CorEnergy Infrastructure Trust Inc (CORR) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Tortoise Capital Resources first quarter conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conferences will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, April 8, 2010.

I would now like to turn the conference over to Pam Kearney, Investor Relations. Please go ahead.

Thank you, and welcome to the 2010 first quarter earnings call for Tortoise Capital Resources Corp. I am joined today by Ed Russell, President, and Connie Savage, Controller. An audio replay of our call will be available on our website. This information is included in the press release issued today, which is also posted on our website at www.tortoiseadvisors.com.

We would like to remind you that some of the statements made during the course of the presentation that are not purely historical may be forward-looking statements regarding PTOs 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 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 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 on Form 10-Q, which was filed earlier today, and our annual report on Form 10-K, which was filed in February. These documents can be accessed through the IR section of our website. We do not update our forward-looking statements.

And with that, I'll turn the call over to Ed.

Thanks, Pam. Good afternoon, everyone, and thank you for joining us today for our first quarter 2010 earnings conference call. I'll begin today by reviewing our investment performance during the first quarter and then discuss each of our private investments. Following that, Connie will discuss our financial and operating performance, and then we will open the phone line for questions.

From a market value perspective, our stock price continues to improve this quarter, closing at $6.85 per share on February 28, 2010, compared to $6.23 per share on November 30, 2009. Our total return for the three months ended February 2010, based on market value and assuming reinvestment of quarterly distributions, was around 12%. And since that time, our stock price has continued to improve, closing today at $7.59.

Our net asset value also improved this quarter from $9.29 per share on November 30 to $9.60 per share as of February 28. This increase in net asset value is primarily due to an increase in the fair value of our private investments, most notably, Mowood and IRP. Our total return for the three months ended February 28, 2010, based on net asset value and assuming reinvestment of quarterly distribution, was about 5.3%.

As of February 28, the value of our investment portfolio, excluding short-term investments, was $76.9 million, including equity investments of $71.6 million and debt investments of $5.3 million. The portfolio consists of 57% Midstream and Downstream investments; 8% in Upstream; and 35% in Aggregates and Coal.

And now I'll just go over and update [of] each of our private companies. First is Mowood, LLC, a holding company that owns and operates Omega Pipeline, a local distribution company that serves the natural gas and propane needs of Fort Leonard Wood and other customers in south-central Missouri. Mowood closed on the sale of its formerly wholly-owned subsidiary, Timberline Energy, LLC, to Landfill Energy Systems in February of this year.

We received $9 million in cash distributions from Mowood and used a portion of the proceeds to pay off our credit facility, which had an outstanding balance of $4.6 million as of November 30, 2009. We also invested another $750,000 this quarter in Mowood in the form of subordinated debt to facilitate growth projects at Omega. The remainder of the proceeds received from the sale of Timberline were invested in publicly traded securities after our quarter-end.

Over the next two years, we could receive additional proceeds of up to $2.4 million, based on contingent in-escrow terms contained in the sales agreement as amended. We expect the impact of the Timberline sale and the elimination of our credit facility to be neutral to distributable cash flow. The fair value of our Mowood investment as of 2/28 increased 14% on an apples-to-apples basis compared to last quarter, which included the Timberline investment.

Next is High Sierra Energy, our largest holding. High Sierra is a holding company with diversified midstream energy assets focused on the processing, transportation, storage and marketing of hydrocarbons. This quarter, High Sierra maintained its cash distribution of $0.63, which was paid in February of 2010.

For the year ended 12/31/2009, the company reported aggregate [un]audited EBITDA results approximately at budget. Results within the various business units were mixed, with favorable results at the company's Anticline water treatment facility in Pinedale, Wyoming, and Centennial Energy, which is a natural gas liquids marketing company -- generally offset the weaker than budgeted performance from several other business units.

National Coal County, an Oklahoma-based water transportation and disposal service company, which they acquired in 2007, continued to struggle, with reported results significantly below expectations, driven in part by a reduction in drilling activity in its service area.

