CorEnergy Infrastructure Trust Inc (CORR) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Tortoise Capital Resources second quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, July 9 of 2009.

I would now like to turn the conference over to our host, Mr. Ed Russell, President, Tortoise Capital Resources Corp. Please go ahead, sir.

Thank you for joining us today on our second quarter earnings call. I'm joined by 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 call -- during the course of this presentation that are not purely historical are forward-looking statements, including TTO 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 security 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 on Form 10-Q, which was filed earlier today, and our annual report on Form 10-K, which is filed earlier this year. These documents can be accessed through the Investor Relations section of our website. We do not update our forward-looking statements.

TTO invests primarily in privately held and micro-cap public companies operating in the midstream and downstream segments, and to a lesser extent, the upstream segment of the energy infrastructure sector. Unlike most BDCs, we focus on equity investments, which carry a different risk/reward profile than our competitors, who invest primarily in debt.

While equity investments are generally more at risk for price volatility and distribution cuts, these investments provide an opportunity for capital gain upon the eventual sale or IPO of the issuer.

In the public markets, the MLP sector has continued to see a recovery in 2009 with the Wachovia MLP index reflecting a total return based on market value, assuming reinvestment of quarterly distribution of 33.5%, as of May 31, 2009. However, individual publicly-traded MLPs have continued to post mixed results. MLPs with fixed-based fee models, strong capital positions, and minimal commodity exposure, have fared best; but even gatherers and processors have been impacted by declining volumes, margin erosion and credit concerns.

Our net asset value for May 31, 2009 was $8.91 compared to $8.67 at February 28, 2009. The value of our investment portfolio, excluding short-term investments, was about $91 million, including equity investments of $82.2 million, and debt investments of $8.8 million. We had $16.4 million in unrealized appreciation of investments this quarter before income taxes.

The fair value of all our private companies, with the exception of Lonestar, increased over flat during the last quarter. The increase in fair value of the private investments was offset by a decrease in the value of our Eagle Rock units held at quarter end, a reduction in assets due to sale of publicly traded securities, the utilization of sales proceeds to reduce leverage, and a decrease in the deferred tax asset, resulting in an overall decrease in our total assets.

Our total assets decreased from $103.5 million in February of 2009 to $100.9 million as of May 31, 2009. Our portfolio was invested 57% in midstream and downstream, 12% upstream, and 31% in aggregates and coal as of May 31, with approximately 85% in private investments and 15% in publicly traded securities.

We recently announced a 90-day extension to our amended credit facility through October 20, 2009. We reduced the balance of our credit facility from $23.1 million as of February 28, 2009, to a current balance of $11.7 million.

The amended credit facility retains a provision requiring us to apply 100% of the proceeds from any private investment liquidation and 50% of the proceeds from the sale of any publicly traded portfolio asset to the outstanding balance of the facility. In addition, each repayment of principal will primarily reduce the maximum amount available. Under the terms of our credit facility, we maintain asset coverage required under the 1940's Act.

We have been and continue to be in compliance with these terms. The paydown of our line of credit has been accomplished primarily through the sale of publicly traded securities. We sold all of our freely tradable Eagle Rock units as well as the restricted units we received from the Millennium sale, which were sold pursuant to Rule 144.

We continue to seek a longer-term lending arrangement and to reduce our leverage position through the sale of publicly traded securities. Additionally, there may be opportunities to realize liquidity from a few of our private holdings, in order to further reduce or even eliminate our leverage.

Credit constraints and liquidity issues have been factors in the reduction or suspension of cash distributions of some of our portfolio companies, including Eagle Rock, Abraxas, and Quest, which in turn, have reduced our ability to pay distributions to you. Eagle Rock announced a voluntary reduction in its quarterly distribution from $0.41 to $0.025 per unit in order to reduce debt and improve its liquidity position, resulting in a $0.04 per share decrease in our second quarter DCF.

Another of our portfolio companies, Abraxas Energy Partners, elected to defer its distribution until the second quarter. This resulted in a $0.02 per share reduction in our second quarter DCF. On June 1, 2009, we paid a distribution to stockholders of $0.13 per share, a decrease of $0.10 per share compared to our prior quarter.

