CorEnergy Infrastructure Trust Inc (CORR) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Tortoise Capital Resources first quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this call is being recorded today, Wednesday, April 9th, 2008. I would now like to turn the conference over to Ms. Pam Kearny. Please go ahead, ma'am.

Thank you, and thank you for joining us today for the Tortoise Capital Resources 2008 first quarter earnings call. I'm Pam Kearny, and I am joined today by Ed Russell, President of Tortoise Capital Resources, and Dave Henriksen, Vice President - Tortoise Capital Resources, and Connie Savage, Controller.

An archive of today's webcast will also be available on our webcast as well as an audio replay of our conference call. That information is included in our press release and posted on our Website at www.tortoiseadvisors.com.

I want to remind you that the statements made during the course of presentation are not purely historical but 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 protections available under applicable securities law. Because such statements deal with future event they are subject to various risks and uncertainties, and actual outcomes and results might differ materially from those projected in the forward-looking statements.

Important factors that can actual results to differ materially from those in the forward-looking statements are discussed in our filings with the SEC, including the quarterly report filed on Form 10-Q, which we filed today Wednesday, April 9, 2008, and our annual report filed on Form 10-K. These documents can be assessed through our Investor Relations section of the website. We don't update our forward-looking statements.

I will now turn the call over to Ed Russell, (technical difficulties) Tortoise Capital Resources.

Thanks, Pam. As a reminder Tortoise Capital Resources is a business development company classified as a closed end nondiversified management investment company under the 1940 Act. We are not a RIC and are taxed as a corporation. We own securities of privately held microcap public energy companies in the midstream and downstream and to a lesser extent the upstream statements of the U.S. Energy infrastructure sector.

We target companies we believe will provide stable and growing cash flows as a result of their fee-based revenues and limited direct commodity price exposure, which in turn should provide our shareholders with a stable and growing distribution.

During our first quarter the BDC and MLP markets continued to experience volatility as a result of problems in the credit market. Since the end of last quarter, the Wachovia MLP index, total return was down approximately 1.2% and the S&L RIC index total return was down approximately 12.6%.

Over this same period, TTO's total return based on market value was approximately 4.5%. TTO shares have suffered from the volatility of the market during 2007 but have seen a modest rebound in 2008 which we believe is due to the market recognition of our portfolio quality and growing distribution, as well as the increased awareness in the market of our differentiation from a typical mezzanine BDC.

I will now discuss our investments efforts during the quarter. We funded the final $1.2 million tranche of our original commitment to purchase units from Lone Star and after quarter end, we invested an additional $1.5 million on the same terms as our original investment. We also invested an additional $2 million in our equity interest in [Mullwood] which we used to fund land filled to gas energy projects at Mullwood's subsidiary Timberline Energy.

Closely monitor the risk profile of each of our investments and as part of that process rate each investment on a scale of 1 to 3. As of February 29, 2008, all of our portfolio companies had a rating of 1 which we define as performance that is within or above our expectations with trend and risk factors that are generally favorable to neutral.

In February our advisor hired full-time valuation officer Sherman Pitts to further enhance best practices related to fair valuation policies and procedures. Our procedures already include a multistep valuation process each quarter in connection with determining the fair value of investments. Further an independent valuation firm is engaged by our Board of Directors to provide third party valuation consulting services on a selection of valuations as determined by the Board. Sherman is primarily responsible for the oversight of the overall fair valuation process for private investments and we welcome Sherman to our team.

As of February 29, 2008, the value of our investment portfolio, excluding short-term investments, totaled $155 million including equity investments of $144.3 million and debt investments of $10.8 million. Our portfolio was 73% midstream and downstream investments, 15% in aggregates and coal, and 12% in upstream investments. The weighted average yield on our investment portfolio, excluding short-term investment as of February 29th was 8.8%. Our net asset value decreased approximately 3.5% in the first quarter of 2008 compared with the overall MLP market which saw a decrease of approximately 2.8% in the Wachovia's MLP index.

After quarter end, we secured an extension to our revolving credit facility. As announced the amendment provided for a revolving credit facility of $40 million that could be increased to $50 million with a bearable annual interest rate equal to the one-month LIBOR plus 1.75%. Subsequently we secured an additional $10 million for that credit facility and our maximum borrowing amount is now $50 million. We are pleased to have negotiated these terms in light of market conditions and we believe it indicates a positive view of our Company's underlying value. The amended credit facility terminates on March 20, 2009.

On April 8, 2008 we filed an initial shelf registration statement with the SEC. When effective, the shelf will allow us to prudently raise additional capital.

With that, I'll turn the call over to Connie Savage for a more detailed analysis of our financial results.

Thanks, Ed. I will review first our GAAP operating results and then, more significantly, our disputable cash flow or DCF.

