CorEnergy Infrastructure Trust Inc (CORR) 2011 Q4 法說會逐字稿

Greetings and welcome to the Tortoise Capital Resources 2011 fiscal year-end earnings call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pam Kearny, Investor Relations for Tortoise Capital. Thank you, Ms. Kearny. You may begin.

Thank you and welcome to the 2011 year-end earnings call for Tortoise Capital Resources Corp. I'm joined today by David Schulte, CEO, Ed Russell, President, and Connie Savage, Controller. An audio replay of our conference call and information included in our press release issued yesterday is available 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 yesterday.

These documents can be accessed through the Investor Relations section of our website and we do not update our forward-looking statements. For the purposes of this call, we will be referring to a slide presentation that is available for download on the home page of our website at www.tortoiseadvisors.com. I'll now turn the call over to David Schulte, who is a founder and managing director of Tortoise Capital Advisors and a member of Tortoise's investment committee. He has been Chief Executive Officer of TTO since its inception and is now also a managing director of Corridor InfraTrust Management and will be working with the Corridor team to guide TTO's future.

Thanks, Pam. Good afternoon, everyone and thank you for joining us today for our 2011 year-end earnings conference call. I'll begin today by outlining our reflections on the strategic positioning of TTO. Following that, Ed Russell will review the performance of our private investments and Connie will discuss our financial and operating results. Hopefully you've been able to access the slide presentation on our website. I'll start with Slide 4.

As with all public vehicles created by Tortoise, TTO's objective has been to provide attractive risk-adjusted total return and we seek to accomplish this by providing distribution stability and distribution growth. TTO as a private equity platform was challenged to achieve this objective. We had experienced many challenges as a BDC including small investment size due to our platform, variability of distributions from the portfolio including reactions to the financial crisis, lack of leverage for the strategy, and an inability to raise equity capital to grow our platform under the restrictions of the 1940 act.

After studying all available options, a year ago the managing directors of Tortoise recommended positioning TTO to be able to access the significant opportunities for acquisitions of energy infrastructure, real property assets, rather than securities. We chose the REIT structure because it had a single layer of tax and could be owned by institutions and retirement plan investors. In 2011, we accomplished many steps to address this opportunity for TTO.

We received shareholder approval for our plan; we acquired our first real estate qualifying asset, a power line in New Mexico; we withdraw our BDC election; and changed our shelf filing from an N-2 under the 40 Act to an S-3 under the 33 Act. We also formally retained Corridor as a manager and changed the management fee to align our incentives with distribution stability and distribution growth. We expect that the activities that we engage in with Corridor's leadership which are outlined on Slide 5 will result in investment attributes sought out by infrastructure asset investors. We believe these investors seek long duration investments suitable for retirement plans.

Institutional investors are increasingly focused on infrastructure as a distinct asset class due to its desirable characteristics. There are very few publicly listed vehicles that offer direct access to the infrastructure assets in the United States. We believe TTO focuses on the most attractive segment of infrastructure, the transportation and storage of power and energy throughout the United States. The essential nature and long lives of these assets make them relatively stable through economic cycles. By qualifying for REIT status, TTO's ownership can include retirement plan investors which we believe are a significant source of investment appetite for long duration assets.

We believe TTO's distribution will be attractive relative to benchmark REITs and utilities today and I personally work closely with the Corridor team and will remain active in the acquisition of quality assets and the structuring of financing around those assets. Corridor InfraTrust Management is an asset manager specializing in financing the acquisition and development of real property, infrastructure assets. Corridor provides capital to operating companies through infrastructure REITs or what we have called InfraTrust financing vehicles. The strategy is founded on the critical assets contained in infrastructure right of ways, called corridors. Corridor was formed by and is a joint venture with the Corridor Management team, Tortoise Capital Advisors and Montage Investments.

Our mission in providing attractive risk-adjusted returns focused on distribution stability and distribution growth starts with understanding of the market we're serving depicted on Slide 6. Operating businesses that are ground into the infrastructure asset class have, in common, revenue that is linked to socially necessary services and underpinned by capital assets with long lives. Investments in these businesses have a quasi-public purpose and are widely available outside the United States. Inside the US, most of these kinds of assets have been funded with municipal bonds but are becoming more widely funded with private equity. The unique and appealing characteristics of this asset class include long-term stability and low volatility, attractive risk-adjusted returns relative to other market sectors with cash distributions being the largest portion of return, growth potential of the distribution which might provide a hedge against inflation and low correlation to both debt and equity that tends to provide an additional layer of diversification for investment portfolios.

