CorEnergy Infrastructure Trust Inc (CORR) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the TTO earnings conference call. At this time all participants are in a listen-only mode.

Following the presentation we will conduct a question-and-answer session, and instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Monday, October 15, at 10:30 AM Central time.

I'll now turn the conference over to Terry Matlack, Chief Financial Officer at Tortoise Capital Resources. Please go ahead.

Thank you for joining us today for the Tortoise Capital Resources 2007 third-quarter earnings call. My name is Terry Matlack; I'm CFO of Tortoise Capital Resources. I'm joined today by Tortoise Capital Advisors and CEO of the fund, David Schultze, Director of Investor Relations Pam Kearny; Tortoise Capital Resources Assistant Treasurer, Brad Adams; and Ed Russell, the President of Tortoise Capital Resources.

An archive of today's webcast will also be available on our website as well as an audio replay of the conference call. Replay information is included in our press release today and is posted on the website.

We would like to remind you that statements made during the course of this presentation that are not purely historical are forward-looking statements regarding TTO's or management's intentions, estimates, projections, assumptions, beliefs, expectations and strategies for the future. All such forward-looking statements are intended to be subject to the Safe Harbor protection available under the applicable securities laws. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual outcomes and results might differ materially from those projected in the forward-looking statements.

As a reminder, we are in registration, which will limit our ability to comment on our future performance or future expectations. We understand our registration status will also limit the analysts who cover Tortoise Capital Resources and their ability to comment on our performance.

Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our filings with the SEC, including the 8-31-07 10-Q which we filed on Friday. These documents can be accessed through the Investor Relations section of our website. We do not update our forward-looking statements.

I will now turn the call over to Ed Russell, the President of Tortoise Capital Resources.

For those of you new to Tortoise Capital Resources and for those of you who would like a refresher, we invest primarily in privately held and microcap public energy companies in the midstream, downstream and, to a lesser extent, the upstream segment of the US energy infrastructure sector. As of August 31, our portfolio was 66% midstream investments, 14% upstream investments, 14% in aggregates and coal and 6% in downstream investments.

We believe our companies generally produces stable cash flow as a result of their fee-based revenues and limited direct commodity price risk. We invest primarily in equity securities of companies that we expect to pay us a distribution on a current basis and provide us distribution growth.

We are a business Company, and we're classified as a closed-end, nondiversified management investment Company under the 1940 Act. Unlike most investment companies, we're not RIC, a regulated investment company, and we are taxed as a corporation.

I would like to take a moment to speak about the recent market conditions. We faced an unusually challenging third quarter despite the outstanding results of our portfolio companies. Absent any fundamental issues in the MLP sector, we did see a selloff of assets by both retail and institutional investors.

This volatility has impacted most yield investments including energy infrastructure companies and business development companies such as ours. Industry analysts have pointed to institutional investors who may have sold or reduced their energy infrastructure position, followed by retail investors looking to protect gains. Despite these recent conditions, we're encouraged by the investment opportunities we see in the market and remain positive about the MLP energy infrastructure sector.

Our dividends is based on distributions, dividends and interest from investment companies, including those expected from investments made during the quarter less our expenses. Dividends paid to our stockholders prior to full investment may exceed distributable cash flow for the period. On September 4, 2007, we paid a quarterly dividend of $0.18 per common share for a total of $1.6 million. Of this total, the dividend reinvestment amounted to approximately $73,000.

Our third-quarter dividend does not reflect full investment of the IPO proceeds and was largely derived from total investments at the beginning of the quarter on May 31, 2007, of $102.8 million and short-term investments of $27.8 million. We anticipate our next dividend will be paid on or about November 30, 2007.

As of August 31, 2007, our net assets total $121.8 million or $13.77 per share compared to $124.1 million or $14.05 per share over the prior quarter. We attribute the quarter-over-quarter decrease in net asset value primarily to our public portfolios' performance related to the recent market downturn, and we continue to believe the sector fundamentals are very strong.

We have successfully completed the investment of our February initial public offering proceeds within our stated six to nine-month targeted timeframe. The last quarter was particularly successful, as we completed five investments totaling $49.6 million.

In September we increased the maximum principal amount of our revolving credit facility from $35 million to $40 million, and we are now investing those proceeds and currently have approximately $13 million available to support additional private and microcap public energy infrastructure capital expenditure products. There are restrictions in our ability to incur debt under the terms of our credit facility.

The value of our investment portfolio as of 8-31-07 excluding short-term investments totaled $153.6 million, which included equity investments of $142.8 million and debt investments at $10.8 million. As of 8-31-07, our portfolio generated a current weighted average yield of 8.7% excluding short-term investments.

Our third-quarter investments included a $7.5 million investment in a direct placement with EV Energy Partners in common units, a $10 million in common units of International Resource Partners, LP; a $10 million follow-on investment in High Sierra Energy, LP common units and a $2 million follow-on investment in subordinated debt of Mowood LLC.

