CorEnergy Infrastructure Trust Inc (CORR) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Tortoise Capital Resources 2010 year end 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, Wednesday, January 26th of 2011.

And I would now like to turn the conference over to Pam Kearny, Investor Relations. Please go ahead, ma'am.

Thank you and welcome to the 2010 year end earnings call for Tortoise Capital Resources Corp. I'm joined today by Dave Schulte, CEO; Ed Russell, President; and Connie Savage, Controller.

An audio replay of our conference call and information included in our press release that we issued today is available at 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 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 annual report on Form 10-K, which was filed earlier today. 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'll turn the call over to Ed Russell.

Thanks, Pam. Good afternoon, everyone, and thank you for joining us today for our year end earnings conference call.

I'll begin today by reviewing our investment performance and then discuss each of our private investments. Following that, Connie will discuss our financial and operating results, and Dave will discuss our upcoming annual meeting, and then we will open the phones for questions.

Our net asset value was $10.44 as of November 30, 2010, compared to $9.74 last quarter and $9.29 a year ago, November 30, 2009. Total investment return based on net asset value and assuming reinvestment of distribution was approximately 20% for the year. Our stock price also increased significantly this past year, closing at $7.28 on November 30 compared to $6.23 on November 30, 2009.

The fair value of our investment portfolio, excluding short-term investments, at November 30, 2010, our most recent year end, was approximately $93.7 million, with approximately 78% of the portfolio in private investments totaling $72.9 million, and 22% in publicly traded investments totaling $20.8 million. In comparison to last year, the fair value of our investment portfolio, excluding short-term investments, was approximately $82.5 million, with 93% of the portfolio in private investments totaling $76.9 million, and 7% of the portfolio in publicly traded investments totaling $5.6 million.

On November 30, 2010, we paid a distribution of $0.10 per common share, the same amount as the prior quarter. We believe we'll have sufficient cash flow to pay $0.10 per share distribution to the first quarter of 2011, subject to the Board of Directors' approval and continued portfolio distribution at the current level.

In order to sustain that level beyond the first quarter of 2011, High Sierra would need to resume distributions at or near minimum quarterly distribution, again, absent any other changes within the portfolio.

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 fair value increased approximately $18 million this past year. Over the last 12 months, there have been significant increases in comparable company valuation, two coal MLP IPOs, and renewed M&A activity which, combined with IRP's improved financial performance, supported a significant increase in valuation. IRP also steadily increased its quarterly distribution this year, from $0.40 per unit in TTO's first quarter to $0.55 per unit in our fourth quarter.

Mowood's subsidiary, Omega Pipeline, continues to perform near budget. In July 2010, the term note of $5.3 million was converted to a revolving line of credit with a maximum principal balance of $5.3 million. This line allows Mowood greater flexibility related to seasonal fluctuations in working capital, and Mowood subsequently paid $1.5 million off prior to year end, leaving a principal balance of $3.8 million.

The fair value of our Mowood investment, including debt equity and any potential contingent payments, was approximately $9.3 million as of November 30.

The fair value of VantaCore decreased approximately $2.4 million over the past year. The company has struggled with lower-than-anticipated operating results, primarily attributed to its Southern Aggregate subsidiary, which has experienced a decrease in demand in pricing and higher-than-expected costs, which is partially offset by better results from its Winn Materials and Macintosh operations.

VantaCore was unable to meet its minimum quarterly distribution for the last two quarters. Common unit holders received a cash distribution equal to the MQD of $0.475 for each of those two quarters, however, due to preferred unit holders' acceptance of a paid-in-kind distribution, and no distributions were made to the holders of subordinated units.

In 2011, we expect VantaCore's cash distribution to fall below its MQD of $0.475, and if the company elects to maintain its MQD, we would expect to receive a combination of cash and PIK. And as you recall, we have elected not to pay out PIK payments.

The fair value of High Sierra decreased by approximately $5 million over the past year. High Sierra's Board elected not to declare a cash distribution for our second, third, and fourth quarter. Now, High Sierra did extend its existing credit facility through March 31, 2011, and they have reported operating results that are below budget through September 2010. However, we remain confident that High Sierra will successfully enter into a long-term credit facility. And it is our expectation that this, along with improved performance, would allow the company to resume distribution payments.

Quest Midstream completed its transformation into a publicly traded C corp. as Post Rock Energy Corp. in March of 2010. Upon closing of the merger, we received nearly 0.5 million freely tradable common units of Post Rock in exchange for our 1.2 million units of Quest Midstream. We held 260,500 units of Post Rock as of November 30, 2010, at a fair value of $3.65. And subsequent to our fiscal year end, we sold all of our remaining units of Post Rock.

