CorEnergy Infrastructure Trust Inc (CORR) 2011 Q1 法說會逐字稿

Well, good afternoon. Thank you, everybody for making it. Appreciate your attendance today. I'd like to welcome you to the annual stockholders meeting for Tortoise Capital Resources. Today, as we've done in the past, we're having a Conference Call and a Webcast, so I would also like to welcome those stockholders who are joining via those technologies. So, thank you. Appreciate everybody being here. I am Kevin Birzer. I am the Chairman of Tortoise Capital Resources. I am also a Senior Managing Director at Tortoise Capital Advisors. And with that let me make a few introductions around the room. So first let me go with the head table. So to my immediate right is Ed Russell. Ed is the President of Tortoise Capital Resources. In the middle we have Connie Savage, who today gets to serve as the inspector of elections, but more officially serves as the Controller of Tortoise Capital Resources.

And then Dave Schulte, at the far right, as I'm looking at it, who is the CEO of Tortoise Capital Resources and one of my fellow Managing Directors here at Tortoise Capital Advisors. Additionally in the room we have Terry Matlack, on the second table here to the right, my right, one of the founding Managing Directors, as well as Ken Malvey, directly behind him. Let me make a few other introductions. We do have all the independent Board members here today. So first I see Chuck Heath, who is sitting to my far right, your left as you are facing it. Chuck is the retired Chief Investment Officer from GE Capital's Employers Reinsurance Corporation. Next to Chuck is Dr. John Graham. John is the Executive-in-Residence and Professor of Finance, part time at this point, at Kansas State University's College of Business Administration and he is the former CEO of Kansas Farm Bureau financial services firm.

Directly behind those two, sitting next to Terry, is Conrad Ciccotello. And Conrad is the tenured Associate Professor of Risk Management and Insurance at Georgia State University's Robinson College of Business. Additionally in the room (inaudible) there is Scott. We have Scott Odall, who is with Ernst & Young, representing them for us today, thank you. We also have Steve Carmen from Husch Blackwell, who is four tables back on the right. So, thank you. I want to make a couple other quick introductions. In the very back we had David Haley and we have Becky Sandring. These two come to us with Corridor Energy, who was the firm we've affiliated with in doing the transition on Tortoise Capital Resources. With that, let me turn this over to Connie Savage, the Inspector of Elections, to go through the formal business matters.

Thanks, Kevin. First I'll address some procedural items before we move forward. With respect to voting, if we have received your proxy card your shares will be voted in accordance with your instruction. Now, if anyone present has any proxies that have not been filed, please raise your hand so your proxies can be collected and recorded. If anyone present has already turned in proxies, but would like to revoke them and vote in person, we would also ask you to raise your hand for a new proxy card and we'll collect it for recording. We have several items to consider for Tortoise Capital Resources Corporation as stated in the printed proxy dated February 7, 2011 and mailed to stockholders, and, Mr. Chairman, I'd like to report that we do have a quorum present.

Thank you, Connie. In that case the meeting is duly convened.

I do present a certified list of the holders of Common Stock of TTO at the close of business on January 24, 2011, the date fixed by the Board of Directors for determining the stockholders entitled to notice of and to vote at this meeting. I also present copies of the notice of Annual Meeting and proxy materials and will file these documents with the record for the Company. And now we'll discuss the official business of the Company. As the Inspector of Elections, I'll record the votes on these matters and announce the results later in the meeting. The first proposal is for the election of one Director, Conrad Ciccotello, for a term of three years. The Board of Directors has unanimously recommended a vote for this proposal.

The second proposal is for approval to sell or otherwise issue warrants, rights or options to subscribe for or convertible into shares of Common Stock and to issue the common shares underlying such warrants, rights or options upon their exercise. And the Board of Directors, again, unanimously recommends a vote for this proposal. The third proposal is for approval to authorize the Board to withdraw the Company's election to be regulated as a Business Development Company under the Investment Company Act of 1940. The Board of Directors unanimously recommends a vote for this proposal. And the fourth proposal is for ratification of the Board's selection of Ernst & Young, LLP as the Company's independent registered public accounting firm for the fiscal year ending November 30, 2011. And, again, the Board of Directors unanimously recommends a vote for this proposal.