We also invested $19.6 million in common units of Lonestar Midstream Partners, LP and $500,000 in GP LP units of Lonestar's general partner, LSMP GP LP. Lonestar indicated its plan to use the proceeds to support various expansion projects.

Lonestar is an independent midstream natural gas services provider of gathering, dehydration, compression and processing services to natural gas producers targeting the Barnett Shale and the Fort Worth Basin. We also purchased $2.6 million of additional common units of Lonestar and $40,000 of GP LP units in September of 2007, and we have agreed to purchase $1.2 million of additional common units of Lonestar and $20,000 of GP LP units in December of 2007.

We closely monitor our portfolio investments to assure we meet our return objectives. As part of that process, we rate each of the investments' risk profiles on a scale of 1 to 3.

We're pleased to report that as of 8-31-07, all of our portfolio companies have a rating of 1, which we define as performance that is within or above our expectations with trends in risk factors that are generally favorable to neutral. A 2 rating defines an investment performing below expectations, and a 3 defines an investment performing materially below expectations.

With that, I will now turn the call over to Brad Adams, Tortoise Capital Resource's Assistant Treasurer, for a more detailed analysis of our financial results.

As it is already reported on our balance sheet, my comments will focus first on our GAAP operating results and then on our distributable cash flow for, or DCF.

Full investment income of $0.8 million for the quarter ended August 31, 2007 consisted of $2 million in gross distributions from investments including $1.6 million characterized as return of capital and $0.4 million in dividends from money market mutual funds and interest income from debt investments.

Total expenses before interest for the quarter ended August 31, 2007 of $0.6 million consisted of $0.5 million in management fees, a $0.2 million reduction in accrued capital gain incentive fees and $0.3 million in professional fees and other operating expenses. We incurred $0.2 million in interest expense during the quarter from the utilization of our bank line of credit.

We had a net investment loss for the quarter of approximately $63,000 before a deferred tax benefit of $38,000. We had net unrealized depreciation of $0.7 million in the third quarter after a deferred tax benefit of $0.4 million. Year to date, we have net unrealized appreciation of approximately $5.3 million net of deferred tax of $3.2 million.

Now I want to switch the focus to our DCF, which we believe is a more meaningful measure of our core financial performance than our GAAP results. DCF is distributions and other income received less total expenses other than deferred taxes and accrued capital gain incentive fees.

Our DCF for the quarter was $1.3 million or $0.15 per-share. Our DCF is calculated by adding back the $1.6 million in distributions characterized as return of capital and the $0.2 million adjustment to capital gain incentive fees, to our GAAP net investment loss before deferred taxes of $63,000. Of course, our run-rate DCF would have been higher, had we had the benefit of return on recent investments for the full quarter. Our DCF calculation and reconciliation to our GAAP results are included in our MD&A discussion within our 8-31 10-Q.

Dividends paid to stockholders prior to full investment may exceed distributable cash flow for the period. We consider expected distributions upon investment, thus matching the anticipated but not yet received income from investments with corresponding operating expenses and leverage costs, if any.

I will now turn the call back over to Ed for final comments.

Thank you, Brad. That concludes our prepared remarks. We appreciate your interest in Tortoise Capital Resources. We will continue to identify attractive investment opportunities to benefit our stockholders, and we are ready to respond with any questions, operator.

(OPERATOR INSTRUCTIONS). James Shanahan.

It's Jim Shanahan with Wachovia. Good morning. I have a question, please, about the portfolio. The assets that you described as midstream, which are in the gas gathering and processing businesses -- companies like Lonestar, for example, or Millennium Midstream -- how do you feel about the commodity price risk associated with those investments?

Well, again, we try to structure that and invest in companies that do not have a significant commodity risk. We essentially get paid to move the product from point A to point B. We have analyzed the commodity risk of the underlying producers in those areas, and we're happy to report, with both of those examples, the producers are very active in those spaces and it's still economical to drill under these environments.

If you have any commodity price risk, then, is it hedged?

We do not specifically hedge any of our commodity risk for any of our companies. The companies would make that decision if they felt they needed to. But again, both of these companies essentially get paid to move the commodity and don't have a significant amount of commodity exposure within their company -- particularly like Lonestar and Millennium do not do a lot of processing.

When you were -- going way back, I guess, when you were looking to go public and you were on the road to raise capital, did you talk about what you thought the run rate was for the dividend when the portfolio was fully invested and optimized? How do you think you're tracking towards that original target?

We really didn't give a number. We just talked about where we thought the investments would yield, relative to the underlying MLP [universe]. We believe we are on target with that. But I can't really comment much beyond that right now.

