CorEnergy Infrastructure Trust Inc (CORR) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the CorEnergy Infrastructure Trust 2014 third-quarter earnings conference call.

(Operator Instructions)

As a reminder this call is being recorded. At this time I would like to turn the conference over to our host, Katheryn Mueller, Investor Relations for CorEnergy. Ms. Mueller, you may now begin.

Thank you and welcome to CorEnergy Infrastructure Trust third-quarter 2014 earnings call. I am joined today by CorEnergy Executive 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 Friday as well as the presentation materials for this call are available at coreenergy.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 will turn the call over to CorEnergy President and CEO, Dave Schulte.

Thank you and welcome to CorEnergy's third-quarter 2014 earnings call. I'm pleased to discuss the results of another successful quarter as a real estate investment trust. The first three quarters of 2014 demonstrate CorEnergy's ability to deliver stable dividends covered by growing cash flows from our energy infrastructure assets while optimizing our balance sheet for our pipeline of investment opportunities.

Now let me address some of the highlights of the quarter and our expectations for the balance of 2014. Turning to slide 3 of our investor presentation, throughout the third quarter our investments continue to provide stable contracted revenues allowing us to reaffirm our full-year annualized dividend guidance of no less than $0.52 per share.

As a reminder this is a 4% increase over our prior year and an 18% increase over our dividend as a BDC. We also declared our third-quarter dividend of $0.13 a share payable to shareholders on November 28.

Third, we successfully established a new $30 million senior secured revolving credit facility. This new four-year facility enhances CorEnergy's financial flexibility tremendously. We expect to use the new upsized facility to fund potential acquisitions, capital improvements or other corporate purposes.

Fourth, we filed a new registration statement on Form S-3 with the SEC. If and when declared effective, the shelf registration statement is intended to refresh the ability to offer and sell up to $300 million of CorEnergy equity, debt or other types of securities.

Next we completed the sale of one of our legacy portfolio companies, VantaCore effective October 1. We are very pleased that the performance of our private securities met our expectations. We received gross proceeds of $13.6 million from the sale, slightly above the reported fair value for VantaCore.

Net of taxes our proceeds of approximately $2 million are expected to be used for the construction or acquisition of real property assets. Lastly, we remained active on the investment side of our business.

We funded $11 million in support of Black Bison's third saltwater disposal acquisition, resulting in an upsizing of this investment to $15 million. Year-to-date we funded $65 million of acquisitions, capital expansion projects in the energy infrastructure sector.

Now turning to our portfolio of assets for a third-quarter update on slide 4. We continue to focus on high-quality assets with proven business models. The requalifying assets currently in our portfolio satisfy our investment criteria of fixed asset intensive businesses with stable cash flows and limited commodity price sensitivity, potential growth opportunities, experience management teams and limited technological risk.

Each of these assets, listed across the top of the page, provide long-duration visible cash flows which are capable of mitigating inflation risk through participation features.

Our low volatility assets performed as expected in the third quarter.

Starting with the Pinedale LGS, our outlook remains stable. In the third quarter Ultra Petroleum acquired a property from Shell that is adjacent to our system. This transaction demonstrates Ultra's commitment to the region and more specifically the Pinedale Field.

Ultra plans to maintain a four rig program for the remainder of 2014 but drilling activity has yet to translate to increased volumes through the LGS. However, with CPI-based rent escalations alone, our rents have the potential to increase significantly over the next 13 years.

The second largest asset in our portfolio is the terminal in Portland. In August base rent increased to $5 million per year, an increase of 82% over our prior reduced rate. Base rent is also expected to increase based on a percentage of terminal-related improvement projects which are estimated currently at $10 million.

Assuming such improvements are completed, minimum lease payments would then be in excess of $6 million per year. We are pleased with the progress made at the terminal and are optimistic about the possibility of receiving variable rent once construction is completed.

The remaining assets in our portfolio also performed according to plan. With that I will turn presentation over to our Chief Accounting Officer Becky Sandring for an overview of our financial results.

Thank you, Dave. Let's now turn to slide 5.

The third quarter represented another quarter of consistent and strong performance from our diversified asset portfolio. On Friday we filed our 10-Q and issued a press release highlighting our financial results for the quarter ended September 30, 2014.

The financial information presented in the 10-Q 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. We believe 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 quarter ended September 30, 2014, totaled approximately $5.1 million, or $0.16 per share. This represents a 6% increase over the prior quarter's FFO of approximately $4.8 million, or $0.15 per share.

FFO increased as a result of distributions received from investment securities, namely distributions received from the sale of VantaCore. AFFO for the quarter totaled approximately $5 million, or $0.16 per share.

This represents a 12% increase over the prior quarter's AFFO of approximately $4.5 million, or $0.14 per share.

