CorEnergy Infrastructure Trust Inc (CORR) 2012 Q1 法說會逐字稿

Greetings and welcome to the Tortoise Capital Resources Corporation first-quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. A brief 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 Kearney, Director of Investor Relations for Tortoise Capital Advisors. Thank you Ms. Kearney, you may begin.

Thank you and welcome to the 2012 first-quarter earnings call for Tortoise Capital Resources Corp. I'm joined today by Dave Schulte, CEO, Becky Sandring, Principal at Corridor InfraTrust, and Ed Russell, President, TTO. 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 these 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 10K and these documents can be accessed through the Investor Relations section of our website. We do not update our forward-looking statements.

I'll now turn the call over to Dave 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 a Director of TTO since December 1, 2011. He is also a Managing Director of Corridor InfraTrust Management and is working with the Corridor team to guide TTO's future. Dave?

Thanks, Pam. We believe that we are validating our strategy to broaden the opportunity set for TTO to provide lead spaced funding for energy assets such as pipelines and power lines. Networks of these types of assets continue to expand in order to transport growing volumes of energy commodities from US onshore resource basins like the Bakken and Marcellus. We believe TTO can fill a role in the capital formation activities of growing energy companies, while providing our stockholders with an attractive risk-adjusted return appropriate to the infrastructure asset class. Businesses that are grouped into this asset class have many desirable operating characteristics such as revenue linked to socially necessary services and underpinned by capital assets with long lives.

The appealing investment characteristics of the asset class include cash distributions as the largest portion of return, growth potential of those distributions that can provide a hedge against inflation, and additional diversification to an investment portfolio. We believe that our plan to become a REIT will create an innovative vehicle which will deliver these investment characteristics to our stockholders. Now since the shareholder vote last April, we've made progress in transitioning from an investment company to an operating company in preparation to achieve REIT status. However, we did not meet one of the REIT threshold tests for 2012 tax qualifications. As of March 31, we needed to have 75% of our assets in requalifying form which did not occur. We are continuing to evaluate acquisition opportunities which we expect will enable us to qualify for REIT status in 2013.

Our transition from a BDC to an operating company also causes us to be subject to several disclosure requirements which were not previously applicable when we were an investment company. Of note, we were required to file with the SEC by March 31 supplemental financial information for our largest private securities, holding High Sierra. The filing requires the consent of High Sierra's auditors and due to various factors we were unable to be timely in obtaining that information. Now there are a number of options under consideration which could result in our being able to file that information in the near future. This is a new requirement for TTO which we expect to be transitory by acquiring additional requalifying assets. We do expect TTO to have equity capital market access once we complete our filing, but we also have marketable securities in our portfolio which can be liquidated, and of course we may be presented with prudent liquidity opportunities in our private portfolio to help fund acquisitions of those requalifying assets.

We're making good progress in our private portfolio as evidenced by the increase in fair value during the quarter and by again earning our $0.11 distribution and confirming our guidance for 2012. Mowood continued its steady performance through the first quarter and its results are now consolidated in our financial information. Base operations were above budget while construction revenues and profit lagged due to scheduling and weather delays. Mowood expects the pace of completed construction projects to pick up during the summer and fall, with a total for the year to be at or above budget. Our independent valuation firm also prepared a valuation of Mowood as of quarter end, even though that valuation is no longer used as the carrying value in the consolidated financial statements. The resulting analysis does indicate a stable fair value consistent with the last reported valuation used in the third quarter of 2011 before we transitioned our financial reporting at year-end.

In 2012, we do expect to meet and slightly exceed Mowood's 2011 EBITDA. For the period ending February 29, 2012, our first quarter, there were no material events related to our private securities portfolio and changes in valuation were generally positive due to improved year-over-year performance. Should material events occur within the private investment portfolio, we'll report them in our quarterly calls.

I'd now like to turn the call over to Becky Sandring for a discussion of TTO's financial results in the quarter. Becky is a Principal with Corridor and became Treasurer of TTO on December 1 when Corridor became the Manager. She has more than 20 years of financial and accounting experience in the energy industry. Becky?

Thanks, Dave. The 10-Q, as filed April 9 reports TTO's first-quarter 2012 financial results. Comparable prior-year financial statements presented in the 10-Q should be read in conjunction with the Management's discussion and analysis where supplemental information is provided on Mowood's performance. Items on the consolidated statement of income for the period ended February 28, 2011 have been reclassified and aggregated to conform to the presentation of results of operations for the period ended February 29, 2012. There was no impact to net income or earnings per share. Due to our change in strategy, income from investment securities is now reported in other income.