I guess more of a strategic question. I'm curious about the way that you structured your Company relative to one of your competitors or similar peer companies; I guess you would agree they were a peer company. But you are a [BBC] but not a RIC, and that has some advantages, I guess, associated with diversification.

But at some point in the future, would it make sense to be a [BBC] RIC? Is it even possible to make that sort of conversion, down the road?

We really chose the structure that we did because we want to be able to invest primarily in equity type investments, and we feel that the return characteristics of the equity type investments as they are, being primarily return to capital -- there was not a lot of tax implications in choosing that structure. So we feel we have much more flexibility to make these equity investments and provide investors with the type of structure that they really want, not what is easiest for us to put into our structure. We are very comfortable with where we are structured right now.

Henry Coffey.

Trying to sort some of this out -- it looks like in the second quarter your end-of-period yield was 8.8%, and now it's 8.7%. I'm assuming that there was some growth in the distributions coming out of the underlying assets. Then, of course, you have made new investments.

Can you give us some sort of breakdown? Are we seeing growth at least on a link-quarter basis from the distributions from the existing companies, or is that sort of holding -- is that flat?

No, we have seen some growth, but that growth is mitigated a little bit by -- we've got some GP investments that are not paying the yield target but have significant growth underlying with them. So we are very excited about the GP investments being added, but that -- when they go up in value, that affects our yield a little bit. We also made a direct --

So you mean there's an underlying unrealized depreciation there that changes -- the denominator?

Then you saw us make a direct placement in EVEP which has a lower current yield but, we believe, excellent growth opportunity.

What is the current yield on that?

It's around, I guess, about 5.5% or so, a little bit higher.

And then what else?

But even with that, we see some distribution growth within that particular investment that's very attractive as well.

On a linked quarter basis, if you look at everything that was on the books on day one of the preceding quarter, what sort of growth in distribution are you seeing?

We saw some growth in distribution from High Sierra and from Mowood. Our public portfolio companies have all --

High Sierra and Mowood are private?

High Sierra and Mowood are private.

And then your public companies? Can you put numbers on this?

Probably better if we could do it off-line.

Okay, we'll get into that. The next issue is looking at your current dividend of $0.18; you earned 14.9. Should we assume that the next -- that you're guiding us towards $0.18 for the November quarter?

I really can't talk about that right now.

But I'm trying to understand. There was a $0.02 increase. The distributable earnings were $0.149 or $0.15, and the dividend is $0.18. I'm trying to figure out what to make out of the $0.02 increase in dividend.

Well, what we're trying to do is structure a distribution that would match the income that we were scheduled to receive versus those corresponding expenses. Now, we made almost $50 million in investments in this quarter. We didn't realize investment income on all of those for the full quarter, and some of those like Lonestar -- I think we made that investment the 19 days at the end of the quarter. So that $0.18 is just matching what the income we expect to receive versus the expenses (multiple speakers) --

So if your end-of-period yields were your average yields, we should expect to see distributable income of closer to $0.18? This is kind of what my predecessor was asking; now that you are fully invested, is the $0.18 information loaded? Can we use that as kind of a benchmark of what we're modeling going forward?

I think it is what it is, described as we described it. I think you understand we have to be careful about all of that.

Then the adjustments on the unrealized side -- were they tied to performance or market shifts? They are small, but --

Our adjustments were primarily derived from market shift.

Everett Reveley.

There seems to be some uncertainty about what assets qualify for the 70% asset test to be a [BBC]. I guess I have two questions around that. One would be, what is your current operating assumption? Then kind of do you expect to ever have more than 30% of your assets be publicly traded MLPs?

I guess the second question would be, if you strictly adhere to the 70% rule, would that cause the turnover in your portfolio to be higher than you originally anticipated or in any way kind of change your investment strategy?

Well, it wouldn't, if we went beyond the 30% restriction of owning public companies. The only thing it would prohibit us from doing is potentially making a follow-on investment in that public company at a later date, which is not the primary focus of our Company. So I don't anticipate it to be -- it would never force us to sell something, if we go over it. It just potentially could force us to not be able to make a follow-on investment in that particular public company. So I don't find it to be that restrictive for us, in terms of how we operate.

So you think you can make -- can you make other investments, though, if you have more than 30% of your portfolio in publicly traded MLPs?

We can make other private investments, which is our normal.

My understanding of the rule, which may be wrong, is if you get past that 30% number, then you can't make any investments until you get back under that 30% number. Is that not right?

In public companies, but not in the private -- we could continue to do businesses -- making private investments in early-stage MLP companies, just like we normally do.

(OPERATOR INSTRUCTIONS). Henry Coffey.

Mr. Coffey, please re-queue. Mr. Henry Coffey, please re-queue.

Mr. Matlack, there are no further questions at this time. Please continue.

Okay. Thank you all for participating in the call and for your questions, and we look forward to your continued support of Tortoise Capital Resources. Good day.

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating. You may now disconnect your lines.