CorEnergy Infrastructure Trust Inc (CORR) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TTO first-quarter 2009 conference call. (Operator Instructions). Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, April 8, 2009. I would now like to turn the conference over to Mr. Dave Schulte, CEO for Tortoise Capital Resources.

Thank you for joining us today for our 2009 first-quarter earnings call. An archive of this 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 tortoiseadvisors.com.

I 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 your 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 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. 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 earlier today.

These documents can be accessed through the Investor Relations section of our website. We do not intend to update our forward-looking statements.

Now for the substance of the call. TTO invests primarily in private companies, which operate in gas gathering, processing and transportation, oil and gas productions, aggregates and coal extraction. We primarily own equity securities in these companies and seek high current dividend payouts combined with growth prospects. These characteristics are available in private equity investing, which also generates the opportunity for capital gains upon an eventual sale or IPO of the company.

While we mitigate investment risk by concentrating in these defensive sectors, our companies tend to be smaller and more reliant on bank financing for their working capital needs in order to fund growth. The shrinking of bank funding which began in 2007 has been very challenging for private companies, which also pay out high dividends, which puts pressure on our dividend income.

Capital gain opportunities have also been scarce due to the relative decline in equity values affecting public companies in our sector and their limited capital availability to fund M&A activity.

In the public market publicly traded MLPs have posted mixed results thus far in 2009. Long-haul pipeline company fundamentals have been impacted by declining volumes, and gas gathering and processing companies have suffered margin erosion due to falling commodity prices and higher service costs. Nonetheless, MLPs have had positive total returns in 2009 and have begun accessing capital markets to support growth programs.

Late last week one of our upstream MLP holdings announced receipt of a going private offer at a 40% premium to its last trade. While our reported NAV is down for the first quarter, all but three of our companies are essentially flat to the last quarter or the end of 2008. We view this as an indication that there is value in our sector and in our holdings, and that the capital markets are beginning to function to support TTO's sector focus and investment thesis.

We recently announced that our own credit line has been extended, albeit on more restrictive terms. Terry Matlack, our CFO, will next address our leverage position after which Ed Russell, President, will discuss specific investment results. Followed by Connie Savage, our Controller, who will review our financial results.

With that, I will hand the call over to Terry Matlack.

We recently announced that we had extended our bank line through June 20, 2009, and we continue to work toward a longer-term bank solution. Our policy has been to employ leverage where we believe that return can be generated, but we believe that the return that can be generated from our investments exceeds the all-in cost of leverage. And certainly at today's yields on TTO's holdings, we believe the returns exceed our all-in cost of leverage.

We have reduced the size of our bank line to $25 million. And through this extension period we will further reduce it by at least half of any of the proceeds from the liquidation of public holdings, and all of the proceeds from the sale of private holdings, although we are not required to liquidate any holdings.

As of February 28, 2009 we had bank borrowings of $23.1 million or approximately 25% of the value of our investment assets. In other words, the value of our investment assets, excluding deferred tax assets and cash used to pay distributions, was approximately 4 times our bank debt.

Since February 28, we have liquidated a portion of our public investment holdings and utilized the proceeds to reduce bank debt. We presently have outstanding $19.3 million of bank debt, with our investment assets exceeding that by 4.6 times.

We realize that reductions in our investment holdings to reduce leverage will decrease our distributable cash flow. Based upon our portfolio of sales to date, debt reduction and our increased borrowing costs, we estimate our quarterly distributable cash flow would decline $0.04 as compared to last quarter, holding most other things constant.

Furthermore, Legacy Reserves LP announced that a private equity firm has offered to purchase that company. If that sale were to be achieved at the stated price, it would further reduce both our investment holdings and bank leverage by approximately $3 million.

Combined with the recent sale of public holdings, this sale would leave us with leverage on a pro forma basis of about 19% of our investment assets. Meaning that our assets exceed our leverage by 5 times on a pro forma basis. This is a level of asset coverage that we think is more than adequate. We believe this amount of coverage provides ample cushion against market volatility and should be acceptable to banks.

Our final lending facility terms will depend on continued discussions with the banks over the next quarter and on market conditions for both MLPs and the broader financial markets.

Now let me turn the call over to Ed Russell, who will discuss our portfolio in more detail.

The MLP sector continues to manage through the impact of the recession and the related credit crisis and recover from significant deleveraging of MLPs positions late last year.

For the three months ending February 28, 2009, the Wachovia MLP Total Return Index reflected a total return based on market value assuming reinvestment of quarterly distributions of 6.1%. Our total return for the same three-month period based on the same parameters compared favorably at 28.3%.

