CorEnergy Infrastructure Trust Inc (CORR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the TTO 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 8, 2010. I would now like to turn the conference over to Pam Kearny, Investor Relations, Tortoise Capital. Please go ahead.

Thank you and welcome to the 2010 second-quarter earnings call for Tortoise Capital Resources. I'm joined today by Ed Russell, President; and Connie Savage, Controller.

An audio replay of this conference call will be available on our website and 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 statements made during the course of this presentation that are not purely historical may be forward-looking statements regarding TTO's or management's intentions, estimates, projections, assumptions, beliefs, expectations and strategies for the future.

All such forward-looking statements are intended to be subject to the Safe Harbor protection available under applicable securities law. Because such statements deal with future events, they are subject to various risks and uncertainties and actual outcomes and results may differ materially from those projected in the forward-looking statements.

Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our filings with the SEC, including a 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 investor relations section of our website. We do not update our forward-looking statements. And with that, I will turn the call over to Ed Russell.

Thank you, Pam. Good afternoon, everyone, and thank you for joining us today for our second-quarter earnings conference call.

I'll begin by reviewing our investment performance during the quarter and then discuss each of our private investments. Following that, Connie will discuss our financial and operating results and then we will open the phone lines up for questions.

In our May 12 press release, we announced a decrease in our distribution this quarter due to unfavorable developments in our portfolio and we estimated that our then current NAV would reflect about a 10% decrease from the prior quarter. Our net asset value did decrease approximately 9% this quarter from $9.60 per share at February 28 to $8.69 per share at May 31 primarily due to the decrease in the fair value of our largest holding, High Sierra, as well as a significant decline in the market value of PostRock Energy Corporation for which we received a substantial number of shares in exchange for our Quest Midstream units in March.

While these results were disappointing, the portfolio did experience some positive developments during the quarter including an increase in the distributions at IRP and the receipt of a contingent payment related to the sale of Timberline Energy which I will discuss in more detail shortly. At May 31, the value of our investments portfolio excluding short-term investments was $73.9 million with about 49% in midstream and downstream investments, 13% in upstream investments and 38% in aggregates and coal.

Following the press release, our stock price declined, closing at $5.80 per share on May 31 compared to $6.85 per share at February 28. And with that, I would like to review the developments of our private companies and the associated impact on our net asset value and distribution.

First 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.

As reported in our press release, High Sierra was unable to declare a cash distribution this quarter as a result of a credit agreement covenant default with its bank. High Sierra's results from operations were sufficient to support a distribution at or above the minimum quarterly distribution level of $0.45 per share, however, High Sierra was unable to receive a waiver from its bank to allow a cash distribution in light of the technical default.

High Sierra distributed $0.63 per common unit last quarter. The distribution suspension decreased our distributable cash flow by approximately $0.07 per share.

High Sierra is engaged in continuing discussions with its lenders and expects to be successful in reaching a long-term solution. High Sierra reported year-to-date operating results through April 2010 significantly below budget, primarily due to its business units, Centennial Energy and Monroe Gas Storage, and also due to unfavorable commodity prices for natural gas and increased competition.

The company is ceasing operations at National Coal County, an Oklahoma-based water transportation and disposal service which it acquired in 2007. Our fair value of High Sierra as of May 31 was $18.54, a decrease of about 21% from our $23.33 per common unit value last quarter.

Next is International Resource Partners LP. IRP [surface] underground coal mine operations in Southern West Virginia, include met and steam coal reserves, a coal washing and preparation plant, rail loadout facilities and a sales and marketing subsidiary. In addition, IRP owns and leases assets in Eastern Kentucky with capacity for seven surface and three underground mines.

IRP announced a quarterly distribution increase from $0.40 per unit to $0.45 per unit effective this quarter. We own 0.5 million Class A units of IRP.

The company reported year-to-date operating results through April 2010 well in excess of its budget. Due to the significant improvements in operations through April, management revised upward its forecast for the remainder of the year.