If we sell our freely tradable public securities to further reduce our credit facility balance, our DCF would be reduced by approximately $0.01 to $0.02 on a sustainable basis.

As part of the monitoring process, we continue to assess the risk profile of each of our investments. During the fiscal quarter, we discontinued the rating of our investments on a scale of one to three, because we felt the rating scale could not adequately capture and convey all the factors that we consider in an assessment of the overall investment risk.

So, going forward, it's our intention to discuss each private investment, the relative performance and risk factors that we deem relevant in assessing that particular investment. And we believe this will allow our shareholders to develop a more complete understanding of our portfolio company.

I'll begin the discussion of our private portfolio companies with Abraxas Energy Partners, a private exploration and production company that operates long-lived, low-decline natural gas and oil reserves located primarily in the Delaware and Gulf Coast Basin of Texas, Rocky Mountains, and mid-continent regions of the United States.

As mentioned earlier, Abraxas suspended its distribution this quarter, and has since announced the signing of a definitive merger with Abraxas Petroleum, which trades on the NASDAQ under the symbol AXAS, in all-stock transaction. Consideration is valued at $6.00 per Abraxas energy unit, subject to a collar of 4.25 to 6 units of Abraxas Petroleum. It includes a 90-day lock-up period, followed by a multi-year staggered lock-up period.

By merging into Abraxas Petroleum, which has very little outstanding debt and does not pay out a dividend, the merger should result in a borrowing base sufficient to have one tranche of debt, eliminating Abraxas Energy's second lien debt. However, the merger is expected to result in the permanent discontinuation of distributions, as well as more exploration-oriented risk profile.

If the merger is not approved by Abraxas Petroleum's shareholders or regulators, Abraxas Energy, under its current loan agreement, would be faced with significant debt amortization payments due to the maturity of its second lien debt, which we believe would have precluded its ability to pay distributions, until the second lien debt was paid off or refinanced.

Moving on to High Sierra, which is a holding company with diversified midstream energy assets, focused on the processing, transportation, storage and marketing of hydrocarbons, as well as a processor and disposer of oilfield-produced water. Year-to-date, overall consolidated performance versus budget has been favorable, enabling the Company to maintain a strong cash position.

Management continues to make progress in bolstering its credit arrangements with its lenders, which last year, caused the Company to pay PIK distributions instead of cash distributions for two quarters. The Company recently amended its construction and term loan credit facility for the Monroe Gas Storage facility, and expanded its corporate revolver by $20 million, significantly reducing its liquidity concerns.

Depressed natural gas prices and high basin differentials in certain of the areas served by the Company's water-handling operations have dampered drilling and production activities; but construction permitting and testing of the Company's discharge plant in the Pinedale anticline is complete, and the plant is operating commercially, providing capacity for increased water-handling and treatment activities. In addition, Monroe Gas Storage, High Sierra's Mississippi-based natural gas storage facility, although not complete, has commenced commercial operations, and the facility is expected to be a significant contributor to High Sierra's future overall results.

Next is IRP, which has surfaced in underground mines in southern West Virginia, comprised of metallurgical and steam coal reserves, coal washing and preparation plant, rail load-out facilities, and a sales and marketing subsidiary. Demand for pricing for central Appalachian steam coal and metallurgical coal has fallen dramatically from last year's levels, as the worldwide recession has lowered industrial electricity usage, and significantly curtailed domestic and international steel production.

While the recession continues, some examples of increased demand for coal has surfaced. IRP is buoyed by the strong cash position resulting from last year's operations, proactive steps taken by management to offset the reduction in sales, and strong first quarter results at its marketing subsidiary. Year-to-date, the Company is above budget and in compliance with bank covenants.

We note that in addition to reduced demand and lower pricing, recent environmental regulation and proposed legislation could have a negative effect on the Company's operations.

For the discussion on Mowood, I'd like to talk primarily about the Company's two main subsidiaries, Omega Pipeline Company and Timberline Energy. Omega, which operates the pipeline servicing the Fort Leonard Wood in Missouri and commercial customers, has performed in line with budget and is expected to continue to post strong results during the year, as expansion projects on the Fort enhance results.

