CorEnergy Infrastructure Trust Inc (CORR) 2011 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 opened for questions. (Operator Instructions).

This conference is being recorded today, Thursday, July 14, 2011. I would now like to turn the conference over to Pam Kearny, Director of Investor Relations. Please go ahead, ma'am.

Thank you and welcome to the 2011 second-quarter conference call for Tortoise Capital Resources. I am joined today by Dave Schulte, CEO, Ed Russell, President, Connie Savage, Controller, and Rick Green, Corridor Energy Managing Director.

An audio replay of our conference call will be available on our website and this information is included in the press release issued yesterday, 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 yesterday and our Annual Report on Form 10K, which was filed in February. These documents can also 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.

Thanks, Pam. Good afternoon, everyone, and thank you for joining us today for our second-quarter conference call. I'll start by giving an update on our distribution guidance, followed by an update on our private equity portfolio and then we will hear from Rick Green from Corridor Energy who will discuss our first real property acquisition. Connie will discuss our financial and operating results and, finally, Dave will provide a strategic update and we will conclude by opening the phone lines for questions.

We are pleased to confirm our distribution guidance that we expect to pay no less than $0.10 per quarter for the remainder of 2011. However, after investing most of the proceeds from the sale of IRP, we now expect our earned distribution -- distributable cash flow to support our annualized distribution of $0.40 per share with upside potential to that rate depending on the performance of VantaCore and High Sierra. We believe this revised guidance provides the basis for our stockholders to have confidence in the sustainability of our distribution at this level.

I'll begin the discussion of our private equity company investments with International Resource Partners or IRP. In April 2011, IRP was acquired by James River Coal Company. In exchange for our interest in IRP, we received cash proceeds of approximately $31.6 million. An additional $2 point million payable to us was placed in escrow. Proceeds from the escrow account will be released upon satisfaction of certain post-closing obligations and/or the expiration of certain time periods, the shortest of which is 14 months from the closing date. As of May 31, 2011, we estimate the fair value of the escrow to be approximately $1.7 million.

Subsequent to our second-quarter end, we successfully reinvested most of the proceeds from the IRP sale into two private investments and public MLPs. In early June, we invested $9.9 million in Magnetar MLP -- investment LP which was formed solely to invest in Lightfoot Capital Partners LP. As a reminder, Lightfoot brought us the IRP investment opportunity and we are excited to have the opportunity to reinvest some of those proceeds, this time at the fund level with an indirect investment in its portfolio company, Arc Terminals.

Arc is an independent operator of above ground storage and delivery services for petroleum products and chemicals, including refined products, renewable fuels, and crude oil. Since its inception in 2007, Arc's business has grown to more than 3.5 million barrels of storage capacity through acquisitions and development projects. In addition to Arc, Lightfoot also holds approximately $60 million set aside for other platform investments or additional investments in Arc.

The fair value of High Sierra increased approximate $4.5 million this quarter with the Company making significant improvements in the first six months of 2011. In May, High Sierra completed the sale of Monroe Gas Storage over which it had a 70% interest for $140 million. The sale of Monroe, which was no longer a strategic asset for the Company, was key to allowing High Sierra to focus on strategic acquisitions in the water disposal section. In June, High Sierra acquired assets of Marcum Midstream, a water disposal company located in Colorado which serves the oil and gas industry. We believe the completion of these transactions along with the new credit facility which closed in March will allow the Company to return to paying a modest cash distribution as early as next quarter.

The fair value of Monroe decreased slightly this quarter based on Omega Pipeline Mowood subsidiary being slightly below budget through April, generally due to the timing of completion of construction projects. Omega Pipeline's assets in Ft. Leonard Wood, Missouri continue to grow and we expect schedule construction revenues to bolster its performance for the remainder of 2011.

The fair value of VantaCore increased approximately $2 million this quarter. VantaCore was unable to earn its minimum quarterly distribution or MQD of $0.475 per unit for its quarter ending March 31, 2011; and common and preferred unit holders elected to receive their MQD as a combination of $0.12 in cash with the remainder of newly issued preferred units compared to $0.09 in cash and newly issued preferred units in the prior quarter.