I would insert a note of caution that while we feel positive about the performance of IRP, the recent Massey Upper Big Branch mine explosion has resulted in increased regulatory scrutiny by the state and federal enforcement agencies which could have a negative impact on the industry. Our fair value of IRP at May 31 was $24.55 per common unit, an increase of about 17% over our $21.04 per unit value last quarter.

Next is Mowood LLC, a holding company that owns and operates Omega Pipeline, a natural gas local distribution company located on the Fort Leonard Wood military installation in South-central Missouri. Omega serves the natural gas and propane needs of Fort Leonard Wood and other customers in the surrounding area.

Mowood's subsidiary, Omega Pipeline, continues to perform at budget and provides a 14% yield to original cost on both our debt and equity investments. In February 2010, Millwood sold its wholly subsidiary, Timberline LLC, the landfill energy systems, and we received $9 million in initial proceeds.

In May we received additional capital gain proceeds of $585,000 which we elected to include in our distribution this quarter and next. We may receive additional contingent in escrow payments from the Timberline sale over the next year and a half which are currently expected to total approximately $1.6 million.

The fair value of our Mowood investment at May 31 was about the same as last quarter, inclusive of the contingent payment we received in May. Next is 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 maintained its quarterly distribution of $0.475 per unit this quarter and in April 2010, VantaCore completed its capital raise of approximately $100 million with a large institutional investor. The additional capital is expected to be used to take advantage of the growth and acquisition opportunities.

VantaCore experienced some flooding in its Clarksville, Tennessee quarry in May but is now back up and running. The Company reported year-to-date EBITDA through April 2010 slightly below budget.

The Southern Aggregates property in Louisiana continues to fall short of budget but the company is optimistic that recent signs of improvement in the building industry in that area along with cost-cutting measures imposed by management will help improve their performance. Our fair value of VantaCore as of 5/31 is $17.07 per common unit, about a 3% decrease compared to our $17.58 per common unit value last quarter.

Finally, I'd like to discuss PostRock Energy Corp. PostRock is not a private company but we did receive a substantial number of freely tradable PostRock shares, nearly 0.5 million, in exchange for Quest Midstream units when the merger closed this past March.

PostRock began trading on the NASDAQ on March 8 at $19 per unit and closed that day at $16.36 per unit. However, since then, the stock price has deteriorated significantly.

We held 460,300 common units of PostRock as of May 31 with a fair value of $4.83 per unit which was the closing price on that day. While we feel strongly that the new management team at PostRock has made numerous improvements to performance and processes, however the company continues to face significant challenges.

Low natural gas prices and higher than peer levels of leverage with near refinancing needs have dampened the prospect for near-term performance and we believe it continues to negatively affect its trading price. Although the shares we hold are fairly tradable, the stock did not provide much liquidity.

That concludes the discussion of our portfolio companies. I will now turn the call over to Connie for a discussion of our financial results.

Thanks, Ed. First I will review DCF, followed by our operating results. And as you know, DCF is distributions we receive from our investments less total expenses.

Our Board determines the amount of distributions we pay to our stockholders based on our DCF for the quarter. Generally we do not provide future distribution guidance due to the nature of our private investments which 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 the Form 10-Q which was also filed earlier today. This quarter we received about $1.1 million in distributions and investment income from our investments. We incurred approximately $258,000 in base management fees net of the expense reimbursement and about $216,000 in other operating expenses.

We did not incur any leverage costs this quarter since we repaid and terminated our line of credit back in February. Our total distributable cash flow for the quarter was about $593,000.

As Ed mentioned earlier, we elected to include half of the additional capital gain proceeds we received from Mowood in our distribution this quarter, getting us cash available for distribution of $885,000. We paid out about $910,000 in distributions to our stockholders this quarter.

We had unrealized [appreciation] for the first quarter of $2.9 million. That's before deferred taxes and return of capital on distributions we received from our investments and we had realized losses for the quarter of about $10.3 million, again before deferred taxes.

Those are generally attributed to a realized loss that was recognized on our Quest Midstream units when they were exchanged in the merger, as well as realized losses attributable to PostRock shares which we received in the merger and sold prior to quarter end. So in summary, we had a net decrease in net assets resulting from operations for the second quarter of about $7.3 million. And with that, I'll turn the call back to Ed.