TTO will endeavor to achieve these objectives for our stockholders. Under the Communications Asset silo, recently a company called American Power completed its conversion from a corporation to a publicly traded Real Estate Investment Trust. There are many other listed infrastructure vehicles such as master limited partnerships which may be difficult tore some retirement plan investors to access. This set of companies provides distinct investment characteristics like real estate due to recurring revenues but with competitive positions more like utilities. We think TTO's focus on the most attractive part of this group and let's take a closer look at why we think so.

The US is the largest market in the world for both energy production and energy consumption. On Slide 7 you can see that over the past 40 years, the United States has seen a fairly steady upward sloping trend in energy and electricity consumption. The long-term expectations for continued demand growth into the foreseeable future driven both by economic growth as well as population growth. Long-term leases with high-quality credit counterparties that provide transportation of these energy commodities is really the basis for revenue of the assets we're targeting to invest in. Infrastructure assets such as pipelines and power transmission lines provide a vital link connecting energy producers and end users. The revenue model of the companies operating these assets is more volume based as depicted on this chart and less commodity price based.

We endeavor to provide financing terms to these companies that include both base rentals and participation features to provide TTO with exposure to the long-term benefits of this business model. The volume of energy utilized in our economy is depicted on the slide has been relatively stable even through economic downturns, including the most recent one. Part of the reason for this is the tremendous buildout under way by pipeline and transmission operators connecting growing areas of supply with markets. We believe TTO has an opportunity to invest in this expansion of our country's energy infrastructure. Whether it's electric transmission, to connect new wind development, pipeline development to bring new shale gas to market, or other infrastructure such as storage terminals, TTO has provided and intends to continue to provide funding for these assets.

Let's take a look at why the transition of TTO from a BDC to a REIT is very familiar territory for us on Slide 8. Each of the companies in TTO's private portfolio operates assets with our targeted asset characteristics. The companies provide socially essential services, for example Mowood's gas distribution pipeline; are supported by long duration assets, such as Lightfoot's Arc Terminal business; and by and large have attempted to limit commodity price and technological risk and provide access to potential growth. Historically TTO was limited to investing in private securities of these companies. Going forward, we expect to acquire the physical assets and lease them to the same types of companies such as we have done with the Eastern Interconnect Project.

We believe that our stockholders should expect TTO to deliver on the promise of infrastructure asset class outlined next on Slide 9. In our distribution press release we announced confidence that we could pay not less than $0.44 annualized from economic earnings regardless of characterization for accounting or tax purposes during 2012. We intend in the future to adopt REIT-style reporting to illustrate the earnings power of TTO for stockholders in a format widely followed, such as Funds From Operations. We will target investments in assets and on terms that can provide visibility of distribution growth of 2% to 4% over the long run. We believe this growth will mitigate the impact of inflation on our distribution and is consistent with the expectations of infrastructure investors.

Through distribution stability and modest growth we believe we can be favorably compared with an investment in REITs or utilities. Our strategies to obtain these results, are designed to generate desirable return characteristics. First, we target high-quality energy infrastructure real assets which, upon ownership would be REIT-qualifying. We are proposing leases around those assets with both a base rent and participating rent feature which we believe will provide us with an attractive risk-adjusted total return profile of 8% to 10%, with most of that coming in the form of current income. While we feel we have adequate operating flexibility today with the MLPs in our portfolio as potential liquidity sources, our S-3 filing, once declared effective, will enable TTO to issue a wide range of securities including debt or equity and will result in increased liquidity for our stockholders.

We plan to issue equity only in the event that proceeds can be deployed to grow the value for our current stockholders. We confirmed, when obtaining stockholder approval for deregistration last April, that our managing directors and Board of Directors will consider the stock price and potential for dilution and accounting value per share resulting from new equity issuance, if any. The earnings power of the new capital must outweigh that dilution and contribute to our objective of increasing distribution stability and distribution accretion for existing stockholders before we will issue new equity. The filing simply allows us additional financial flexibility for the future, upon its being declared effective by the SEC which has not yet occurred.

Finally we believe we have aligned both downside and upside incentives between our manager and our stockholders. Tortoise has always had shareholder-friendly terms as an investment advisor and Corridor continues in that tradition. On Slide 10, we summarize for you the manager's expertise. We believe that investors in infrastructure assets want management teams with both investment acumen and operating skills to create working relationships with the operating teams in the companies they finance as a way to mitigate risk.