Thank you, Connie. I now declare the poles closed and the Inspector of Elections will now tabulate the ballots. The Annual Meeting is officially recessed until all ballots have been tabulated and the votes have been certified. During this time we will open the floor to any questions for stockholders attending the meeting.

Seeing no questions at this point and, again, we will have a question period after the presentation on the portfolio, but at this point there are no further questions so I'll call the annual stockholders meeting back to order.

Thanks, Kevin. With respect to all proposals, the required number of votes have been obtained and therefore all of the proposals have passed. I will furnish a written report of the final vote count with respect to the matters voted on today and they will be included in the minutes of the meeting. So now I'll turn the meeting back to Kevin.

Thanks, Connie. With that let me turn it over to the three panelists up here. So again, Ed Russell on the end, Connie Savage in the middle, and Dave Schulte on the far right as I'm facing it. They will provide you an update with the operational and financial results and provide a Strategic Update for the portfolio. And again, at the end we will conclude that with a question and answer period. So, let me turn it to Ed at this point.

All right, thank you, Kevin, and thank you, everyone, for joining us today. Following our prepared remarks, we will take questions from those in the room and the Operator will open the phone line for questions for those on the line today for our 2011 first quarter earnings call. The presentation contains forward-looking statements. These forward-looking statements include all statements regarding the internet, belief or current expectations regarding matters covered and all statements which are not statements of historic fact. The forward-looking statements involve known and unknown risks, uncertainties, contingencies and other factors, many of which are beyond our control and are discussed in our filings with the Securities and Exchange Commission.

Since these factors can cause our results, performance and achievements to differ materially from those discussed in the presentation, you are cautioned not to place undue reliance on the forward-looking statements. We will not update these forward-looking statements to reflect events or certain certainties that occur after the date of the presentation. This presentation shall not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of securities in any state or jurisdiction which such offer or sale is not permitted. So now that we got that out of the way, I'll begin today by reviewing our investment performance during the quarter and then discuss each of our private investments. Following that, Connie will discuss financial and operating results and then finally, Dave will provide a Strategic Update and then we'll open the line for questions. Our net asset value per share was $10.46 as of February 28, 2011 compared to $10.44 at November 30, 2010.

Our stock price improved significantly again this quarter closing at $8.50 on February 28 compared to $7.28 on November 30, 2010. Total investment return based on market value and assuming reinvestment of distribution was approximately 18.1% for our first quarter. The fair value of our investment portfolio, excluding short-term investments, at February 28 was approximately $93.9 million, with about 77% of the portfolio in private investments totaling $72.1 million and approximately 23% in publicly traded investments totaling $21.8 million. Our portfolio is diversified among 51% midstream and downstream investments, 4% upstream, and 45% in aggregates and coal. I'll begin the discussion of our private companies with International Resource Partners. The fair value of IRP increased approximately $2.3 million this quarter.

IRP increased its quarterly distribution from $0.55 per quarter to $0.60 per quarter and on March 6, 2011, IRP entered into a Definitive Agreement to sell its partnership interest to James River Coal Company. This transaction is expected to close in the first half of 2011 subject to completion of various closing conditions. Our portion of the initial sales proceeds is expected to be approximately $31.1 million in cash, with an additional $2.1 million held in escrow for a period of up to 14 months. The release of escrow funds is contingent upon a number of factors including coal reserves and outstanding regulatory items. We anticipate investing the proceeds of the sale of IRP in publicly traded MLPs and cash equivalents pending being deployed in newly qualified investments and subject to limitations on publicly traded investments in the BDC structure.

