CorEnergy Infrastructure Trust Inc (CORR) 2020 Q3 法說會逐字稿

Hello, and welcome to CorEnergy's Third Quarter Results Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Doug, and thank you, everyone, for joining CorEnergy Infrastructure Trust's Third Quarter 2020 Results Call. I'm joined today by David Schulte, Chairman, President and CEO; Jeff Fulmer, our Executive Vice President; Rick Kreul, our President at Mowood and MoGas Pipeline; and Kristin Leitze, our Chief Accounting Officer.

Materials related to this call, such as our press release issued yesterday afternoon and an audio replay of this conference call, will be available on CorEnergy's website, corenergy.reit. Our third quarter 10-Q will also be available on the SEC filings site and on the Investor Relations section of corenergy.reit. The press release and 10-Q include additional non-GAAP metrics and a reconciliation to our GAAP results. We encourage all of you to review our complete disclosures, including both our GAAP numbers and those non-GAAP metrics with the related reconciliations.

We recognize that many of you have questions. And while we are presently at a point that limits our ability to make further disclosures at this time, we will take a few analyst questions at the end of today's call. However, we will not be able to take questions on any potential acquisition activity details nor about our efforts to resolve rent due for our GIGS asset.

Finally, I would like to remind everyone that 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 the 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 on the Investor Relations section of our website. We do not update our forward-looking statements.

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

Good afternoon, everyone. Thank you for joining us on the call today. The Election Day is a good moment to talk about where our company is headed. We believe that we have an opportunity to exit this challenging year by deploying our balance sheet liquidity into new dividend-generating assets, resetting our platform in a position for growth. Those efforts are well along in the process, and we believe that we're on track to meet our goal of announcing a transaction that will bear fruit for our stockholders in 2021 and beyond. And before I cover more information about our future, let's start with a few comments about our current asset portfolio.

Our MoGas and Omega assets continue to perform in a steady, predictable manner as we expect regulated assets of this nature to do. For Omega, we continue to enjoy a strong working relationship with the Department of Defense at Fort Leonard Wood in South Central Missouri. We've been on post since 1991 and are currently in our third 10-year contract period with more than 5 years remaining on the current contract. This is a large army post, with 30,000-plus soldiers and civilians on-site in any given day. The DoD continues to invest in the Fort with projects that will need increased support from our system, examples include a new large VA regional hospital currently under construction, gas-fired cogeneration facilities and other new buildings and facilities that need natural gas. We also just installed and commissioned a new propane air plant to provide energy redundancy.

For MoGas, population growth in the areas MoGas serves is driving the need for additional capacity and facilities with Ameren and Spire Missouri. We recently signed an additional 10-year 6,000 Mcf per day agreement with Ameren, and we completed an additional delivery point with Spire Missouri in the suburbs of Western St. Louis, our 12th such delivery point with that customer. We are presently engaged in the construction of a new interconnect with the St. Louis pipeline, the STL pipeline, with completion expected in a few weeks. We are pleased to announce that this interconnect enabled us to sign a new 10-year transportation agreement with Spire Missouri that will more than double Spire's capacity on MoGas. We continue to operate safely with no effects from COVID-19 virus and well within DoT and Missouri PUC requirements.

Turning to the Grand Isle Gathering System, the refusal of the payment by our tenant there earlier this year pertained in large part to the unprecedented disruption in oil pricing brought on by the global COVID-19 pandemic. Our efforts to achieve resolution in the third quarter were hampered by a difficult series of events affecting Gulf of Mexico production, including continued price volatility, business events related to other shippers on the system and multiple tropical storms and hurricane events, resulting in temporary production shut-ins. Most recently, Hurricane Zeta crossed our assets on October 28, and we are awaiting more details on the degree of damage. However, our triple-net lease specifically addresses all of these scenarios and states clearly that the tenant is obligated to maintain the asset and to pay contracted rents. While we work toward resolution, the rent is due each month and continues to accrue.

Now turning to the future and with reference to our forward-looking statements qualifier, our balance sheet is strong with approximately $100 million in cash at quarter end. With this cash and our bank line plus potential target asset financing, we believe CORR can execute new acquisitions in excess of $200 million in size with our resources on hand, enough to make significant headway in rebuilding our dividend-paying capabilities for all of our stockholders. We believe there is support for even larger transactions from equity sources if it is beneficial for existing stockholders. I shared on our last call that we were engaged in diligence on new opportunities for acquisition, and our P&L this quarter shows nearly $1 million in diligence-related costs as we continue to advance our work on this important goal. While there's no assurance that a specific transaction will come to fruition, it has been our goal since the summer to complete an acquisition by the end of the year. Our progress to date, again, gave the Board confidence to approve the issuance of both the preferred and common dividends for the third quarter. While I cannot share details of the particular transaction today, I can give you additional insight into the framework we're applying in the acquisition work we have undertaken.

