CorEnergy Infrastructure Trust Inc (CORR) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the TTO 2008 second-quarter 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. (OPERATOR INSTRUCTIONS). I'd like to remind everybody that this conference is being recorded today, July 9, 2008. I'd now like to turn the conference over to Tortoise Capital Resources' President, Ed Russell.

Thank you. Thank you for joining us today for the Tortoise Capital Resources' 2008 second-quarter earnings call. I'm Ed Russell, President of Tortoise Capital Resources and I'm joined today by Connie Savage, Controller and Dave Schulte, CEO of Tortoise Capital Resources.

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

We'd 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 under applicable Securities law.

Because such statements [deal] with future events, they are subject to various risks and uncertainties and actual outcomes and results may differ materially from those projected in the forward-looking statements. 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 quarterly report filed on Form 10-Q, which we filed today, Wednesday, July 9, 2008 and our annual report filed on Form 10-K. These documents can be accessed through the Investors Relations section of our website. We do not update our forward-looking statements.

As you know, Tortoise Capital Resources is a business development company or BDC investing primarily in equity securities of privately held and micro-cap public energy companies in the Midwest, in the midstream and downstream and to a lesser extent upstream segments of the United States energy infrastructure sector.

We continue to target companies we believe will provide stable and growing distributions to us as a result of their fee-based revenue and limited direct commodity price risk. By basing our distribution strategy on these equity securities, we in turn should be able to provide our shareholders with a stable and growing distribution.

During the quarter, the Wachovia MLP Index total return increased approximately 1.2% and the [S&L RIC] Index total return was down approximately 8.1%. Over the same period, TTO'S total return based on market value was 6.8%. The BDC market continued to experience volatility as a result of prolonged problems in the credit market. We believe that the MLP market provides better insight for developing trends, which affect the valuation and prospects for our portfolio of equity securities of our private and micro-cap public companies. We believe the current commodity environment, coupled with strong growing activity and lower interest rates, is creating an environment that will allow both our public and private investments to increase distributions.

The Wachovia MLP Index is down year-to-date and the MLP IPO market has been slow with only three deals done year-to-date and the follow-on equity market is slightly above the 2007 pace, but we believe organic growth and acquisitions of MLPs have been financed with debt offerings, which year-to-date have exceeded 2007 levels and in June, five MLPs issued debt totaling $1.7 billion. We also believe that our public investments have suffered from the technical selling pressures over the last six months from the PIPEs they originated in 2007.

I'll now discuss our portfolio and investment activity during the second quarter. In April, we invested an additional $1.5 million in Lonestar Midstream Partners and [LSMPGP], bringing our total investment to approximately $25.4 million. On June 17, after our quarter end, Lonestar entered into a definitive agreement to sell its gas gathering and transportation assets to Penn Virginia Resources Partners, LP, a publicly traded limited partnership whose shares trade on the New York Stock Exchange under the symbol PVR.

Penn Virginia operates a midstream natural gas gathering and processing business, as well as managing coal properties and related assets. The transaction is expected to close later this month with Lonestar distributing substantially all of the sales proceeds to its limited partners, which include TTO. We expect our portion of this distribution to be approximately $13.5 million in cash and 494,191 unregistered common units of PVR.

This agreement also provides for a cash payment at December 31, 2009 of which we expect to receive approximately $1 million and in addition, TTO could potentially receive contingent payments totaling approximately $9.7 million based on the achievement of specific revenue targets on or before June 30, 2013. Though subsequent to our quarter-end, the June 17 transaction serves as a strong indicator of the value of Lonestar as it existed at May 31, 2008 and therefore, reflected in the fair value expressed in our May 31 financial statement.

The Lonestar transaction is essentially the first realization event for Tortoise Capital Resources and we believe the transaction is an important step in validating our private investment thesis. The transaction provides us some liquidity, a position in PVR closing and more importantly, an opportunity to significantly improve our return on investment if activity in the Barnett Shale region reaches expected levels. The cash received from the transaction will allow us to pay down debt or redeploy capital in new or follow-on investments while the PVR units received from the sale are expected to provide us future distribution growth.

With regard to our overall portfolio, we continue to monitor the risk profile of each of our investments and as part of that process, we rate each investment on a scale of one to three. As of May 31, 2008, all of our portfolio companies had a rating of one, which we define as performance that is within or above our expectations with trends and risks that are generally favorable to neutral.

