CorEnergy Infrastructure Trust's CEO Discusses Q4 2013 Results - Earnings Call Transcript

CorEnergy Infrastructure Trust, Inc. (NYSE:CORR)

Q4 2013 Earnings Conference Call

March 20, 2014 2:00 PM ET

Executives

Katheryn Mueller - Manager, IR

Rick Green - Chairman

Dave Schulte - CEO, President and Director

Becky Sandring - Treasurer, CAO and Secretary

Analysts

Michael Blum - Wells Fargo Securities

Selman Akyol - Stifel Nicolaus

Operator

Greetings and welcome to the CorEnergy Fiscal Year 2013 Earnings Conference 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.

I would now like to turn the conference over to your host, Katheryn Mueller, Manager of Investor Relations for CorEnergy. Thank you. Ms. Mueller, you may now begin.

Katheryn Mueller

Thank you and welcome to CorEnergy Infrastructure Trust’s fiscal 2013 earnings call. I'm joined today by CorEnergy Chairman, Rick Green; CEO and President, Dave Schulte; and Treasurer and Chief Accounting Officer, Becky Sandring. An audio replay of our conference call and information included in our press release issued Monday, as well as the presentation materials for this call, are available at corenergy.corridortrust.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 CorEnergy’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. These documents can be accessed through the Investor Relations section of our website. We do not update our forward-looking statements.

At this time, I would like to turn the call over to CorEnergy President and CEO, Dave Schulte.

Dave Schulte

Thank you and welcome to the CorEnergy's fiscal 2013 earnings call. CorEnergy delivered another year of stable performance reflecting the quality of our assets and providing our shareholders with reliable cash dividends at a growing rate. Our investments in pipelines and electric transmission provide us with stable contracted revenue supporting our distribution. I want to focus on today is how we’re positioned to grow that distribution, and we think we have three means of doing so. Internal contracted revenue growth, capital funding for projects that we own today and new projects which we can buy or build for 10 years which are only done if it’s accretive for our long-term growth prospects. Now when you combine the low risk long-term contracted cash flows in our portfolio, with the growth potential from our positioning in the energy sector, we believe Cor offers investors a compelling opportunity to gain access to U.S. energy infrastructure assets in a transparent tax efficient vehicle with a 1099 can be owned in any account and we’ll highlight those concepts in our remarks today.

On Slide 3, CorEnergy has come a long way in its short history. It was just June of 2012 that we became self eligible, providing a path through capital formation to start our refinancing in earnest. At the end of 2012 we completed the transformational acquisition of a Liquids Gathering System in the Pinedale Anticline executing an operating lease with Ultra Petroleum. We then built out our management team in 2013 and that effort has resulted in our ability to source and consummate additional transactions including two more since year-end.

Our other 2013 accomplishments include, increasing annualized dividend guidance. We went from $0.44 a share in 2012 to $0.50 per share annualized in 2013. Our Board of Directors have confirmed their intent to agreed to management’s recommendation to increase the dividend to $0.52 for 2014, that’s a 4% increase over the prior year run rate and an 18% increase overall run rate as a BDC, before we transitioned to a REIT. We established a $20 million line of credit of which we have approximately 5 million immediately available to provide short-term acquisition financing if need be. We made a formal election to be treated as a REIT for the 2013 tax year. And lastly we’ve expanded our asset platform and opportunity set with two new transactions subsequent to year-end. We funded the acquisition and upgrading of a petroleum products terminal on the West Coast and provided acquisition and construction funding for three saltwater disposal properties in Wyoming’s Powder River Basin and Green River Basin.

In our 2012 portfolio of assets, I want to provide concrete illustrations of our strategy and action. On Slide 4, we depict the assets we currently own and measure each asset against the investment criteria we set out. As you can see, all of the investments and their operating characteristics are consistent with our target criteria, which we utilize as a risk mitigation strategy in putting our portfolio together. Starting with the Pinedale LGS, it has 14 years of remaining lease contract providing reliable revenue for CORR with potential rent growth through CPI adjustments and volume participation features. The CPI adjustment will contribute to 2014 revenue at CORR and that allows us to be patient to our expectations for that volume growth portion of the contract. This contract illustrates below direct commodity price sensitivity of our revenue stream supporting our dividend payout. Now we would expect to pay out any meaningful CPI-based growth, but consider participating revenue to be additive to our coverage and only paid out if it’s sustainable. And with the CPI escalation alone, our rents have the potential to increase significantly over the next 14 years.