Total investment income of $1.1 million for the quarter ended February 29, 2008 consisted of $2.6 million in gross distribution from investment including $1.9 million characterized as return of capital and approximately $345,000 in interest income from debt investments, dividends from money-market and mutual funds and other income.

Total operating expenses for the quarter of $556,000 consisted of $585,000 in basic management fees and approximately $251,000 in professional fees and other operating expenses.

We also recognized a $280,000 reduction in the payable for capital gains incentive fees as a result of the decrease in the fair value of our investments this quarter. As of February 29, 2008, our advisor has waived approximately $1.1 million in accrued capital gains and incentive fees which were attributable to normal distributions from our portfolio companies that were characterized as return of capital for book purposes. The capital gains incentive fee is accrued but paid annually only if there are realizations events and only if the calculation defined in the agreement results in an amount due.

To date no capital gains or incentive fees have been paid. We incurred approximately $498,000 in interest expense during the quarter from the utilization of our bank line of credit. As of February 29, 2008, the principal balance outstanding on our line was $32.1 million with an interest rate of 4.86%. In the first quarter we also received an expense reimbursement from the advisor of approximately $92,000.

We had net investment income for the quarter of approximately $89,000 after a deferred tax expense of $55,000. We had net unrealized depreciation of $2.1 million during the quarter after a deferred tax benefit of approximately $1.3 million.

Now I'll review DCF, which we believe is the most meaningful measure of our operating performance and distribution paying capacity. DCF is distributions received from investments less our total expenses. Distributions received from our investments include the amount received by us as cash distributions from equity investments, paid in kind distributions, and dividend and interest payments.

Total expenses include current or anticipating operating expenses, leverage costs and current income taxes on our operating income. Total expenses do not include deferred income taxes or accrued capital gain incentive fees. Our DCF calculation and reconciliation to our GAAP results for the quarter are included in the MD&A discussion within our quarterly report filed on Form 10-Q.

DCF for the first quarter was approximately $2.2 million, an increase over the prior quarter of approximately $500,000. DCF for the quarter consisted of $2.6 million in distributions from investments; $454,000 in distributions paid in kind and $345,000 in interest, dividends, and other income less $494,000 in basic management fees, net of the expense reimbursement; approximately $250,000 in other operating expenses; and approximately $498,000 in leverage costs.

That summarizes our DCF and operating results for the quarter. Now I'll turn the call back over to Ed.

Thank you, Connie. We remain committed to our original goal of a 7% yield and are making significant progress in reaching this goal as we continue to invest the proceeds from our line of credit. We were able to increase our quarterly distribution to $0.25 per share this quarter for a yield of 6.7%, based on our IPO price of $15. We expect to continue increasing our distribution as we reach full investment.

Our portfolio of companies continue to report what we believe are strong results. During the first quarter, all three of our public portfolio companies and two of our private portfolio companies, VantaCore and Mullwood, increased their distribution.

To provide investors with additional information on our private portfolio investments, we plan to highlight one of our investments each quarter. This quarter we will review High Sierra Energy. To discuss our investment in High Sierra is Dave Henriksen. Dave?

Thanks, Ed. High Sierra Energy LC, which I will refer to as High Sierra, or the company, is a holding company that identifies, acquires, manages and integrates businesses and revenue generating assets in the natural resources industry, primarily in connection with the transportation, processing, storage and marketing of hydrocarbons.

High Sierra is headquartered in Denver, Colorado and has primary operations in Colorado, Wyoming, Oklahoma, Texas, Kansas and Florida. The company began operations in December 2004 and as of September 2007 had 457 employees.

Tortoise was an early investor in High Sierra, making our first investment in common units for approximately $15 million in November of 2006 alongside other institutional investors. With our investment, we also received the option to purchase a portion of the general partner. We have been and continue to be a supporter of the company and its business plan and, as such, exercise our option to purchase a portion of the general partner in May 2007 and purchased approximately $10 million in additional common units in June 2007. To date the company has raised in excess of $300 million, including investments from prominent private equity energy investors.

Key factors that have influenced our investment decision include a proven ability to acquire companies at attractive multiples; our belief that High Sierra could grow its distributions; and the company's pipeline of potential additional acquisitions. Most importantly, perhaps, is the company's management team.

High Sierra is led by Brian O'Neill, Jim Burke and Steve Cramer. Brian O'Neill is the former Chief Operating Officer of MarkWest Energy and co-founder of MarkWest Energy Partners. Jim Burke founded PetroSource Partners and sold a portion of the company to [Simco]. Steve Cramer founded and built Centennial Energy, High Sierra's platform investment.

