CorEnergy Infrastructure Trust Inc (CORR) 2012 Q2 法說會逐字稿

Greetings and welcome to the Tortoise Capital Resources second-quarter 2012 conference call. 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, Ms. Rachel Stroer, Investor Relations for Corridor InfraTrust Management. Thank you, Ms. Stroer. You may begin.

Thank you, and welcome to the 2012 second-quarter earnings call for Tortoise Capital Resources Corp. I am joined today by David Schulte, CEO and President; and Becky Sandring, Treasurer and Chief Accounting Officer.

An audio replay of our conference call and information included in our press release issued today are 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. These documents can be accessed through the Investor Relations section of our website. We do not update our forward-looking statements.

I will now turn the call over to David Schulte, who is a founder and managing director of Tortoise Capital Advisors. He has been Chief Executive Officer of TTO since its inception. He is also a managing director of Corridor InfraTrust Management.

Thank you for joining our call today. As a reminder, Tortoise Capital Resources Corp. -- as we refer to it, TTO -- is transitioning from a Business Development Company or BDC managed by Tortoise to a Real Estate Investment Trust or REIT managed by Corridor InfraTrust Management. Corridor is an infrastructure asset financing company owned by the management team, Tortoise Capital Advisors, and Montage Investments. I remain a managing director at Tortoise, and I am also working directly with the Corridor team including Rick Green, David Haley, and Becky Sandring, who will be on this and future calls with me regarding TTO.

Corridor's mandate is to originate REIT-qualifying energy infrastructure investments for TTO. The REIT structure offers investors transparency to the cash flow of the underlying assets, tax efficiency, and is suitable for investors who dislike the K-1s that come along with owning partnerships.

We have confirmed our guidance that our existing investment portfolio should allow us to continue to pay not less than $0.44 annualized dividends from economic earnings, characterized for tax purposes in 2012 as return of capital and qualified dividend income. We will target acquisitions of new assets during the remainder of 2012 on terms that we believe will enhance our distribution stability and provide visibility for modest growth of 2% to 4% in the distribution over the long run, with a total return expectation of high single or low double digits on each new investment we make. We believe this return profile is consistent with expectations of infrastructure investors broadly, and competitive with other REITs and utilities today.

I'd like to spend a few minutes on the market environment we find and then on our portfolio. Technological developments have enabled access to vast amounts of unconventional crude oil and natural gas resources; and exploration and production companies, offered referred to as E&P, need capital to build out transportation and storage facilities to support this increase in production. Examples are crude oil terminals in the Bakken shale and storage facilities for excess production of both gas and liquids.

Softening oil and gas prices are also putting E&P companies in a position where they need to raise capital from external sources to support their drilling and production efforts. Long-term lease-based financing for non-core infrastructure assets preserves equity capital for high-return projects for these companies.

Now Tortoise, our affiliate, estimates that global energy companies invested more than $23 billion in 2011 and an additional $40 billion will be invested through 2014 on major pipeline infrastructure projects. These are generally identified and committed projects with long-term contracts in place.

Much of this capital will be expended by Master Limited Partnerships, pipeline operating companies, and upstream energy production companies. We believe that TTO can also fill a role in the capital formation activities of growing energy companies, while providing our stockholders with an attractive risk-adjusted return appropriate for the infrastructure asset class. Over time we expect to diversify our holdings across geographies, management teams, and types of assets.

A moment about our private portfolio. We are very pleased to report that another aspect of our strategy has worked out as planned.

Our private equity team led by Ed Russell invested approximately $26.8 million in High Sierra in 2006 and 2007. This was our largest single investment.

Now, allowing our current investors to retain the upside associated with our legacy private portfolio was a critical part of our strategy for TTO. We are pleased to report that, based on the last closing price of the acquirer of High Sierra, NGL Energy, and excluding any discount for restrictions on trading, TTO received in aggregate a pretax value of approximately $38.8 million versus its $26.8 million investment.

When you factor in distributions received during our ownership of High Sierra, even giving no effect to the continued benefit of holding those units, our return would be well within our target range. This result accrued solely to the economic benefit of investors in our private equity platform. Our thanks to Ed Russell and his team of Abel Mojica, Dave Henriksen, Jeff Fulmer, and Lisa Marquard for this tremendous outcome.

Moving on, the fair value of VantaCore increased approximately $669,000 or 7% during the quarter. The increase is attributable to VantaCore's improved performance, driven by cost-cutting initiatives we discussed previously and price increases that have gone into effect.

