CorEnergy Infrastructure Trust Inc (CORR) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the CorEnergy Infrastructure Trust 2014 fiscal-year earnings conference call. At this time, all participants are in a listen-only mode. Following the formal presentations, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this conference will be recorded.

At this time, I would like to turn the conference over to our host, Debbie Hagen, for CorEnergy. Thank you, Ms. Hagen. You may now begin.

Thank you and welcome to CorEnergy Infrastructure Trust's 2014 year-end earnings call. I am joined today by CorEnergy Executive Chairman Rick Green; CEO and President David Schulte; and Treasurer and Chief Accounting Officer Becky Sandring. The presentation materials for this call as well as information included in our press release issued Monday and an audio replay of this conference call are available on CorEnergy's website 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 protections available under applicable securities law.

Because such statements deal with future events, they are subject to various risks and uncertainty. And actual outcomes and results might different 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 President and CEO David Schulte.

Thank you and welcome to CorEnergy's fiscal 2014 earnings call. On slide 3, CorEnergy is the first listed infrastructure company. It is operated and taxed as an investor-friendly real estate investment trust.

Our name highlights that we own and operate infrastructure assets, providing utility-like functions across the entire energy value chain, such as essential pipelines and associated storage facilities. Our revenue model is more like an infrastructure company and we will illustrate why on this call.

The highlights of 2014 include CorEnergy's achievement of further dividend growth, asset diversification, and creation of liquidity to continue to execute on our plan. We have announced our intention to raise our dividend again by 4% for the first quarter of 2015, which will put us at a $0.54 annualized run rate.

Today we are announcing a long-term dividend growth target of 3% to 5% annually, which we believe is supported by the performance we are discussing today. We only seek to increase the dividend if we believe that it is a sustainable increase.

We deployed more than $190 million of capital during 2014, expanding our business with investments in four different projects, with commitments ranging from $10 million to $125 million. We increased CorEnergy's total assets by 56%, which helps diversify our sources of revenue, thereby enhancing dividend stability.

We continue to build visibility in the capital markets. The institutional ownership of CORR's common stock with two follow on equity offerings is up to about 55%. CORR also joined benchmark indexes for NAREIT and others, providing liquidity to our stock.

In January, we conducted a successful public offering with preferred, strengthening CorEnergy's balance sheet. Following that offering, we have liquidity of approximately $120 million, plus we refreshed our shelf registration statement. We're better positioned going into 2015 from a liquidity standpoint than we have been in our entire history.

We want to address on slide 4 the operating fundamentals of our assets that provide us with utility-like predictability and long-term growth. The characteristics of our assets, which produce that kind of revenue, are listed on the top of the slide. And I want to review each one with reference to one of our assets.

First, we look for long-lived infrastructure, which is critical to our customers' operation. The operator of our largest asset is Ultra Petroleum. The rent revenue we receive is part of UPL's operating expense. It is an above-the-line operating expense for UPL, which has a small impact on their overall costs when spread over the total value of reserves in their field. Like a pipeline capacity payment, our minimum rent is not based on usage.

Next, we look for recurring utility-like revenues with stable cost structures. In addition to our triple net leases, we also have pipelines actually deployed in utility service. Omega Pipeline, for example, is a nonregulated LDC utility, which has a fixed charge to the US Department of Defense for access to the pipeline at Fort Leonard Wood. We are in the process of renewing this contract for a 10-year period.

MoGas has annual contracts, but with LDCs, which contract for capacity on MoGas with base payments made regardless of usage.

Next, we look for assets where demand is relatively unaffected by energy commodity price changes. The most sensitive investments we have made to energy prices are saltwater disposal financings.

In 2014, we provided $20 million of committed financing to two companies that operate saltwater disposal facilities in Wyoming and North Dakota. The assets securing these loans enable producers to dispose of flowback water from the joint process and produced water from ongoing oil and gas production. The water disposal volumes and therefore the revenue streams of these operators are sensitive to drilling and production activity in the regions that they serve.

While these operations have revenue variability, our mortgage financing structure provides us with a way to smooth out that cash flow. We receive base and contingent interest payments and flexible repayment terms. Therefore, we believe these contracts provide us with reliable cash flows at the level of base interest, which is all we count on for our dividends.

