CorEnergy Infrastructure Trust, Inc. (CORR) CEO Dave Schulte on Q4 2020 Results - Earnings Call Transcript

CorEnergy Infrastructure Trust, Inc. (NYSE:CORR) Q4 2020 Earnings Conference Call March 4, 2021 2:00 PM ET

Company Participants

Matt Kreps - Investor Relations

Dave Schulte - Chief Executive Officer

John Grier - Chief Operating Officer

Robert Waldron - Chief Financial Officer

Conference Call Participants

Barry Oxford - D.A. Davidson

Operator

Hello, and welcome to CorEnergy's Conference Call to discuss the Fourth Quarter and Full Year 2020 Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I would now like to turn the call over to Matt Kreps, Investor Relations for CorEnergy. Please go ahead.

Matt Kreps

Thank you everyone for joining today's CorEnergy Infrastructure Trust conference call. With me today are Dave Schulte, CEO; John Grier, COO; and Robert Waldron, CFO.

For those of you joining by telephone, yesterday after the market closed, we published a press release announcing the year-end results and our outlook for 2021 following the acquisition of Crimson Midstream. We have also published a slide deck to accompany today's call, which is available online at the Investor Relations section of corenergy.reit. You can also access a webcast replay on the site typically posted within a couple of hours of the live call's end.

I'd like to remind everyone that the statements made during the course of this presentation that are not purely historical may be forward-looking statements and are subject to the Safe Harbor protection available under applicable securities laws. 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 are available in the Investor Relations section of our website. We do not update our forward-looking statements.

During this call, we will make reference to certain forward-looking non-GAAP metrics, which we reconcile in subsequent filings as part of our results reporting. We will make additional disclosures and filings with the SEC, including but not limited to 8-K as filed with respect to the Crimson transaction and a proxy statement. We encourage all of you to review our complete disclosures, risk factors, GAAP numbers and those non-GAAP metrics with the related reconciliations.

And with that, I would like to now turn the call over to Dave Schulte. Please go ahead.

Dave Schulte

Thanks everyone for participating today. While our prepared remarks will briefly review aspects of the 2020 financial year, we believe the past is no longer an appropriate indicator of our opportunities going forward. Following the strategic transaction with Crimson, we now have a much more stable cash flow model from our infrastructure assets.

Having stabilized our dividend with more reliable earnings, we believe the execution of our business plan will generate long-term growth opportunities for stockholders. During 2020, the global COVID-19 pandemic created an unprecedented disruption to energy demand simultaneously with a global supply glut. Our company suffered greatly when two of our four legacy tenants stopped honoring their leases, which had survived prior disruptions in 2016.

We subsequently exited both of those negatively impacted assets. I should note that through that disruption, our MoGas and Omega assets performed steadily, reflecting their regulated nature and more diverse customer base. And the sustained consistent performance of those assets characterizes our goal in owning infrastructure assets to begin with; long useful lives, stable cash flows, limited commodity price sensitivity at least on a direct basis, and reasonable growth opportunities. While no asset is completely immune to major economic shifts such as we experienced it became increasingly clear that certain characteristics of our assets made for more sustainable and predictable returns in both up and down cycles. Now these challenges were only navigable due to CORR's liquidity profile coming into 2020. Our strategy of relatively low leverage, manageable debt maturities and the cash on our balance sheet gave us time to focus on how to best deploy capital into new and better assets with multiple creditworthy customers and more than one possible use.

I want to pay particular thanks to the dedicated team at CORR that worked through these challenging circumstances, including many days and weeks of negative news, while maintaining the conviction that we would not just manage through the difficulties, but emerge stronger and better for it.

The Crimson team also worked hard in 2020, completing a spin-off of California to us, and expressing their belief, in our combination by rolling over equity into CORR securities. I believe very much, that their hard work has paid off. And together we have a bright future ahead.