VantaCore reported year-to-date EBITDA through April 2011 below budget. The Company has initiated a number of projects at both locations to design to improve profitability, which we believe will create value at the Company. I would, however, expect the remainder of this year to be challenging absent a significant improvement in new home construction in VantaCore's service area.

That concludes the update of our private equity investments. Next, we thought it would be helpful for Rick Green, Managing Director of Corridor Energy, who assisted our advisor in identifying and closing on the acquisition of the Eastern Interconnect Project, to discuss the asset.

Thanks, Ed. Corridor is pleased to have facilitated TTO's first real property asset transaction with the purchase of a 40% undivided interest in the Eastern Interconnect Project for approximately $16.1 million, including the assumption of $3.4 million of debt. Corridor Energy was founded on the belief that our combination of operational and financial expertise allows us to be better partners with energy company management teams.

Furthermore, it was through our network of energy operators and capital market relationships that we originated the Eastern Interconnect Project or EIP. This opportunity -- this opportunity and we are hard at work continuing those efforts.

The EIP is electricity across New Mexico between Albuquerque and Clovis. The physical assets include 216 miles of 345 KV or kilovolt transmission lines, towers, easement rights, converters and other grid-supporting components. TTO's interest in EIP is subject to a triple net lease, which provides that the lessee, Public Service Company of New Mexico or PNM retains responsibility for operations and maintenance, insurance payments, and property taxes. The lease was initiated in 1985 for a 30-year term and will expire in 2015.

At termination, PNM has the option to repurchase the 40% interest at its then fair value, renew the lease, or allow the lease to expire. It is our hope to develop a constructive relationship with PNM, thereby encouraging their renewal of the lease. We believe PNM is a quality partner and we respect that this asset is a critical component of their electric system, enabling them to fulfill their regulatory obligation to serve, which is required of all utilities.

Additionally, EIP serves as one of only seven direct current or DC ties in North America, connecting the Eastern and Western grids. More specifically, it provides an interchange between the Western Interconnect and the Southwest Power Pool. We believe the operational characteristics of this asset combined with the lease structure translate into a reliable contracted investment for our TTO stockholders.

I will now turn the call over to Connie Savage for a discussion of TTO's financial results.

Thanks, Rick. Our net asset value per share was $10.66 as of May 31, 2011, compared to $10.46 per share at February 28, 2011. The fair value of our investment securities excluding short-term investments at May 31, 2011, was approximately $70.1 million with approximately $43.3 million in private securities and about $26.8 million in publicly traded securities. And it was diversified amongst 85% midstream and downstream, 14% aggregates, and about 1% in upstream.

We had a net investment loss for the quarter of approximately $69,000. We had a net decrease in unrealized gains before income taxes of about $21.3 million, which was offset by a net increase in our realized gains, again before income taxes, of about $25.7 million and both of those are related primarily to IRP.

So in summary, we had a net increase in our net assets, resulting from operations for the second quarter of approximately $2.8 million.

Next I will review DCF, which is distributions or income received from our investment less our total expenses. Our DCF calculation and a reconciliation to our GAAP results are included in our press release issued yesterday and in the MD&A section of our Quarterly Report on Form 10-Q, which was also filed yesterday.

Our DCF this quarter consisted of approximately $793,000 in distributions and investment income from our investments. We incurred approximately $398,000 in operating expenses this quarter, which includes space management fees, net of the expense reimbursement. This left us with approximately $395,000 in distributable cash flow and we elected to include approximately $521,000 of the IRP capital gains in our cash available for distribution.

Financial statements included in our current Form 10-Q are prepared in conformity with GAAP specifically as an investment company. Following the withdrawal of our election to be regulated as a BDC, we will instead apply general corporate GAAP reporting guidance.

The impact of this change is still being evaluated. However it will result in a change in our financial statement presentation, most notably consolidation of our majority-owned company, Mowood. We will also follow historical cost reporting rules for our required assets such as the Eastern Interconnect Project.

Since our reported book value per share is expected to migrate to historical costs similar to other -- to REITs and utilities that own physical assets, we intend to, where appropriate, provide supplemental non-GAAP information in order to enhance our investors' overall understanding of our financial statements. These items would likely include supplemental fair value information regarding Mowood, TTO's net asset value, and distributable FLOW coverage of our distributions.

So with that, I will now turn the call over to Dave Schulte for a strategic update.