The fair value of Mowood decreased approximately $600,000 this quarter, generally due to a decrease in the probability of receiving future contingent payments related to the Timberline Energy sale. Omega continues to perform at budget, but on December 31, 2010 a tornado touched down on Fort Leonard Wood. Our pipeline system was relatively undamaged by the tornado and the financial effects of the tornado are not expected to be significant. Fort Leonard Wood continues to grow and Omega expects that construction revenues will bolster its performance in 2011. The fair value of VantaCore decreased approximately $1.9 million this quarter. VantaCore was unable to meet its minimum quarterly distribution of $0.475 per unit for its quarter ended December 31, 2010. Common and preferred units elected to receive their distribution as a combination of $0.09 in cash and the remainder in newly issued preferred units.

We received 23,185 preferred units in addition to our $0.09 in cash. VantaCore reported year-to-date EBITDA through December 31 below budget and the Southern Aggregates property in Louisiana continues to fall short of budget, but VantaCore is optimistic that signs of improvement in the building industry in that area, along with cost cutting measures imposed by Management, will improve their performance in 2011. And finally, the fair value of High Sierra decreased slightly during the quarter. High Sierra has not made cash distributions to its LP or GP unit holders for the last four consecutive quarters. On March 16, 2011, High Sierra closed on a new $215 million, three year committed senior secured credit facility led by BNP Paribas. The new credit facility is expected to provide a level of stability and flexibility to meet the needs of the partnership's existing operations and provide a base of working capital to take advantage of market opportunities.

The new facility also financed the buyout of High Sierra's minority partners at Anticline Disposal, resulting in them owning 100% of the membership interest of that business. The closing represents a very positive event for the partnership and we believe this, along with the improved operations, should allow High Sierra to return to paying a cash distribution. That concludes our discussion of the private companies. I'd now like to review our distribution strategy. This quarter's distribution of $0.10 per share was in excess of our DCF for the quarter. Assuming the sale of IRP closes in the expected timeframe, we anticipate paying a distribution of not less than $0.10 per share per quarter for the remainder of fiscal 2011. In order to sustain this distribution for 2011, we may elect to include a small portion of the proceeds from the IRP sale depending on the operating performance of selected portfolio companies and their ability to return to near historic distribution levels. And with that I'll turn it over to Connie Savage for a review of our DCF.

Thanks, Ed. First I'll review our distributable cash flow for the quarter, followed by a summary of our operating results. As most of you know, DCF is distributions received from investments less our total expenses. We don't include in DCF the value of distributions received from portfolio companies, which are paid to us in stock as a result of credit constraint, market dislocation, or other similar issues. Our DCF calculation and a reconciliation to our GAAP operating results are included in our press release, which we issued yesterday, and in the MD&A section of our Quarterly Report on Form 10-Q, which was also filed yesterday. So this quarter we received approximately $891,000 in distributions and investment income from our investments compared to about $1.7 million in the first quarter of the prior year. The variance is primarily related to two of our portfolio companies that are not currently paying distribution.

We incurred approximately $389,000 in operating expenses this quarter, that includes base Management fees net of the expense reimbursement, compared to about $433,000 in the first quarter of the prior year. This left us with about $502,000 in cash available for distribution compared to about $1.2 million in the first quarter of the prior year. And as Ed mentioned, we did payout -- our payout percentage for the first quarter was in excess of our distributable cash flow. We paid a distribution of $0.10 per share or about $915,000. We had unrealized depreciation this quarter of about $304,000, that's before income taxes, primarily related to the increase in the fair value of IRP. We had net realized gains, again before income tax, of $374,000 for the quarter and that's primarily attributed to a gain on the sale of our Abraxas shares, which was offset by a loss from the sale of our [post rock shares. So in summary we had a net increase in net assets resulting from operations for the fiscal quarter of about $1.1 million. And with that I'll turn it over to Dave Schulte for a discussion of our Strategic Update.

Thanks, Connie and Ed. We're very fortunate to have made the progress in our private portfolio demonstrated by the success of IRP. A performance like that requires tireless involvement of the Management team of the private Company, as well as its investors. IRP and Ed Russell and his team deserve congratulations for this outcome. We're very pleased by it. Additionally, the lengthy effort by your Board of Directors to evaluate strategic options for TTO has borne fruit. We all thank the Board and their financial advisor, Stifel Nicolaus, for their objective guidance through this process. The vote today provides TTO with significant flexibility to meet its investment objective, which is providing a growing distribution stream thereby allowing stockholders to achieve a high level of total return. And we've already begun to target real physical energy infrastructure assets which can be leased to high quality operating companies.