Moving to slide five, the resiliency and dedication enabled us to spend most of the second half of 2020, heavily engaged in acquisition diligence, culminating in the strategic transactions with Crimson Midstream, announced on February 4.

Recognizing the strengths of our MoGas and Omega assets through the difficult pandemic months, and considering the ongoing energy transition in the U.S. we believe the shift in the nature of our assets to emphasize cash flow, stability and control, of regulated systems, creates a platform on which CORR can grow, and integrate new assets, for decades to come.

The Crimson California acquisition also created the first real estate investment trust, capable of conducting both, energy infrastructure operations or leasing, through the use of a private letter ruling.

We believe that, Crimson provides attractive benefits toward our goal of stable dividends with growth opportunities. There are approximately 2,000 miles of pipeline, serving a diverse group of well-known creditworthy shippers.

The pipelines can be used in many ways to transport a range of products that can be run in either direction, expanding the range of economic activities in markets we can support. And the rights-of-way provide additional value-creation opportunities.

And Crimson has an operating platform on which we can build, whether through, new uses of existing assets, the addition of further assets or commercial activities, connecting our systems to other assets in California's overall energy ecosystem.

The Crimson transaction solidifies CorEnergy's outlook, and enables us to cover our capital obligations including securing our starting point of a $0.20 per share annual common dividend, increasing to $0.35 to $0.40 on economic recovery, on synergies or commercial activities.

Importantly, the dividend of our common stockholders is further secured, through the subordination of the Class B common dividend, placing the execution risk on the insiders who received shares as consideration in the purchase agreement.

As we exit what has been a challenging year the future of CORR is bright. We'll emerge stronger, more future-ready, and positioned to grow. Let's take a few minutes to discuss each of our assets in more detail starting on slide six.

Our Midwest assets include our MoGas and Omega pipelines. MoGas experienced record throughputs during February, after having just set the record last year. The cold weather in the Midwest created a sharp increase in natural gas demand, plus we had the new interconnect with Spire, that was needed during that period to handle the substantial volume.

This performance provides a rare testament to the criticality of our assets, keeping people warm and their lights on. We also had installed a propane plant, designed for periods of high demand in cold weather as part of our expansion program at Fort Leonard Wood.

This asset was critical to providing uninterrupted service, on the Fort, during capacity constraints elsewhere in the natural gas system. This also generated a sizable savings to the DoD, as natural gas costs skyrocketed during the cold weather.

I'll now turn the call over to John, on slide seven, to discuss our northern and southern California assets and market opportunities.

John Grier

Thanks, Dave. Those of you who are on the acquisition call will recognize this slide seven detailing the northbound and southern California systems. In total, there are about 2,000 miles of critical pipelines and assets that connect California crude produced in conventional low-decline fields to in-state refineries making California-mandated fuel blends not produced elsewhere. These refineries are designed to run on California crude making the supply we transport on Crimson's pipe the baseload for the refineries and import oil as the swing supplier.

Additionally, we believe that local production and transport by pipeline is the most economically efficient and environmentally responsible way of meeting California's energy needs now and into the future of its energy transition.

The state has two major refining areas; the San Francisco Bay Area and Los Angeles Basin. Crimson operates one of the pipelines taking crude from the San Joaquin Valley northbound to the Bay Area.

Northbound P66 has a pipeline that parallels Crimson that serves their refinery in the Bay Area, which they have announced they will shut down in 2023. We believe that some of that oil will continue to go north to other refiners, but in our pipe instead. Those volumes would represent incremental revenue to our company.

Looking southbound, there are two pipelines, one of them being a competitor's near-capacity proprietary pipeline. Volumes coming off the P66 system related to their shutdown would need to ship on either the other L.A.-bound pipe or on Crimson's. We believe our pipeline is very well-situated to manage competition and volume opportunities in the future.

In Southern California, Crimson also operates a system of pipelines that transport nearly all of the crude produced in the area. Crimson works well with the producers, shippers, and refiners providing a diverse base of quality creditworthy customers.

