CorEnergy Infrastructure Trust Inc (CORR) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen; thank you for standing by. Welcome to the TTO third-quarter conference call. (Operator Instructions). This conference is being recorded today, October 13, 2011.

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

Thank you. Good afternoon and welcome to the 2011 third-quarter conference call for Tortoise Capital Resources. I'm 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. 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 the 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 also be accessed through the investor relations section of our website. We do not update the forward-looking statements.

And with that, I'll turn the call over to Dave.

Thank you very much, Pam.

I have to say that this is one of those times when the forward-looking statements dissertation is well worth it because we're going to talk about the transition that is underway at TTO.

This is our third-quarter conference call. I'll give an update on our real asset strategy in transition, and we'll talk a little bit about our private companies, and then Connie can discuss our financial results. We will take questions. Rick Green, managing director of Corridor Energy, which is an affiliate of Tortoise, will join us for the Q&A portion of the call, if anybody would like to ask him anything specific.

We are continuing to make progress on repositioning TTO. On June 30, we acquired a 40% undivided interest in the transmission line in New Mexico called the Eastern Interconnect Project. It's operated by the Public Service Company of Mexico. The utility has performed as expected, and a recent strategy announcement by the utility led S&P to upgrade their senior unsecured debt rating to BBB from BB-plus. We have begun what we hope to be a long-term relationship with the utility's senior management team.

The EIP transaction is reflected in our financial statements for the quarter as a business combination. The acquisition consisted of leased asset property of $14.1 million, receivables assumed of $700,000, an intangible lease asset of $1.1 million, interest payable of $100,000, and a fair value premium on the debt assumed of $200,000. We incurred transaction costs of approximately $600,000, which were required to be expensed as incurred. We expect future real property acquisitions to be accounted for in a similar manner.

On September 21, we filed a withdrawal of our election to be treated as a BDC with the SEC. This withdrawal supports the real asset strategy we've embarked on and allows us to facilitate progress on our shelf registration statement, which effectively converted our previously-filed N2 under the 40 Act to an S3 under the 33 Act. When effective, the shelf will allow us to raise additional capital to acquire real property assets as described in that document.

We do not currently have any agreements or plans for any issuance of debt or equity securities, and frankly would be reluctant to do so at current prices. The market opportunity, however, for acquiring real property assets is substantial. Industry sources estimate the amount of capital to be invested in new electric grid construction at approximately $10 billion per year. The pipeline network represents another $10 billion to $15 billion per year. We believe that lease funding is an advantageous option for operators of these networks, as it conserves their equity capital and provides them another tool for funding growth.

The acquisition of the New Mexico transmission line has strengthened our pipeline of potential deals. Inquiries and opportunities have arisen for similar assets, other energy transportation and distribution assets, and even some energy and chemical storage facilities. Our relationships with our current private portfolio companies could also lead to additional requalifying investments, and we are reviewing the re-eligibility of our existing holdings presently.

We can only target real property assets that have long lives, stable associated cash flows, and limited commodity price sensitivity operated by experienced management teams that have limited technological risks and have growth opportunities. We seek to enter leases that provide us with a base rent and a participating rent over the lease term.

These increases in potential leases -- lease revenue are expected to be either fixed or tied generally to increases in an indice such as the Consumer Price Index. Although P&M is an investment-grade utility, we expect to lease our property to both investment-grade and non-investment-grade operators. We anticipate structuring our lease payments to reflect the risk profile of both the underlying asset and the operating company.

Our objective is for each new real asset acquisition and associated lease agreement to provide our stockholders with an attractive risk-adjusted total return, with an emphasis on distributions and distribution growth. Our belief is that upon requalification, our risk and return characteristics can be compared favorably to utilities and to other REITs.

Furthermore, we believe it is important that all of our acquisitions are accretive to stockholder distributions.

We continually undertake diligence regarding additional acquisitions and believe that 2012 requalification is attainable. However, the current low interest rate environment is stimulating a lot of companies to refinance their debt. The current economic and market pressures have tempered the environment for acquisition financing and could lengthen our timeline for requalification. If that is the case, we will continue to be a taxable Corporation through 2012, but would not anticipate any change in our distribution-paying capacity during that year from the current year.

On or before the end of the current fiscal year, we do anticipate terminating the investment advisor agreement currently in place with Tortoise Capital and entering into a management agreement directly with Corridor Energy, pursuant to which Corridor will provide full management services in connection with our real asset in investments.

This agreement is expected to contain economic terms no less favorable to us than to the terms of the current advisor agreement entered into with Tortoise. Upon execution of the management agreement with Corridor Energy, Corridor will become our primary manager. We would then enter into a new advisor agreement with Tortoise to continue to provide services necessary to liquidate the securities portfolio and certain other day-to-day noninvestment operational services.

We believe Corridor has demonstrated the expertise necessary to pursue TTO's future strategy, supported by Tortoise's platform of research and relationship management. With that discussion of our future, I'll turn the call over to Ed, who'll give an update on our current private companies.

Thank you, Dave.

I'll begin by mentioning our previous distribution guidance, in that we expected our earned distributable cash flow to support an annualized distribution of not less than $0.40 per share, with upside potential to that rate depending on the performance of our private portfolio. We believe this guidance provides the basis for our stockholders to have confidence in the sustainability of our distribution at this level.