VantaCore also completed its acquisition of Laurel Aggregates. Laurel is a leading regional producer of limestone aggregate products serving the energy and construction industries in Southwestern Pennsylvania, Northern West Virginia, and Eastern Ohio. The acquisition more than doubles VantaCore's volume and provides future growth potential as regional energy companies continue to build out the Marcellus.

VantaCore was unable to meet its minimum quarterly distribution of $0.475 per unit during the quarter. However, TTO did receive 17,421 additional preferred units and $0.23 in cash per common and preferred unit that we hold.

The fair value of our holding in Lightfoot decreased approximately $862,000 or 9.1% from the value at the beginning of the quarter. The decrease was driven by Lightfoot's reduced forecast for 2012 as the company experienced delays in building out their Blakeley terminal.

We believe, however, the long-term outlook for the business is still intact. Lightfoot paid a quarterly distribution of $0.21 per unit, equal to the amount we received in the previous quarter; and as a reminder, this is just over half of the full run-rate distribution we expect to receive on our investment beginning next year.

I will now turn the call over to Becky Sandring, Treasurer and Chief Accounting Officer of TTO, for a discussion of our financial results. Becky?

Thanks, Dave. We want to thank our shareholders for voting their proxies this year. We had an important matter that required a majority of positive votes, which was attained and is a testament to the support our shareholders have for the new strategy. Upon the qualification and election of REIT status, this proposal will protect TTO by ensuring that concentrations of ownership will not disqualify TTO from maintaining REIT tax status.

REIT qualifications can be obtained attained through satisfaction of two primary tests that are measured on a calendar year. 75% of our total assets must be real property, such as pipelines; and 75% of our income must be from passive sources, such as lease payments. Our private and public securities do not satisfy either test, so we did not meet the required REIT threshold test for 2012 tax qualification.

If we are successful in our asset acquisition plan, we expect to meet the REIT test throughout 2013 and apply for REIT tax status in the beginning of 2014.

This morning we filed our 10-Q and issued a press release highlighting important financial information. The 10-Q reports TTO's second-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 May 31, 2011, have been reclassified and aggregated to conform to the presentation of results of operations for the period ended May 31, 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 May 31, 2011, have also been reclassified and aggregated to conform to the presentation of cash flows for the period ended May 31, 2012.

The book value per share was $10.47 as of May 31, 2012, compared to last quarter's $10.37 per share. The legacy private securities portfolio is still subject to fair value measurement 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 May 31, 2012, was $78.8 million. $53.3 million comes from private securities, and $25.5 million comes from publicly traded securities.

As compared to the February 29, 2012, balance the investment securities portfolio increased $2 million. The increase represents the net effect of a $6 million increase in our private securities and a $4 million reduction in the value of our publicly traded securities. High Sierra, one of the major holdings in the portfolio, drove most of the increase in equity securities.

During the second quarter of 2012 we earned our dividend. This was accomplished via our investment securities distributions received of $1.24 million, net an operating loss of $126,000, plus depreciation of $246,000. These amounts covered the $1 million distribution paid.

The operating loss is due to asset acquisition costs incurred in the quarter, which is a normal expense and one we will likely continue to experience as we grow the Company. 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 back to Dave Schulte for final comments.

Thanks. TTO has been supported by the expertise of the Tortoise Capital Advisors team since its inception in 2005. Over the last year we have gradually transitioned the TTO officer positions from members of Tortoise Capital Advisors to Corridor InfraTrust Management. On June 6 the TTO officer transition was completed, when a number of team members resigned and Corridor team members became officers of the Company.

The purpose of these changes was to clarify the shift in responsibilities for new asset origination and oversight to Corridor. On behalf of TTO stockholders I want to offer our sincere thanks to the leadership team of Ed Russell, Terry Matlack, and Connie Savage, who are instrumental in forming the Company and in executing its transition to date.

Ed will maintain responsibility for oversight of the remaining private holdings in VantaCore, Lightfoot, and Mowood. And the portfolio team at TCA will retain responsibility for the disposition of the investment securities in a timely fashion to support new acquisitions.

This completes our formal presentation. Operator, I would be pleased now if you would open the line for questions.

(Operator Instructions) Selman Akyol.

Thank you. Good afternoon. A couple quick questions if I may.

First of all, on your public securities portfolio. I know you don't break it out anymore, but was there any substantial changes in that portfolio?

There were no changes in the holdings in the portfolio since we last published it, and there won't be. That portfolio is being held pending its eventual sale, but not for trading. So any movement in valuation is a result solely of market changes of those holdings that were reflected in the last time we published the holdings.

Fair enough. Thank you very much. Number two, on the decrease on the Lightfoot for the assets there, on the project -- the Blakeley terminal that you said was delayed. Okay; so it is pushed to the right, I get that.