We believe the resources of an external manager are critical to our success in executing this plan. Corridor's team has over 70 years of combined leadership experience in operating multi-national electric and gas utilities, national energy marketing and trading businesses and in optimizing portfolios for real energy asset investment. The management team has developed strong industry and regulatory relationships, is credited with building an energy utility and trading business into a Fortune 30 company. We believe Corridor's experience and relationships provide us with the expertise necessary to acquire real property assets with strong performance standards and provide effective, ongoing oversight of our portfolio.

We may need to oversee the operation of these assets in the event of a default or nonrenewal upon termination of the lease and we built that capability in up-front. Additionally, the resources of Tortoise are of great help to Corridor. Tortoise led the first MLP-focused closed-end fund and is a pioneer in the MLP direct placement market. Our investment committee members at Tortoise have an average of over 25 years of investing experience. Tortoise employs a dynamic approach to maximizing value in its portfolios of securities with knowledge and experience across the power and energy value chains. Tortoise also has experience investing across the corporate capital structure including debt and equities securities.

The firm has developed a proprietary financial valuation and risk model that it has employed successfully since inception and which will be available for Corridor to assist evaluating of new opportunities. With roots in both private equity and high yield, Tortoise has developed deep relationships with energy companies having invested $2.7 billion in direct placements, pre-IPO investments, IPOs and critical affiliate liquidity events since inception. Tortoise and its affiliates, including Corridor, have invested significant sums in the development of the new opportunities set for TTO. Over the past several years, Tortoise has waived $1.5 million in fees while still bearing the cost associated with management of the vehicle.

The Corridor effort has incurred an additional $3 million in management costs, which are not covered by fees. Additionally, in aggregate, our investors own approximately $600,000 of stock. When you add that together, the $5 million represents nearly 6% of the market capitalization of TTO. In short, we believe your manager has skin in the game and is committed to the long-term success of this Company. I'll now turn the call over to Ed Russell to give an update on our private holdings.

Thank you, Dave. High Sierra's fair value increased approximately $4.2 million since November 30, 2010. In March 2011, High Sierra closed on a new $215 million three-year committed senior secured credit facility led by BNP Paribas. The new facility financed the buyout of High Sierra's minority partners in Anticline disposal, resulting in High Sierra owning 100% of the membership interest of that business. High Sierra further expanded its investment in the water treatment sector by acquiring the assets of Marcum Midstream, one of the largest oil and gas water disposal companies in Colorado.

In 2011, the Company continued to divest of its non-core assets by selling its 70% interest in Monroe Gas Storage and its interest in Asgard Energy. The Company did not make cash distributions to its LP and GP unit holders during our first two fiscal quarters of the year. However, in the third quarter High Sierra returned to paying cash distributions at $0.15 per unit and increased the per unit payout to $0.30 per unit in our fourth quarter. In the coming year, we expect High Sierra to maintain its current level of cash distribution with modest room for growth. In June 2011, we purchased an 8.2% ownership interest in Magnetar MLP Investment, LP for a net consideration of $9.9 million. This represented an indirect investment into Lightfoot Capital Partners, LP which owned 83.5% of the outstanding limited partnership units of Arc Terminals and 100% of that GP. At the time of the investment, Lightfoot also held approximately $60 million in cash available for new investments.

Arc Terminals provides storage and delivery services for petroleum, petrochemical, and chemical products to customers under long-term storage and throughput contracts. In October of 2011, Magnetar MLP sold a substantial portion of its interest in Lightfoot's LP and GP to provide liquidity to certain original investors in the fund. As part of their transaction we received direct ownership interest in Lightfoot's LP and GP units. Immediately following this transaction, Lightfoot invested its remaining cash in a minority interest in a liquefied natural gas regasification facility located in Mississippi. The decrease in value since August 31, 2011, which was approximately $0.5 million was due in large part to the anticipated expenses of potential acquisitions and capital market events in the coming year. The addition of the LNG facility and Arc's refined product storage assets should provide for growing distributions in the future.

VantaCore's fair value decreased approximately $7.4 million since November 30, 2010 and the Company was unable to meet its minimum quarterly distribution throughout this past year. Common and preferred unit holders elected to receive a small percentage of the MQD in cash with the remainder paid in newly issued preferred units. VantaCore reported year-to-date EBITDA below budget with the Southern Aggregates' property in Louisiana continuing to fall short. In August of 2011 VantaCore completed an acquisition of Cherry Grove Quarry in Todd County, Kentucky and purchased a new milling machine. As part of that transaction, we invested an additional $1.2 million in VantaCore in August 2011 in exchange for newly issued preferred B units to provide funding.