Our primary goal is to acquire additional operating assets analogous to Omega and MoGas, with the benefit of our private letter ruling, thereby establishing CorEnergy as the lowest cost midstream platform in the United States. We expect to acquire assets that generate access and uses from customers of pipelines, storage facilities and related infrastructure and provide the highest level of resulting dividends to our shareholders in the tax advantage structure. And the REIT structure provides a very real advantage over MLPs and C-corps. Like an MLP, there is no entity level tax, but like a C-corp, institutional investors can get a Form 1099, the best of both worlds for CORR assets and for access to capital. But since REITs are not limited to oil and gas, I should be clear that our company can also consider opportunities to expand into different asset categories we've not previously owned, such as renewable energy distribution or similar functioning assets.

Regarding the momentum to transition to renewable energy, some of you asked questions about this given the news coverage, so let me share a few thoughts from industry experts. We believe that no matter which party controls the White House or Congress, there's a vital continuing role for hydrocarbons to support the economy in daily life. More importantly, we believe this role will last many decades even with a transition to alternative fuel sources. As a reference point, the IEA forecast oil and gas demand continuing to make up half the global energy mix in 2040. And in that scenario, they've modeled requiring sustained government subsidies for alternative energy sources. Putting this into a practical example, electric vehicle mandates have gained a lot of attention lately as a way to reduce dependency on hydrocarbons, however, electric-generating and distribution grids lack the capacity to meet the required increase in demand that would accompany this transition. We've already seen many stories and news about these deficiencies and their negative consequences. With decades of government-subsidized investment and construction necessary to make the grid and generate capacity suitable for a transition to electric vehicles, hydrocarbons will continue to be required during and even well beyond a possible transition, even in the best case scenario. We believe this practical reality generates a rich opportunity set for CorEnergy that we believe can result in favorable shareholder outcomes for the next 20-plus years.

Now our acquisition framework will continue to consider assets, which provide critical, hard-to-duplicate services to numerous counterparties, and we have a long-term goal for our platform to diversify our portfolio into assets across energy commodities and geographies and across the value chain from producers to consumers. While 2020 has been a difficult year, we're striving to reset our foundation with dividend stability as our primary shareholder objective while pursuing asset growth to add diversification and scale to our platform. In summary, our diligence and negotiation work over the past quarter has reinforced our conviction in the competitive advantage of our platform. We believe this will set the stage to rebuild our dividend-generating capacities in 2021 for all of our stakeholders.

In closing, I'd like to thank the CORR team for its hard work through this difficult time and thank our stockholders and bondholders who have patiently continue to support our work during these challenging periods and have expressed confidence in our business model and in our ability to rebuild.

At this time, we'll open the call for questions for analysts, but anybody is free to call into our Investor Relations line at any time. Operator?

(Operator Instructions) Our first question comes from the line of Barry Oxford with D.A. Davidson.

Great. Dave, quick question on the receivables on GIGS. Where does that stand right now?

The total amount that's accrued to date is approximately $30 million. However, we're at this time only according receivables that we receive in cash -- or revenue, excuse me, receiving cash. So we're not accruing the lease payment with the revenue recognition associated with that.

Right, right. And as much as you can tell, what might be the time period that happens before resolution, whatever that might be, but how long do you kind of foresee this? Is this a 6-month period, is it a year period, is it an 18-month period? I know it's a tough question to answer, but when you're huddling up with your lawyers, what are you guys foreseeing at this point?

Well, Barry, we -- I appreciate the question, and it's certainly a sensitive one for our management team...

Right. I'm just trying to ask a question more in general terms and not get too -- I'm trying not to get too specific. I appreciate the situation that you're in.

So the circumstances that gave rise to the tenant not paying have really not abated throughout this year. And whether it's commodity volatility or shut-ins, which caused shut-in or other shut ins, we have been exposed here to unprecedented circumstances and as have they. So what we've decided to do is hold our -- put our litigation on hold while we tried to work something out. So that was a public announcement last quarter, and that has not changed. Fortunately, we're past hurricane season, knock on something, but we can't predict whether there's incremental volatility in other areas that would continue to hamper Gulf of Mexico production. So generally speaking, we're -- it's a top priority for us.

Do you sense that there's a willingness for them to want to pay back rent? Sorry, is that too sensitive? It might be too sensitive.

We're not going to comment on any specific element of the current state of litigation.

Right. Right. Appreciate that. Appreciate that. When you indicated that you could do an acquisition in the $200 million range, is that what I should take from your comments?

Yes.

