CorEnergy Infrastructure Trust Inc (CORR) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by, and welcome to the TTO fourth quarter conference call. At this time, all participants are in a listen-only mode. And following the formal presentation instructions will be given for the question-and-answer session. (Operator Instructions). And as a reminder, this conference is being recorded today Thursday, February 12th, 2009.

At this time, I would now like to turn the conference over to our host, Mr. Dave Schulte, CEO, for Tortoise Capital Resources. Sir, you may now begin the call.

Thank you for joining us today for our fourth quarter 2008 conference call and year end earnings call. I'm joined by Ed Russell, President, and Connie Savage, Controller. An archive of our webcast will be available on our website as well as an audio replay of our conference call, this information is included in the just issued press release, which is also posted on our website at www.tortoiseadvisors.com.

We'd like to remind you that statements made during the course of the presentation are not purely historical and are forward-looking statements regarding TTOs 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 Laws. And because these statements deal with future events, they're subject to various risks and uncertainties and actual outcomes and results may differ materially from those projected in the forward-looking statements. Important factors could cause actual results to differ materially from those in the forward-looking statements and are discussed in our filings with the SEC including our-- the annual report filed on Form 10-K, which we filed earlier today. These documents can be accessed through the investor relations section of our website. We do not update our forward-looking statements.

Before we discuss the Tortoise Capital Resources particularly I wanted as an overview to share what this entity, this Company has in common with all Tortoise close ended to management investment companies. First we focus in each company on energy infrastructure investments, which we believe have attractive risk reward characteristics. Second we utilize research and investment disciplines that have been derived from both private equity and high-yield fundamental analysis techniques in assessing the desirability of each investment. Third, we have a goal of selecting high quality investments consistent with our portfolio strategy, on providing investors with yield, growth and quality. And finally, we invest in portfolio companies that have been organized as tax pass through vehicles, which we believe allows transparency of available cash flow for distributions which we receive and can then pay out to our stockholders.

Now TTO, and that's the NYSE symbol, is differentiated in that it was organized as a business development Company. That allows us to utilize our historical expertise in public market securities analysis to supplement our private equity expertise. We combine these disciplines to identify private companies which we believe have the potential to develop into either successful IPO's themselves or be acquired by other public companies. Alternatively we might retain a private investment over the long-term enabling our stockholders to benefit from growth in that company's cash flow through our distribution payments. The key factor then that differentiates TTO from the other Tortoise investment vehicles is not the industry but the stage of development and the private character of these companies, characteristics in the portfolio that may be expected to add risk relative to later stage publicly traded investments. Over the long run however, we expect to achieve a higher total return for assuming these added risks.

One of the features common to all business development companies is that portfolio holdings are generally valued quarterly in connection with the preparation of financial statements. Now our quarterly reports are generally released 45 days after the end of the quarter and at that time you would have an updated book value or net asset value per share. After our fiscal year however, these statements are subject to audit. And it has taken us, and generally does take us, 75 days to prepare and have fully subject to audit procedures our book value or net asset value per share. More frequent valuations are not cost effective and are not commonly undertaken.

We believe that the best indicator of our long-term performance is distributable cash flow. DCF is helped by realizations of net gains in the portfolio and the deployment of those gains into new investments. Our thesis has been supported by the IPO's of two of our portfolio companies, as well as the sale of two others to publicly traded entities, in each case relatively early in the life of these investments. Finally, as consistent with our other investment companies we're taxed a as Corporation not as a RIC like many other business development or other investment companies. We also differ from other BDCs because we invest primarily in equity securities instead of mezzanine debt investments.

At November 30th, 2008, or at year end, our portfolio value was diversified among approximately 60% midstream and downstream investments, 13% upstream and 0.7% in aggregates and coal, and this is consistent with the investment philosophy that we set forth in our prospectives and in subsequent conference calls and public reports. With that I'll hand over the call to Ed Russel, President, to discuss the environment and the portfolio.

Thank you, Dave. In addition to the terminal-- turmoil in the broad market in the latter part of the year, MOPs were further challenged by selling pressure from deleveraging and unwinding of total return swaps. The Wachovia MLP index reflected a total return based on market value assuming reinvestment risk of quarterly distribution of a negative 35.6% for the 12 months ended November 30th, 2008. Our stock price was also impacted by adverse market conditions and continued pressure on the BDC sector as a result of the global credit crisis. Our total return for the fiscal year based on market value assuming reinvestment, the quarterly distribution was 49-- was a negative 49.9%.