Although VantaCore has done a better job of meeting expectations, we continue to lower our EBITDA expectations for 2012 due to the economic outlook in our territories which contributed to the reduction in fair value for VantaCore, particularly in the fourth quarter. We do believe the fair value of VantaCore will ultimately increase as the construction and housing markets improve Until that time, VantaCore continues to look for small acquisitions and operational improvements in its existing facilities.

As a result of our withdrawal to be regulated as a BDC, we no longer prepare financials of our wholly-owned Mowood LLC as an investment Company but rather as a general corporate entity and thus consolidate the operations of Mowood. Our independent valuation firm prepared a positive assurance valuation of our Mowood Equity Investment as of November 30, 2011, even though the valuation is unaudited and not used as carrying value on the consolidated financial statements. The resulting valuation increased slightly from what was reported last quarter and in 2012 we expect Mowood to meet and slightly exceed 2011 EBITDA. Connie will now discuss our financial and operating performance.

Thanks, Ed. First I'll address the changes in our financial statements included in our annual report on Form 10-K which was filed yesterday. These changes are also summarized for you on Slide 13 of the presentation. As a result of the withdrawal of our prior election to be regulated as a BDC and our resulting change in our investment focus, we no longer prepare our financials as an investment company but rather as a general corporate entity. The most notable changes to the financials include the removal of the schedule of investments and the financial highlights and consolidation of our wholly-owned portfolio company, Mowood.

The income statement in our annual report reflects the results of our operations for the years ended November 30, 2009 and 2010 and the period from December 1, 2010 to September 21, 2011 which was the date we withdrew our election to be regulated as a BDC. During those times we reported as an investment company and, therefore, reported and accounted for Mowood at fair value. Now the results of operations for Mowood for the period from September 21, 2011 to November 30, 2011 and the related balances at November 30, 2011 are included or consolidated in our income statement for the year ended November 30, 2011, and in our balance sheet as of November 30, 2011.

Our securities investments other than Mowood have been reclassified on the balance sheet as either trading or other equity securities. Trading securities represent our publicly-traded securities which are reported at fair value with changes in value reflected in the Other Income section of the income statement. Other equity securities represent our private investments, again, other than Mowood, which is High Sierra, VantaCore and Lightfoot. These securities are reported at fair value pursuant to the fair value option available under GAAP with changes in fair value also recorded in the other income section of the income statement. The fair value of these private securities is reported in aggregate on the balance sheet. However, detailed information on the fair value of each holding can be found under the private company update in the MD&A section of our 10-K.

The total fair value of our trading and other equity securities, excluding Mowood and excluding short-term investments, at November 30, 2011 was about $68.9 million, with approximately $41.9 million in private securities and about $27 million in publicly traded securities. Consistent with the prior quarter, the EIP acquisition is accounted for separately as a business combination and detailed information on that transaction can be found in Footnote 7 to our financial statements. In addition to the changes I've described, certain prior-year balances on the balance sheet, income statement and cash flow statements have been reclassified to conform to the current year presentation required for general corporate entities and to provide comparability of our financial results across the reporting periods. These reclassifications are described in more detail in Footnote 2B of our financials and they did not impact our financial position or our reported net results of operations.

Net asset value has historically been a meaningful measure of our operating performance and it is included on the balance sheet now labeled as book value per share. Our book value per share as of November 30, 2011 was $9.85 compared to $10.44 per share as of our last year end, November 30, 2010, a $0.59 per share decrease. Keep in mind that for the period ended November 30, 2010, last year end, we prepared our financials as an investment company and therefore reported Mowood at fair value. But after withdrawing this year as a BDC and given our change in investment focus, Mowood is now consolidated. So essentially we're carrying it as book value which is typically less than fair value. The consolidation of Mowood decreased our book value this year by about $0.41 per share.

The net decrease in fair value of our other private investments, primarily VantaCore, reduced our book value by about $0.34 per share. And then we picked up about $0.16 per share book value on deferred tax and other assets and liabilities on the balance sheet. Total revenue for the year ended November 30, 2011 was about $3.2 million. This represents sales revenue from our wholly-owned subsidiary Mowood for the period from September 21 through November 30, 2011 as well as leased income from our EIP investment during the year. The EIP investment was not held and the results of Mowood's operations were not consolidated in prior years so there are no comparable revenues for those periods.