High Sierra's crude oil and marketing favorable gross margins were offset by higher than budgeted delivery expenses, and the prolonged downturn of construction in Florida continues to produce lower results in High Sierra's asphalt business. High Sierra continues to work on refinancing its bank facilities. The terms of the working capital facility were recently amended and the facility was also extended to May 31, 2010.

We remain concerned that High Sierra does not have a permanent facility in place, which we believe is critical to any distribution paying company. The frequency and amount of High Sierra's distribution payments are subject to both operating performance and terms of financing arrangements. Our fair value of High Sierra at 2/28 is $23.33 per common unit, a slight decrease from our $23.46 per unit value last quarter.

Next is International Resource Partners, or IRP, which operates surface and underground coal mine operations in Southern West Virginia, which are comprised of both metallurgical and steam coal reserves, a coal washing and preparation plant, rail load-out facilities, and a sales and marketing subsidiary. For the year ended December 31, 2009, IRP reported EBITDA results well in excess of its budget. In January of 2010, IRP purchased certain assets of Miller Brothers Coal in Eastern Kentucky for approximately $22.7 million in net cash and a 1% royalty on future sales of the property. The transaction increases IRP's existing reserves to approximately 82.4 million tons.

Lightfoot Capital Partners, which owns 100% of IRP's general partner, purchased 980,000 new Class A units in IRP to finance the majority of the transaction. The assets include both leased and owned properties with capacity for seven surface and three underground mines. The acquisition was not expected to significantly contribute to IRP's EBITDA until 2011. However, IRP has significantly exceeded its budgeted EBITDA in the first two months of the fiscal year; and as such, has the option of ramping up production at the Miller Brothers site if the spot market conditions warranted it.

We remain bullish on the current met coal market conditions and believe we will see gradual improvement in the steam coal market. I also wanted to make a brief comment about mine safety after the tragic event at Massey's Upper Big Branch mine in West Virginia. We understand the safety is always a major concern for IRP, and we are assured that adequate procedures are in place to ensure compliance with existing regulations. However, with regulators' reaction to mining accidents in the past, we would anticipate increased federal and state oversight in the coming months, which could delay existing mine plans.

Our fair value of IRP at 2/28 is $21.04 per common unit, an increase of approximately 5% over our $19.97 per unit value last quarter.

Next is Quest Midstream Partners LP. Quest Midstream Partners was formed by the spinoff of Quest Resources, Midstream coalbed, methane natural gas gathering assets, which are located in the Cherokee Basin. Quest Midstream owns more than 2,000 miles of natural gas gathering pipeline, primarily serving QELP, which is an affiliate, and over 1,000 -- or 1,100 miles of interstate natural gas transmission pipelines in Oklahoma, Kansas and Missouri.

Shareholders of QRCP and QELP and unitholders of Quest Midstream recently approved a merger. Shares of the resulting entity, PostRock Energy Corp., began trading on the NASDAQ under the symbol PSTR on March 8. We received 490,769 freely tradable common units of PostRock in exchange for our roughly 1.2 million units of Quest Midstream. The merger changes the risk profile of our investment from primarily a gathering company to an integrated company that has increased drilling risk and commodity exposure.

PostRock closed today at $10.77; and as PostRock does not pay a cash distribution, we would expect to monetize this investment in an orderly fashion and reinvest the proceeds in accordance with our investment objectives. Our fair value of Quest at 2/28 was $5.21 per unit, an increase of approximately 6% compared to our value of $4.92 last quarter.

Finally, VantaCore Partners LP, which was formed to acquire companies in the aggregate industry, and currently owns a quarry and asphalt plant in Clarksville, Tennessee, and a sand and gravel operation located near Baton Rouge, Louisiana. VantaCore paid a quarterly cash distribution for their fourth quarter of [$0.475] per unit, the minimum quarterly distribution in 2010 -- or excuse me, in February 2010.

The operating results for VantaCore's Clarksville facility continue to exceed budget, supported by two large projects and activity at the Fort Campbell military base. Overall, construction activity in the area is down, but signs of improvement are becoming apparent with jobs for bids steadily increasing.

Southern Aggregates continues to report disappointing results, with values well below historical numbers. VantaCore has made significant changes to Southern Aggregates' operations to reflect the lower volume scene. The Company believes that 2010 will yield improved construction spending in the area.