At this time last year I was asked about the availability of credit and could demonstrate that our portfolio companies had access to debt markets to partially finance acquisitions and growth projects. In one specific case a portfolio company was able to finance 100% of an acquisition utilizing only bank debt. As 2008 progressed and the credit markets began to constrict, our portfolio companies began to feel these affects. The companies began to see less debt availability and higher capital costs to finance acquisitions and growth projects. A few companies were hit with reduced credit availability. As a result, all of our portfolio companies have become more focused on the best use of their capital and many are considering changing distribution policies in order to redirect cash to pay down leverage. Because of the changes in the credit markets, including the bankruptcy and acquisition of several large capital providers including Lehman and Merrill, we remain focused on leverage employed by our portfolio companies, their debt to total Cap, their loan covenants, bank relationships and their loan syndication. Our portfolio companies not unlike other companies in the industry-- energy industry have and will continue to spend considerable time in 2009 working with their banks to access the financing needed to operate and grow their businesses.

Because of privately held energy infrastructure investments are valued in part based on public MLP comparables, the value of our portfolio will also decline, most notably in the fourth quarter. As of November 30th, 2008 the value of our investment portfolio excluding short-term investments was $105.8 million including equity investments in $97.5 million and debt investments of $8.3 million. Before deferred taxes we had nearly $42 million in unrealized depreciation of investments for the year with nearly $47 million in unrealized depreciation being recorded during the fourth quarter alone. Total assets decreased from $159 million at the end of fiscal 2007, to $120-- $112.3 million at the end of fiscal 2008. And our net asset value declined from $13.76 at November 30th, 2007 to $9.96 at November 30th, 2008. Our current net asset value includes the deferred tax asset of approximately $0.63 per share, which represents the benefit the Company expects to realize from their reduction in taxes payable in future periods. We do not include the deferred tax asset in the calculation of our management fee.

We monitor the risk portfolio -- profile of our investments and rate each investment on a scale of one to three. A one means the portfolio company is performing at or above expectations and the trends and risks factors are generally favorable to neutral. The two rating indicates the portfolio company is performing below expectations and the investment risk has increased materially since origination. And a three rating implies the portfolio company is performing materially below expectations and the investment risk has substantially increased since origination. And consistent with the respective ratings at the end of our prior quarter, as of November 30th, 2008, Quest midstream partners and High Sierra Energy were assigned a rating of two, the remaining-- remainder of our portfolio companies maintained a one rating.

In regard to Quest midstream partners, we did not pay a distribution during the quarter-- they did not pay a distribution during the quarter ending November 30th, 2008 in an effort to preserve sufficient liquidity to properly conduct operations, maintain strategic options and comply with debt convenants. Quest entities continue to work through issues related to the misappropriation event which we discussed with you last quarter. The special committee formed and it's advisors continue to work to determine the affect of the misappropriation and appropriate measures-- in addition the special committee is attempting to identify possible sources of recovery of the assets that were inappropriately transferred.

Now we believe the Company can conclude its investigation soon and begin to refocus it's attention on the significant business challenges it faces with the recent volatility in the commodities market, both the general partner, Quest Resources Corp. and the prime producer on the blue stem pipeline, Quest Energy Partners face considerable challenges due to their current amount of leverage in the underlying economics of the Cherokee Basin based on current commodity prices. We continue to work closely with Management to manage-- monitor costs and improve efficiencies. Until these situations are involved-- resolved we are unable to predict when or if the Company will resume distributions to it's unit holders or at what level.

High Sierra continued to experience tightening of it's trade finance credit line which was made more difficult by it's exposure to a voluntary petition for reorganization under Chapter 11of the US bankruptcy code filed by (inaudible) Group LP and certain other subsidiaries in July of 2008. During our fiscal quarter ended August 31st, 2008 High Sierra elected to distribute additional common units in lieu of a cash distribution. In addition High Sierra's Senior Management voluntarily chose to forego receiving any distribution including payments in kind on their LP units and in connection with their interest in the High Sierra general partner. During the fiscal quarter ended November 30th, 2008 High Sierra's Board of Directors again determined the most prudent action would be to distribute common units in lieu of a cash distribution, instead utilizing the cash to support it's marketing business during the period of constrained credit. All investors that were entitled to distributions received common units in lieu of a cash distribution.

