 
$
(1,503,396
)
Basic and diluted weighted average shares (1)
24,141,720

 
9,176,889

 
15,564,861

Basic and diluted earnings per share attributable to CORR Stockholders
$
0.10

 
$
0.63

 
$
(0.10
)
(1)
Warrants to purchase shares of common stock were outstanding during the periods reflected in the table above, but were not included in the computation of diluted earnings per share because the warrants’ exercise price was greater than the average market value of the common shares and, therefore, the effect would be anti-dilutive.
The decrease in earnings per share for the three-month period ended March 31, 2013 as compared to the three-month period ended February 29, 2012 reflects the overall change in the business structure as the Company transitions out of securities-based transactions and into ownership and leasing of real property assets. Additionally, 14,950,000 shares were issued in the one-month transition period ended December 31, 2012.
Subsequent Events
SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

The Company performed an evaluation of subsequent events through the date of the issuance of these financial statements and determined that no additional items require recognition or disclosure, except for the following:
On May 8, 2013, the Company entered into a $20 million revolving line of credit with KeyBank. The primary term of the facility is three years with the option for a one-year extension. Outstanding balances under the revolving credit facility will accrue interest at a variable annual rate equal to LIBOR plus 4.0 percent or the Prime Rate plus 2.75 percent. We intend to use the facility to fund general working capital needs and if necessary, to provide short-term financing for the acquisition of additional real property assets.
Significant Accounting Policies (Policies)
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.
Leased Property – The Company includes assets subject to lease arrangements within Leased property, net of accumulated depreciation, in the Consolidated Balance Sheets. Lease payments received are reflected in lease income on the Consolidated Statements of Income, net of amortization of any off market adjustments. Costs in connection with the creation and execution of a lease are capitalized and amortized over the lease term. See Note 4 for further discussion.
Cash and Cash Equivalents – The Company maintains cash balances at financial institutions in amounts that regularly exceed FDIC insured limits. The Company’s cash equivalents are comprised of short-term, liquid money market instruments.
Long-Lived Assets and Intangibles – Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements, which extend the useful lives of assets, are capitalized and depreciated over the remaining estimated useful life of the asset.
The Company initially records long-lived assets at their acquisition cost, unless the transaction is accounted for as a business combination. If the transaction is accounted for as a business combination, the Company allocates the purchase price to the acquired tangible and intangible assets and liabilities based on their estimated fair values. The Company determines the fair values of assets and liabilities based on discounted cash flow models using current market assumptions, appraisals, recent transactions involving similar assets or liabilities and/or other objective evidence, and depreciates tow he asset values over the estimated remaining useful lives.
The Company may acquire long-lived assets that are subject to an existing lease contract with the seller or other lessee party and the Company may assume outstanding debt of the seller as part of the consideration paid. If, at the time of acquisition, the existing lease or debt contract is not at current market terms, the Company will record an asset or liability at the time of acquisition representing the amount by which the fair value of the lease or debt contract differs from its contractual value. Such amount is then amortized over the remaining contract term as an adjustment to the related lease revenue or interest expense.The Company periodically reviews its long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company’s review involves comparing current and future operating performance of the assets, the most significant of which is undiscounted operating cash flows, to the carrying value of the assets. Based on this analysis, a provision for possible loss is recognized, if any. No impairment write-downs were recognized during the three-month period ended March 31, 2013 and February 29, 2012 or for the one-month transition period ended December 31, 2012.
Costs in connection with the direct acquisition of a new asset are capitalized as a component of the purchase price and depreciated over the life of the asset. See Note 4 for further discussion.
Investment Securities – The Company’s investments in securities are classified as either trading or other equity securities:
Trading securities – the Company’s publicly traded equity securities are classified as trading securities and are reported at fair value because the Company intends to sell these securities in order to acquire real asset investments.
Other equity securities – the Company’s other equity securities represent interests in private companies for which the Company has elected to report these at fair value under the fair value option.
Realized and unrealized gains and losses on trading securities and other equity securities – Changes in the fair values of the Company’s securities during the period reported and the gains or losses realized upon sale of securities during the period are reflected as other income or expense within the accompanying Consolidated Statements of Income.
Security Transactions and Fair Value – Security transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis.
For equity securities that are freely tradable and listed on a securities exchange or over-the-counter market, the Company values those securities at their last sale price on that exchange or over-the-counter market on the valuation date. If the security is listed on more than one exchange, the Company will use the price from the exchange that it considers to be the principal, which may not necessarily represent the last sale price. If there has been no sale on such exchange or over-the-counter market on such day, the security will be valued at the mean between the last bid price and last ask price on such day.