Net assets increased from $117.7 million or $13.28 per share at February 28, 2008 to $121.5 million or $13.69 per share at May 31, 2008. As of May 31, 2008, the fair value of our investment portfolio, which excluding short-term investments, totaled $165.7 million, including equity investments of $154.9 million and debt investments of $10.8 million.

The portfolio represents a mix of 70% midstream and downstream investments, 14% in aggregate and coal investments and 16% upstream investments. The weighted average yield of cost on the investment portfolio, excluding short-term investments, as of May 31, 2008 was 8.9%. These positive results were driven primarily by second-quarter distribution increases from six of our portfolio companies and improved financial performance of several of our portfolio companies.

As we mentioned last quarter, we secured an additional $10 million increase in our credit facility, giving us a maximum borrowing capacity of $50 million. The current principal balance outstanding is $36.5 million, so we have $13.5 million available.

We also filed our initial shelf registration on April 8 and filed our first amendment on June 19. When the shelf registration becomes effective, it will provide us an opportunity to prudently raise capital when market conditions are favorable.

With that, I'll turn it over to Connie Savage for an analysis of our financial results.

I'll focus on distributable cash flow or DCF, which we believe is the most meaningful measure of our operating performance and our distribution paying capacity. We outline our computation of DCF in the MD&A section of our quarterly report and we provide a reconciliation to our GAAP financial statement.

DCF is total distributions received from investments less total expenses, including management fees and leverage costs. This quarter, our total received from investments was about $3.6 million, which consisted of around $2.8 million in gross distributions from our equity investments, $484,000 of distributions paid in stock and approximately $300,000 in interest income from debt investments and dividends on our short-term investments.

Total expenses for the quarter included $486,000 in base management fees and that's net of an expense reimbursement from the Advisor of $104,000, approximately $263,000 in other operating expenses and $436,000 in leverage costs.

For DCF purposes, total expense does not include $686,000 of deferred income tax benefit or $1.4 million in accrued capital gain incentive fees. As a reminder, the capital gains incentive fee is accrued, but it's paid annually only if there are realization events and only if the calculation defined in the agreement results in an amount due.

Also, you might recall that the Advisor waived its right to receive capital gains incentive fees attributable to that portion of expected distributions from our portfolio companies that are characterized as return of capital for book purposes. As of May 31, on a cumulative basis, this amounted to about $1.4 million in capital gains incentive fees for which the Advisor voluntarily terminated its right to receive and are therefore not reflected in the accrued liability.

The resulting distributable cash flow for the second quarter was roughly $2.4 million, an increase over the prior quarter of about $200,000. We paid out $2.3 million in distributions to our shareholders this quarter or about 98% of our DCF. We believe this level of distribution is sustainable and is a meaningful growth comparison going forward given that we are nearing full investment in our target leverage for the Company.

As for our GAAP operating results, we had a net investment loss for the quarter of approximately $1.1 million after the deferred tax benefit of $686,000. We had net unrealized depreciation on investments of approximately $11.4 million during the quarter before a deferred tax expense of approximately $4.3 million, resulting in a net increase in net assets due to unrealized gains of $7.1 million. The total increase in net assets applicable to common stockholders resulting from operations were $[6.6] million -- excuse me -- $6 million. That summarizes our financial results for the quarter and I'll now turn the call back to Ed.

Thanks, Connie. In May, we announced a second-quarter distribution of $0.2625 per share compared to $0.25 for the previous quarter. This increase enabled us to deliver on our original goal of a 7% yield based on our initial public offering price of $15. We continue to see strong results from our portfolio companies.

During the quarter, three of our private portfolio companies -- Abraxas, Millennium and [Mowood] -- increased their distribution, as well as all three of our public portfolio companies -- Eagle Rock, EV Energy and Legacy.

To provide investors with additional insight into our portfolio, we highlight one private company each quarter. This quarter, we will review Millennium Midstream Partners, LP and here to discuss our investment in Millennium is Dave Schulte, the CEO of Tortoise Capital Resources.