Just today, VantaCore signed an agreement with a large private equity investor, providing $100 million in equity financing, allowing the Company to accelerate growth through acquisitions, pay off its subordinated debt, and enter into a new credit facility under more favorable terms. We believe this large commitment relative to the current size of VantaCore is validation of the strength of the Company's current management team. Our fair value of VantaCore at 2/28 is $17.58 per common unit, a slight increase compared to our $17.42 common unit value last quarter.

That concludes the discussion of our private companies. I'll now turn the call over to Connie for a discussion of our financial results.

Thanks, Ed. First, I'll review DCF, followed by a summary of our operating results.

DCF is distributions received from investment plus total expenses. Our Board of Directors determines the amount of distributions we pay to our stockholders based on DCF for the quarter. As you may know, we generally do not provide future distribution guidance due to the nature of our private investments, which may inherently contain more uncertainty and management discretion with regards to distributions than do publicly traded investments.

Our DCF calculation and a reconciliation to our GAAP results are included in our press release issued earlier today, and in the MD&A section of our quarterly report on Form 10-Q, which was also filed earlier today.

In the first quarter of 2010, we received a total of $1.7 million in distributions and investment income from our investments. We incurred approximately $258,000 in base management fees net of the expense reimbursement; about $175,000 in other operating expenses; and approximately $46,000 in leverage costs. This left us with distributable cash flow for the quarter of about $1.2 million as compared to about $1.3 million last quarter. We paid out $1.18 million in distributions to our stockholders this quarter, or about 97% of our DCF.

We had unrealized appreciation for the first quarter of about $1.9 million and that's before deferred taxes and return of capital on distributions received on our investments. We had realized gains for the quarter of about $1.6 million -- again, before deferred taxes, and that is primarily attributed to the Mowood Timberline sale.

So, in summary, we had a net increase in net assets resulting from operations for the first quarter of about $4 million.

And with that, I'll turn the call back to Ed.

Thank you, Connie. Thanks again to everyone for joining us on our call today.

In closing, I would like to reiterate that we continue to explore various alternatives to gain access to additional capital. Our proxy contains a proposal which, if passed, would authorize us to sell warrants or securities to subscribe for or convertible into shares of common stock, and to issue common shares underlying such warrants or securities upon their exercise -- and that would be if a prudent opportunity were to arise.

This proposal and others will be considered at our annual meeting, which is scheduled to be held at our offices on Friday, May 21, at 10.00 a.m. Central.

Operator, that concludes our prepared remarks and we're now ready to respond to questions.

(Operator Instructions). Selman Akyol, Stifel Nicolaus.

A couple quick questions, if I may. First of all, have you sold any of your PostRock shares?

We -- as I mentioned, that does not fit into our investment strategy since it does not pay a distribution, so we'll look at that and liquidate those shares in an orderly fashion.

But as of yet, you haven't liquidated anything?

We haven't disclosed what we've done, yes.

Okay. Then, along those same lines, what about Abraxas? I mean, what are your thoughts on those shares?

Yes, Selman, that's a good question. I would put them into the same bracket that they don't pay a distribution, and although we like the company and the assets, it doesn't fit as a result of it becoming a non-distribution paying asset. About one-third of our shares are up from the -- relieved from the lock-up period, but they're all covered by an effective registration statement and we have not met the holding period under Rule 144. So, we are looking at that but we're subject to those things that are outstanding. And again, we haven't disclosed any sales of those.

Okay. And then just a quick follow-up on that. In terms of the holding period, do you know when that would be up?

We have that -- I'm sorry, I misspoke that -- we have met the holding period for the first third; so we could sell those. The other two are subject to a lock-up period.

Okay. And then -- the franchise tax expense for $2.6 million? What was that about?

Connie's looking at that.

Yes. Generally, Selman, I would -- I'm sorry I don't have a quick answer for you on that. We do have someone on staff who specializes on the tax issues and we'd be glad to get back with you on that. I'm certain that it has something to do with state franchise tax; but beyond that, I don't have any details, I'm sorry.