Our total assets decreased from $112.3 million at November 30, 2008 to $103.5 million as of February 28, 2009. Our net assets at the end of the quarter was $8.67 per share compared to $9.96 per share at November 30.

The total cost basis of our investments remain in excess of their fair value, and that combined with our operating losses, results in a deferred tax asset of about $9.3 million net of a $4 million valuation allowance of roughly about $1.04 per share. As a reminder, we did not include the deferred tax asset in the cancellation of our management fee.

At the end of the first quarter the value of our investment portfolio, excluding short-term investments, was approximately $91 million, comprised of equity investments of $82.2 million and debt investment of $8.8 million. The portfolio was invested in 57% midstream and downstream, 12% upstream and 31% aggregates and coal companies.

We made one follow-on investment during our fiscal quarter. In December we invested $515,000 in Mowood, and combined that with our other notes and turned it into one promissory note with an annual interest rate of 9% and a maturity date of December 31, 2009.

We monitor the risk profile of our investments and rate each investment on a scale of 1 to 3. In February 28, 2009 all of our portfolio companies had a rating of 1, with the exception of Quest Midstream Partners, which we downgraded from a 2 to a 3.

During our third and fourth quarters last year High Sierra elected to distribute additional common units in lieu of cash distributions to common unitholders. We therefore had assigned it a rating of 2 as of November 30, 2008; however our first quarter this year High Sierra paid a cash distribution of $0.61 per unit to all common unitholders. And primarily as a result of the cash distribution High Sierra was upgraded to a 1.

Before we provide more detail on Quest, I would like to walk through other particular portfolio items that are worthy of mention. Given the effect of debt payments that Terry mentioned, our distribution would be $0.19 for the present quarter. For sensitivity analysis purposes we also provide our estimate of the possible impact that certain event, if they transpired, would have on our distributable cash flow.

Terry had mentioned earlier that last week Legacy Reserves announced that its management team had received a purchase offer at $14 per unit. Assuming the transition closes and we use 100% of the proceeds to pay down debt, this realization event, while improving our leverage ratio would result in a pro forma reduction of our quarterly DCF of approximately $0.01 per share.

Abraxas Energy Partners' existing subordinated loan agreement requires that the company raise new capital of not less than $20 million by April 30, 2009. The company is working on refinancing its existing subordinated debt facility and has filed for an IPO. In the event that it cannot raise the required capital, the subordinated credit facility will begin to amortize, hurting the company's ability to maintain its distribution at the current level. Such action could result in an estimated $0.01 per share reduction in TTO's quarterly DCF.

Eagle Rock Energy Partners, our largest publicly traded investment, is currently hedged 90% in 2009 and 2010. We believe these hedges provide important support for the ability to maintain Eagle Rock's current distribution level. In addition the subordinated units in the company's capital structure provide common unitholders with additional protection below the MQD of $0.3625 per unit. While not currently anticipating a reversion to the MQD, it would result in a reduction in TTO's quarterly distributed cash flow of less than $0.01 per share.

Now the discussion of these previously mentioned items are not meant to be a definitive indication of future performance, but they are intended to provide parameters around potential impact to our DCF. And just as a reminder, we currently target a payout of between 95% and 100% of distributable cash flow.

Finally, Quest Midstream continues to face challenges largely as a result of the current commodity price environment for natural gas, and more specifically the Cherokee Basin natural gas, which is currently priced at a 30% discount to the NYMEX spot price versus the historical discount of 14%.

This pricing environment has put significant financial pressure on Quest Midstream's primary customer and on the rate it expects to receive on it Bluestem Pipeline. In addition the KPCP pipeline, which is was acquired by Quest Midstream in November 2007, has not performed to our expectations, due mainly to higher than anticipated expenses.

Quest Midstream suspended its distribution to its common unitholders during our fourth quarter last year, and accordingly we assigned the Company a rating of a 2 at year end.

During our first quarter this year Quest Midstream again did not pay a distribution to its common unitholders. And the company is currently -- but the current company is currently in compliance and expects to remain in compliance with its bank covenants. The company could resume distribution to common unitholders, subject to debt covenant requirements. However, since the company anticipates its gathering rate beginning in 2010 to go down, we do not expect to receive any distributions in 2009.

Further, our fair value for Quest Midstream has declined from $12.25 to $5.50 this quarter. And based on the current commodity environment it appears that the investment will likely not provide a full repayment of the amount invested, and accordingly we are going to downgrade that rating to a 3.

With that, I will turn the call over to Connie Savage for a discussion of our financial results.