Thanks, Ed. Millennium Midstream Partners, LP, which I refer to as Millennium or the company, is a private company operating natural gas gathering, treating, compression and processing businesses in Texas, Louisiana and the Gulf Coast. Millennium was formed in late 2002 as Millennium Midstream Energy by John O'Shea and Kevin Coxon with capital from two angel investors. The company's original natural gas processing asset interests were acquired by them in 2003 and they've been continuously expanded through internal growth funded primarily or solely with operating cash flow.

The company then entered the natural gas gathering business in late 2004 with an acquisition of 400 miles of pipeline in East and Central Texas using a combination of internally generated cash flow and some debt. By the end of 2006, Millennium had successfully completed over 10 acquisitions and had revenues of over $130 million. Remember from start in 2003. The company was named number 63 on Inc. 500's 2000 list of fastest growing private companies and was actually the list's fourth fastest growing private energy company.

Millennium created its private limited partnership structure in 2006, enabling it to raise a total of $70 million from institutional investors. Your company funded $17.5 million in return for 875,000 units of common stock and approximately 8% of the incentive distribution rights or IDRs.

Key factors that influenced our investment decision include the company's proven ability to grow and successfully complete acquisitions while optimizing its capital structure, the movement of drilling activity toward the company's existing assets and therefore, the potential for organic growth from the existing business and finally, our belief the company would be able to grow distributions.

Most importantly though was our faith in the company's management team. Millennium's team is still led by its founders, John O'Shea and Kevin Coxon. Prior to forming Millennium, John had served as Vice President of Corporate Development at Dynegy and had over 20 years of experience in the energy sector. Kevin Coxon, previously the Senior Director of Gulf Coast Operations at Dynegy, has over 25 years of experience. Today, the company has grown to include 32 employees that bring a combination of market knowledge, chemical capabilities and deal experience to Millennium.

To discuss the assets, they can be divided into East Texas, Central Texas and West Texas from a gathering system standpoint and then the Gulf of Mexico processing business. The East Texas gathering system was acquired in late 2004 and now consists of over 250 miles of gas gathering pipelines. The system traverses six counties with recent growth focused primarily on the [Angelina] River trend.

The Central Texas gathering system was part of the systems acquired in late 2004, but now consists of over 235 miles of gas gathering pipelines. The Central Texas system resides primarily in Austin, Waller and Harris Counties and in December 2007, almost a year after we made our first investment, Millennium acquired a gathering system referred to as the West Texas Gathering System. This system has over 100 miles of gathering pipe located in Crockett County. It was 100% financed with debt and has been successfully integrated into Millennium at this point.

In total, Millennium's gathering systems account for about 68% of revenues year-to-date through March. The remaining 32% of total revenues are represented by the processing segment. The company's Gulf of Mexico processing business was originally developed in 2003 and includes ownership interest in two large processing plants and commercial interests in five additional plants serving producers offshore, Gulf of Mexico.

Millennium has posted significant growth in revenue and EBITDA since our investment in late 2006. Today, revenue exceeds $175 million on a trailing basis in 2007 with EBITDA of over $17 million. The annualized quarterly distribution has increased from the initial minimum quarterly distribution of $1.70 to its current level of $1.82, providing an annualized yield of 9.1% on our investment cost. We continue to be pleased with Millennium's performance and remain very excited about the company's future growth opportunities.

With that, I'd like to turn the call back over to Ed for closing remarks.

Thanks, Dave. Again, we're pleased with our results this quarter, which included a $0.41 increase in net asset value per unit over last quarter, significant unrealized depreciation on our portfolio investments, our first realization event and achievement of our targeted 7% yield goal.

This wraps up today's prepared remarks. We want to thank you for your interest and investment in Tortoise Capital Resources. And with that, operator, we are ready to respond to questions.

(OPERATOR INSTRUCTIONS). Gabe Moreen, Merrill Lynch.

Congratulations on the Lonestar transaction.

Thank you.

Couple questions specific to Lonestar. From PVR's press release, it seemed like they were mostly giving people PVG units. Just to clarify, you're getting PVR units, but not PVG, is that correct?

Yes, that's correct.

Okay. And I guess, Ed, if you could just talk for a minute or two about what additional investment opportunities you're seeing out there, whether it's your portfolio companies or elsewhere and whether you've got any commitments to make investments in the near to medium term?