Finally, we look for strategically located assets with high barriers to entry. An example of that is our Portland Terminal facility on the Willamette River, which is operated by Arc Logistics. The property has 84 storage tanks for a variety of petroleum products, plus loading facilities to receive and deliver these products via rail, truck, or Panamax-sized vessels. The Pacific Northwest is a desirable location due to its connectivity with multiple producing regions and in use markets.

Now the four characteristics of all infrastructure companies we've described are enhanced by our diversification across points along the energy value chain. We can own upstream production serving assets, midstream storage and transportation, and even downstream utilities.

We also have diversified the manner in which we can own these assets so as to provide flexibility to our operating partners, including long-term triple net leases, debt financings, and intercompany mortgage loans to our own taxable operating subsidiary. All of these include participating features, which provide a basis for our revenue growth expectation.

We want to further discuss the intercompany mortgage method, with reference to MoGas on slide 5. In November of 2014, CorEnergy acquired the MoGas Pipeline, a critical transportation link carrying natural gas to utilities in the St. Louis region and small-town Missouri. It also extends across the Mississippi River into western Illinois.

It is regulated by FERC and receives natural gas from three major supply lines, such as the Rockies Express, delivering that gas to 22 delivery points, including our own Omega Pipeline, which serves Fort Leonard Wood.

Key characteristics of that pipeline include the capacity contract revenues with long-tenured credit-worthy utilities, like Ameren and Laclede; a stable history of both firm and interruptible contracted volumes through the pipeline; potential growth from increasing LDC capacity needs in their supply line.

It is a FERC-regulated requalifying real property asset. And we have an intercompany mortgage loan through our operating subsidiary. And for that intercompany loan, we obtained third-party verification of the allocation of value to the requalifying assets and to the terms of the intercompany loan. These opinions follow well-defined processes and are part of our re-compliance documentation.

MoGas also has an operating business, which is overseen by our experienced utility management team. This model has been used by other REITs to acquire operating businesses where the assets are primarily qualifying real property and this can be an effective means to grow our Company.

Our Chief Accounting Officer, Becky Sandring, will next provide an overview of our financial results, with an emphasis on pro forma information, which give effect to MoGas, as our most recent transaction at the end of last year. Becky?

Thank you, Dave. This week, we filed our Form 10-K and issued a press release highlighting CorEnergy's financial results for the fiscal year ended December 31, 2014. The financial information presented in the Form 10-K should be considered in its entirety. For purposes of this call, we have provided a few key financial metrics here that we think will be helpful to you in evaluating CorEnergy's performance and expectations.

Because CorEnergy is a REIT and a majority of our assets are requalifying, 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 our operational performance.

On slide 6, we show FFO as calculated by NAREIT, our FFO adjusted to take out the effects of legacy assets from our BDC days, and adjusted FFO. A reconciliation of these measures to net income is provided on slide 12 of these materials.

In the right-hand column are pro forma figures. As Dave said, 2014 was an active year, adding MoGas, the Portland Terminal facility, and financing for two saltwater disposal companies. This pro forma offers a perspective of what results would have been if CorEnergy had held all of those assets and our VantaCore Holdings had been sold on January 1, 2014. Revenue, cost, and other impacts are treated on a full-year basis.

As you can see, the new assets add to significantly to CorEnergy's earning power. AFFO on a pro forma basis was $0.61 per share for 2014 if we were to take a full-year view. This increase illustrates that our acquisitions were accretive to our current stockholders.

The assets acquired in 2014 positioned CorEnergy strongly in relation to our dividend guidance. We have solid coverage of the preferred dividend, which will be approximately $4 million in 2015. And our AFFO also supports the annualized common dividend of $0.54 for 2015.

On slide 7, our strategy is to grow common stock dividends grounded in long-term contracted revenues, supported by diversification of our asset and revenue sources. The graphs show our progress.

Total assets have grown from $111 million at the end of fiscal 2012 through several acquisitions of REIT qualifying assets to $444 million at year end 2014. Our contribution margin has almost quadrupled with the rents and interest income from the additional assets.

Pro forma contribution margin for 2014 would have been $45.8 million. This represents a pro forma contribution of 10% on total assets of $444 million.