Our EIP and Mowood are utility-based assets that also offer potential for upside. The EIP lease had a fair value purchase option that favored PNM, which when they exercised it resulted in our realization of a total return of 7% over the life of this low risk investment. Not a lot of upside but very low volatility. Omega’s sales revenue was higher in 2013 largely however attributable to overall cooler temperatures and therefore higher gas volumes in 2013 compared to 2012. Mowood also has 15% higher operating results than originally expected due to higher margins from construction projects that were completed during the year. These construction projects result in added assets on which we earn fees representing incremental growth potential.

And the Portland Terminal has ample storage capacity in a very desirable West Coast location. So we have a long-term lease with fixed-based rent payment plus participation in volume growth and we’re funding the upgrading and optimization of the facility -- let’s see Arc Terminals is in-charge of the project, has a track record of successful value creation in the terminalling business which you can read more about in our SEC filings.

Our newest asset is the secured funding for Black Bison which provides water disposal services to upstream companies. While well volumes are less predictable in this business our structured financing provides us with 10 years of regular payments and increases based on activity levels at the well sites. Water disposal is an economically critical activity for production from shales and is a sane driver as we have underpinning the Pinedale LGS system, moving the water in an environmentally sensitive manner is a required activity for the production of oil and gas.

On Slide 5 we want to highlight the successful completion of our two most recent transactions Portland Terminal and Black Bison with some added information. In mid-January we raised capital efficiently to finance the $40 million acquisition of the Portland Terminal facility. We’re also funding a near-term optimization project in the range of 10 million. And this asset is in our sweet spot of sizing, where we were able to structure a long-term lease with flexible terms to meet the needs of our tenant while providing upside in the form of participating rent. Now although we have an ownership interest in the GP of our tenant, we want to assure our investors that we provided a competitive financing option for them, and that the other owners of the GP, are sophisticated energy companies and funds all which are disclosed in Arc Logistics’ public reports.

In March we closed the transaction to finance Black Bison’s acquisition of saltwater disposal properties and related capital improvement projects. The financing is secured by three water disposal properties serving oil and gas producers in the Powder River Basin and the Green River Basins in Wyoming. We have a 10 year secured financing which is a facility initially sized at 11.5 million with a base interest rate of 12% per annum which escalates every year at 2%. A variable interest component initiates after the first year contingent on volume at the well site. Additionally, the Company will purchase, or did purchase at closing, a 15% equity option in Black Bison, enabling that company to retain control, accounting and tax benefits of ownership of this network of related assets. And Black Bison’s opportunity set provides another enhancement to our growth prospects as we hope to finance their future growth.

Now that concludes our update on our portfolio of assets. And I want to take a step back just to reflect on the broader market opportunity available to CorEnergy. On Slide 6 you will see what we think is a significant driver of future growth. The renaissance in the energy sector currently underway in North America is depicted on this map. There are vast oil and gas production regions in dark green and light green which are occurring in new areas not previously exploited. The capital necessary to support moving that production from where it’s found to where it’s used are significant as are the pipeline networks illustrated by the arrows on that map. Our colleagues are Tortoise Capital Advisors project 100 billion plus in MLP pipeline and related projects through 2016.

In this capital thirsty market we provide a differentiated funding source for companies that want to retain control over their infrastructure, but prefer to dedicate their capital to higher returning projects. The Portland Terminal and Black Bison saltwater disposal assets are examples of assets that provide critical links in the supply chain. The Portland Terminal is capable of receiving, storing and shipping petroleum products from truck, rail and ship. The Black Bison water disposal assets are necessary parts of the production of the commodity and need to exist as long as the wells in the fields are producing oil and gas. Both of these assets provide CORR with long duration cash flows and with participation features providing visibility and dividend growth and opportunities for additional capital expenditures for us to fund for the continued optimization of those assets.

And with that, I’d like to turn the presentation over to our Chief Accounting Officer, Becky Sandring for an overview of our financial results.

Becky Sandring

Thank you, David. This week we filed our 10-K and issued a press release highlighting our financial results for the fiscal year ended December 31, 2013. The financial information presented in the 10-K should be considered in its entirety. For purposes of this call, we have provided you with a few key financial metrics that we think will be helpful to you in evaluating CorEnergy's performance going forward.

Because the majority of the Company’s assets are now re-qualifying management believes that non-GAAP performance measures utilized by REITs including funds from operations, FFO and adjusted funds from operations AFFO also provide useful insights into CorEnergy’s operational performance. FFO for the year ended December 31, 2013 totaled approximately $13 million or $0.54 per share. AFFO for the quarter ended totaled approximately $12.7 million or $0.52 per share. These measures are after payments made to our non-controlling interests that were applicable to our common shareholders.