Last week Abraxas Petroleum announced that it intends to offer 10 million shares of common stock. Certain selling shareholders intended to offer roughly 8.5 million shares of common stock, both subject to marketing conditions and an underwritten offering. We elected to participate as a selling unit holder and potentially included all of our remaining units in the offering.

Now, that concludes the discussion of our portfolio companies. And with that, I'll turn it over to Connie for discussion of our financial results.

Thanks, Ed. First I'll review our distributable cash flow figure, followed by a summary of our operating results. 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 annual report on Form 10-K, which was also filed earlier today.

This fiscal year we received approximately $5 million in distributions and investment income from our investments compared to about $8.6 million in the prior year. We incurred approximately $1.6 million in operating expenses for fiscal year 2010, which includes base management fees, and that's net of the expense reimbursement, compared to about $2 million in fiscal 2009.

Leverage costs incurred in 2010 were about $46,000, as we paid off and terminated our credit facility in February, compared to $628,000 in leverage costs in 2009. So this left us with about $4.2 million in cash available for distribution for 2010 -- and that did include capital gain proceeds received from Mowood -- compared to about $5.9 million in the prior year.

We had unrealized appreciation for the fiscal year of about $30.6 million. That's before deferred taxes. And that is primarily related to the increase in our fair value of IRP. We had net realized losses -- again, before deferred taxes -- of $11.1 million for the year. And those are generally attributable to the Post Rock shares we received in the Quest merger, which were later sold.

So in summary, we had a net increase in our net assets resulting from operations for the fiscal year of about $14.7 million.

And with that, I'll turn the call over to Dave for a discussion of our upcoming annual meeting.

Thanks, Connie. I'll review an important voting matter with you that requires stockholder action. For regulatory reasons, my comments are limited to statements we've made in TTO's preliminary proxy statement, which is on file with the SEC.

And TTO is distinct from other Tortoise funds by virtue of its private investment focus. We've been evaluating ways to invigorate TTO as a result of challenges it faced stemming from the credit crunch and regulatory constraints relating to its structure. This process has involved evaluation of a variety of strategic alternatives.

We believe we've developed an attractive opportunity for TTO and filed a preliminary proxy with a proposal to withdraw TTO's election to be treated as a BDC. Our Board of Directors, on recommendation of the advisor, believes it's in the best interest of TTO and its stockholders to make this change for two primary reasons.

First, there are believed to be significant opportunities from investment in real assets in the energy infrastructure sector, but BDC investment constraints limit these type of direct investments.

Second, TTO is expected to have greater capital market access and flexibility in raising capital for its investment strategy outside of the BDC regulations.

TTO's investment strategy is expected to be very similar to the one it has historically followed -- targeting investments in the energy infrastructure sector. However, withdrawal will allow TTO to expand its investment pool to be able to invest in real physical assets rather than solely investment securities.

If this proposal is approved, TTO expects to continue operating as a BDC for a period of time during which it will focus on identifying and investing in real assets, but have the potential to become REIT qualified. REIT stands for real estate investment trust. This could be near term or extend out for some time. TTO will officially withdraw from BDC status when it no longer meets the BDC requirements.

To assist us in identifying, analyzing, and financing potential real asset investment opportunities, Tortoise Capital Advisors has entered into a consulting agreement with Corridor Energy, a real asset management company. Corridor Energy was formed by principals of the Calvin Group, as well as Tortoise and Tortoise's majority owner, Montage Asset Management. Mr. Richard Green, who has extensive energy industry and operating expertise, will lead the Corridor management team.

Prior to forming Tortoise, Tortoise Managing Directors Terry Matlack and I worked with Rick in private equity investing. I will spend time working directly with Corridor Energy, given my focus on TTO's business development opportunities as CEO of TTO.

You should receive a proxy statement further explaining this proposal, along with other routine voting matters, in the mail.

We're excited about this opportunity for TTO. We believe it's consistent with its strategy at the same time it expands the investable pool of assets in a sector with significant growth financing needs. We expect it to provide greater flexibility in achieving TTO's investment objectives.

Thanks, Dave, and I want to thank everyone for joining us on the call today. Operator, that concludes our prepared remarks, and we're now ready to open the phone lines for questions.

(Operator Instructions.) Selman Akyol.

You said you were confident, Ed, in High Sierra getting a long-term credit agreement, and I'm wondering why you have that confidence.

We can't share anything specific, but I continue to have discussions with the company and getting their opinion on the process. It's a fair comment that you're never done until you're done with that and it's closed, but we have a projected closing date, and we are involved in a process that we feel comfortable that will end with them getting a long-term facility.

And with them having a long-term facility, then, would it be reasonable to anticipate a return to a distribution status by them?

It would be along with improved financial performance. So we have to have those two things in common for that to happen.

All right. And then, changing topics, on Abraxas, and I understand that they've registered to do the sale. It hasn't been completed yet. But what do you anticipate doing with those proceeds?