On a per share basis, dividends have increased steadily. This annualized dividend graph takes the last quarterly dividend of each fiscal year, multiplied by four, to give comparable figures since we changed physical years and the timing of dividend payments after 2012.

We have announced the intention to increase the annualized dividend to $0.54 per share in 2015, starting with the first-quarter dividend to be paid in May. Dividend growth is hitting the target of 1% to 3% per year based on AFFO from existing access assets consistent with our prior guidance. We are pleased to announce total dividend growth guidance of 3% to 5% annually over the long term when we include growth from new investments.

Now let's discuss our financing of that plan. Turning to slide 8, we have presented a capitalization table on the left and an update on liquidity on the right. The pro forma columns are based on year-end 2014 values and illustrate the impact of the preferred stock offering in January of 2015 as if it had occurred on December 31, 2014.

In the pro forma capitalization table, the core leverage is approximately 15% after using the net proceeds from our January preferred offering of $54.5 million to pay down our corporate revolver balance of $32 million. The remaining balance of proceeds is in cash.

With $90 million in availability on our corporate revolver and $30 million in cash on a pro forma basis, we now have a total of $120 million in available liquidity. We also refreshed our shelf registration statement in the amount of $300 million.

Going forward, we are targeting preferred equity at 50% of our common equity market capitalization, with debt targeted at 25% to 50% of total capitalization. CorEnergy is well positioned with low leverage in order to execute on our plan of acquisition growth.

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

Thanks, Becky. Let's turn now to slide 9, which we entitle Overheard in the Corridor. We use this opportunity to discuss topics of interest to our stockholders. And today we will discuss the energy commodity price sensitivity of our business model.

In this graph, we have pulled monthly prices on WTI crude oil, which is the light blue line. And you will see it experienced a dramatic decline starting in about August of 2014. For comparison purposes, all of the data points on this chart are doing indexed to 100, beginning with the end of 2013.

The S&P Energy Index, shown in orange on the graph, is weighted to the largest cap energy producers and service companies and is widely followed. The equities in this group dropped off substantially as the crude oil price declined, as you expect and as we all experienced.

Now let's look at the indexes that we suggest comparing to. If you look at utilities, the red line, and REITs, the purple line, both of those asset classes diverged from energy and rose substantially during the autumn, even though commodity prices dropped. Utilities, of course, are users and resellers of energy and they would benefit if economic activity picked up during periods of low energy prices.

The All REITs Index comprises companies depending on real estate rents, and as many nonenergy-related, while the S&P Infrastructure Index, shown in green here, seems unaffected by the energy commodity price change.

CorEnergy stock, the dark blue line, has followed the Energy Stock Index in reaction to the commodity price drop. At the top of this call, we posed a question on whether our risk profile was closer to utilities and REITs and therefore infrastructure companies or to energy producers. On the next slide, we will summarize why we believe that our stockholders do not need to react to short-term energy commodity prices.

CorEnergy's revenue is contracted. We have minimum rents, base interest, and capacity payments. Those contracts have low or no direct commodity price exposure. We own real property assets that perform utility-like functions.

Our rent is an operating expense to our partners, like their utility bill. We have diversified across the entire of energy value chain. We own assets serving upstream production, midstream, as well as downstream utilities.

We are announcing anticipated dividend growth of 3% to 5%. That is organic growth of 1% to 3%, plus acquisitions, which we have achieved the last 2 years. Our investor-friendly REIT structure provides cash flow transparency to infrastructure assets, with long-duration revenue streams.

We have a large opportunity set and a flexible financing structure for our operating partners. We have ample liquidity to execute on our plan. And our team is built from utility and energy operating backgrounds.

Our CorEnergy's management is compensated aligned with our stockholders' interest in dividend stability and dividend growth. We believe CorEnergy provides our investors with direct access to infrastructure assets where quarterly cash flows are high component of total return. Therefore, we offer investors a real yield opportunity.

I would like to open the line to questions, operator.

(Operator Instructions) Selman Akyol, Stifel.

Could you talk a little bit about the pipeline to what you are seeing out there in terms of the acquisition front? You did a recent capital raise; your balance sheet is good position. So just trying to get a handle on what kind of assets are out there and maybe how long until you are able to execute and pull the trigger.