While we continue to monitor High Sierra status with its lending group, although the company is vulnerable to a slow down in the overall economy and volatility in commodity prices, it's recent challenges which resulted in part from its banks significantly reducing access to lines of credit or letters of credit used in its marketing business. As a result High Sierra has used it's available cash to the support it's marketing business instead of paying cash distribution to shareholders. Access to stable long-term leverage is a primary focus for High Sierra's Management in 2009, with the goal of returning to payment of cash distribution to shareholders. But in a relative and positive subsequent-- in a related and positive subsequent event, High Sierra has approved a cash distribution to be paid during the first quarter of 2009, the prospective distribution underscores the positive operating results in the Company's fourth quarter.

Returning to the review of our balance sheet, we believe our use of leverage and the leverage of companies in which we invest is significantly lower than most PDC's. Our leverage consist solely of 50-- of a $50 million line of credit. Total leverage outstanding on a credit facility as of November 30th, 2008 was $22.2 million at a rate of 3.65%. We use proceeds from two realization events to reduce the amount outstanding on our line of credit by about $8.4 million during the year. At November 30th, 2008 our total leverage represented approximately 20% of total assets, including the deferred tax asset and approximately 20% of the total assets excluding the deferred asset. We have maintained adequate asset coverage such that as values have declined we have not been required to sell any investments to pay down leverage. We are and intend to remain in compliance with our asset coverage ratios under the 1940s Act and our basic maintenance convenants under our credit facility.

Our current credit facility matures on March 20th, 2009. We intend to renew or replace the credit facility upon maturity. However, there can be no assurance that we could obtain such financing on similar terms.

Two realization events occurred during the year resulting in realized gains of approximately $8.7 million before deferred taxes. We believe these realization events support our investment thesis which in part seeks to identify private companies that we think would make good public market candidates or acquisition targets for public MLP's. In July, Lonestar Midstream Partners sold it's gas gathering and transportation assets to Penn Virginia Resource Partners. And in October, Millennium sold its partnership interest to Eagle Rock Energy Partners. We may follow on investments in two of our portfolio companies during the year, we invested a total of $4.7 million in debt and equity of Mowood LLC and part to fund Landfill gas to energy projects at it's subsidiary, Timberline Energy. Timberline now operates a high BTU facility, a direct use facility and an electricity generation facility, each one of the three types of landfill gassed energy projects feasible under current technology.

In August VantaCore repaid our $3.75 million term note, at a 3% premium to it's par value and we reinvested those proceeds in an additional $6.1 million to purchase common units and incentive distribution rights of VantaCore. VantaCore used the proceeds to partially fund it's acquisition of Southern Aggregate, a sand and gravel operation located near Baton Rouge, Louisiana.

Turning to our distribution, during 2008 we included all paid in kind units of-- in our calculation of distributable cash flow. In the future we do not intend the include in distributable cash flow the value of distributions received from portfolio companies which are paid in stock as a result of credit constraints, market dislocation or other similar issues. At November 28th, 2008 we paid a quarterly distribution of $0.265 for common share for a total of approximately $2.4 million. For the year ended November 30th, 2008 our distribution for tax purposes were combined of approximately 3% invested income and 97% return of capital. We expect a substantial amount of distributions paid in 2009 to also be categorized as return of capital. Today our Board of Directors declared a dividend for the first quarter 2009 of $0.23 to be paid on March 2nd, 2009 to stockholders of record as of February 23rd, 2008. Based on-- or excuse me 2009. Based on our current financial information this distribution is estimated to consist of 15% to 20%, ordinary income and the remainder as a return of capital for book purposes.

As we look to the future we expect the next year to be challenging for almost every industry, including the energy infrastructure sector. But we believe the flow of energy commodities remains critical to our economy and that the long-term prospects for energy infrastructure investments continue to be attractive. With that I'll turn the call over to Connie Savage for a more detailed analysis of our financial results.

Thanks, Ed. I'll begin with our GAAP operating results and briefly summarize results from the fourth quarter. We had total investment income of approximately $645,000 and total expenses of about $1.1 million, which includes base management fees, operating expenses and interest expense on our credit facility. We reversed the accrual for the capital gain incentive fee because of unrealized depreciation on investments thereby reducing our expenses by about $1.1 million and eliminating the liability previously recorded on our statement of assets and liabilities. We had unrealized depreciation on investments of roughly $47 million before deferred taxes and a realized gain on investments before deferred taxes of $6.5 million. After a total net deferred tax benefit of about $12 million we had a net decrease in net assets for the quarter of roughly $27.9 million.