Timberline, which construction operates landfill gas to energy projects, has performed moderately below budget year-to-date, as a result of start-up operational issues. Timberline has been working to resolve its operational issues and to expand capacity at its existing locations, which should result in improved performance.

Timberline has structured its off-take contracts to eliminate or minimize commodity exposure in an effort to create more predictable performance. In addition, Timberline has several growth opportunities available at existing locations over the next few years, as well as the opportunity to develop new projects requiring additional capital. Mowood, as a consolidated entity, remains in compliance with all bank covenants.

Quest Midstream, which owns more than 1,800 miles of natural gas gathering pipeline and over 1,100 miles of interstate natural gas transmission pipes in Oklahoma, Kansas, and Missouri, announced earlier this week a definitive agreement to merge with Quest Resources and Quest Energy Partners, into a new publicly traded company that is not expected to pay dividend.

The new company's strategy will be to create shareholder value through efficient development of unconventional resource plays, including coalbed methane in the Cherokee Basin of southeast Kansas and Northeast Oklahoma, and the Marcellus shale in the Appalachian basin. Management expects significant cost savings from this simplified structure.

The merger would change the risk profile of our investment from primarily a gathering company, to an integrated company that has increased drilling risk with the exploration of its Marcellus assets, and commodity exposure as it drills and provides gathering services in the Cherokee Basin.

If the merger were not to be approved by shareholders or regulators, we believe Quest Midstream would be able to profitably operate in 2009, but would face significant operational risk created by an estimated lower gathering rate in 2010, and significant financial pressures with QELP, its primary customer, and QRCP. Quest Midstream is in compliance with all of its bank covenants.

VantaCore, which owns a quarry and asphalt plant in Clarksville, Tennessee, and a sand and gravel operation located near Baton Rouge, Louisiana. The Company's business is closely linked to the level of commercial construction and infrastructure spending in the two territories it serves.

Due to the weakened economy and difficult credit environment, baseline construction spending in these sectors has been off significantly, resulting in lower than anticipated revenue for the Company. In addition, wetter than normal spring weather delayed the typical seasonal uptrend in VantaCore's sand and gravel operations in Louisiana. Management has responded to these challenges by implementing cost-saving initiatives and by prudently reducing CapEx.

In addition, the impact has been partially offset by business stemming from the construction of a new Dow Hemlock facility in Clarksville, prospective contracts resulting from the continued growth at the Fort Campbell Army base, and the infrastructure development from the American Recovery and Reinvestment Act of 2009, are expected to provide support during this difficult economic environment.

In addition, our common unit positions in the Company's capital structure provide us certain payment preferences over subordinated unitholders, and therefore, provide us some comfort with respect to our distribution. VantaCore remains in compliance with its bank covenants.

That summarizes our private companies. We believe that the market and the economy in general have shown small signs of recovery, and we are cautiously optimistic about further recovery in 2010. However, we believe that private companies and the private market may recover more slowly than the economy in general. To this end, we are defensively positioning our portfolio to manage through current credit constraints and general economic challenges.

In our view, the fundamentals of our portfolio companies remains strong, and the long-term prospects for the energy infrastructure investments are attractive.

And with that, I'll now turn the call over to Connie Savage for a discussion of our financial results.

Thanks, Ed. First, I'll review this quarter's DCF. DCF, as you probably know, is distributions received from investments less total expenses. Distributions from investments include cash distributions from our equity investments, and dividend and interest income. DCF also includes stock distributions, but not those which are paid 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 financial results are included at the bottom of our press release issued earlier today, and in the MD&A section of our quarterly report filed on Form 10-Q.

Ed discussed earlier how the reductions and suspension of cash distributions from some of our portfolio companies has reduced our DCF. Our DCF for the second quarter of 2009 totaled about $1.3 million, compared to about $2.2 million last quarter and about $2.3 million in the second quarter of last year. We received $2.1 million in investment income this quarter, and incurred approximately $282,000 in base management fees, that's net of the expense reimbursement; about $236,000 in other operating expenses, and approximately $257,000 in leverage cost. We paid out approximately $1.2 million in distributions to our stockholders this quarter, or about 90% of our DCF.