Although new CorEnergy investors, Crimson is a well-known operator with legacy assets acquired from major oil companies and we receive high marks from regulators due to our culture of safety.

Consistent with CORR's focus on stable predictable cash flows generated by our assets, more than 90% of our Crimson revenue is generated through fee-based tariffs or long-term fixed rate contracts. These are primarily CPU-regulated allowing for cost of service-based pricing that adjust to ensure minimum profit threshold are achieved over the long run mitigating the impact of volume declines likely expected.

On slide eight, building on that concept of baseload versus swing supply, California is a captive market and the fifth largest oil-producing state in the US. That might be a surprise to many, but with more than 27 million registered vehicles on the road, significant airline activity and a huge population to support with infrastructure, distribution, and basic services, the state consumes a lot of gasoline, jet fuel, and diesel. The unique car gasoline and diesel blends are almost entirely produced in state at refineries designed to run on in-state-sourced crude.

You can see that in the chart on the right, it shows a small drop in in-state production versus a large decline in import oil during the pandemic. That led to an interesting picture on the slide where dozens of oil tankers are holding off the coast of California waiting to deliver their foreign-produced crude. The point is that local production is price-driven and we are seeing improved pricing. The refiners take 100% of the local production so imports are the swing supply. This explains part of our confidence underlying the sustainability of our business model in California.

On slide 9 another part of our opportunity is actually growth. And while that statement maybe a surprise, we believe that the transition to a renewable energy economy will take time. While the length of the transition period is debatable and CorEnergy is interested in and intent on being a part of the transition, we think the time frame permits the extension of our crude transportation business into the foreseeable future.

Following the combination with CORR, we see opportunities to improve performance and the dividend. This can come from several different paths or combinations of these paths. First simple demand recovery as we emerge from the COVID lockdown restrictions and increased energy use would get us to our target dividend range.

California is and has been in quite a severe lockdown. Today there is evidence that the worst may have passed and an opening economy will likely benefit our company and industry. Conversations we've had with producers and refiners both reflect that sentiment.

We see a pathway based on operating synergies in the combined company and a third pathway from commercial projects that generate growth. Importantly, we can also deploy our pipelines and rights-of-way in a variety of uses, including reversing flow or transporting other producing -- produced commodities, creating new avenues of growth to explore.

But as a platform the combination of CORR and Crimson is better positioned to look at growth in a number of markets and opportunities. We are operating in a mature industry characterized by low organic growth, consolidation and a focus on costs. That's actually an opportunity for us as we emerge -- excuse me, as we manage consolidation in our assets in ways that generate consistent reliable cash flows for our stockholders by owning and operating assets that are under appreciated.

Our newly combined team is full of industry veterans who operate in highly regulated locations with solid enviable track record of safety and reliability. A great example of that is Valerie Jackson, our Vice President of Engineering and Regulatory. I want to thank and congratulate her for being offered an appointment to the state -- California State Fire Marshal's Public Safety Advisory Committee.

The CSFM regulates the pipeline industry in California and it's a great honor for Val and for our company to have a representative there. I think the appointment speaks to her knowledge experience and integrity. CORR and the state of California are fortunate to have her.

With that I turn the call over to Robert.

Robert Waldron

Thanks, John. 2020 was a challenging year for CORR. The change in our asset base after the strategic combination with Crimson means that our 2020 financial results are not indicative of our direction and the company.

Slide 10 provides a brief summary of our key metrics including the net loss, which is primarily the result of write-downs and impairment charges taken in the COVID-19 pandemic environment. The assets which generate those negative outcomes have been sold creating a new diversified asset base for 2021.

The only major legacy CORR assets remaining from 2020 are MoGas and Omega, which have increased revenue in 2020 relative to 2019. Our consolidated results for Q1 2021 will include Crimson California in February and March, since the transaction was completed with an effective date of February 1.

