CorEnergy Infrastructure Trust Inc (CORR) 2015 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the CorEnergy Infrastructure Trust second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. At this time I would like to turn the conference over to your host, Lesley Robertshaw for CorEnergy. Thank you, Ms. Robertshaw, you may now begin.

Thank you and welcome to CorEnergy Infrastructure Trust second-quarter 2015 earnings call. I'm joined today by Rick Green, CorEnergy's Executive Chairman; David Schulte, CEO and President; and Becky Sandring, Treasurer, Secretary and Chief Accounting Officer.

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 will be available on CorEnergy's website.

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 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 the applicable securities laws.

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 President and CEO Dave Schulte.

Thank you, CorEnergy has enhanced our corporate finance staff and I would like to first introduce you to three people. We recently named Jeff Teeven as Vice President of Finance, leading the team and managing communications with both public and private capital markets. And JT has more than 20 years of experience in private equity management and mergers and acquisitions and we've worked together over the years.

Lesley Robertshaw who introduced this call joined as Manager of Investor Relations. She comes to CorEnergy from Equity Research at Credit Suisse in New York where she covered specialty finance companies.

Also Natalie Hill came on board as Assistant Corporate Secretary and paralegal adding strength to the team.

We initially built our senior team with commercial and engineering expertise and we're now investing in our capabilities to serve the information needs of our debt and equity investors, private capital partners and lenders.

Now onto slide 3. CorEnergy delivered second-quarter revenue and earnings results in line with the first quarter and consistent with pro forma financials disclosed in our 10-K. We compared to pro forma data to illustrate the impact of material acquisitions on our financial statements.

This quarter we're presenting new pro formas because the Grand Isle Gathering System which we call GIGS was acquired in the last day of the quarter for $259 million of total consideration. Our balance sheet reflects the new asset and capitalization of common equity, a new 7% convertible bond offering and additional draw on our senior credit facility. But you need to look at our pro forma data to see the impact of the revenue on our results.

We do not grow the asset base unless it is beneficial to our existing investors. And we believe that GIGS allowed us to increase revenue, diversify our assets, access additional junior capital on less dilutive terms, grow our dividends per share and increase our available liquidity by approximately $25 million. We believe that was beneficial to our previous stockholders.

On slide 4 the diagram illustrates the placement of our assets along the energy value change from upstream on the left where production takes place to downstream on the right where utilities and end users consume energy. Our infrastructure mostly fills support roles used by companies engaged in production, transportation, storage and processing of energy.

As depicted on this diagram 97% of our assets are economically critical to their operators providing us with long-term contracted minimum rents similar to take-or-pay, reservation fees and minimum volume commitments for MLPs. GIGS diversifies our balance sheet and revenue sources, amounting to about 37% of our total assets post-transaction. We'll cover the Grand Isle Gathering System in more detail on slide 5.

The system includes 153 miles of pipelines connecting 45 offshore production platforms to dedicated onshore storage tanks, separation facilities and saltwater disposal wells as well as connections to pipelines delivering crude to Exxon refineries in the Gulf Coast. We acquired GIGS from Energy XXI which now operates the system as our tenant.

Over 40% of EXXI's producing reserves are associated with the GIGS fields. And Energy XXI's management team refers to these fields as the backbone of their core strategy.

These fields have attractive production economics which supports reserve lives of 20 years. And these statistics are reflected in our lease terms discussed on slide 6.

The minimum rent in the bar chart is based upon production profiles on proven reserves. A nine-year renewal term is anticipated to provide for additional minimum rents which are expected to be based on the production profile at that point in time.

This lease illustrates how the evaluation of renewal risk and upside opportunity are balanced by our team and by our partners. Over the potential 20-year life of the lease the contracted rents are designed to provide both the return of capital we've invested and the return on our capital.

For this reason we do not believe that our dividends can or should include a payout of all the rent received on this asset and as a triple net lease Energy XXI retains operating control of the asset and pays its costs. We believe our economic return is fair to our stockholders and to the Company with upside on a shared basis, aligning our return potential with the risk we assume in ownership of the asset.

Our Chief Accounting Officer Becky Sandring will next provide an overview of our financial results for the second quarter. Becky?

Thank you, Dave. This week we filed our 10-Q for the quarter ended June 30, 2015. For purposes of this call we have provided a few key financial metrics that we think will be helpful to you in evaluating CorEnergy's performance and expectations.