Total expenses for the year ended November 30, 2011 were about $4.7 million, compared to $1.9 million for the prior year. The increase in the expenses is primarily related to cost of sales and other operating expenses resulting from the consolidation of Mowood and costs pertaining to our asset acquisition and related depreciation expense recognized during the year. Other income represents earnings on our portfolio of trading and other equity securities including realized and unrealized gains or losses, distributions, dividend and other income received.

Total other income after tax for the year ended November 30, 2011 was about $3.8 million. This represents a decrease of about $12 million as compared to the prior year. In the prior year, the fair value of IRP increased significantly, about $18 million, driven by the Company's strong performance, significant increases in comparable Company valuations, two coal MLP IPOs and renewed M&A activity. As you'll recall those unrealized gains were ultimately realized during 2011 when IRP was sold. In summary, our net income for the year ended November 30, 2011 was about $2.9 million, compared to $14.7 million in the prior year. With that I'll turn the call back to Dave.

Thanks, Connie. Slide 15. Investors typically can look to a Company's historical performance as the best indicator of its future possibilities. However, 2011 has marked a year of transition for Tortoise Capital Resources Corp., particularly as relates to our financial statement presentation as Connie just outlined. We also believe that the past is no longer an appropriate indicator of the opportunity created by our new strategy. We intend to acquire assets that enable us to provide the desirable promise of the infrastructure asset class in an investor-friendly structure. With that, operator, we'll be open for questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session.

(Operator Instructions)

Kathleen King, Bank of America.

Thanks. Good afternoon. First question, just on the timeline of it all when you guys identify additional REIT-qualifying assets, just looking at this timeline on Slide 4 that you outlined, would you look to liquidate your public MLPs first to fund any new acquisitions or would you first look to use that $10 million loan facility?

We would look the to do -- I think the $10 million loan facility is something we would use first, but as we use the MLPs, that loan facility goes away so it's an either/or. It's not both. I don't have $40 million of available. I've got $30 million. By using the line, if we could, we wouldn't have to disturb our existing ownership of those income-producing assets and could use those to continue to have a diversified portfolio. So I think we'll look to try and do external financing first and not use the MLPs, keep those as a placeholder for additional liquidity down the road.

Okay. Got it. And just as far as the value of REIT-qualifying investments that you need to find in order to become REIT-qualifying, is it sort of to the tune of the value of the public MLPs you have currently or is there a number on that?

The rule is that 75% of your assets must be REIT-qualifying. We can count EIP. We don't have the ability to count any other assets other than cash and we don't plan to sell the MLPs just to get to cash because of the importance of their contribution to income. What that means is that we would need to have the current remaining portfolio be less than 25% of the total. We can use some leverage, including leverage against assets that we buy. Our total asset acquisitions relative -- if we did liquidate the MLPs would be around $150 million, necessary of added acquisitions in order to be MLP or REIT-qualifying. Of course, we could leverage against a portion of that based on the asset quality we're looking at. So that gives you a sense of sizing.

Okay. Understood. And then as far as when you might start disclosing FFO, would that be after you become a REIT, since in the meantime you won't really have a cash flow metric or could that be sooner?

We will look at it in connection with our first quarter 10-Q, but really until we become a REIT we're not sure that it's that meaningful, so we would continue to believe that our historical earnings off of the portfolio that is disclosed just in different geography on our income statement could show you the revenue that we have available to us in total cash flow as well as cash expenses and, therefore, coverage of the distribution that we're paying.

Okay. And then finally, just if you could talk a little bit more to how Lightfoot is working out compared to your original expectations and just the growth prospects there.

I'd like Ed to address that.

We've been pleased with their progress. As part of that investment we knew that they had some facilities that were not fully developed so they're in the process now of completing those and we've been happy with that and are also happy with the acquisition opportunities that they're seeing and we're hopeful that their growth plan will materialize in this coming year.

Okay. That's all from me. Thank you.

Robert Walker, Cargill Power Markets.

Thank you. Good afternoon. Just wanted to see if you could comment at all on any efforts or plans on renewal of the EIP lease?

Robert, we have a fair amount of time before that lease expires and we are fairly new to the lease and have been working to develop a view from the tenant as to their plans upon the expiration of that lease. I think we announced that we were going to try to work toward developing a long-term relationship with that tenant so that we could have a visibility on extension of the lease but we don't have anything that we're prepared to announce right now in that effort. But fortunately we've got several years to try to confirm the future opportunities for that investment.

Thank you.

(Operator Instructions)

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Thank you very much, everyone, for your attention and we are very diligently at work preparing potential new investments to make and look forward to being able to at some point have confirmed that we've acquired enough assets to become a REIT and report on that in the not too distant future. Thanks again.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.