The major components of net realized and unrealized gain or loss on trading securities for the three-month periods ended March 31, 2013 and February 29, 2012 and for the one-month transition period ended December 31, 2012 are as follows:
Major Components of Net Realized and Unrealized Gain (Loss) on Trading Securities
 
 
For the Three Months Ended
 
For the One-Month Transition Period Ended

 
March 31,
2013
 
February 29,
2012
 
December 31,
2012
Net unrealized gain on trading securities
 
$
751,004

 
$

 
$
4,663,211

Net realized gain (loss) on trading securities
 
(434,941
)
 
2,862,272

 
(6,432,269
)
Total net realized and unrealized gain (loss) on trading securities
 
$
316,063

 
$
2,862,272

 
$
(1,769,058
)

The Company holds investments in illiquid securities including debt and equity securities of privately-held companies. 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 of the entire company. 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. An independent valuation firm has been engaged by the Company to provide independent, 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 Investment Committee of the Adviser reviews the valuations and supporting analysis, prior to approving the valuations.
Security Transactions and Fair Value – Security transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis.
For equity securities that are freely tradable and listed on a securities exchange or over-the-counter market, the Company values those securities at their last sale price on that exchange or over-the-counter market on the valuation date. If the security is listed on more than one exchange, the Company will use the price from the exchange that it considers to be the principal, which may not necessarily represent the last sale price. If there has been no sale on such exchange or over-the-counter market on such day, the security will be valued at the mean between the last bid price and last ask price on such day.
Accounts Receivable – Accounts receivable are presented at face value net of an allowance for doubtful accounts. Accounts are considered past due based on the terms of sale with the customers. The Company reviews accounts for collectibility based on an analysis of specific outstanding receivables, current economic conditions and past collection experience. At March 31, 2013, Management determined that an allowance for doubtful accounts related to our leases was not required. Lease payments by our tenants, as discussed within Note 4, have remained timely and without lapse.
Derivative Instruments and Hedging Activities - FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company's objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. Accordingly, the Company's derivative liabilities are presented on a gross basis.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
FASB ASC 820, Fair Value Measurements and Disclosure ("ASC 820"), defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.. In accordance with ASC 820, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Fair Value Measurements - Various inputs are used in determining the fair value of the Company’s assets and liabilities. These inputs are summarized in the three broad levels listed below:
Level 1 – quoted prices in active markets for identical investments
Level 2 – other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.)
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)
ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following section describes the valuation methodologies used by the Company for estimating fair value for financial instruments not recorded at fair value, but fair value is included for disclosure purposes only, as required under disclosure guidance related to the fair value of financial instruments.
Cash and Cash Equivalents — The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements approximates fair value.
Escrow Receivable — The escrow receivable due the Company, which relates to the sale of International Resource Partners, LP, is anticipated to be released upon satisfaction of certain post-closing obligations and/or the expiration of certain time periods (the shortest of which was to be 14 months from the April 2011 closing date of the sale). The fair value of the escrow receivable reflects a discount for the potential that the full amount due to the Company will not be realized. No clear agreement has been reached as to the remaining escrow balance and Management anticipates that it may take more than a year to satisfy other post-closing obligations, prior to receiving the approximately $699 thousand escrow balance remaining.
Long-term Debt — The fair value of the Company’s long-term debt is calculated, for disclosure purposes, by discounting future debt service requirements by a rate equal to the Company’s current expected rate for an equivalent transaction.
Line of Credit — The carrying value of the line of credit approximates the fair value due to its short term nature.
Revenue Recognition – Specific recognition policies for the Company’s revenue items are as follows:
Sales Revenue – Revenues related to natural gas distribution and performance of management services are recognized in accordance with GAAP upon delivery of natural gas and upon the substantial performance of management and supervision services related to the expansion of the natural gas distribution system. Omega, acting as a principal, provides for transportation services and natural gas supply for its customers on a firm basis. In addition, Omega is 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. Revenues from expansion efforts are recognized in accordance with GAAP using either a completed contract or percentage of completion method based on the level and volume of estimates utilized, as well as the certainty or uncertainty of our ability to collect those revenues.
Lease Revenue – Income related to the Company’s leased property is recognized on a straight-line basis over the term of the lease when collectibility is reasonably assured. Rental payments on the Pinedale LGS leased property are typically received on a monthly basis. Prior to November 1, 2012 rental payments on the EIP leased property were typically received on a semi-annual basis and were included as lease revenue within the accompanying Consolidated Statements of Income. Upon the November 1, 2012 execution of the Purchase Agreement related to the EIP leased property (the "Purchase Agreement"), rental payments on the leased property are to be received in advance and are classified as unearned income and included in liabilities within the Consolidated Balance Sheets. Unearned income is amortized ratably over the lease period as revenue recognition criteria are met.
Cost of Sales – Included in the Company’s cost of sales are the amounts paid for gas and propane, along with related transportation, which are delivered to customers, as well as the cost of material and labor related to the expansion of the natural gas distribution system.