But how far right to the right was it pushed? Given that you took a 9% write-down or decrease in the value.

I would like to allow Ed Russell to answer that question, who is joining me on the call. Ed, if you are available do you have a -- can you comment on -- ?

Yes, yes. Selman, the projections were put out, kind of moved out for Blakeley around six months. Which -- we have a very dynamic process in valuing the companies. So those kind of changes, which is where the growth is coming from, because that facility is being developed where there's a number of new tanks that are going in; and by pushing the growth expectations out that far, it will have an effect on the valuation because we look at -- we heavily weight near-term performance.

So we still expect that facility to be completed. The company did acquire some land adjacent to that terminal, and it already began the permitting process of improving the dock so that we can take oceangoing vessels, which is a key component of filling the large 150,000 gallon tanks that we have constructed.

So it will have a big effect, even just a short period of time. But we expect them to get that back online and performing.

Thanks. Then lastly, as you start investing in REIT-qualified assets, Dave, can you talk a little bit about what you are seeing in the marketplace and how that is going? And just any color you can be giving on that front?

Sure. First, I might mention for everybody on the call, because you are familiar with Master Limited Partnerships, the kinds of investments that TTO can make will look like the same kinds of assets that MLPs might invest in. Accordingly, if there is growth in the United States and demand for incremental capital in the energy infrastructure market, those are possible places for TTO to find financing opportunities.

However, unlike an MLP, TTO can't operate a trade or business. So we can't provide transportation services. We are not trying to be an operating business that optimizes economics and constructs incremental projects associated with our network.

So for clarity's sake, our best opportunities are being presented by companies that have acreage to develop and need infrastructure assets for which an MLP is not the best owner because there is no optimization opportunity and no need for transportation services. So, dedicated assets that really facilitate a single, growing E&P company are the kinds of situations that we are finding our financing solution to be attractive versus a sale to another operating business like an MLP.

We think there is a tremendous amount of that out there and that once we establish the parameters of the kinds of assets and financing terms that we are proposing, that it will be evident to other operators how our financing might fit into their capital structure and where it would be a good fit. And we are reviewing a variety of interesting opportunities and trying to find the best ones to start with.

Okay. You talked about defining parameters. I guess, can you talk about when you are going to have your parameters defined, or when you hope to? And again I guess I'm still kind of confused on what kind of assets would be involved here.

Yes, we have tried to illustrate the kinds of assets with the existing portfolio that TTO has. If you look in our annual report you will see, at least from an illustration standpoint, that we are looking to do the same kinds of investing that TTO has done already.

For example Mowood, which we own 100% of, has a pipeline that serves a military installation. That asset is the type of asset that qualifies for a Real Estate Investment Trust. The contract around that asset currently does not qualify, but it could if it was reconfigured to a lease.

The debt we have on that asset would qualify. So we could own a mortgage against that kind of an asset.

So when I talk about illustrating the types of parameters to the market, one is -- what kind of assets might fit? So people can recognize when they might want to discuss financing options with TTO.

And then secondly is whether the contract nature that can be put in place fits in the capital structure of the operating business. Where does a lease fit, for example, in their capital structure? Or does it?

And whether it is a capital lease or an operating lease may have different levels of appeal for different kinds of issuers. Those are the kinds of things we are illustrating for people.

One thing I would like to point out is we are not trying to compete with bank financing or insurance company debt financing in the mortgage market. We are not trying to become a mortgage REIT that has an energy focus.

Our terms and conditions have included financing for 100% of the value of the acquired asset and terms that include both a base rent and some participation in economic value creation by the operator. REITs typically get that through participating rents that get revenue bumps or in lease bumps based on revenue growth of the operator.

Got it. Then just last question as I think about this. Could you lease terminals to Lightfoot and have those qualify?

We could. Yes, Lightfoot is a great relationship of ours and we have spoken to them about their financing needs in the past. They are well aware of our new strategy. So far they have significant private equity backing and debt availability, and their asset development path has had more equity characteristics to it, in terms of delay, potential delay, and development cycle, than what we are trying to start with.

So we have yet to find a good fit for us and them. That is a great example, though, of a good team, assets that fit, and something we could do -- but we are reluctant to initiate our acquisition strategy around developmental assets versus existing assets that are either just came online or about to come online, or are being acquired and that we can point to with an existing operating history.

So Selman, I think you have just hit it right on the challenge we are facing in getting -- finding the right fit for our strategy and the marketplace.

Great, thank you.

(Operator Instructions) We have no further questions in the queue at this time.

Thank you, everyone, for dialing in. We have got our shoulder to the wheel, and we'll look forward to reporting out next quarter.

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