In the MD&A we have provided results from operations in a revised format that management believes provides additional information related to the Company’s operational performance. Turning to pro forma column on Slide 7, we have assumed the completion as of January 1, 2013 of the Portland Terminal acquisition. The pro forma column includes the purchase of the Portland Terminal facility, execution of the Portland lease agreement and the sale of 7.5 million shares of our common stock which includes shares issued in the over allotment option. On a pro forma basis FFO totaled approximately $18 million or $0.57 per share and AFFO totaled approximately $17.5 million or $0.56 per share. Due to a shift in our calendar year-end, our fourth quarter dividend of $.0125 was declared on January 3, 2014. Going forward, we anticipate making four dividend payments in each calendar year, starting with 2014.

The graph on Slide 8 showing total revenue and dividend distributions or detections of CorEnergy’s recurring sustained performance quarter-over-quarter. With privately held investment securities now representing less than 10% of our asset portfolio, we believe that in 2013 sequential comparisons rather than prior year comparisons are more relevant to assessing dividend payments. The fourth quarter dividend was again supported by steady and recurring revenue streams from our asset portfolios. The graph showing total assets illustrates the growth of our asset portfolio. The increase in 2012 and pro forma 2014 are results of our Pinedale and Portland acquisitions. We continue to maintain a conservative leverage range of 25% to 50% of total assets which we expect to help fund our target 8% to 10% hurdle rate on investing capital.

And with that overview, I will turn it back to Dave to conclude the presentation and lead us into the Q&A.

Dave Schulte

I want to turn you to slide that we call overheard in the quarter wherein use this opportunity to give you a sense for what’s on our mind as the backdrop for 2014. And with two transactions completed in the last two months, it’s important to highlight how and why these particular assets illustrate the market potential for CorEnergy. The asset for re-financing are critical [indiscernible] of the value chain, which is shown here. On left side of the diagram you will see a ship or offshore oil field, onshore oilfield and a gas field. And I just want to point out where our assets are located in this chart. The Arc Terminals would be representative of the storage tanks that service the ship and pipeline on the top part of the chart.

On the oilfield side you will see that there are for oil producing wells and on the gas field side, gas producing wells. Both the Pinedale LGS and the Black Bison operations served operators in those fields. And if you remember back at the map we showed earlier, those are very large areas that demand a tremendous amount of capital. And we also own Mowood, a utility which would be on the right side of the chart an EIP transmission line. But the amount of infrastructure assets necessary to support the upstream growth in United States generates ripple effects of asset development needs, almost all of which could be characterized as real property assets under current rig rules. And by attaching long-term leases to those assets, we’re able to identify and develop long duration predictable cash flows with multiple growth opportunities serving those assets.

On Page 10, our enterprise value at December 31 was approximately $252 million, but giving effect to the transaction we completed in January for approximately $286 million of enterprise value. This represents a 15% increase in the enterprise value over the prior quarter of course giving effect to the equity offering. The dividend yield of CorEnergy is approximately 7.3%, significantly higher than the average yields on a NAREIT equity index and a Dow Jones utilities index and the S&P global infrastructure index.

And these benchmark yields include growth expectations from widely held institutional investors. And we’ve tried to illustrate on this call how we have derived our growth. 1% to 3% solely from contractual rent increases, through escalators and participations that I mentioned. We get added growth from construction based financing on assets we already own. And we augment all of that from new assets which are accretive to our existing shareholders. And we add growth to our dividend rate and compare it to other similarly risked assets, we believe CORR offers investors a compelling return opportunity.

With that, I’d like to open the line to questions, operator?

Question-and-Answer Session

Operator

Thank you. At this time we’ll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Michael Blum from Wells Fargo.

Michael Blum - Wells Fargo Securities

Hi. Good afternoon.

Dave Schulte

Hi Michael.

Michael Blum - Wells Fargo Securities

Just two questions, one, I guess the -- you’ve somewhat addressed this in your press release but just to clarify just your latest thoughts on what the landscape is of new assets or opportunity in investment if you are looking at in that in the press release it seems that you’ve talked about opportunities in the $50 million to $200 million range and I just wanted to clarify that that’s a like a per project range or in other way do you have multiple opportunities within that range?

Dave Schulte

Yes, the assets that we’re looking at today include initial investments plus add-on growth that we expect to get into the 50 million to 200 million ranges, so taking Arc as an example, the acquisition was 40 million. There was a scheduled construction project of another 10 that’s started us at 50 in our view. On the Black Bison transaction although our initial capitalization is 11.5 that gets the Company up and running and it got their own project backlog of commercial opportunities that they’re developing surrounding those wells that could result in additional growth again getting us up to the $50 million to $200 million size for that opportunity.

So Michael, we are seeing more activity at the smaller end but we’re trying to focus on those activities that allow us to have growth identified with the initial investment and we’re still looking at transaction sizes in the 200 range those are a little fewer and farther between and we’re finding much more productivity in the smaller sizes where there is longer term growth with better pricing there.