Thank you, Connie. Operator, that concludes our prepared remarks and we are now ready to open the phone lines up for any questions.

(Operator Instructions) Selman Akyol, Stifel Nicolaus.

Is there any additional insight I guess on High Sierra and their credit facility and what is going on there?

We do not have any at this time. However, we would hope to have more insight probably by the end of the month on the status of their financing.

Okay and then at that time, would you anticipate putting something out so we know what's going on?

I would hope we would be able to do that.

Gabe Moreen, Bank of America-Merrill Lynch.

I just had a question on the High Sierra business results and I guess in the Q, it talked about their NGL marketing business being below plan. Was that actually a function of not having the facility in place and being able to borrow or is that more just overall business conditions?

I think although the lack -- the tightness of their available capital does have some effect on the business, I think as you look at it in their performance relative to budget, it had more to do with the commodity price environment that we are experiencing right now as opposed to lack of available capital because that's reflected in their budget.

Got it, Ed, thanks. And then also in terms of it mentioned the water disposal business I think in the Rockies kind of shutting down, realizing that the impairment charge they're taking is obviously non-cash, just can you talk about how big a portion of their EBITDA that was when things were going (multiple speakers)

We don't release those numbers. But unfortunately, that company's performance has been disappointing through most of its life under High Sierra. So they -- it negatively affected their budget last year.

However, other segments of the company were able to overcome those, the misses from NCC. And basically going into it this year, they put very little weight into any positive EBITDA from the company and have -- and went from basically low expectations to just decided that it would be best to shut it down and take the impairment.

And then just last question I guess an IRP. You're seeing some coal MLP IPO activity potentially on the near-term horizon. Maybe if you talk about the kind of latest plans or thinking around IRP, given the good results there.

They are performing well. We see some IPO activity that is encouraging and we also saw a transaction, a private transaction -- well, excuse me. It's a public company purchasing a private company that has assets adjacent to ours.

I think those are all very positive and will be reflected in future evaluations as a data point if they get concluded. So I think basically the company will anxiously wait and see how they -- if they can get the IPOs done and if the coal MLP market is open and they will look at their strategic alternatives as well.

Got it, great, thanks.

(Operator Instructions) David Ratliff, Doucet Asset Management.

I was just following up on -- you gave a breakdown, a brief breakdown of the realized loss. So the realized loss was all attributed to the Quest and the PostRock exchange?

Yes, the lion's share is of it is related to the Quest units when those were exchanged in the merger. We did recognize a realized loss at that time. And then as I mentioned, some of the PostRock shares were sold prior to the quarter end. So the combination of those two is the lion's share of the realized loss for the quarter.

Can you give any color for basically -- I know you don't give guidance on your distributions but it's been a couple of quarters since you paid down the credit line and delevered completely. It sounds like you had the High Sierra situation to deal with.

But going forward, about how you are going to basically provide shareholder value or maximize shareholder value, short of adding a credit line, putting new money into investments to work, is there any kind of guidance you can give to that question?

Well as we have stated in the past, we continue to look at a number of strategic alternatives. We certainly are disappointed that our stock doesn't trade closer to its net asset value, but we do in terms of trying to provide shareholder growth, we do have some liquid securities that we could -- that are publicly traded and free to -- that we could liquidate to make additional private equity investments that we think would be -- have a higher yield and allow us to try to grow our distribution.

So we do have an opportunity to grow without a leverage facility and that would be our plan to look at private investment opportunities as part of that strategy. But then we'll also look at any other alternatives that may make sense and have us trade closer to -- cause us to trade closer to the net asset value.

Okay, great. Thanks for taking my questions.

I'm showing there are no further questions at this time.

Well with that, I thank everybody for joining us today and that will conclude our call, operator.

Folks, thanks for tuning in. We're going to sign off now. If you have any further questions, call Tortoise Investor Relations Department, Pam Kearny, 913-890-2139 area code -- I'm sorry, let me start again. 913-890-2139. Thank you. Good day.