As to our results for the year we had total investment income of $2.9 million this fiscal year compared to $3 million in fiscal 2007. Total investment income this fiscal year consisted of $9.7 million in gross distributions from investments, $1.1 million in interest income from debt investments and dividends from money market mutual funds, less about $7.9 million characterized as return of capital on distributions.

Total operating expenses for fiscal 2008 were approximately $3 million compared to about $3.3 million for the prior fiscal year. Operating expenses this year included $2.3 million in base management fees, about $1 million in professional fees and other operating expenses and roughly $308,000 as a reduction in the provision for capital gain incentive fees due to unrealized depreciation on investments as described earlier. In 2008 we received about $386,000 as an expense reimbursement from our advisor compared to about $94,000 in 2007. We incurred $1.7 million in interest expense in fiscal 2008 from the utilization of our bank line of credit, compared to about $1.8 million in leverage costs in 2007, which included roughly $1 million in preferred dividends and loss on redemption of our referred stock which was utilized as bridge financing and redeemed in full at our initial public offering in February of '07. After current and deferred taxes we had a net investment loss for the year of approximately $978,000 compared to a net investment loss in fiscal '07 of approximately $1.6 million.

We had a net realized gain on investments for the year of $6.2 million after a deferred tax expense of about $2.5 million. These realized gains were a result of the Lonestar Millennium transaction and the VantaCore debt redemption described previously. According to our advisory agreement, a capital gain incentive fee is paid to the advisor annually if there are realization events and if the calculation defined in the agreement results in an amount due. The capital gain incentive fees equaled a 15% of accumulative net realized capital gains, which is realized capital gains less realized capital losses less any unrealized depreciation at the end of the fiscal year less the amount of all capital gains fees paid to the advisor in prior years.

At the end of this fiscal year because the unrealized depreciation exceeded the amount of the net realized capital gains no capital gain incentive fee was due or payable. And to date, no capital gain incentive fees have been paid. We had net unrealized depreciation of $29.6 million during the year after a deferred tax benefit of about $12 million, compared to a net unrealized appreciation of $6.5 million during fiscal '07 after a deferred tax expense of roughly $4 million. In summary we had a net decrease in net assets resulting from our operations for fiscal 2008 of approximately $24.4 million, compared to a net increase in net assets resulting from operations for fiscal '07 of approximately $5 million.

That leaves us into DCF, which we consider the most meaningful measure of our financial performance. And again DCF is distributions received from investments less total expenses. Distributions from investments include the amount received by excess cash distributions from our equity investments, paid in kind distributions and dividend and interest payments. Total expenses for DCF include current or anticipated operating expenses, leverage costs and current income taxes payable on our operating income. Total expenses do not include deferred income taxes or accrued capital gain incentive fees. And I'll point out that our DCF calculation and reconciliation to our GAAP results for both fiscal '08 and '07 are included in our MD&A discussion in our annual report filed on Form 10-K earlier today. DCF for the fourth quarter was about $1.4 million, which includes roughly $2.4 million in gross distributions from investments less about $445,000 in base management fees, and that's net of the expense reimbursement, less $272,000 and other operating expenses, and about $322,000 in interest expense on our credit line.

DCF for our fiscal 2008 was approximately $8.4 million in total as compared to $4.4 million in fiscal '07. As you recall our IPO was in February of '07, so a good part of that year was a ramp up period and therefore we would-- we received less in distributions in 2007 than we did in 2008 when we were essentially fully invested. We received $9.7 million in gross distributions from investments in fiscal '08 compared to about $6.5 million in '07. We had approximately $2.2 million in distributions paid in kind from Lonestar and High Sierra LP and GP in 2008, compared to roughly $295,000 in distributions paid in kind from Lonestar in 2007. And as Ed mentioned earlier, historically we have included all paid in kind distributions in our DCF, however in the future we don't intend to include paid in kind distributions which are received by us as a result of credit constraints, market dislocation or other similar issues.