The management team brings a combination of industry knowledge, public company experience and deal background to High Sierra. High Sierra operates 23 subsidiaries under the common theme of midstream assets, purchased at reasonable multiples, and categorized under the following five general business segments -- Water Services; Marketing; Crude Oil Marketing and Transportation; Natural Gas; and Power Marketing.

One of the largest contributors to High Sierra's 2007 performance was the company's Water Services segment. High Sierra owns three companies that are exclusively focused in the handling and processing of large quantities of water that are used in the well drilling and completion process, or produced as part of the process of extracting gas and oil from the ground. In some cases, High Sierra's companies collect the water and truck it to a site where it is injected back into the ground in a disposal well. In other cases, water is recycled for drilling and completion use.

In High Sierra's Marketing segment, a large portion of the Company's cash flows have historically been attributed to the Company's initial acquisition, Centennial Energy, and other marketing operations. Companies in this segment typically move or store the hydrocarbon products such as butane, propane, or asphalt and use their real focused logistics expertise to market the delivered commodity to interested parties.

In its Crude Oil Marketing and Transportation segment, High Sierra runs three companies operating throughout the Midcontinent region to gather, transport and market crude oil. In essence, these companies trucking operations act as virtual pipelines between the operator or production point and a truck station along the common carrier pipeline, where it is shipped to a centralized oil hub such as Cushing, Oklahoma.

High Sierra's Natural Gas segment is comprised of a range of companies engaged in the handling of natural gas, including the gas gathering system in Louisiana; a gas storage facility in Mississippi; and a company that leases mobile wellhead compressors.

Lastly, representing a relatively small part of the Company's overall earnings is High Sierra's Power Marketing segment, which includes a merchant energy company [that] engages in the remarketing of electricity.

High Sierra has posted significant growth in its EBITDA and its distributions to its investors. EBITDA has grown rapidly from $2 million in 2005 to $27.5 million in 2007. The Company's annualized quarterly distributions have also progressively increased from $1.80 per unit in 2004 to $2.44 per unit currently.

Now I'll turn the call back over to Ed for his closing remarks.

Thanks, Dave, and I want to thank everyone for their continued interest and investment in Tortoise Capital Resources. Please plan to join us for our annual stockholders' meeting on April 21st, 2008 at 11 AM Central Time at the Doubletree Hotel in Overland Park, Kansas. If you are unable to attend the meeting, you can join us via our website at tortoiseadvisors.com.

Operator, we are now ready to respond to questions.

(OPERATOR INSTRUCTIONS). Gabe Moreen from Merrill Lynch.

Good afternoon, everyone. I had a couple of quick questions. One is just a housekeeping item. Can I get the fourth quarter '07 DCF figure again?

$1.7 million was the DCF for the fourth quarter 2007.

Thank you. Congrats on getting the revolver upsized to date here. I just had a quick couple questions on that. One is there's no accordion feature on the $50 million?

No, there's not.

Okay. Have you thought about hedging your interest rate exposure on your revolver?

We continue to look at that on a regular basis. But we haven't made any decision about that at this time.

Got it. I guess more broadly speaking in terms of looking at new investments given the heads (inaudible) that you've got on your revolver right now, do you feel like you've got enough headroom to look at new investments or do you feel like you kind of have to leave this dry powder in order to fund potential additional investments at your existing portfolio?

You know, we are getting close to full investment now, based on leaving some room for reasonable working capital. But we still are actively out looking at new investments and just weighing what we have left versus what's available to us in the market.

Got it. In terms, also, of your portfolio companies, you mentioned the increases and the distributions you are getting from Mullwood and VantaCore. Just in terms of your portfolio companies, are distribution increases evaluated there on a quarterly basis at all of the holdings or does it vary according to the different holdings?

I'm not sure I understand your question and how we analyze our distribution increases are the individual portfolio companies.

I meant the individual portfolio companies, whether they themselves are evaluating distribution increases on a quarterly basis?

Yes, they do.

Finally, I was wondering you've made an additional investment in Mullwood, and I wonder if you could just talk a little bit about what that investment is for? And I guess what are some of the projects they've got on their plate?

Sure, we would be happy to. They have continued to develop along the plans of increasing their projects that they are investing in at Timberline which, essentially, captures methane gas from landfills and processes that gas and sends it to an end-user, which could either be a pipeline or a commercial user. Both ends of those contracts are long-term contracts that we sign up, and that capital was used to continue those project developments. And we have three that we are working on right now.

Henry Coffey from Ferris, Baker Watts.

Good afternoon, everyone. The easiest -- we don't have good year-over-year comps yet, because the Company is still obviously growing its investments. Clearly looking at the sort of link quarter growth in your distributable cash flow, it's extremely attractive. Can you give us some sense of -- from looking at your existing portfolio companies, what their distributions or how their distributions are likely to grow on kind of a year-over-year basis and how your own DCF is likely to grow on a year-over-year basis?