I will begin with a review of our DCF, which as you know, is simply distributions received from investments, plus total expenses. Distributions from investments include cash distributions from our equity investments and dividend and interest income.

DCF includes stock distributions, but not those which are pay-in-kind as a result of credit constraints, market dislocation or other similar issues. Total expenses for DCF include current or anticipated operating expenses, leverage costs, and current income taxes payable. Deferred income taxes and accrued capital gain incentive fees are not included in DCF.

Our DCF calculation for this quarter and a reconciliation to our GAAP results are included at the bottom of our press release issued earlier, and in the MD&A discussion of our quarterly report filed on Form 10-Q.

We received $2.9 million from our investments this quarter, which excludes about $28,000 of distributions paid-in-kind from Abraxas. This distribution, which was in addition to Abraxas' normal cash distribution, was paid in stock as a result of credit constraints, and therefore are not included in DCF.

We incurred approximately $327,000 in base management fees net net of the expense reimbursement, about $218,000 in other operating expenses, and approximately $171,000 in leverage costs. That gives us DCF for the first quarter of approximately $2.2 million, about the same as the comparable quarter last year.

We paid out approximately $2.1 million in distributions to our stockholders this quarter, or about 94% of our DCF, compared to about $2.2 million in distributions or 102% of DCF in the comparable quarter last year.

We had unrealized depreciation this quarter of $12.9 million -- that is before deferred taxes -- and realized losses of about $500,000, also before deferred taxes. The realized losses are attributable to events that occurred this period relative to our Millennium and Lonestar realization events, and essentially serve to reduce the realized gains we recognized from those transactions last fiscal year.

This quarter we increased the reserve against the escrow from the Millennium sale for additional post closing adjustments, resulting in a realized loss of $327,000.

Also, in February we received a distribution of freely tradable common units of Penn Virginia Resources and PVG from the Lonestar transaction. We recorded these units at a cost basis equal to the fair value on the date of receipt, and reduced our basis in lone Star by a portion of the respective relative value of the entire transaction, resulting in a realized loss of $173,000.

In summary, we had a net decrease in net assets resulting from our operations for the first quarter of approximately $9.5 million.

And with that, I will turn the call back to Dave.

Thank you again for listening in. I would like to invite you to attend our annual meeting of stockholders on Friday, May 22, 2009 at 11 AM Central time at our office. Please take time to review your proxy statement and to vote.

Operator, that concludes our prepared remarks. We are now ready to respond to any questions.

(Operator Instructions). Gabe Moreen, Banc of America Securities.

A couple of questions. First, a question on the bank facility. Are they -- in your discussions with your banks, are they looking for a specific level for you to get down to, whether as a percentage of assets on an absolute basis?

And secondly, I guess in your discussions with them, do you feel comfortable that even if 90 days or however many days it is now up until that 90 day extension eclipses that you would be able to get another 90 day extension?

In answer to your first question, they have not expressed a specific percentage or a specific level. I think that generally I would characterize it as it came after a period of time where both they and us have had a lot of volatility in the market. We came up to the end of the period and had not had everything documented. and it was right during the month of March, where there is a lot of travel. So we didn't hit the deadline of March 20, and so we agreed that we would move it to 20th of June and continue to discuss a program that we think will be longer-term.

Based on those discussions I believe that certainly at the level that we are at, we should be successful in achieving a relationship with the bank or banks that will allow us to continue to utilize leverage, as we have in the past.

Your second question was --?

Just in terms of -- well, it sort of sounds like, Terry, you're not going to get to this 90 day deadline, or your extension, you will have something (multiple speakers).

My experience with life has always been that if you allow a test to take a certain amount of time it will probably fill it up. So since we have 90 days to work on it, I wouldn't expect that we will have a lot to announce much. But obviously when we do, we will be back to you with an announcement as quickly as we have something to work on.

Our goal, obviously, is to work on it as expeditiously as possible, but I'm not in control of that whole situation. And certainly the experience that we have had in the sector over this quarter I think is helpful, in that it has been good and the more stable, and so that has been helpful. I guess I would just commit to you that as soon as we know something, you will know it.

Okay. Appreciate that. Ed, can you talk about High Sierra? Is that $0.61 distribution the same level you were getting before, I think it PIK'ed the last two quarters?

And also if you can just comment a little bit in terms of the resolution at High Sierra around their revolver and whether they are I guess playing offense at this point in terms of what they are able to line up?

Sure. The $0.61 was the PIK distribution, and they paid that in cash here in the first quarter. In terms of -- I just have to be careful. They are not a publicly traded company -- in terms of where they are at with the process.