Sure. We articulate that we have and have continued to have acquisition opportunities ranging in size from $200 million at the higher end to $50 million at the lower end. And even the smaller ones we executed last year are designed to get us to that minimum.

Right now, we feel our pipeline is as robust as it has been since inception and that results, we believe, of the need for capital across the infrastructure complex in the United States, both transmission on the electric side and additional capital on the energy production side. And frankly, we can play anywhere in there. And our opportunity set reflects that.

As far as when we could execute, we don't and can't predict that. But we do expect, as you see now, that we have enough confidence in our pipeline to increase our growth expectations from just organic growth to inclusive of acquisition growth for 2015 and beyond.

Okay. And I guess just to reiterate, even with the decline in the commodity prices, you are still seeing robust demand for energy production and assets, or at least opportunities out there?

We are. We have always thought that our financing solution enabled energy companies -- the producers, anyway -- to allocate their capital to their highest and best use, focusing on their return on invested capital. And with energy prices trading off, that really puts a emphasis in those companies on that need.

And so they are willing to examine all of their asset portfolio and think about, even if they want to retain operating control, do they really need to own it and fund it on their balance sheet. And that is resulting in us having a significant number of conversations around a solution we already thought was an efficient one for them. So the low environment may actually be helping stimulate some potential interest in our solution.

All right. And then the last question for me. If you could just help me understand -- if you could give me a little insight into your thinking in terms of keeping $30 million in cash on the balance sheet, continuing -- as opposed to continuing to pay down your revolver?

Well, we did pay -- so our revolver is down to zero on a pro forma basis. In the Form 10-K, you have to look in MD&A to ferret out our current capitalization. So we did include it in these slides. We might have a minimal amount of revolver at Mowood -- excuse me, Omega, which is more seasonal related to accounts receivable funding.

But we don't have any significant revolver borrowings at present. We do have cash and it is our expectation that some of that would be deployed in commitments we already have, including finishing construction up in Portland, Oregon, on that Terminal complex and a few other things that we believe will be near term. So we don't expect to continually maintain cash for very long periods of time.

All right. Thanks very much.

(Operator Instructions) Kate Morris, Bank of America.

Just first, a quick clarification. The 3% to 5% dividend growth -- so that is inclusive acquisitions in 2014, but does that include any unannounced acquisition?

There are no unannounced acquisitions that we can talk about. What I would say is that we have grown at that pace and we expect in 2015 to grow at that pace as well. So the $0.54 is our going in rate. I am not expecting that to be our exit rate at the end of 2015.

Understand.

So that growth rate would be an annualized growth rate. And you might just say that 2015 exit rate would be somewhere between 3% and 5% greater than it is today.

Got you. Okay. Great. Thank you. And another one for me. The saltwater disposal wells, can you disclose who the counterparties are on those two assets? (multiple speakers).

We can and I believe we have. The first one -- and the one in Wyoming that we first did -- was Black Bison. It is a separately funded company. They have raised their own equity capital and Black Bison is focusing on a region in Wyoming that happens to be very nearby our Pinedale asset. So we have got some awareness of production in that region.

The second one is called Four Woods and they are in the Bakken in North Dakota. And that team is also a separate team from us. And we are providing both of them with debt financing for their construction and acquisition projects.

Okay. Great. And what is the term or the length of those contracts?

Our debt financing has 7- to 10-year terms on it, depending upon whether the company has active disposal activity ongoing. They could shorten that period by us capturing excess cash flows during periods of higher activity. That would, then, require us to redeploy that principle in equally productive ways to maintain our dividend, but we think that is very relatively predictable and not a material enough challenge for us to worry about.

What we like about our financing there is that it therefore is long tenured. We can count on our base interest being paid by levels of activity that do not depend on direct commodity price, but do depend on production.

And we really think in both of those situations, there is very long-lived production in the fields that are being served. So there will be a continual need for disposal of saltwater in each place. And in an environmentally responsible manner.

Great. That's it for me. Thanks.

(Operator Instructions) We appear to have no further questions. I will turn the call back over to Dave Schulte for closing comments.

Thank you, everyone. We feel as though we have really developed the platform significantly since we started with our shareholder vote in 2011. We have achieved a tremendous amount of diversification and stability and liquidity and are pleased about our prospects going forward. And thank you for your attention.

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