Slide 11 recaps several aspects of the Crimson transaction, which is accomplished through cash debt and the issuance of both preferred and common stock. We have also proposed internalization of the REIT manager, Corridor Infrastructure Trust, which we believe will reduce operating expenses by approximately $2 million per year versus the contract level. The internalization requires shareholder approval. Perhaps most importantly, the equity used in the Crimson transaction and for the proposed internalization of the manager created strong alignment with the interest of our stockholders.

Furthermore, the Class B provides additional support since their dividends are subordinated to common dividend and dependent on ensuring common – certain minimum dividend thresholds are achieved for our common stockholders. We believe that subordination derisks the transaction for our common shareholders, as well as conveys our confidence in growing the common stock dividend in line with our plan.

Slide 12 shows the pro forma capitalization table as of 12/31/2020, taking into account both the Crimson and the proposed internalization transaction. Our proposed – our pro forma cash on hand and revolver availability give us approximately $45 million of total liquidity.

The other item I wanted to highlight is you'll notice a new non-controlling interest line, which represents all the consideration to Grier and Crimson management as part of this transaction. The minority interest does not function like a typical JV might. By using an operating partnership structure, common among REITs, CORR is entitled to 100% of the cash flow from the partnership, while the payments to the 50.5 interests are determined by the CORR securities they own which are listed on this slide. Going forward, we'll illustrate the capitalization, as though these securities are outstanding, as we do on the next slide.

So Slide 13 takes the cap table shown on Slide 12 and breaks out the minority interest into the three equity securities it represents: the Series C preferred, Series B preferred and Class B common stock. This table also shows how the capitalization changes as we reach full conversion of all securities and including approval of the internalization of the manager.

Lastly, using the midpoint of our guidance, the current annual $0.20 per share dividend is 1.75 times covered for both common and Class B common. We think about coverage as a ratio of AFFO less mandatory debt amortization over dividends to both common and Class B. This also indicates a high-level security in our preferred dividend and convertible note interest, both of which we paid in cash, consistently throughout the pandemic-affected quarters of 2020.

Perhaps the most important part of our financial commentary is the outlook for CORR post transaction in 2021 on Slide 14. Our guidance remains unchanged from our previous call. We expect combined revenue of between $130 million to $135 million on an annualized basis for 2021. We also expect combined annualized EBITDA to be in the range of $50 million to $52 million with maintenance CapEx of $10 million to $11 million.

Our initial annualized dividend will be $0.20 per share but we are targeting a dividend of $0.35 to $0.40 per share upon return to pre-COVID market conditions in California.

As we've stated on the February conference call, it is important to recognize that, we only need approximately $5 million of incremental AFFO to reach our near-term target dividend range. We could also reach the target through commercial opportunities. We are also focused on bringing our leverage down below four times by year-end 2022. The credit facility is comprised of a $50 million revolver and an $80 million term loan. The term loan amortizes at $8 million per year. The amortization of $8 million per year is approximately 0.15 turns per year decrease in our leverage holding everything constant. So we almost get there simply through the mandatory debt amortization over the two years period. We do feel, it's important to be conservative with leverage and are committed to de-levering and have the visibility to do so.

With that, I'll turn it back to Dave.

Dave Schulte

Thanks Robert. At CorEnergy, we're also looking at various ways we can do our part in the growing focus on ESG outlined on slide 15. As a midstream energy company, we believe that pipelines are the most economical and safest forms of transportation for energy products, including some of the lowest total transportation impact to the environment as compared with other methods.

To maintain this environmental advantage requires a diligent commitment to safety, inspection, and maintenance of our systems. We're also actively engaged in our communities. Internally, we want to be a great employer to work for offering a safe engaging workplace with the opportunity for advancement, competitive pay, and an environment driven by respect and integrity.