We expect these lease payments, which TTO would receive, to support its distribution strategy. We expect to continue to utilize REIT and utility yields as institutional benchmarks for our stockholders. Our plan is to continue to seek distribution growth, while accessing low volatility available from our sector. And by allowing TTO to pursue this strategy, our stockholders have also confirmed their preference for maintaining our current private investments in our portfolio to allow them to reach their value potential. The private investing has been the key differentiation of TTO from our other investment companies since the beginning and we're very excited to be able to dedicate significant new resources to growing the asset base, as well as the distribution stream for TTO. Our plan is to return to a growth Company by pursuing Real Estate Investment Trust, or REIT, qualifying energy infrastructure investments.

During the remainder of 2011, TTO will continue to be a taxable C-corporation and, as Ed mentioned, we expect to maintain the distribution even if it means paying out some of the gain on the IRP sale. We'll utilize liquid assets on our balance sheet plus leverage and the proceeds of equity issuance to fund acquisitions of new qualifying assets. We filed a shelf registration statement to further enhance our capital raising flexibility in this regard. We expect that our requalifying investments will be in the form of triple net leases with operating companies. These leases would be a supplement to that Company's other capital sources. The advantage of a triple net lease funding is the possibility of preserving equity by the operating Company, while maintaining control over the use of their asset.

The advantage for TTO is that the Operator would retain responsibility for all maintenance and operating expenses, enabling TTO to be a financing vehicle. Now REITs must pay out at least 90% of their net income, allowing TTO to continue to generate cash flows for stockholders. The IRS has confirmed REIT qualification for assets like those operated by TTO portfolio companies and we'll talk about that. In order to qualify for REIT treatment, the assets must be real property under applicable rules. Recently the IRS confirmed real property designation for fixed assets that function as a conduit for energy transmission and storage. The forms of energy, they have included both hydrocarbon commodities like oil and gas and electricity. The fixed assets, which either create or convert those forms of energy, do not constitute real property, so pipeline assets, like Omega Pipeline owned by Mowood, would qualify but processing plants or generation would not qualify. In addition to the type of asset being important, the IRS considers the character of income from those assets to be important. In order to fit inside a REIT rule, income must be passive.

Lease payments are the type of income that is passive within the rules, so TTO will not be operating any assets which it will finance. Now this is similar to the historical strategy of other Tortoise Funds , but we provide innovative funding mechanisms for operating companies, but stop short of competing with them for assets. We believe our historical association with high quality Management teams is a hallmark of Tortoise's investment strategy and one we expect to continue. At TCA and our affiliate Montage have formed a joint venture with Rick Green called Corridor Energy to pursue these investments. Members of our investment committee, including me, have a history of successful private investing with Rick Green. His associates, David Haley and Becky Sandring, form the core team providing access to asset owners and helping us to qualify the kinds of regulatory and operating concerns demanded by real property ownership in the energy sector. On behalf of all of us at Tortoise, we're pleased to have this outstanding resource engaged to help develop the REIT strategy for TTO. With that, my remarks are completed and open for questions.

Yes, we'll open it up for questions.

(Operator Instructions)

The question from Mike Zuk was during the transition process will the non-affiliated assets basically be sold or something happen to them?

If those non-affiliated assets are in essence public securities that have been placeholders for new potential investments by TTO, we would expect that to be a reservoir of available investment capital for new investments, so the answer is yes. Over time we expect those assets to be liquidated when there is a desirable new investment to make.

Other questions in the room? Questions on the phone?

(Operator Instructions)

No questions from the phone? Okay. Any other questions, one last check in the room. All right, at this point we'll adjourn the meeting. Thank you so much, everybody, for your attendance today.