CorEnergy Infrastructure Trust Inc (CORR) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Tortoise Capital Resources third-quarter earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, October 7, 2010.

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

Thank you and welcome to the 2010 third-quarter earnings call for Tortoise Capital Resources. I'm 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 both the press release issued today and posted on our website at Tortoiseavisors.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 not 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 of 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.

With that, I will turn the call over to Ed Russell.

Good afternoon everyone. Thank you for joining us today for our third-quarter earnings conference call.

First, I'll review 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'll open the phone line up for questions.

Our net asset value increased approximately 12% this quarter to $9.74 per share as of August 31 as compared to $8.69 per share at the end of the prior quarter. The increase is largely attributable to the increase in the fair value of International Resource Partners, which I will discuss in detail shortly.

Total investment return based on the net asset value and assuming reinvestment of distribution was 10.67% for the nine months ended August 31. The fair value of our investment portfolio, excluding short-term investments at 8-31, was $84.6 million, including private investment totaling $69.2 million and publicly traded MLPs totaling $15.4 million. Our portfolio was approximately 45% midstream and downstream investments, 10% upstream investments and 45% in aggregates in coal.

On September 1, 2010, we paid a distribution of $0.10 per common share, the same amount as the prior quarter. In May, we received additional capital gain proceeds of $585,000 from Mowood LLC as a result of a contingent payment from the February sale of a Timberline Energy subsidiary. We elected to include a portion of these capital gain proceeds in our distributions last quarter and this quarter, enabling us to pay $0.10 per share.

We believe we have sufficient cash flow to pay a $0.10 per share distribution through the first quarter of 2011 subject to Board approval, continuing portfolio distributions at current levels, and anticipated non-occurring payments from our portfolio company. In order to sustain that level beyond the first quarter 2011, High Sierra would need to resume distributions at or near its minimum quarterly distribution, again absent any other changes within the portfolio. We believe this should provide sufficient time for High Sierra to secure a long-term credit facility and to achieve improved margins in its Marketing segment.

Now, with that, I'll review the developments in our private companies and the associated impact on our net asset value and distribution.

IRP's significant outperformance of its budget, along with robust pricing in the IPO and M&A markets for coal producers, particularly met coal producers, resulted in an $11.4 million increase in our fair value of IRP this quarter. IRP is now our largest portfolio holding, representing 27% of our total investment on a fair value basis at 8-31. IRP continues to significantly outperform its budget, due in part to the strong met coal market, as well as improved production and cost control.

The IPO and M&A markets have improved considerably, as demonstrated by two recent coal-based MLP IPOs, Oxford Resource Partners and Rhino Resource Partners, as well as acquisitions such as Cliffs Natural Resources acquisition of INR Energy, Massey Energy Company's acquisition of Cumberland Resource Corp., and Essar Minerals' acquisition of Trinity Coal partners. We believe these transactions represented companies that are of similar size and reserve characteristics to IRP which, in combined with IRP's updated projections for 2011's EBITDA, resulted in an increase in our fair value for this quarter.

I would, however, note -- insert a note of caution [that a] current strong pricing environment and favorable mining conditions that have led to this improved value could change, and have an adverse impact on future valuation. As a result of their strong performance, IRP also increased their quarterly distribution from $0.45 per unit to $0.50 per unit this quarter.

The fair value of VantaCore Partners LP decreased approximately $1.5 million this quarter. VantaCore was unable to meet its minimum quarterly distribution in cash for all unitholders for the quarter ending June 30, but common unitholders did receive a cash distribution equal to the MQD of $0.475 for the quarter, due to preferred unitholders' acceptance of a payment in kind distribution. No distribution was made to the subordinated unit.

Now, as a result of VantaCore's poor performance at its Southern Aggregates subsidiary, which has experienced lower demand and pricing coupled with higher than expected costs, we would expect VantaCore's distributable cash flow to again fall short of its minimum quarterly distribution for all units. However, if the preferred unitholders were to elect to take a pick distribution, we believe common unitholders would again receive a cash distribution.

VantaCore did make a small acquisition during the quarter using its $100 million capital commitment to fund that transaction. The asset is in the Baton Rouge area and was merged into the Southern Aggregates operations. We expect the remainder of the year to be challenging for VantaCore but are cautiously optimistic that conditions will improve in 2011.

The fair value of High Sierra Energy LP, inclusive of our interest in the general partner, increased by approximately $550,000 this quarter. Monroe Gas Storage cured the alleged technical default in its credit agreement, which required additional capital investment. Based on recent modeling of the reservoir, the project has shown improved storage capacity, which should lead towards significant improvement in 2011 EBITDA. The cure of the technical default and the improved outlook for Monroe were the primary factors in the increase in the fair value for High Sierra this quarter.