Components of cash flows for the period ended February 28, 2011 have also been reclassified and aggregated to conform to the presentation of cash flows for the period ended February 29, 2012. The book value per share was $10.37 as of February 29, 2012 compared to last quarter's $9.85 per share on November 30. For comparability, the legacy private securities portfolio is still subject to fair value accounting on a quarterly basis. As a reminder, we along with our independent valuation firm review, all of our private company financial statements as well as other meaningful information in arriving at fair value. The fair value of the investment securities portfolio, excluding short-term investments, at February 29, 2012 was $76.8 million. $47.3 million comes from private securities and $29.5 million comes from publicly traded securities. As compared to the November 30, 2011 balance, the investment securities portfolio increased $7.9 million. Of the increase, $2.5 million is attributable to trading securities and the remaining $5.4 million increase comes from other equity security. High Sierra, one of the major holdings in the portfolio drove most of the increase in equity securities.

During the first quarter of 2012, we earned our dividend. This was accomplished via our investment securities distributions received of $1.138 million plus both operating income of $196,000 and depreciation of $246,000. These amounts covered the $1 million distribution paid during the quarter. Until we adopt other REIT cash flow metrics we believe these amounts which are provided in the 10-Q and Management's discussion and analysis are helpful in evaluating and predicting whether TTO is capable of earning its distribution. With that, I will now turn the call over to Dave Schulte for final comments.

Thank you, Becky. Please watch for the proxy statement that you will receive in coming days. It includes a proposal to approve a change in our articles of incorporation which prohibits certain share transfers from acting to impede REIT tax status. This generally protects shareholders from unwanted tax outcomes due solely to ownership concentration.

In closing, we've confirmed our guidance that our existing investment portfolio should allow us to continue to pay not less than $0.44 annualized from economic earnings, characterized for tax purposes in 2012 as return of capital and qualified dividend income. We recognize the need to reestablish distribution stability it as the basis for any expectations going forward. We will target acquisitions of new assets during the remainder of 2012 on terms that enhance our distribution stability and provide visibility of distribution growth of 2% to 4% over the long run with a total return expectation in high-single or low-double digit range on each investment. We believe this return profile is consistent with expectations of infrastructure investors, competitive with other REITs and utilities broadly. That completes our formal presentation. Operator, could you now open up the line for questions?

Certainly.

(Operator Instructions)

Kathleen King, Bank of America.

Thank you and good afternoon. So first question stems from something I saw in the Q where you talked about needing to make investments that would allow you to shield your taxable income in 2012. So just wondering what sort of investments you're considering that might allow you to not pay taxes in 2012 until presumably you become a REIT in 2013.

This is Dave, and thank you for the opportunity to answer that question. We first of all don't need to make any acquisitions in order to continue to earn and pay the distribution we have and for those of you that have been following TTO for a while, you're aware that TTO already is a tax-paying company. It's a C corporation for tax purposes and we do rely on distribution paying capability that is shielded by depreciation charges that flow through from the partnerships that we own.

Similar to that, if we were to make additional acquisitions of assets during 2012, that we believe could be requalifying in 2013, we would simply rely on the idea or the fact that in setting our distribution from those new acquisitions, we would need to shield or have a tax shield for income generated by those acquisitions so as to preserve our dividend-paying capacity at the level that we're currently at. That's what the 10-Q was attempting to say. So that, just making investors aware that largely the assets we would be acquiring would have a capability of generating depreciation charges that would shield the income from tax and enable us to maintain a consistent dividend level through the remainder of 2012 and '13 if we were to make any such acquisition.

Okay, so just to clarify, how would liquidating your current MLP portfolio play into that and the acquisitions that you would make in 2012 going forward? I mean, as using the MLP as a funding source and then the tax shield, that would go away with that?

Well, that tax shield would go away but so would that income source. But then it would be replaced by new income from an acquisition that would have its own attendant tax shield. So it really is no different than what we have today. I mean, TTO is a C corporation. Through partnerships, it owns assets that have depreciation charges. It's the same as if TTO individually owned those assets and had depreciation charges. It's no different because its owned through a partnership. That's just a flow-through tax structure that passes to TTO the underlying depreciation characteristics attributable to the income flow.

Okay, and then just a question more broadly on what you're seeing out there acquisition-wise and maybe also if you could comment on the size of acquisitions that you're looking at if maybe you'd expect this to be more piecemeal to get each of that $150 million in acquisitions that would get you to REIT status? Or are you looking at bigger size acquisitions and maybe you only need to do one or two? Just general commentary on the size and then what you're seeing as far as acquisition opportunities.

Well, for acquisition opportunities that we're evaluating within TTO, we of course are constrained in some ways by TTO's size versus the size of capital requirements in the industry. So while there are tens of billions of dollars of announced projects in the next year or two in midstream energy alone and another similar size in electrical infrastructure, for TTO to make meaningful acquisitions at its current size would be challenging. So what we've described to the market in the past is that we expect to be able to prudently acquire additional assets in sizes that range between approximately $100 million to $200 million in size and that would be a combination of existing liquidity on our balance sheet, funding the equity portion of those acquisitions, plus leverage we could put on the acquisition itself. That would result in a leverage strategy that's well within our target of 50% because we've got no debt on our balance sheet today, or very, very little debt on our balance sheet today. Now we are also looking at smaller-sized acquisitions as well and we've evaluated a number of these for suitability and finance ability in accordance with our strategy in the last several quarters.