The Company's FFO and AFFO measures are after payments made to our noncontrolling interest so are applicable to our common shareholders. We believe our run rate of FFO and AFFO will support annualized dividend payments of no less than $0.52 per share.

Turning to slide 6, CorEnergy's total revenues and dividend distributions are shown quarter over quarter. We believe that sequential comparisons rather than prior-year comparisons is more representative of where the business is from a cash flow perspective and thus more relevant to assessing dividend payments.

The graph shown here depict the Company's recurring and sustained revenues in addition to our stable dividend performance. The growth of our portfolio is evidenced by the graph on the far right which depicts our total assets. In December of 2012 the major increase in total assets is attributable to the Pinedale LGS acquisition.

Next we see an increase in the first quarter of this year which is attributable to the Portland Terminal Facility acquisition. In the third quarter we have a modest decrease which is attributable to the depreciation associated with those aforementioned assets.

In terms of liquidity we replaced the Company's $20 million corporate revolving credit facility with a new upsized $30 million facility. The Portland Terminal Facility will be eligible collateral under the new facility enhancing our financial flexibility within our total leverage range of approximately 25% to 50% of assets. We would expect to utilize balance sheet resources including prudent leverage when available supplemented with accretive equity issuance as needed for future acquisitions.

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

Turning to the slide entitled Overheard in the Corridor, we provide some additional insights as we close out the year. Now along with yieldcos the REIT vehicle is gaining traction as an alternative financing structure with utilities. In October Moody's published a report noting large power transmission utilities are actively exploring the feasibility of using the REIT structure as a financing vehicle.

Transmission assets and the steady cash flows they generate align with CorEnergy's target investment characteristics and importantly are assets that, unlike MLPs, CorEnergy can and already does own. Our management team has over 100 years in combined leadership experience in the utility sector, which includes direct experience in electric transmission, utility asset acquisition and operations, development and in federal and state regulations.

By working hand-in-hand with utilities CorEnergy can leverage its REIT experience and structure serving as a partner to help satisfy the capital needs of power companies. Through our EIP lease, CorEnergy is already serving as a partner on power transmission assets. A key competitive advantage of CorEnergy's EIP lease is that Public Service Company of New Mexico retains complete control over its assets.

Importantly for our investors seeking reliable real asset-based cash flow streams from utility like assets, infrastructure investing via the REIT vehicle can enable investors to access those reliable cash flows from a tax efficient liquid structure with no K-1. CorEnergy is well-positioned to target power transmission assets as it builds its diversified energy infrastructure REIT.

Finally as 2014 begins to wind to a close, the US energy boom continues despite macroeconomic challenges. The recent decline in crude oil prices caused a short-term ripple effect across the broad energy markets.

Nonetheless, we remain steadfast in our view the North America is still in the early innings of an energy revolution and we also believe the long-term fundamental market opportunity means intact for CorEnergy. CorEnergy provides access to energy infrastructure assets and simultaneously offers our owners a real yield opportunity.

With that I'd like to thank you for your participation in our call and ask that our operator open the phone lines for your questions. Operator?

Thank you. (Operator Instructions) TJ Schultz, RBC.

I guess just curious if discussions have changed at all with E&Ps with pipeline assets just given changes or volatility with commodities whereby maybe in a lower commodity price environment they would be more prone to monetize some of those assets through sale leaseback? Just looking for any color really on how or if discussions have changed over the past couple of months here.

TJ, we have added an increase in inquiries from E&P companies through their investment banking relationships and even lender referrals. As the commodity price volatility seems to be moving in a downward direction the ability to execute expected capital expenditure plans within existing cash flow becomes tighter. And that is a very good backdrop against which our financing solution is of interest to E&P companies.

Okay, what are some other -- as you look at those deals with the E&Ps what are the other hurdles you are facing to do another LGS-type deal? Have they bought into the core REIT financing option?

Are there outright buyers of assets that are more attractive, or what other financing options, if any, are they finding out there right now? Just trying to get any more specific on the color of the conversations you are having right now.

Well, long-term interest rate spreads have remained relatively tight throughout the quarter and companies that are investment-grade rated have pretty open access to debt and equity markets and an integrated business model that makes it a little tougher for them to separate out one-off assets. On the other hand, companies that are below investment grade have less diversification or integration in their business models and are open to innovative ways to finance are actually increasing their inquiries of us. So we had focused our efforts on those kinds of companies, as I mentioned earlier this year.

And we are seeing that activity bear fruit in terms of an increased deal flow opportunities. And our pipeline right now seems as full as it has been since we started the business in terms of opportunities that are under review.

Okay. That's great. I guess just lastly, if you monetize VantaCore, just any color on the longer-term plan with Lightfoot here?