Well we don't --.

Assuming no additional investments.

Yes. We really don't provide that kind of growth expectations, although we expect our underlying portfolio companies to continue to grow, and we hope in excess of a public company growth performance, but what we have seen is depending on the stage of where those companies are that they tend not to grow their distribution so much in a little bit each quarter it's chunkier. So go ahead and make investments. They get at a certain maturity level and then they can increase those distributions more than you would typically see in just a publicly traded company.

So if any color that I could give you that I think the distribution growth of our underlying portfolio will come in chunks and probably not as predictable as the public company comps. But we hope at the end of the day just like with Tortoise that we -- kind of slow and steady and that we will catch up and provide good distribution growth within our portfolio and that is without the need to continue to invest, make additional investments.

And, yes, just looking at the existing portfolio. The $2.2 million, is that a figure that is likely to grow forward from the existing portfolio? Or is it possible that could move up-and-down a little bit every quarter?

No. I think we can continue to -- that will continue to grow as our companies continue to develop.

And then, of course, you're -- you've got a LIBOR-based funding which in this environment is fairly attractive. Are your companies, as you negotiate new deals are they sort of reacting to where short-term interest rates are? Or is that sort of a fixed bogey and --?

Well, what we have seen, I will comment, is we have seen our companies continue to have access to capital from the banks. The banks seem to be still attracted to these, to our companies that we are investing in and we have seen two of our portfolio companies complete acquisitions where they used leverage to finance those and didn't go back to the equity market. So we remain excited about that.

But the -- you are not seeing the kind of lack of competition in the general private equity market though?

In private equity market, the whole market is on strike and cost of capital is up 200 to 300 basis points and you're obviously not seeing that. But I was wondering what kind of gains you might be seeing in terms of just your ability to price deals?

Well, we just continue to monitor the public markets and use that as a measurement of how much -- what we should be -- get for our liquidity and that and where we think those companies would be valued as a public entity. So we have seen some improvement in that, I think, as every other private equity investors have as well.

Thank you. Thank you very much.

(OPERATOR INSTRUCTIONS). Selman Akyol from Stifel Nicolaus.

Good afternoon. Couple of quick questions, if I may. Are you guys seeing more attractive terms on private investments for companies than a year ago, kind of given the environment?

Yes, Selman. I mean like you said we measure that against the public companies and where they are at and we look at the amount of liquidity that we would have to -- that we would have. And so it has benefited private equity investors, I think, in that respect. Some of the uncertainty of the capital markets in terms of your ability to go public and so forth have also weighed in.

So then you are being able to get higher yields off of investments than you would have for, say, a year ago?

I mean, you know, I think that when we are talking to companies the public market -- the volatility in the public market is weighed in on on our negotiations and the terms we have gotten.

Okay and then just one last question and it's more philosophical. But as you guys approach fully invested, how do you guys look at making an investment in a company you currently have as part of your portfolio versus going out and making a new investment in a new company?

We hold them both to the same threshold. Risk [versus] reward and things like that. We look at them independently and I will just tell you, from a practical standpoint when we look at things, too, we make sure that there is more than one person on it. So for example I led kind of work primarily on one investment, I am bringing other people involved in those when we are looking at reinvesting in those, so that it's not -- so that they are all measured fairly and weighed against each other and as a group, collectively the TTO team, we all look at our investment possibilities or opportunities on a weekly basis and measure those. And as they come closer to potential funding we talk about those independently.

Okay. Thank you very much.

Henry Coffey from Ferris, Baker Watts.

I know your valuation officer is going to appreciate this. How is 157 for you? Have you really adjusted to that yet? You just have the good fortune of being one of the first companies that release had to come out and put out numbers?

Yes. We were on the front end of the adoption of FAS 157 which really had no effect on us, our procedures or our financial statements other than the required disclosure which you would see in our footnotes in the 10-Q.

So it was more of a change in method than -- a change in disclosure than a change in method for you all?

Definitely.

And pointing the finger not at you but at the accounting profession, we understand they have been less than clear about how the rules should be interpreted. Do you think that -- was there sort of a growing consensus amongst your auditors about exactly how these rules should be interpreted or were they --?

I think that is probably true and probably true of every accounting pronouncement that has ever come out. In the early stages that continues to develop, but --.

So it is still kind of a work in process?

I think so for everyone, but it's been clear to us that we were actually already adhering to what we needed to do and, again, really it amounted to just additional disclosure for us.

Thank you.

I'm showing that we have no further questions. Please continue.

All right. Well, thank you, everybody, and, again, reminder to feel free to join us for our annual meeting. With that, we will conclude the call. Thank you.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.