In June 2011, we invested $9.9 million in Magnetar MLP Investment LP, which presents an indirect investment into Lightfoot Capital Partners portfolio company, Arc Terminals. Arc is an independent operator of aboveground storage and delivery services for petroleum products and chemicals, including refined products, renewable fuels, and crude oil. As of August 2011, Arc had nine terminals located in the United States with a combined working capacity of 3.6 million barrels. At the time of our investment, Lightfoot also held approximately $60 million in cash set aside for other platform investments or additional investments in Arc.

High Sierra's fair value increased approximately $2.7 million this quarter. In May, High Sierra completed the sale of Monroe Gas Storage, and in June acquired the assets of Marcum Midstream, a Colorado-based water disposal company serving the oil and gas industry. The completion of these transactions, along with a new credit facility which closed in March, is expected to result in a modest increase in the quarterly cash distribution next quarter.

Over the last two quarters, we've seen a meaningful increase in High Sierra's fair value, which has been a direct result of management's efforts to sell nonstrategic assets, close on a bank facility that gives them sufficient capital to grow, and expand their water recycling business. I would, however, caution investors that, given the volatility of High Sierra's businesses, it is unlikely that we will see distribution return to historical levels in the near future. Instead, I would expect management and the Board to focus on providing predictable and stable distributions based on expected distributable cash flow.

Mowood's fair value increased approximately $300,000 this quarter. Mowood reported a very strong third quarter, due largely to Omega Pipeline's July performance in which revenues and EBITDA were well above projection. The company's pipeline assets located in Fort Leonard Wood, Missouri, continue to grow, and we expect scheduled construction revenues to bolster its performance in the remainder of 2011.

And finally, in August of 2011, VantaCore completed an acquisition of Cherry Grove Quarry in Todd County, Kentucky. TTO provided VantaCore $1.2 million to help fund the acquisition in exchange for newly-issued preferred B units. The fair value of VantaCore's securities decreased approximately $3.3 million in total in the quarter, exclusive of these preferred B units.

As VantaCore was unable to meet its minimum quarterly distribution of $0.475 per unit for its quarter ended June 30, 2011, TTO received 27,167 preferred units, in addition to $0.04 in cash per common and preferred unit. We expect the Cherry Grove acquisition and the continued operating improvements at Southern to improve profit margins, and I would expect the Company to continue to make additional investments in equipment or improvements to its facility. But I don't expect a dramatic improvement in Southern Aggregates volumes in the near future, which will likely result in us continuing to see a significant portion of our distribution in the form of PIK units instead of cash.

And with that, I'll now turn the call over to Connie Savage for a discussion of TTO's financial results.

Thank you, Ed.

Our net asset value per share was $10.62 as of August 31, compared to $10.66 per unit last quarter. The fair value of our investment securities, excluding short-term investments, at August 31 was approximately $81.5 million with approximately $54.5 million in private securities and about $27 million in publicly-traded securities.

The transmission line acquisition is reflected on our balance sheet separately from our investment securities, as Dave previously described.

We had a net investment loss for the quarter of approximately $610,000, which includes approximately $583,000 in transaction costs related to the transmission line acquisition, which were expensed as incurred. We had a net increase in unrealized gains before income taxes of about $1.4 million and a net realized gain before income taxes of about $611,000. So in summary, we had a net increase in net assets resulting from operations for this quarter of approximately $591,000.

Our DCF this quarter consisted of about $1.4 million in total from our investments, less about $492,000 in operating expenses. This left us with distributable cash flow of about $888,000, or $0.097 per share, and we paid out $0.10 per share in distributions to our shareholders.

The financial statements included in our current Form 10-Q, which we filed today, are prepared in conformity with GAAP specifically as an investment company. As a result of the withdrawal of our election to be regulated as a BDC, we will no longer qualify as an investment company for purposes of applying U.S. GAAP, and this will result in a significant change in our future financial statement presentation.

The most notable changes include the removal of the schedule investments and financial highlights and consolidation of our wholly-owned portfolio company, Mowood. Exclusive of Mowood, we expect our other equity investments, both public and private, to continue to be reported at fair value under provisions of GAAP within our financial statements.

NAV and DCF have historically been meaningful measures of our operating performance and distribution-paying capacity. As our regulatory and operating structure transitions towards investing in real property assets, some of these historical measurements may become less meaningful or may be presented in a different context. We intend to, where appropriate, provide supplemental GAAP and 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, our net asset value or book value per share, and cash flow coverage of our distributions.

And with that, I'll turn the call back to Dave for final comments.

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

(Operator Instructions). At this time, I'm showing no questions in queue. I'd like to turn the call back over to management for closing remarks.

Okay, everyone, thank you very much for your attention, and we look forward to continuing to report on our progress. We'll talk to you again next quarter. Bye-bye.

Ladies and gentlemen, this does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial 1-303-590-3030 or toll-free 1-800-406-7325 and enter the access code 446-7190. As a reminder, a replay will also be posted on the Tortoise website. We would like to thank you for your participation. You may now disconnect.