Asset Acquisition Expenses – Costs in connection with the research of real property acquisitions are expensed as incurred until determination that the acquisition of the real property is probable. Upon the determination, costs in connection with the acquisition of the property are capitalized as described in paragraph (D) above.
Offering Costs – Offering costs related to the issuance of common stock are charged to additional paid-in capital when the stock is issued.
Debt Issuance Costs – Costs in connection with the issuance of new debt are capitalized and amortized over the debt term. See Note 11 for further discussion.
Distributions to Stockholders – The amount of any quarterly distributions to stockholders will be determined by the Board of Directors. Distributions to stockholders are recorded on the ex-dividend date.
Other Income Recognition Specific policies for the Company’s other income items are as follows:
Securities Transactions and Investment Income Recognition – Securities transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis. Distributions received from our equity investments generally are comprised of ordinary income, capital gains and distributions received from investment securities from the portfolio company. 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 each portfolio company and/or other industry sources. These estimates may subsequently be revised based on information received from the portfolio companies after their tax reporting periods are concluded, as the actual character of these distributions are not known until after our fiscal year end.
Dividends and distributions from investments – Dividends and distributions 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 generally are 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/or 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/or 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.
Federal and State Income Taxation – We intend to elect to be treated as a REIT for federal income tax purposes (which we refer to as the “REIT Conversion”) for the calendar and tax year ended December 31, 2013. We anticipate that the Company will satisfy the annual income test and the quarterly assets tests necessary for us to qualify and elect to be taxed as a REIT for 2013. Because certain of our assets may not produce REIT-qualifying income or be treated as interests in real property, during the fourth quarter of 2012 we contributed those assets into wholly-owned Taxable REIT Subsidiaries ("TRSs"). This was done in 2012 in order to limit the potential that such assets and income would prevent us from qualifying as a REIT for 2013. Due to the REIT Conversion, we changed our fiscal year end from November 30 to December 31. As a result, the financial statements presented in this Form 10-Q include two periods, a one-month transition period ended December 31, 2012 and a three-month period ended March 31, 2013.
As to the one-month transition period ended December 31, 2012, the Company is treated as a C corporation and is 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. For years ended in 2012 and before, the distributions we made to our stockholders from our earnings and profits were treated as qualified dividend income ("QDI") and return of capital. QDI is taxed to our individual shareholders at the maximum rate for long-term capital gains, which through tax year 2012 was 15 percent and beginning in tax year 2013 will be 20 percent.
The Company's trading securities and 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. The Company'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. Due to the restructuring in December 2012, it is expected that for the three-month period ended March 31, 2013 and future periods, any deferred tax liability or asset will be related entirely to the assets and activities of the Company's TRSs.
In 2013, the Company intends to be taxed as a REIT rather than a C corporation and generally will not pay federal income tax on taxable income that is distributed to our stockholders. As a REIT, our distributions from earnings and profits will be treated as ordinary income and a return of capital, and generally will not qualify as QDI. To the extent that the REIT has accumulated C corporation earnings and profits from the periods prior to 2013, we will distribute such earnings and profits in 2013, which will be treated as QDI.
The restructuring done in December 2012 causes us to hold and operate certain of our assets through one or more wholly-owned taxable REIT subsidiaries. A TRS is a subsidiary of a REIT that is subject to applicable corporate income tax. 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.
If we fail to qualify to be a REIT for 2013, 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.
Recent Accounting Pronouncements – In June 2011, the FASB issued ASU No. 2011-05 "Presentation of Comprehensive Income". ASU No. 2011-05 amends FASB ASC Topic 220, Presentation of Comprehensive Income, to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-05 is effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. Management has adopted this amendment and this did not have a material impact on the Company's consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11 "Disclosure about Offsetting Assets and Liabilities". ASU No. 2011-11 amends FASB ASC Topic 210, Balance Sheet, to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-11 is effective for fiscal years beginning after January 1, 2013 and for interim periods within those fiscal years. Management has adopted this amendment and this did not have a material impact on the Company's consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12 "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05". ASU No. 2011-12 amends FASB ASC Topic 220, Presentation of Comprehensive Income, to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments. ASU No. 2011-12 is effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. Management has adopted this amendment and this did not have a material impact on the Company's consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02 "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". ASU No. 2013-02 amends FASB ASC Topic 220, Presentation of Comprehensive Income, to improve the reporting reclassifications out of accumulated other comprehensive income. ASU No. 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. Management has adopted this amendment and this did not have a material impact on the Company's consolidated financial statements.
Significant Accounting Policies (Tables)
Major components of net realized and unrealized gain on trading securities
The major components of net realized and unrealized gain or loss on trading securities for the three-month periods ended March 31, 2013 and February 29, 2012 and for the one-month transition period ended December 31, 2012 are as follows:
Major Components of Net Realized and Unrealized Gain (Loss) on Trading Securities
 