On slide 7 we show FFO as calculated by NAREIT, FFO adjusted to take out the effects of private equity and adjusted FFO. A reconciliation of these measures to net income is provided in slide 14 of these materials.

The second-quarter AFFO of $0.13 per share on a fully diluted basis was consistent with the expected quarterly results provided earlier this year based on our acquisitions in 2014. To illustrate the effect of the GIGS acquisition we are providing a six-month pro forma in the right-hand column.

Assuming a January 1, 2015 close of the GIGS acquisition and related transactions the pro forma AFFO for the first half of 2015 is $0.41 per share on a fully diluted basis. More detailed pro forma information is included in our 10-Q.

As we look at slide 8 our contracted revenues support dividend stability and we are targeting long-term dividend growth of 3% to 5% annually. These graphs show our progress. Total assets have grown substantially with the latest acquisition increasing our portfolio to $697 million as of June 30, 2015.

Contribution margin is a measure of the earnings from our assets and operations and the results have grown along with our assets. Our actual first-half 2015 contribution margin was in line with prior expectations. The updated pro forma contribution margin with the GIGS system included is $42.6 million for the first half of 2015.

The annualized contribution margin on a pro forma basis is approximately $85.2 million. On the right dividends per share have grown.

The Board has confirmed its intention to declare a dividend of $0.15, or $0.60 annualized for the third quarter of 2015. As we look at the annualized pro forma AFFO per share on a fully diluted basis, it is approximately $0.80 per share. Our Board has set our dividend to provide for future debt amortization.

As we look at slide 9 we have an overview of our capital structure and liquidity. We strengthened our financial flexibility in the second quarter and early July. The capitalization as of June 30 is summarized in the top half of the slide.

We now have five tools in our capital structure toolbox: portfolio level debt linked to specific assets, our revolving line of credit, convertible debt, preferred equity and common equity. Two ratios that we pay attention to are the total debt to capitalization ratio which is at 34% and is well within our target range of 25% to 50%. The second ratio is referred to total equity which is well below our target level of 33%.

In the liquidity section we provide information as of July 8 when we closed on our expanded credit facilities. We have strengthened our position following these recent transactions. Our total liquidity of $119.3 million is available for investment and potential acquisitions.

As you review our income statement to calculate the ratio of earnings to combine fixed charges and preferred stock dividends, the coverage of 2.45 in the second quarter should provide some degree of comfort to preferred shareholders. Operating results also adequately covered the common stock dividend.

With that I will turn it back over to Dave.

Thanks, Becky. Slide 10 shows our progress in increasing returns to CorEnergy shareholders over the past three years by making accretive acquisitions that fund growing dividends per share even as we raise additional equity capital. As we mentioned the latest step-up in dividends is to begin with the one to be declared for the third quarter.

People often ask about our pipeline. On slide 11 in our overheard in the corridor conversation I want to reinforce that the opportunity set in infrastructure is large and continues to evolve. We are seeing a robust set of potential future investments for CorEnergy and the opportunity set we're positioned to serve as a real estate investment trust is vast.

America has 2.6 million miles of pipelines, 414 natural gas storage facilities, 642,000 miles of transmission lines and on and on. The need for added infrastructure is also strong and within this universe of opportunities we are seeking owners who would benefit from monetizing their infrastructure while maintaining control over those assets under a long-term lease.

To sum up we've built CorEnergy to provide investors with access to energy infrastructure within an investor-friendly real estate investment trust. We expect the utility-like cash flows generated by our portfolio of assets to deliver sustainable dividend with growth of 3% to 5% a year for the foreseeable future.

We have a good start on that long-term goal having raised our total dividends by 20% since we became a REIT in 2013. The current commodity price environment has had limited impact on cash flows from our critical infrastructure assets. Our rents represent essential operating expenses for our partners and we evaluate each new asset on its ability to continue being necessary even in challenging energy markets.

Our contacts with interested energy companies are growing with each proof of concept transaction for our infrastructure REIT, including the recently completed GIGS acquisition. And we believe this is a good time to put money to work with our healthy balance sheet and flexibility to execute our plan.

Now I'd like to open the line to questions. Operator?

(Operator Instructions) T.J. Schultz, RBC Capital Markets.

Great, thanks. Maybe if you could just comment on just given where equity capital is now if you could comment on the financing environment, if you were to find another opportunity similar to the size of GIGS in that $250 million range just how should we think about your process to potentially finance that transaction in this market?

We're disappointed with where our equity is trading as I'm sure that all issuers in the energy sector are today. The realities of the equity portion of our capitalization would be considered by us in evaluating the opportunity.