We had approximately $1.2 million in interest income and dividends this fiscal year, compared to about $1.5 million in fiscal '07. We incurred approximately $1.9 million in base management fees, net of the expense reimbursement this year compared to $1.8 million in the prior year. We had approximately $1 million in other operating expenses and approximately $1.7 million in leverage costs in '08, compared to $1.1 million in other operating expenses and about $1.1 million in leverage costs the prior year. We paid out approximately $.3 million in distributions to our common stockholders in fiscal 2008 compared to approximately $5.3 million in the prior year. And that summarizes our DCF and operating results. I'll now turn the call back over to Ed.

Thank you Connie. And thank you, guys for joining us today and for your continued interest and investment in Tortoise Capital Resources. Operator, that concludes our prepared remarks, and we are ready to respond to questions.

Thank you very much. (Operator Instructions). And our first question comes from the line of Gabe Moreen with Banc of America/ Merrill Lynch. PLease go ahead.

Afternoon, everyone. Couple of questions. Ed you talked about the bank facility renegotiation, can you just provide some more color on that in terms of how you expect to go in terms of the size that you're possibly look to renew the facility out and any discussions around pricing you might have had around the facility?

Yes, we haven't got in detailed discussions but we are aware of one participant that has told us that they don't intend to renew. But we do believe that based on the commitments of the other members in the syndicate that we can renew it for a size that really makes sense for us, and our thoughts on the amount of leverage we would take going forward and should give us plenty availability going forward if we need it. So we're obviously don't know for sure what pricing will be right now, but we think we'll be comfortable with the availability we have.

Okay, great. And then in terms of Lonestar and the sale to Penn Virginia is it too early to start-- to be talking about some of those metrics on the volume side that need to be hit to get additional payouts for you guys?

Yes, well it is a little bit early, we expect to be able to get some data from the company after they've kind of concluded their annual meeting which was-- they had their call this afternoon at 12:00. So we should be able to get some color on that in the next few weeks. But I will tell you in general that the Barnett drilling activity has been down, so I would expect it to be--to be-- I expect it to be below what we originally anticipated but we'll deal with that information when we get it.

Okay. And then in terms of your stance, some of your public MLP's clearly had a nice snap back here in the new year along with the rest of the sector, just your thoughts in terms of monetizing some of these to potentially get some more capital in the door.

Well, you're right, we have seen a rebound since January, right now when we look at our portfolio public companies we feel that they've done a good job to stabilize their 2009 distribution. So it definitely makes sense for us to hold these with their leverage costs being below 4%, these are providing attractive yields to us. But obviously they are, they're available to us if we would see the attractive private market, or private investment that would be in excess of those yields obviously, so.

Okay and just final question for me in terms of any immediate-- I say-- think there was a little bit more investment in Mowood that happened recently, but otherwise in terms of your portfolio of privates any other immediate capital contribution needs or opportunities?

Not at this time that I think we would be prepared to talk about. I think we're focusing right now on monitoring and servicing our existing portfolio and I think in general we hope to see more attractive opportunities in 2009 on the private side.

Okay. Thanks for the time.

Thanks, Gabe.

Our next question comes from the line of Selman Akyol with Stifel Nicolaus. Please go ahead at this time.

Thank you, just a couple quick questions. First of all, can you just remind me who has your current revolver?

US Bank is the lead in that.

And then for the portfolio companies, especially on the private side, do they have lines of credit that are coming up this year or is that going to be 2010 events that they've got to be worried about?

Well they're scattered throughout the year in 2009 through 2010, but we do have some that are coming up for maturity, and as I kind of eluded to in the call, we monitor that very closely.

Okay, thanks, Ed.

You're welcome. Thanks, Selman.

(Operator Instructions). And Mr. Schulte, there do not appear to be any further questions at this time. Please continue with any comments you may have.

Thank you, everyone. I hope that the questions are a result of the-- we hope as our completeness in our discussion about our financial results. There is more information in the 10-K that was filed today. We very much appreciate your continued interest in our Company and we'll endeavor to continue to identify attractive investments on a risk adjusted basis in 2009. Thanks very much.

Thank you. Ladies and gentlemen, this does conclude the TTO fourth quarter conference call. If you would like to listen to a replay of this conference call, you may do so by dialing 303-590-3000 or 1-800-405-2236. You will need to enter the access code of 11124158. The conference will be available after 6:00 p.m. Central. We do thank you for your participation in today's call. You may now disconnect your lines at this time.