 
For the Three Months Ended
 
For the One-Month Transition Period Ended

 
March 31,
2013
 
February 29,
2012
 
December 31,
2012
Net unrealized gain on trading securities
 
$
751,004

 
$

 
$
4,663,211

Net realized gain (loss) on trading securities
 
(434,941
)
 
2,862,272

 
(6,432,269
)
Total net realized and unrealized gain (loss) on trading securities
 
$
316,063

 
$
2,862,272

 
$
(1,769,058
)
Leases (Tables)
As of March 31, 2013 and December 31, 2012 the Company had two significant leases. The table below displays the impact of each lease on total leased properties and total lease revenues for the periods presented.

 
As a Percentage of
 
 
Leased Properties
 
Lease Revenues

 
As of
March 31, 2013
 
As of
December 31, 2012
 
For the Three Months Ended March 31, 2013
 
For the One-Month Transition Period Ended December 31, 2012
Pinedale LGS
 
94.2%
 
94.2%
 
88.7%
 
75.2%
Public Service of New Mexico
 
5.8%
 
5.8%
 
11.3%
 
24.8%
Summary Consolidated Balance Sheets and Consolidated Statements of Income for Ultra Petroleum are provided below.
Ultra Petroleum
Summary Consolidated Balance Sheets (Unaudited)
(in thousands)

 
March 31, 2013
 
December 31, 2012
Current assets
 
$
129,063

 
$
125,848

Non-current assets
 
1,906,320

 
1,881,497

Total Assets
 
$
2,035,383

 
$
2,007,345

 
 
 
 
 
Current liabilities
 
422,094

 
514,092

Non-current liabilities
 
2,175,481

 
2,071,120

Total Liabilities
 
$
2,597,575

 
$
2,585,212

 
 
 
 
 
Shareholder's equity (deficit)
 
(562,192
)
 
(577,867
)
Total Liabilities and Shareholder's Equity
 
$
2,035,383

 
$
2,007,345

 
 
 
 
 
 
 
 
 
 
Ultra Petroleum
Summary Consolidated Statements of Income (Unaudited)
(in thousands)

 
For the Three Months Ended
 
 
March 31, 2013
 
March 31, 2012
Revenues
 
$
225,626

 
$
226,143

Expenses
 
139,994

 
193,539

Operating Income
 
85,632

 
32,604

Other Income (Expense), net
 
(67,831
)
 
97,147

Income before income tax provision
 
17,801

 
129,751

Income tax provision
 
1,368

 
45,489

Net Income
 
$
16,433

 
$
84,262


The future contracted minimum rental receipts for all net leases as of March 31, 2013 are as follows:
Future Minimum Lease Rentals
Years Ending December 31,
 
Amount
2013
 
$
15,000,000

2014
 
24,267,371

2015
 
20,000,000

2016
 
20,000,000

2017
 
20,000,000

Thereafter
 
199,354,839

Total
 
$
298,622,210

Income Taxes (Tables)
Components of the Company’s deferred tax assets and liabilities as of March 31, 2013,
November 30, 2012 and December 31, 2012 are as follows:
Deferred Tax Assets and Liabilities

 
March 31, 2013
 
November 30, 2012
 
December 31, 2012
Deferred Tax Assets:
 
 
 
 
 

Organization costs
 
$

 
$
(17,668
)
 
$
(27,188
)
Net operating loss carryforwards
 

 
(6,411,230
)
 

Net unrealized loss on investment securities
 

 

 
(143,822
)
Cost recovery of leased assets
 

 
(36,443
)
 

Asset acquisition costs
 

 
(134,415
)
 
(158,535
)
AMT and State of Kansas credit
 

 
(196,197
)
 

Sub-total
 
$

 
$
(6,795,953
)
 
$
(329,545
)
Deferred Tax Liabilities:
 
 
 
 
 

Basis reduction of investment in partnerships
 
$
2,090,696

 
$
11,655,817

 
$
2,675,142

Net unrealized gain on investment securities
 
1,040,400