Okay. And when you're looking at acquisitions, you mentioned kind of midstream pipeline or storage. Do you have a preference at this particular juncture between a pipeline or storage or look very -- as long as both of them are a good deal that maximize shareholder return on indifferent?

We are very sensitive to our diligence path, confirming what we think is a reasonable risk-adjusted return potential for every acquisition we look at, and we've looked at dozens over the last 3 or 4 years. And so where we have the opportunity to own both storage and pipelines, we think diversification is important for our platform. Right now, of our operating assets, we're natural gas-focused, so we look to try to diversify. But we're still small enough today that we could -- diversification is a long-term goal, not necessarily built for our next acquisition. So the nice thing is we have an opportunity to own all of the above from a legal standpoint and a contract standpoint, and what -- we have the luxury to do is try to make sure that we're looking out for our shareholders' best interest no matter which way we go.

Right. And David, if the other party wanted to move quickly, you guys are prepared to move as quickly as they are, is that a correct statement?

We are. We've...

If you closed an acquisition, they -- go ahead.

Yes. No, so our team is very focused on being prepared to evaluate all phases of an acquisition. With the expertise of our team, including upstream engineering, midstream process operations experience and downstream chemical engineering experience, we're ready to react in commercial terms as soon as possible, and our REIT qualification evaluation is a pretty well-honed process at this point. We've been together 10 years as a team. We've reviewed -- has to be over 100 different acquisition opportunities. Many of those get to the level of review with our outside experts, so we need to provide opinions. And so we believe we've got a very efficient review process as far as qualification of the assets and revenue, so that's not usually going to be a constraint to our ability to close. And then we've got to confirm with lenders that their availability on the assets we're looking at is a level that's prudent and that our drawing online would be prudent as well. So there are many parties involved in any particular acquisition evaluation, we need to check yes on all of them.

Got you. That all makes sense. Appreciate the comments, David, and good luck to getting this closed, and I'm sure you're well on your way. You don't spend a million bucks for no reason, would be my guess.

Thanks, Barry.

We do have a question from the line of Selman Akyol with Stifel.

A couple of quick clarifications. So just as I think about this, and I read the press release and everything, you're looking at -- or you're closer to sort of 1 acquisition, right? I mean you kind of highlighted a number of things you could look at from sort of your structure standpoint, but you're really just looking at 1 acquisition. Is that the correct interpretation?

Selman, I think we have been looking at several different acquisitions coming from earlier this summer. I think at this point, we're honed in on 1 that could include several different assets inside of it. So it's not to say it wouldn't be -- have some diversification with it potentially, but we need to get 1 across finish line.

Fair enough. And I appreciate that. And then you also highlighted and sort of reiterated in the last question that, sort of an acquisition, the $200 million range. So should we think of it as something in that size of something greater than $100 million?

Well, $100 million is what we would invest in the equity, so you would think that we could do more than that, whether it's 1 acquisition or a handful within a reasonable amount of time. So I think it's reasonable to consider that our balance sheet today can support $200 million in acquisitions without any incremental equity.

Okay. And then just kind of going back to GIGS real quick. You referenced the hurricanes. And I know previously, I mean, there's been other hurricanes, things have come through without damage. Are you giving some sort of indication you expect damage on the system at this time?

Dave, you want me to take that?

Yes. Sorry, Jeff Fulmer. Go ahead.

Hey, Selman. So there's been 5 named storms that have hit L.A. or Louisiana, and we have looked at them all. And some of these have wiped out temporarily 80% of Gulf of Mexico production for a week or 2, and other ones have had little damage. But this latest has -- it was a category 2, is that it hit in October 28. The advantage to it is that it was quick moving, and so it involved less flooding, but we're still waiting on details. But you can contrast that with Hurricane Laura and where we had more details on and there was minimal damage and that involved -- that was a category 4 that included a lot more flooding.

There are no further questions in the queue. I'd like to hand the call back over to Mr. Schulte for closing remarks.

So thank you all for joining us today. As a reminder, feel free to call our Investor Relations line if you have any further questions. We're working hard to bring these various efforts. We discussed 2 successful conclusion for the benefit of all of our equity and debt holders. And in addition to our quarterly reports and periodic press releases, we will be participating in a few upcoming investor events this month. We'll hold meetings on November 17 at REIT World, we'll participate in an RBC Conference on November 18, and we'll host meetings in a group session at the Sidoti Conference on November 19. So that's a busy week for us, and we're available. All of these events will be virtual, but we'd be more than happy to set a meeting with anyone that's attending these conferences. And so to schedule a meeting, please coordinate through 1 of the firms or, again, contact our Investor Relations team. Thank you, everyone, and have a good afternoon.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.