We had unrealized appreciation this quarter of $16.4 million before deferred taxes, and realized losses of about $7.3 million, and that's also before deferred taxes. Those realized losses are primarily attributed to sales of publicly traded securities, most notably our Eagle Rock units, which Ed discussed earlier, were sold to pay down our leverage, which as mentioned earlier, has been extended 60 days to August 20, 2009.

So, in summary, we had a net increase in net assets resulting from operations for our second quarter of about $3.5 million. And with that, I'll turn the call back to Ed.

Hey, thanks, Connie, and thanks, everyone, for joining us on the call today. Operator, that concludes our prepared remarks and we're now ready to open it up for questions.

(Operator Instructions). Selman Akyol, Stifel Nicolaus.

Quick question -- on the PVR, you're supposed to get 4,700 units in July along with some PVG units too. Have you received those yet?

No, we have not received those yet, Selman, but we would expect to. We are aware of no escrow claims at this point, so we would expect to receive those shortly.

Okay. And then the second question I have is -- I guess on June 19, you again had to amend your credit facility, and it's now down to a balance of, I presume, around $11.7 million -- is that correct?

That's correct, Selman.

Okay, and then what would you anticipate how that looks, I guess, over the next 60 days?

Right now I would anticipate us getting somewhere -- a little under $10 million between now and the end of August. I really don't have a planned number, but we do want to get it under $10 million. And we're continuing discussion with the banks regarding the renewal beyond that.

I got you. And then in terms of -- I mean, this keeps going lower -- do the number of banks actually within that continue to go down too? Or are you staying pretty much (multiple speakers) --?

Yes, well, we're looking at really probably having one or two banks handling it, at the most.

All right. Thank you very much.

Thanks, Selman.

David Ratliff, Doucet Asset Management.

Thanks for taking my question. With your appreciation in your holdings or your portfolio this quarter, was there a single -- you know, one single lump appreciation? Or is that pretty widespread?

I can speak to that. Generally, all of the private companies were either flat or up from last quarter. I wouldn't say necessarily that there was one specific. It was more widespread. Though Ed mentioned, though, prior in the call, much of that was offset by the decrease in the Eagle Rock securities, and the fact that we sold assets to pay down our leverage.

And this is probably in your 10-Q, but did you sell all of your Eagle Rock holdings? Or are some of those still held in escrow?

Yes. After the end of the quarter, we sold all of our freely tradable Eagle Rock units, including those restricted units that we received from the Millennium sale, which we sold under Rule 144. We do continue to hold the escrow units.

Okay. And you gave some color on what's going on with each one of your private companies. Your High Sierra, I believe, in your last distribution or your last dividend, made up a significant portion of that -- you know, that dividend. I believe it was like $0.06 or $0.07.

High Sierra prospects going forward to continue the dividend -- continue the distributions? I mean, I know you don't have a crystal ball or anything, but can you just provide any color on their health going forward?

Yes. As you mentioned, we can't -- it's hard to predict that in the future, but what's encouraging to us is that when High Sierra did go to a PIK, it wasn't a result of the Company not producing sufficient cash flow to make that; it was a result of the bank covenants and the bank's desire that it not pay out a distribution, until it got leveraged below a certain point.

So, with the renewal of a couple facilities and improvement in their covenant ratios, we think that goes a long way to allowing High Sierra to provide a sustainable cash distribution going forward in the future. I mean, they obviously still have to watch operations, but that wasn't the reason for not paying it in the past. So, we feel like the -- as they steadily improve their bank relationships, that just provides us more comfort in their ability to pay.

Okay, well, fantastic. Thanks very much and good luck next quarter.

Thank you.

(Operator Instructions). And I'm showing there's no further questions in the queue. I'll turn it back over to management for any closing comments.

Well, we don't have any at this time. Just thanks, everyone, for joining the call. Appreciate it.

Thank you. Ladies and gentlemen, that does conclude today's Tortoise Capital Resources second quarter conference call. If you would like to listen to a replay of today's call, please dial 303-590-3030 or 1-800-406-7325, enter the pass code 4075823. Once again, those numbers are 303-590-3030 or 1-800-406-7325, enter the pass code 4075823. Thank you for your participation and for using ATT. You may now disconnect.