The Company did not declare a cash distribution again this quarter as a result of the Company's decision to reserve its distributable cash flow for anticipated capital expenditures, a decision its Board of Directors felt was in the best long-term interest of the Partnership. High Sierra was able to extend its existing credit facility through December 15, 2010 and is engaged in continuing discussion with its lenders and expects to reach a long-term solution by the end of 2010.

High Sierra reported year-to-date operating results through June 2010 below budget. Its crude oil gathering and natural gas liquids marketing companies continue to underperform budget due to a lack of available credit and decreased margin. However, the oil field, water recycling, and discharge company continues to exceed budget. In spite of the credit challenges, we are optimistic that margins in the upcoming quarter will return to more normalized levels which should return the marketing companies to an improved level of earnings on a run rate basis.

The fair value of our Mowood investment as of 8-31 was about the same as last quarter. Mowood is a holding company that owns and operates Omega Pipeline. Omega serves the natural gas needs of Fort Leonard Wood and other customers in the surrounding area. Omega is slightly behind budget through July 2010 but is expected to be at budget in the following months as construction and growth projects at the Fort make additional contributions to profitability.

In July 2010, Mowood's term note of $5.3 million was converted to a revolving line of credit with a maximum principal balance of $5.3 million. We believe the line of credit allows Mowood greater flexibility related to seasonal fluctuations in working capital. At 8-31, the prior balance of the outstanding was $4.8 million.

As you recall, in February 2010, Mowood sold its wholly-owned subsidiary, Timberline Energy to 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 last quarter and this quarter. We may receive additional contingent and escrow payments from the Timberline sale over the next year and a half, which are currently expected to total $1.6 million.

Finally, I have a quick discussion on PostRock Energy Corp., which you may recall was the new corporation formed for the purpose of wholly-owning all three Quest entities. We received a substantial number of freely tradable PostRock common units of nearly $0.5 million in exchange for our Quest Midstream units when the merger closed this past March. At 8-31, we held 383,500 units at a fair value of $3.28 per unit, which was the NASDAQ closing price on that date, compared to $4.83 at the end of our prior quarter. Subsequent to our quarter end, PostRock announced that White Deer Energy completed its previously announced $60 million investment. Simultaneously, PostRock's existing credit agreements were restructured on more favorable terms, White Deer has reserved an additional $30 million to invest in PostRock on mutually acceptable terms for future growth. The proceeds from the White Deer investment were used to reduce PostRock's outstanding debt by approximately $59 million.

That concludes the discussion on our portfolio companies. I'll turn the call over to Connie for a discussion on our financial results.

I'll briefly review our DCF and our operating results for the quarter.

As most of you know, DCF is distributions received from investments, less total expenses. Our Board determines the amount of distributions we pay to our stockholders based on our DCF for the quarter. Our DCF calculation and a reconciliation to our GAAP results are included in our press release, which was issued earlier today, as well as in the MD&A section of our quarterly report on Form 10-Q which was also filed earlier today.

This quarter, we received approximately $1.1 million in distributions and investment income from our investments. We incurred approximately $191,000 in base management fees, and that is net of the expense reimbursement.

I'll mention here that, this quarter, we also entered into an amended expense reimbursement agreement with the advisor, which has increased the expense reimbursement to 0.50% of our average monthly managed assets for the period from June 1 through December 31, 2010. This represents an increase in the expense reimbursement of 0.25% of our average monthly managed asset. We incurred approximately $168,000 in other operating expenses, and 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 $743,000. As Ed mentioned, we elected to include a portion of the additional capital gains proceeds received from Mowood in our distribution this quarter, allowing us to pay approximately $912,000 in distributions to our stockholders.

We had unrealized appreciation for the third quarter of about $13 million before deferred taxes. As Ed discussed earlier, that was primarily related to the increase in the fair value of IRP. We had net realized losses, again, before deferred taxes, of about $1.3 million for the quarter, generally attributed to PostRock shares we received in the Quest merger earlier this year and sold prior to August 31. So in summary, we had a net increase to net assets resulting from operations for the third quarter of approximately $10.5 million.

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

Thanks Connie. Thanks to everyone for joining us on the call today. Operator, that concludes our prepared remarks. We are now ready to open the line for any questions.

(Operator Instructions). Gabe Moreen, Merrill Lynch.

Great. Thank you. Good afternoon everyone. Two quick questions -- one is on maintaining the $0.10 1Q '11. You had mentioned I guess non-recurring sources of DCF. Is that just Timberline, or is there something else that you're contemplating too?