Yes, we do have some investment opportunities. They're primarily coming right now from our portfolio. We have one portfolio company that we expect will complete a transaction in the next two to three weeks and we anticipate making an investment in that acquisition that they're making. [They] are back in with that company to finance that acquisition and we have a number of other portfolio companies that are actively looking and are in various stages of their due diligence.

Selman Akyol, Stifel Nicolaus.

Just going back to the Lonestar, just assuming you were to pay down debt, you'd take the shares, would you, and I know you're getting [pick] prior with Lonestar, but would you be looking to get a yield pick-up on that?

It'll be about flat by the time we pay down debt and that was one of the reasons to expand on Gabe's question is why we chose to take the PVR units is we felt that that higher yield in the LP units would allow us to be a long-term holder. If you look back at their historical distribution growth, it's been in the double digit range. So we think it's a terrific addition to our portfolio that we can hold onto for a little while and will help. It will probably be flat in terms of our distribution, but based on their growth projections, we think it'll eventually be accretive to us.

Got you and I understand you want to keep it longer term, but is there any lock-up provision that comes with those shares?

There is. Basically we'll get registration rights through 144A, so we have a six-month lock-up and will be fully tradable within a year of the closing.

Got you. And then just looking at the portfolio of companies in general, how is the credit environment impacting them?

Well, as I mentioned last quarter, we've seen some of our portfolio companies be able to complete acquisitions using debt. I would say right now, it's been difficult for companies in other industries, but within the industries we're operating in, they still seem to have access to debt and are out looking for transactions that are financed basically 50/50 debt to equity. It has not been a problem to date.

Mike Beall, Davenport.

Did I hear you correctly in that the NAV that we published at the end of the quarter reflected the price for Lonestar roughly equal to what you were getting in the transaction?

Yes, essentially that is correct. Even though the transaction occurred after the end of the quarter, it's considered a Type 1 subsequent event under GAAP, which basically means that on that date, evidence became available with respect to conditions that actually existed at the balance sheet date, which affected our estimates in the process of preparing the valuations in the financial statements. So therefore, the primary driver for the Lonestar valuation was the sale transaction and that is considered a level 2 input under FAS 157 and is disclosed as such in footnote 6 to our financials.

That all makes sense. I wasn't questioning that. I just wanted to make sure I had that right. The $9 million in consideration that you might get over five years, how does that get -- where does that go? Is that included in this valuation and can you just talk a minute about that?

Yes, generally we have not given rise to that at this time because it does remain uncertain if that would come to fruition. At this time, it does not play a part in the valuation.

Is this something that you would not get for five years or you might get it ratably over five years? How does that work?

Basically, we have -- the Company will pay that if the assets that we sold reach certain revenue projections within that five-year timeframe. So it's basically set up into two payments. Once they hit level 1, if they're $1 over it, they have to pay it and then if they hit the second level, once they go $1 over that, then the full amount is due. They have five years to do it and that's the only timeframe to it. So it becomes --.

So that's something -- not to belabor this -- but is that a pie in the sky level of cash flow or is that something that has a reasonable chance of occurring?

It is not pie in the sky. It's based on the revenue projections that were provided to the Company when they bought it and it's less than 100% of those revenue projections. If we can hit reasonable expectations of the volumes that we think will hit in the Barnett, we expect those to then hit those targets and we'd be paid.

Last question, thank you, the 3% increase in the NAV, looking at TYG and TYY, they were down about 3%. I know they're not the same, so is it, and I guess I can look at the Q when I get it, but is that bump, is a fair amount of that attributable to the Lonestar transaction?

No, it's not. I wouldn't categorize it as that. We use valuation metrics that are consistent each quarter and it's a matter of we had distribution increases and those are driven by increased financial performance of our underlying portfolio companies and that has driven it. And then obviously the public portion of our portfolio is value based on their price at the end of the quarter. I think it's our private companies are performing well and it's being reflected in the valuations.

Including Lonestar for sure? Okay, thank you very much.

(OPERATOR INSTRUCTIONS). Okay, sir, there appears to be no further questions. Please continue.

That will conclude our call. Thank you, everyone.

Thank you. Ladies and gentlemen, this concludes today's TTO's second-quarter conference call. We thank you for your participation and you may now disconnect.