On governance, we've always worked hard to meet our fiduciary duties and engage in best governance practices. The proposed internalization process is another step in that direction. We've committed to 2021 to not just continue the good things that we are doing, but also to look for additional opportunities and new goals to continue building on our ESG performance.

Finishing on slide 16. We are really excited for the year ahead as we build on the new CorEnergy platform. We believe we've established a stable base with internal growth potential as well as optionality to increase our scale and diversification. You can see a number of pathways to achieve prudent long-term growth within our existing assets and commercial opportunities they provide. The decision of insiders to subordinate their position to the common holders provides reassurance to the common dividend and conviction in the plan for CorEnergy as a whole.

I'll end with a graphic we've used for years to illustrate the scale of the energy sector and then for the vast opportunity set of infrastructure assets. Our capability to lease or operate opens a larger addressable market, across the energy value chain. The rights-of-way also may be useful in the distribution storage or even production of alternative energy. The hallmark of infrastructure, as an asset class is to utilize scarce hard-to-replicate physical assets, with long-term economic usefulness. We're excited about the potential for CorEnergy to lead within the energy segment of the energy – of the infrastructure asset class.

At this time, we'll take a few questions from our covering analysts or institutional stockholders, before closing the call. Operator will you please provide the instructions for Q&A? Thank you everyone.

Question-and-Answer Session

Operator

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Barry Oxford of D.A. Davidson. Please state your question.

Barry Oxford

Hey Dave, real quick when you're looking out over the horizon for acquisitions what are you seeing right now in your pipeline as far as characteristics? Are they upstream midstream downstream type of thing? And then what type of gas is -- are those pipelines that you're looking at carrying?

Dave Schulte

Barry, that's a great question. We have had our head down trying to make sure we got our 10-K filed on a timely basis post combination. However we have started thinking about what's next. And the things that have been suggested to us are very similar to things we've looked at in the past. So there's no new information here.

But I'll tell you that it includes assets that have exposure directly to more upstream which we've had before all the way to assets that have more market exposure downstream and which we -- which would have operating characteristics similar to the Crimson assets. We've got opportunities to look at assets that have refined products so post refinery to market, as well as natural gas like MoGas.

So we think that we have a chance to really advance our scale now that we have an operating team on our side with an economic interest in creating scale and diversification. And frankly, I think that we've got a better platform today because of a broadening of our opportunity set than we've ever had in the past to consider those options. And so it's up mid and down Barry and with both gas and liquids products.

Barry Oxford

Okay, great.

John Grier

Barry I've got one add to Dave's answer. We've looked at a couple of things that included renewable natural gas and CO2 as a pipeline. Those are both DoT PHMSA-regulated pipeline. So that's in our wheelhouse. They are very preliminary kinds of discussion. But you asked about what sort of opportunities have been presented to us and that's on the list and certainly things that we're going to look at.

Barry Oxford

Perfect. I appreciate that color. Last question for me. As you guys are looking at acquisitions is the LLC as far as the capacity fine, or are you guys going to go back and kind of talk to the banks about expanding that capacity?

Robert Waldron

Sure. I'll take that. We are always looking to optimize capital structure. So whether it's banks or other sources of debt capital we would -- we are in a constant look -- constantly looking at growing the company and so we are constantly looking at expanding our access to capital. So it would include both the banks and other financial institutions.

Barry Oxford

Okay, perfect. That make sense. Appreciate it, guys.

Dave Schulte

Thanks Barry.

Operator

[Operator Instructions] There are no more questions at this time. We have reached the end of the question-and-answer session and I will now turn the call over to Dave Schulte for closing remarks.

Dave Schulte

Thank you all for joining us today as we look forward to an exciting and growth-oriented year in 2021. If you'd like to meet with us at one of the coming investor conference events or arrange a direct one-on-one call, please contact our IR team and we'd be happy to do so. Have a great afternoon. Thank you.

Operator

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

Comments

[rrb1981]

How long until Crimson nose dives?

These guys are a joke..