It came from Timberline, and also from the escrow with Lonestar, which was the sale we made.

(inaudible)

Okay, got it. Then on VantaCore, so is that just going to be a quarter-by-quarter discussion in terms of picking the preferred equity investment? In other words, when they agreed to pick it this last quarter, there was not an agreement to do it next quarter, it's just picked (inaudible) quarter by quarter?

That's correct. But we have had discussion with them, and it's my opinion that they will be supportive in the short term here as we look at the cash flow projections that we have in the near term.

A follow-up on VantaCore if I could, Ed? On the $100 million commitment, any comments in terms of how the M&A market is looking for VantaCore right now?

It's been competitive. I think, in one way, the multiples are still, in some cases, a little higher than we would like. That makes us feel good about the assets that we hold, but it has been a competitive market, but we have found that, since we announced the $100 million commitment and the Company did a lot of publicity around that, that there has been a lot more willingness to negotiate with us under a variety of terms. So, I think it's been a big help to now be a company with $100 million of known capital available versus what we were before, which was buyers of assets, and we would come up with ways to get additional capital through debt. So, I'm really excited to have this commitment, and we're starting to see the benefits of having that already.

Got it. Great. Thanks.

Selman Akyol, Stifel Nicolaus.

Good afternoon. In terms of your Timberline Energy payment on the $1.6 million, is that something they have the option to (inaudible) when that typical payment would be made?

I'm sorry, say that again? (multiple speakers)

You had $1.6 million in potential additional payments and the last one was paid in May. Is that an annual date?

No, it's based on some contingent projects that we had, and they have different life -- different terms when that money would be due. It's based on when the completion of certain things happen. So there is no set time frame. It just goes out a year or two, depending on the project that we are referring to.

All right. Then in terms of the distribution -- and I heard your comments and I've read your press release, and I see you talking. It sounds like you're guiding to $0.10. But when you go through the Q, you referenced your August 16 press release where you talked about it being forecasted at $0.05. Typically, I give more weight to a Q. So can you help me just get a better handle on that?

Yes. What we are guiding towards, Selman, is just what is sustainable based on what we now know today. So we've looked at our distributions coming up and what we've paid out based -- and what we received last quarter and what we paid out and what we received this quarter. We are looking at -- if we look at everything the way it is today, what would that distribution look like for the next couple of quarters? What we're telling people is we think that $0.10 is sustainable and that, when you go into after Q1 of '11, at that point, for us to sustain that, it would require High Sierra to resume its distribution at or around its MQD, which by the way is less than we were typically getting before. So we're not trying to guide to $0.10. We're just saying that this is sustainable. We could do better than that if we see improvement, but we think the $0.10 based on what we know is sustainable. And then we also say that we are making assumptions that there's consistent payments from our privates based on what they did last quarter. Obviously, if anything changed, that would affect our $0.10 as well.

Then lastly, as it relates to High Sierra, in terms of renegotiating with their banks, it seems like they're kind of being -- I don't know, three months or so being extended. Is that something that is just going to continue until they eventually work down the debt, or is that going to be, at some point, something truly permanent put in place?

Well, their intention is to get a permanent facility in place by the end of the year.

All right, that's all I have. Thank you.

(Operator Instructions). Michael Beall, Davenport & Company.

Good afternoon. I guess I just have a follow-up question on this situation with High Sierra. Is the Monroe Gas Storage facility -- has that been completed? Is that up and running? Is it making money yet? We talked about how performance of some of the other areas are going. Isn't that the critical asset and problem there, and is it fixed?

Well, the reason for the increase -- we don't give specific information on our holdings or their subsidiaries with the Holding. But what they did fix is the alleged technical default in their credit facility. And when they were in default, from a valuation standpoint, we did not give an equity value to Monroe because they were in default. When they cured that, we were allowed to look at Monroe, and when we looked at the vast improvements they have made in the engineering of that facility, we were able to assign more equity value to that. That resulted in the increase in High Sierra. I can give you the general statement yes, they are in business. They are operating. The reserve improvements that they have were a result of the additional drilling and the capital investments they put into that generated increased storage capacity, which we think really outlines for a lot of improvement in 2009. So -- or 2011, pardon me.

(Operator Instructions). At this time, there are no further questions. I'd like to turn the call back to management for any closing comments.

None here, operator. I just want to thank everyone for dialing in.

Thank you. Ladies and gentlemen, this concludes the Tortoise Capital Resources third-quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030, or 1-800-406-7325 followed by passcode of 4358570. ACT would like to thank you for your participation. You may now disconnect.