Thanks, Connie. With the acquisition of a Power Transmission asset, TTO has begun the process of lowering its targeted risk profile and instilling renewed confidence in our distribution stability and eventual distribution growth prospects. We believe that distribution stability and growth are appropriate valuation metrics for several reasons.

First, TTO has direct ownership in a fully contracted energy infrastructure asset such as the transmission line in New Mexico. The second, operators of those types of assets can be either public or private companies, in this case, a publicly traded utility with a long track record of operating its assets. Third, the triple net lease is essentially a financing tool, which leaves the operator with the responsibility of managing employees and costs. However, TTO can obtain visibility on the long-term value of the asset to participation features in the lease such as the fair value repurchase option at closing -- at termination, excuse me.

Our growth prospects for our distributions are enhanced by the opportunity to make accretive new acquisitions. In that regard, we believe that the market opportunity for TTO is relatively large. Industry sources estimate the amount of capital to be invested in the electric grid at $10 billion per year. The pipeline network, another $10 to $15 billion per year. We believe that lease funding is an advantageous option to operators of those networks as it conserves their equity capital and provides another tool for funding growth.

In addition, this strategy is attractive to operating companies like Public Service Company in New Mexico whose assets may not qualify for MLP tax treatment.

Finally, some operators may not want to relinquish operational control by selling their entire operations to another company. As Rick mentioned, TTO will not operate the assets we purchase, thus we provide attractive alternatives for those companies.

To fund future acquisitions for TTO, we plan to utilize liquid assets on its balance sheet, plus leverage in the proceeds of equity issuances. Our goal with each new acquisition will be to enhance the stability and growth prospects for the TTO distribution through participating features in our leases. We're mindful of our obligations to avoid concentration in the portfolio and to obtain financing on terms which enhance our distribution prospects for existing stockholders. We have implemented the same standard in our other publicly traded Tortoise investment vehicles and expect to exercise the same discipline for TTO.

We believe that TTO can provide public market investors with access to the desirable investment characteristics of the infrastructure asset class in an investor-friendly REIT structure. If we find sufficient, suitable, REIT-qualifying investments during the remainder of 2011 and hold them for calendar year 2012, then TTO could qualify as a REIT for the 2012 tax year. Our belief is that our risk and return characteristics can then be compared favorably to utilities and other REITs.

Moving forward, Corridor Energy is expected to act as an advisor to TTO on the Eastern Interconnect Project and other infrastructure acquisitions. The Corridor's team lifetime of experience in energy operations provides us with confidence in the asset quality and our team's oversight capabilities.

We believe the combination of expertise provided by Tortoise and Corridor will create a successful new path for TTO to address the broad market for energy infrastructure investments for the benefit of our stockholders.

Thanks, again, to everyone for joining us on our call today. Operator, that concludes our prepared remarks and we are now ready to open the phone lines for any questions.

(Operator Instructions). [Kathleen King] with Bank of America.

Two questions, if I may. The first one, you talked about resuming a modest cash distribution High Sierra by next quarter. Can you quantify what that means exactly, maybe in reference to previous payments of the MQD there?

Not at this time. They just finished their second quarter for June and I haven't -- we haven't seen the numbers. And you know, we haven't in the past given that information out and there we are going to have a look at performance and the Board is going to have to compare that with what they project for the rest of the year.

But we feel comfortable that they will get to that. They will get to a distribution as early as this quarter and then I think we will see some modest growth in that as they get on track to more historical distribution levels.

Okay. And then switching gears to the electric transmission purchase. Wondering about return expectation there, I know it may depend upon this 2015 option, but still if you could help us get a handle on your expectations there.

We've got a target of obtaining in the long term total return in the 8% to 10% range for investments in energy infrastructure assets that long term is affected by the fair value option here. So what we are hoping happens as Rick mentioned is that we would have an opportunity to have at least be renewed with a long-term total return, including participation in growth, that would get us that kind of total return expectation. But as far as the current yield, we haven't published that and don't have that information presently to share.

Okay. That's helpful. Thank you.

(Operator Instructions). I am showing no further questions at this time. I'll turn it back over to management for any closing remarks.

Thank you, everyone, for dialing in today and we are very pleased with our performance this quarter and look forward to continuing our communications next quarter. Thank you.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect and thank you for your participation.