Okay. I just hadn't seen it before. And then my last question just really it's around High Sierra. The Monroe Gas Storage -- do you have any color on that and why they assumed becoming an operator of it? And how big is it? Do you got anything like that?

Well, their partner Foothills that they had originally started the project with, I believe was no longer able to continue to make its capital contributions. And High Sierra had to assume control of that or was able to assume control of that project, which I think was to their benefit.

So we do follow that investment closely. We haven't issued any specific information on that company, which is consistent with our portfolio, but we know that -- we believe that High Sierra taking control over the project, that they can do the necessary -- take the necessary steps to continue to get that project back online.

It is operating now and they are continuing to make improvements to increase capacity. But I believe that having them take over control of it was a positive.

All right. Just help me think about this -- as you sit there and look at High Sierra, do their capital needs for the Gas Storage project -- because they'll obviously need the capital line in order to support the marketing arm, how should we be thinking about that, in terms of them allocating capital and then, ultimately, paying out a distribution to you guys?

Well, the Monroe Gas Storage capital needs are not significant relative to the size of High Sierra. So it's not a huge part of their maintenance Capex that they have scheduled for this year. So I don't believe that that will be a particular drain on it.

All right. Thank you very much.

[David Rothschild], Raymond James Financial Services.

Thank you for taking my call. I'm just looking here -- it says here no your report here that your weighted average cost on investment portfolio is 6.9%. Is part of the reason that's so low because you have this PostRock that's not paying a cash flow? And then I don't believe Abraxas pays you cash flow either, does it?

Yes, that's exactly right. Unfortunately, our weighted distributions are affected by those nonpaying assets; so as I stated in the call, it's our objective over a period of time to sell those assets when it's possible in an orderly fashion, and reinvest those in both -- in either private or public MLPs that do pay a distribution.

Okay. And I guess the other question I had was, I'm assuming you'll be unloaded sometime this year, in 2010. Are you guys finding opportunities out there in the private area to put this money to work?

Well, with the cash that we received from the Timberline sale, we did make investments in public MLPs securities. But we are starting to see a growing pipeline of potential private MLP transactions. So I'm encouraged by that. Obviously, we haven't made one to date, but I'm starting to see more activity.

Isn't there better return overall in the private areas than in the public area?

Well, that can -- we certainly would hope so, because you're obviously taking more risk in making a private investment. So our demands for return, total return, would be in excess of what we think we could get in the privates than the public space. So -- and we're starting to see transactions where we think that that could be possible (multiple speakers) in terms of the pipeline.

Okay, thanks for that. Thank you.

(Operator Instructions). David Ratliff, Doucet Asset Management.

Thanks for taking my questions. My first question is from -- or basically concerning clarification on Lonestar. You say in the 10-K and in the 10-Q, this last 10-Q, that any further payouts are based on specific revenue targets by or before June 30, 2013. So, do you have any other -- I mean, closer date where you're going to know whether there's going to be any value realized from the Lonestar holdings? Or you're not going to know anything before June 2013?

Well, what we get from Penn Virginia is every six months, they provide us with a calculation on our contingent payments. So what we have done in looking at the valuation is just kind of looking at where the volumes are in the particular region and what our volumes need to be for us to realize those payments. And we're discounting the possibility of that.

So what you would find is, I think, as we get closer to 2013, the likelihood of those volumes increasing to the point where we would be in the money, if you will, becomes less. So you've seen us reduce the value of those assets recently because gas prices where they are, the volumes in that area have been -- have not been what we expected. But should activity in that area pick up, you would see the likelihood of that's -- getting those payments increased.

Now, I would tell you that at some point prior to the end date in 2013, if we don't have the volumes, they frankly just won't be there by that time. So I would say somewhere between six months to a year before it expires, we would probably at that point make more or less a final determination of the value of it.

Okay.

Does that help with your question?

Yes, that's probably the best answer you can give. On VantaCore, several quarters ago, they went -- they stepped back to paying the minimum required distribution. What's the highest distribution that they've paid since they've been one of our holdings?

Well, they were up at $0.50, I believe, for the quarter so they brought it back down to the -- their MQD.