So to more directly answer your question, we would have about $119 million to finance the equity portion of an acquisition without needing to go back to the equity capital markets or any other junior capital. That would enable us to then look to the asset itself as a source for additional availability. In using our rough leverage limitations that we've described if it's 33% levered that would enable us to do about $150 million transaction size without needing additional equity foundation.

Beyond that if we did meet equity we'd have to be very circumspect about valuation, about which instruments we might use. The convertible market has received us favorably. Our preferred stock has held in well.

And both of those forms of junior capital would be within our leverage parameters to add to those instruments if it was suitable. So I think we will be very circumspect about how we would do it but we have a lot of flexibility here to execute in the range that we've described.

Okay, that's helpful. I guess just one other thing is I look at GIGS and given the accretion I'm just trying to think of the dividend growth, the pace and it seems like there's room for additional growth. But if I hear you correctly you stepped up now to $0.60, should I think about that as kind of a run rate for the dividends through 2016 which gets you to that 3% to 5% growth and then reevaluate on the next transaction potentially?

Yes, I think that's a very good way to look at it. There is extra room but as Becky mentioned we need to use that extra cash flow to pay down indebtness incurred in connection with the acquisition and husband that capital that way.

So the ability to grow our dividend from the payout ratio that you're observing is limited by our desire to pay the debt down. We do believe that each contract, though, gives us upside and so we don't have to wait an acquisition before we might potentially realize on that upside.

In this environment with the activity level in our portfolio of companies, the main ones being Ultra Petroleum and Energy XXI at the levels they're at, we don't look to have any participating rent payments in the near-term until such time as their activity levels would increase. So most likely the source of dividend increase would be another acquisition. And as I mentioned we've got a lot of availability to execute that without needing to go back to the market.

Okay great, thank you.

Tom McBride, Monetary Strategies.

Hi, Dave, this is Tom McBride up in Des Moines. How are you today?

Hi, Tom.

You mentioned a minute ago the stock price and where it's trading and so on and so forth. Do you think that your Company is just being lumped in with the whole energy sector and MLPs and what's going on there as opposed to really looking at the specific assets that you have in the portfolio? And what would be the ramifications, I don't follow the stock closely but a company like Ultra Petroleum having financial difficulty and so on and so forth, is that a factor?

Well, the energy complex is certainly under stress and investors in our stock are familiar with the energy fundamentals. They've had to be for years now as we focused our efforts into the energy sector. So we're not immune from tenants having stress, but a difference in our posture vis-a-vis those tenants is that we own direct assets that they rely on for some utility-like function and that's part of our underwriting criteria.

So we believe that our dividend is very stable and that even some challenges that the energy sector might experience they would still need access to our assets and we would have a contract that would be honored. So we take a lot of pains around these issues when we make an acquisition.

We are I think not, though, immune from the idea that if there's stress in the energy sector generally that might impose stress on us. But frankly given our risk assessment and claims status from a contract standpoint we believe our dividend is extremely stable even in this environment.

Thanks, Dave.

Selman Akyol, Stifel.

Thank you, good afternoon. A couple of quick things, I know they are small. As it relates to Omega can you just talk about what's going on with the recontracting there for that?

Yes, we have supplied our proposal and we're not aware of any other potential bidders for the contract. But we've bifurcated our proposal between commodity sales in a different way than the prior 10-year proposal was. It's the same service levels, same cost structures but a different response.

That's put them through a delay in confirming that we will receive the contract. However, they've advised us that they want to continue to work with us and they have no intention of repurchasing the assets from us. And so we think it's just a matter of time.

Okay, great. And then on the MoGas Pipeline just thinking a little bit longer term in the reversal of REX coming back, are you having any concerns at all about having LDCs continuing to sign up for capacity on that line at all?

No, in fact the REX reversal is a positive for the LDCs. They have multiple, they have another access point and that line is still the most direct route to the interstate pipelines that serve those LDCs. So we think of it as a positive for MoGas.

Okay, great. I appreciate it. Thanks.

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

One note on a calendar issue as we close, CorEnergy's preferred dividend that was declared for the second quarter is payable on August 31 as originally announced. In the earnings release yesterday we said August 28 but the 31 is the correct date.

Again thank you for joining CorEnergy's second-quarter call. We look forward to speaking with you soon.

Thank you. This does conclude today's teleconference.

You may disconnect your lines at this time. Thank you for your participation.