But I would say that right now we have a budget and we have projections and we have -- the knowledge that we have based on the bank facility that they have in place that we feel comfortable that they can continue to maintain their cash distributions.

I would tell you that just in my opinion the company is relatively -- has a small amount of debt on its balance sheet. So I don't think that the company would describe themselves as playing offense right now, because I believe that they see a lot of potential opportunities in their marketing business that they are not capturing because of the fact they have reduced their debt considerably. So I would say that their leverage is sufficient -- their leverage situation right now is sufficient to maintain their cash distributions. But I think they are looking to improve that to take advantage of opportunities they see in the market right now.

Just following on, I guess Abraxas, I guess I wasn't (inaudible) is a distribution [PIKing] right now, or do you get a distribution (multiple speakers)?

No, we got a cash distribution from them on the last quarter. We are just trying to quantify that if something happened that they weren't able to renew their debt facility, what effect would that have on our DCF. But they are working on that right now.

This is just one -- in terms of the situation there they are still relatively well-hedged from a commodity price standpoint (multiple speakers)?

Yes, about 85%.

Selman Akyol, Stifel Nicolaus.

Just following up on the High Sierra, typically when do they declare their distribution? I know you said it came in during your fourth quarter?

I think they are a calendar year, and they are similar to the other MLPs in terms of their timing -- the publicly traded MLP schedule.

Then just also last question here. But on Mowood, it says you are providing managerial assistance to them.

Yes.

Can you give us a little color on what that is?

Yes. We have -- one of our associate goes and participates in preparing models and projections and so forth. I sit on the Board of the company. So as outlined in DTCs we are supposed to provide that assistance when necessary. And we are a majority owner in the company, so we are helping them as they are growing, and taking Timberline primarily from a development company with three projects that they were under construction to an operating company.

(Operator Instructions). [Don Kosky], UBS.

What percentage -- two questions actually -- what percentage of your NAV is characterized as level II and level III? And are you exploring potential banking relationships with other banks than the ones you are presently doing business with?

I will go with the second question first. I would tell you that right now we have a relationship with a lead bank that we continue with, and have been very pleased with. At the same time in this market we are constantly talking to capital sources of all types in the hopes that we can improve the duration, the cost, the fees of leverage to -- that are borne by our shareholders. So we try to keep in touch with the market and what is available. And in that regard we are always in touch with the capital markets.

So we are trying to at any time build flexibility into our capital structure. Part of that flexibility is knowing what might be available in the event that your banks at any given time may change their view or their allocation to a particular sector or whatever.

Having said that, I don't see any "trouble" with our banking relationship. And believe that when we get those wrapped up and get something with rate of duration we will be able to announce what that is when that is in place.

Well it would seem that you would be able to accomplish getting much more flexible and better terms at some other institution.

UBS, for example.

Yes, like UBS. Is that an offer?

No, I am not an agent for UBS, nor am I trying to be.

I understand. I think that anybody can look at the capital markets today and see that many banks are in a situation of trying to take care of their own issues with respect to leverage and assets and all of those kinds of things.

You also have to look take a look at the nature of the underlying portfolio that we have here, which is somewhat different than maybe some of the other portfolios that we manage -- the other funds that are all invested in publicly traded securities. Here a good portion are in private securities. Which you have valuation that we have to do quarterly. It is not mark-to-market by a public market, even though we do look to the public market to help us value those. So those kinds of issues make it more time-consuming than it is for perhaps an entity that doesn't have those issues.

But all of that is balanced against the fact that we are very comfortable with where our leverage is as compared to our total assets. So when you look at that -- and we are covered more than 5 to 1, that leads me to believe that certainly we can get this in a position that serves shareholders well. But looking at market conditions, I also think that it is a challenging time for financing of any type.

My first question, is there an answer to that one?

This is Connie. I would be glad to address that. I would also point you to the footnotes to the financials, footnote 6. And to the benefit of those that don't know what level II and level III are, those are inputs that are used to determine fair value. And level II and level III generally are inputs other than quoted market prices in active markets.

The level II and level III inputs for our securities represent approximately 80% of the fair value, total fair value of investments at February 28. I hope that addresses your question.

Yes, thank you.

I am showing there is no further questions in queue. I would turn it back over to management for any closing remarks.

Thank you everyone for dialing in. A reminder this webcast will be available on our website at tortoiseadvisors.com for future reference. We will speak to you again next quarter. Thank you.

Ladies and gentlemen, that does conclude today's TTO first-quarter 2009 conference call. If you would like to listen to a replay of today's call, please dial 303-590-3000 or 800-405-2236. Enter the passcode 11129239. (Operator Instructions).

Thank you for your participation. You may now disconnect.