Okay, thank you.

Selman Akyol, Stifel Nicolaus.

Thank you, good afternoon. Just following up a little bit on Kathleen's question, in terms of just getting the 75% of assets, how much do you have to go just from the current size that you're at now?

It would be approximately $150 million of additional assets at our current size.

And then on Mowood, you guys mentioned that currently you're investing at or above budget and you expect it to complete at or above plan, I guess. How much were you guys planning on investing there?

We weren't planning on making any additional investments in Mowood, if that was your question. We just were referring to the budget for this year and that would meet EBITDA expectations that we had started with in the beginning of the year.

I've got you, okay. And then my last question, can you provide anymore color on the increase in carrying value at High Sierra? I presume -- I know you guys alluded to it that it was most of the $6 million increase there?

Yes.

Am I thinking about that correctly?

Right, yes. That increase was driven by just year over year performance. They had a strong fourth quarter, particularly compared to their fourth quarter last year and we try to maintain a very disciplined matrix of how we value the company. So if you see improvement like that you'll see a write up; if the company is going in the other direction you'll see us write it down. So it's a very fluid process and this just reflects the improvement they had in 2011, and our expectations for this year.

Okay, and then I guess last question here, but in terms of it relates to the private portfolio, I guess you're always in the market looking to sell those as you try to move further towards REIT status. Is that a correct presumption?

We are not actively looking to sell these. I think one of the benefits of the REIT strategy was that it would enable us to allow these companies to matriculate at their own pace to optimize our stockholders opportunity. Having taken the risk of making the investments and spending the time we have cultivating these companies, we would like to allow realization events to occur naturally so we are not forcing anything. We believe these companies all have their own requirements for raising growth capital as you've seen in the past. There have been follow-on investments made into these companies by sometimes larger private equity funds, and to a certain extent these companies, if it's a appropriate they would seek public market capital access. And those kinds of events have occurred in our private portfolio in the past and are the kinds of things we might expect to see out of our current private portfolio in due time.

All right. Thanks very much.

(Operator Instructions)

Phillip Huang, Morgan Stanley Smith Barney.

Hi and thank you for the call. Can you just go over the priority of your sources of funds as it goes towards acquisitions? So the first I know is, I'll be selling out of your current portfolio, but I'd think there was a shelf filing and you had warrants and credit line. Can you just prioritize those for us and how much is in each as far as capacity for acquisitions?

Sure. The first liquidity opportunity that you describe that you accurately saw is our existing portfolio of MLP securities which in round numbers is about $30 million of availability. We do have a line of credit against that portfolio that we could draw down of $10 million but you can't do both, use $30 million and use $10 million. So if it's a small acquisition we don't have to sell anything. We have got a $10 million line we could use and keep our existing liquidity. So I'd say in that order, one is a $10 million line; if it's bigger than that, we've got the $30 million of portfolio securities.

We would next expect to use the assets we're acquiring as a source of secured leverage and that's not on our balance sheet but that would be an opportunity that would enable us to do a larger acquisition than just the $30 million size. We do have an expectation that we would be able to access equity capital markets with our shelf, but our shelf needs to rely on timely filing of financial statements and until our 10K filing becomes complete, which it is not complete yet, we can't rely on the shelf. So we're limited today to internally available funds and availability from assets we might acquire. There might be an opportunity to put a small amount of additional leverage on our current portfolio but that's not an expectation that we're currently pursuing.

Okay, so if you found an acquisition that you absolutely needed to have and it went above your $10 million to $15 million, you'd go to your third pool which would be leveraging your assets. I guess our question is -- one of our concerns is just what would happen if you needed to go to the secondary to the shelf and how much of that would end up possibly diluting your current shares?

Well our expectation is that we would not raise additional equity capital unless we thought the proceeds of that capital were employed in a way to grow the distributions to our current shareholders, and so from a dividend standpoint, we don't expect it to be dilutive. Book value is just over $10 as we reported yesterday and our stock price is closer to $8.50 to $9 in the last week. So there could be some book value dilution but that would be, we would consider that to be mitigated if the proceeds were used to grow the dividend and increase dividend stability. It's our view that dividend stability and dividend growth are the best path for market appreciation of our stock and that's why we adopted the strategy we did and have been working hard on it. I might correct one of your numbers. It's $30 million of availability for the equity portion of an acquisition, not $15 million from our current resources. And if in the math you did you also shifted that from a non-REIT to a REIT-qualifying asset, we would be very close to being requalifying just with one, just by liquidating our current portfolio, investing it in something that we could leverage and count the total assets in our mix.

Got it, thank you.

Yes.

There are no further questions at this time. I would like to turn the floor back over to Management for closing comments.

Thank you, everyone for your time and attention and dialing in and we look forward to talking to you again next quarter and advising you on our progress. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.