Michael Blum - Wells Fargo Securities

Okay now that’s helpful. And in their way to -- can you put a number around for example Black Bison assuming they were successful in their commercial endeavors, how much in terms of capital that could mean for you guys?

Dave Schulte

Yes let’s talk about that one. It is an uncertainty. There is not a large market of developed third-party water disposal assets. There is a handful of companies out there that are trying to engage in that business, but Bison’s spent a year cultivating opportunities that resulted in these three initially that they wanted to start with. But their backlog of potential opportunities and they have just used 11 million as a marker, if they can do that every year it’s a few years and they’re like 30 million, but they are also looking at asset packages. Now that they’re started, that could accelerate that. So I would expect Black Bison’s potential to get us to 50 million within a year. No assurances there but there is that potential.

Michael Blum - Wells Fargo Securities

Okay, that’s very helpful. And then just the last question, just again just to more to clarify but as I am sure you know there has been just chatter around tax reform and issues around “non-traditional REITs” and maybe that status changes or may it doesn’t, can you just comment on your views there and how you think that may or may not impact your company assuming everything happened legislatively?

Dave Schulte

Sure and it would take, we believe legislation to change anything and then that would be a sweeping change that would cover the whole industry. So the long debate on that opportunity it needs to happen and it has not yet happened. The way the proposal is drafted, it used a hard line in the sand on asset life as the measurer of real properties that’s never been done before. The asset life that it picked would be longer than some of our assets and shorter than others. We think there will be plenty of time for us to shift our strategy and response to changes that might be necessitated by that. But ultimately, what I think is important today is that, we did not undertake a conversion which is what generated these proposals in the first place.

And so the rules maybe written broadly enough to capture unintended companies like ours, but we undertook a program to sell non-qualifying assets and buy qualifying assets. And there isn’t any debate today that we don’t believe that’s significant that our assets are qualifying and we have filed our tax return appropriately and we believe to claim that status. So nothing that we believe is imminent and if the work changes we would have to adapt our strategy but there are still other long life assets that would probably put us on the right side of that line depending on where it ultimately gets drawn and how it gets drawn.

Michael Blum - Wells Fargo Securities

Okay, great. Thank you very much.

Operator

Thank you. (Operator Instructions) Our next question comes from Selman Akyol from Stifel Nicolaus.

Selman Akyol - Stifel Nicolaus

Thank you. Good afternoon. In terms of your Black Bison and financing in your equity option within there and you talked a little about potential additional assets that they could be doing as well, can you talk about how that will relate to your equity option and sort of any details you can give around that and what might be some value drivers on that?

Dave Schulte

Sure, and the equity option is something we purchased on a fair value basis, and so we did not actually exercised the option but it is part of our, we acquired it as part of our financing of the Company upfront. So we’re not going to be attributed income to the spin of that option until such time as we exercise it. And we don’t anticipate exercising it in the near future, so the value of that option though could be like our other securities subject to fair value marks every quarter and as Black Bison grows that would give us an opportunity to participate in their equity growth by the appreciation in the value of that option and that option must have ultimately some liquidity features that you would expect with tag along rights and so forth that would allow us to at some point monetize that value of that option.

We think that a significant portion of our total return on this project will come from the interest rate and the contingent interest and that will allow us a more visible cash flow-based return opportunity from these assets and we’ve emphasized that in our discussions with Black Bison in our structuring of this instrument. The last thing I’ll say is as they grow if we put more capital to work, it would again likely not be from exercising option, but from putting additional structured financing to Black Bison or alternatively engaging in an operating lease of the type we did with Ultra Petroleum if they had assets backed by contracts. So we’ve got multiple options in front of them, it all look familiar to things we’ve already done and we think that it would emphasize the cash portion of their total return, less so the equity portion.

Selman Akyol - Stifel Nicolaus

And I guess on a go forward basis you talk about putting additional cash to work would be at similar returns to or as they would grow would you view the risks being reduced and therefore your rates to come down on future projects?

Dave Schulte

Yes, we would have to enable Black Bison to have a market-based pricing mechanism because the Company is owned primarily by management and there are other outside investors. We’ve agreed and we would expect that if they reduced risk that their pricing should reflect that and whether we then participated or not will be up to us at that time with that pricing level. So we do expect them to have future financing needs, we do expect to be participating in it but we also expect them to treat us with arms length and for us to treat them fairly as they have fiduciary duties to their other shareholders as well.

Selman Akyol - Stifel Nicolaus

Okay, thank you.

Operator

Thank you. (Operator Instructions) We appear to have no further questions. I would like to turn the call back over to management for closing comments.

Dave Schulte

Thank you everybody for your time and attention and we look forward to talking to you in our next call.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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