Well Lightfoot has a path to liquidity because the Company is already publicly traded. We fully intend to retain our subordinated unit position there until such time as it becomes commonly traded, or convertible into the common units at which time we will evaluate market conditions for a prudent and regular way exit of that position without forcing anything.

There is additional assets at the general partner there that we also own and there is no imminent liquidity plan for that. So I think other than to say everything is working out as we planned, we are in good shape on our private portfolio.

Okay, thank you.

Michael Blum, Wells Fargo.

I guess somewhere along the same lines, just curious your commentary around the increased potential opportunities with the power utility companies. Should I read anything into that?

Is that suggesting that you are having more trouble competing with MLPs, or not competing with MLPs for more traditional oil and gas assets? Just trying to think how to interpret your commentary.

Well, actually no we feel like our messaging on the energy side has been very much well understood. We're not trying to compete with MLPs for operating assets but that E&P companies that have strategic assets of their own, they are not large enough for their own MLP, or perhaps they don't want to lose operating control over, that we are emerging as a solution that they think of with the help of their advisors without us having to knock on their doors.

So I actually think that part is doing fine. What we commented on today was the growing awareness of the validity of a REIT structure for electric transmission utilities. And although that has been around as a private letter ruling for quite some time and in fact is the basis on which we bought our asset in New Mexico, we are seeing increased opportunity to talk to transmission utilities about how a real estate investment trust can be a partner from helping them leverage their own balance sheet and their operating business model into a larger asset base.

And that awareness we believe is growing and will continue to grow and there is less concern now about whether it has been done before because it has been done before. And the rating agency's willingness to take up a white paper on how utilities can think about the implications on their existing credit facilities and how regulators will enter into that conversation are things we've been talking with utilities about for three years.

So it's a formalization, if you will, of the conversation that is already underway. And we just wanted to be prepared -- among our investor base to be aware that we are expecting to be a partner in that arena and in fact already are.

Okay, great. Thank you very much.

Selman Akyol, Stifel.

I think in your comments, Portland Terminal's cash flow increased from there. How much did it go up for?

Well, it went up from roughly the $230,000 per month that it was through July to I believe it is slightly over $400,000 per month. So that increase was part of the expected increase in step up that we expect to have happen in August, and that did indeed occur.

Okay. Any thoughts on just going back to the VantaCore on how quickly you will be able to reinvest those proceeds just in terms of your pipeline?

Sure, VantaCore is a good source of liquidity for us to fund the CapEx requirements out in Portland. And so that cash is going to be deployed relatively quickly. We are planning to use our line of credit for that but if we don't need to because we've got the cash, we will use the cash.

And that is imminent. So one to two quarters that project should be completed.

And how much -- can you just remind us how much is left to go in terms of the investment there?

The total expectation was $10 million and of that I think we are about $4 million in and the project is still underway and we will be updating that at the end of the year as far as our expectations there.

And I was just going to ask, at this point is there any guidance for 2015? Any broad brush strokes?

We have not announced any guidance for 2015. However, I would like to point out that the nature of our business is such that it is very much a quarter-to-quarter run rate style of income statement with very low seasonality even though in one of our businesses we have some seasonality. That is immaterial to the quarter.

And so we would expect absent announcements, quarterly distributions to be consistent. With the increases, if they are any under our leases announced in connection with a Q that is filed, we would then be able to articulate what coverage ratio might be or what a new dividend might be. So without giving guidance, I think past quarter performance is pretty close to what would be expected absent another transaction.

Okay. Are you guys receiving increased cash flows off of Lightfoot this quarter?

We did. Lightfoot increased their distribution this quarter. As you are probably already aware very pleased with that investment, that opportunity and that management team. Have a good relationship there and yes we do get the benefit of increases in distributions at Lightfoot.

And so that should be a good run rate going forward as well then?

I'm sorry, a good what?

That should be a good run rate going forward as well then?

Yes. Yes, I apologize. A good run rate going forward.

My last question here, in terms of the broadening of the asset class I guess there's pluses and minuses to that, right? Certainly more awareness I think does everyone good.

If there's other players in there that come in and faster growth, with a picture at somewhat of a disadvantage? If it does broaden do you guys think about that and how you guys could respond?

Well, we do think about that. But frankly we think that -- we spend a significant amount of time with each particular tenant making sure we understand their needs and their business and that we are a good -- building a good long-term relationship with them.

And if we do our job on the front end I think that -- and because we are agnostic to anyone asset; we are not dependent on related party asset contributions, we've got a very large opportunity set. And there is -- it is a very large energy asset sector that we are in that there will be opportunities for us.

All right. Thank you very much. Appreciate it.

(Operator Instructions) Thank you and it seems that we have no further questions at this time. I would like to turn the floor back to management for closing remarks.

Thanks, everyone. 2014 is drawing to a close and we will have had a full year of REIT-qualifying status this year and look forward to good things in 2015. Thanks very much.

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