Right now, I think we would anticipate investing those in publicly held MLP securities.

All right. Thank you very much.

(Operator Instructions.) Richard Kaufman, private investor.

I was just wondering what the tax impact is going to be if the proposal goes through of the conversion to the REIT status, and given the tax loss carry-forwards that you have in place and realized gains?

The question is regarding the tax attributes that TTO currently has and how they would be utilized going forward. There's expected to be, and there's required to be, a holding period of requalifying assets before you can elect REIT status. During that time period, we are working to confirm that whether the types of investments we make would be able to absorb some of the tax losses that are on the books of the company now, and as our current operations are continuing to do.

Our tax assets and liabilities are net of the unrealized gains and losses that are required by us to be reflected under fair value accounting. And so we have a net increase in the fair value of our portfolio during the year, which is using up some of those tax losses on a fair value basis in our liability stream.

We would expect that upon election as a REIT, TTO would no longer be subject to tax, but it would have to have qualifying assets of at least 75% of the portfolio and qualifying income from REIT sources of 95% for that to happen.

And how would that affect the distribution structure, with REIT required distributions?

Yes, we would expect to continue to maintain quarterly distributions, and both before and after withdrawal of a BDC election, TTO is still a tax-paying C corporation. If it's able to elect REIT status, it would check that box and then be required to distribute at least 90% of its income to stockholders in order to have a deduction from tax for those distributions.

So distributions from its earnings and profits are treated as ordinary income once it's a REIT, instead of as qualifying dividend income from a C corporation, which is one change that would occur once it's a REIT qualifying status.

Okay, thank you.

A.J. Dieno, private investor.

I was wondering, on this International Resource Partners, whether or not you have intention to monetize that asset now that it's such a huge proportion of your portfolio.

We're restricted on that in terms of our partnership agreement and when we made that private investment. Obviously, we're pleased with the increase, and it is becoming a larger percentage of our portfolio. But at this time, I wouldn't see monetization as a path we would take to sell our private unit.

Are there other investments that will be sold off to keep the distribution, or consider the distribution to keep it at the level that it is or increase it?

We typically haven't been selling assets to pay out a cash distribution. We've just been transferring the distributions that we received and pay out, with the exception of some liquidations in the sale of, like, Timberline and so forth. But right now, we have liquidity, and we would plan to maintain our 10% distribution based on the parameters that we described in the call.

All right, thank you.

(Operator Instructions.) Sam Rebotsky, SER Asset Management.

Would you expect to maintain the BDC as long as you have your tax loss carry-forward, and would you not convert to the REIT until that is used up?

Our expectation is that we would use up our tax loss carry-forwards during the time that we're making our otherwise requalifying investments, but before we have actually been able to make the REIT election.

The way the timing would work is that during this year 2011, if we're able to make requalifying investments, then we would be using the tax loss carry-forwards this year to shelter that income. But then beginning in tax year 2012 -- basically, early next year -- we'd start being able to, if we had qualifying investments, start being able to avail ourselves of the REIT rules regarding payments of dividends and deduction of those dividends from tax within the REIT.

So it's my understanding, are you saying that you will not convert to a REIT until you basically have utilized 100% of your tax loss carry-forward?

I can't say that with complete confidence, only because we can't predict the exact timing of when we would be able to complete a REIT qualifying investment. But there are other ways to use those losses. For example, we may not be able -- that may not be just in the REIT qualifying investments. For example, during the remainder of this year, we still may have income that would result in us using up some of those losses to shelter taxes during 2011.

We've been very fortunate in that those losses are reducing in time here as we've been performing. And so unfortunate that we have them at all, but they have come in handy during last year, and we expect them to this year.

Okay, good luck.

(Operator Instructions.) A.J. Dieno, private investor.

Do you expect that the distributions in future under the new organization would be taxable, then, as opposed to what now is -- most of these dividends are coming back as return of capital.

Yes, the dividend character of REIT income to you, to a stockholder, would be ordinary income rather than qualified dividend income.

No, I understand that. But what you've just been giving so far has been return of capital, which would be non-taxable, even if it were distributed by a REIT.

No, you're correct about that. It's been mostly return of capital. We have had, or you would have, then, a basis reduction from that return of capital, so your gain would be realized upon the eventual sale of the investment. Once we have more REIT qualifying investments, then the kind of investments we have now, which are mainly pass-through investments, then the income there would be ordinary income to you instead of return of capital. That's correct.

Okay, thank you.

Thank you, and I'm showing no further questions in the queue at this time. Please continue.

All right, operator. With that, we'd just like to thank everybody for joining us on the call. Thank you.

Thank you. Ladies and gentlemen, this concludes the Tortoise Capital Resources 2010 year end earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 and enter the access code of 4398228 followed by the pound sign. We thank you for your participation. You may now disconnect.