Okay. This is probably a dumb question, but I'm reading through the 10-Q, I'm trying to determine whether or not the Eagle Rock -- we're going to get any more shares of -- restricted shares from Eagle Rock. Have we basically received everything we're going to receive from Eagle Rock?

No, there's still a small tranche left in escrow. There's about -- if you look at our SOI under the non-affiliated investments category, you'll see 54,474 units. Those are the estimated number that's still left in escrow. And that's up -- that escrow is up April 1. So I know that they're working on the final calculations and we should be getting those shortly.

Okay. And one last question is -- this probably isn't -- because you talked about liquidating the Quest/PostRock position and possibly the Abraxas, maybe this isn't the focus, but any color on the size or the timing on maybe lining up a credit line?

Well, we're continuing to explore options for -- to allow us to access additional capital both on -- for debt and equity. So I don't have a timing that I can share with you right now, but I think -- I would say, in my opinion, that our balance sheet is in much better shape than it was last quarter. We have more publics in our portfolio, which are, frankly, easier for banks to lend against in value. And not having a line of credit in place, we certainly think that we have an attractive group of assets -- to where we could have either a smaller credit facility or maybe one that's larger with more negotiated items.

So we're continuing to look at all of our options right now but I don't have a time frame I can share with you.

Okay. Well, appreciate the information and I commend you guys on navigating through this last 18 months or so.

Jim Mahoney, Oxford Financial Group.

Yes, I think most of my questions have already been answered, but I was just trying to get a better idea as to as far as what you estimate the timeline is going to be to when the majority of the portfolio is going to paying an underlying distribution?

Do you mean when we would have all of our portfolio of companies paying a distribution?

Yes, for the most part. I mean, obviously, there's always going to be [that] material portion that's out there, but --

Well, yes. Well, right now they all do with the exception of Abraxas and Lonestar. So really -- and then the -- or excuse me, Abraxas and PostRock, with the exception of the Lonestar, which is not an operating entity; it's more of a contingent payment. And frankly, neither Abraxas nor PostRock intend to pay a distribution going forward under their new structure. So that would really just be a result of us in an orderly time frame liquidating out of those positions and reinvesting in either public or private MLP assets. I can't really give you a time frame on that.

Particularly on -- well, the Abraxas has a lock-up period that we have to work through. But in particular, PostRock is a newly traded entity, so I think it's going to take some time before we get a true handle on what the real flow to that company is. And so I'm hoping not to be so cryptic in the next couple of quarters, we'll be able to give you a better understanding of the liquidity, true liquidity of the PostRock units.

As far as the lock-up, can you disclose how -- the terms of that?

Yes, we did, that's -- I think we have -- off the top of my head, I think we have another third coming within a year now and then the final third is a year from that date. I'm thinking it's like February of next year, another third come off, and then the final third is a year from then.

Okay, thank you.

Selman Akyol, Stifel Nicolaus.

Ed, you mentioned a couple of times public securities, that you're holding and it sounds like since there's been some repositioning since the end of the quarter or February 28. Can you just give us a sense of how much is being currently held in public securities of the portfolio?

Well, I guess I could just refer you -- do you kind of see where we were at in terms of what we had prior to the last quarter. And you can see what's listed -- sorry, in the February 10-Q. And then we received about $9 million in proceeds from Timberline and we paid off $4.6 million in debt. And then we reinvested $750,000 back in Mowood. The rest we put in public MLPs, so.

Okay. That's helpful. Thank you.

Okay.

Selman, this is Connie. I'm sorry I was stumbling a bit earlier when you asked about the franchise tax expense. And I think you mentioned $2.5 million. I just want to clarify, that's actually $2,500 and it is state franchise tax expense.

Okay, thanks.

(Operator Instructions). I'm showing no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Okay. Well, we'd like to thank everyone for joining us this afternoon. And if you need further questions answered, please call us; otherwise I think we have a lot of information on our website. Look forward to visiting with you again next quarter. Bye.

Ladies and gentlemen, this concludes the Tortoise Capital Resources first quarter conference call. If you'd like to listen to a replay of today's conference call, please dial 800-406-7325 or 1-303-590-3030 and enter the access code 4262236. ACT would like to thank you for your participation and you may now disconnect.