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Edited Transcript of CORR earnings conference call or presentation 31-Oct-19 6:00pm GMT

Q3 2019 CorEnergy Infrastructure Trust Inc Earnings Call

LEAWOOD Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of CorEnergy Infrastructure Trust Inc earnings conference call or presentation Thursday, October 31, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David John Schulte

CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman

* Jeffrey L. Teeven

CorEnergy Infrastructure Trust, Inc. - VP of Finance

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Conference Call Participants

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* Barry Paul Oxford

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Greetings, and welcome to CorEnergy's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jeff Teeven, Vice President of Finance for CorEnergy. Thank you. You may begin.

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Jeffrey L. Teeven, CorEnergy Infrastructure Trust, Inc. - VP of Finance [2]

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Thank you for joining CorEnergy Infrastructure Trust's Third Quarter 2019 Earnings Call. I am joined today by David Schulte, Chairman, President and CEO; and Becky Sandring, our Senior Vice President.

As a reminder, the presentation materials for this call as well as information included in our press release issued Wednesday and an audio replay of this conference call,, will be available on CorEnergy's website.

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 the 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 on the Investor Relations section of our website. We do not update our forward-looking statements.

Reconciliations between GAAP and the non-GAAP results, which we discuss on this call, can be found in our related earnings release and 10-Q filing.

I will turn the call over to Dave Schulte, who will discuss CorEnergy's third quarter.

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [3]

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Thanks, Jeff.

Beginning on Slide 3. Last week, we declared our 17th consecutive $0.75 quarterly dividend for CORR shareholders. Our team had a productive third quarter, bringing to a conclusion the FERC rate case for our MoGas interstate gas pipeline and taking important actions to further strengthen our capital structure with the offering of $120 million in convertible notes. We have a couple of slides to summarize the outcomes of these 2 events.

On Slide 4, the MoGas pipeline rate case that we've discussed last quarter has now formally finished with final approval from the commission in August of our settlement with all parties, which is effective in September. We gained a couple of additional benefits in the settlement of the rate case, principally that the new arrangement includes 5-year firm transportation service agreements with the -- most of our customers in exchange for modest discounts. So that provides stable revenues through December of 2023. Our long-term contract with Spire runs until October of 2030. The MoGas pipeline supports CorEnergy's model of long-lived energy infrastructure with predictable cash flows.

On Slide 5, we completed a $120 million private offering of convertible notes in August. We used about $64 million of the proceeds plus an issuance of $33 million in common stock to repurchase most of the remaining balance on our earlier issue of convertible notes. And although paid-in capital increased to reflect the issuance of common stock, retained earnings reflects the impact of the loss on extinguishment of debt of just under $29 million. These 2 actions, which we see as balance sheet management, have strengthened our financial position. The benefits to CorEnergy are shown here. We have enhanced our liquidity substantially, and we'll look at those numbers in a moment. We added 5 years to the maturity of the debt instruments since the old notes were set to mature in June of 2020 and the new notes mature in August 2025. In the near term, this exchange removed a limitation on our access to the revolver, which would have occurred in February of next year. The 5.875% interest rate on the 2025 notes compared with 7% interest on the 2020 notes substantially reduces our weighted average cost of capital.

On Slide 6, referring to our financial metrics. The net loss to our common stockholders for the third quarter was affected by the onetime loss on extinguishment of debt as were the NAREIT FFO and FFO for the quarter. However, as you can see, our adjusted funds from operations have remained relatively consistent over the past 4 quarters. The decline in revenue from our December 2018 sale of the Portland Terminal was offset by higher participating rents, higher transportation and distribution margins, and lower G&A expense and interest expense in the first 9 months of 2019. It is our practice to reserve participating rents for reinvestment and debt payment. We set our long-term target AFFO to provide a dividend coverage ratio of 1.5x because our asset's terminal values are driven by the long-lived, but nonetheless depleting reserves that they serve. For the third quarter, CORR's AFFO per basic share suggest a dividend coverage ratio of approximately 1.3x, slightly below our target.

Slide 7 provides an overview of our capital structure, with the main changes coming from the convertible notes offering and exchange in the third quarter. Our total liquidity increased by $75 million over the second quarter level, with $257 million now available for potential growth investments. The amount of convertible bonds outstanding increased substantially, but total debt to total capitalization, at 25%, remains at the low end of our target range. We're eager to put our liquidity to work and are actively assessing assets that fit our due diligence profile.

On Slide 8, we want to comment on the capital markets environment for the oil and gas industry, which is a backdrop for creating opportunities for CorEnergy to get looks at attractive assets in infrastructure. Constraints on equity markets and lending are causing many producers to limit their drilling activity to operating cash flow. When this fall Haynes and Boone survey asked where producers are planning to source capital in 2020, 28% said operating cash flow, up from a year ago. Producers are looking to alternatives, such as debt from private equity sources or joint ventures, while both the public debt and equity markets have virtually dried up. The majority don't expect public equity markets to reopen for oil and gas producers until 2021 or later, so this is creating opportunities to add potential deals to CorEnergy's pipeline for growth.

On Slide 9, CorEnergy's REIT model has been generating attention lately, both in the capital markets and among operators in the energy industry. The table is a summary we've shared many times, which compares CORR's attributes as a REIT versus other energy infrastructure vehicles. Note in the table that REITs share entity level tax characteristics of an MLP, with the shareholder reporting of a C-Corp, including no UBTI or K-1s, as some investment banking and law firms have published presentations recently on the scope of the REIT structure for holding energy infrastructure assets. The reports referred to the private letter ruling that CorEnergy received from the IRS, which broadened the asset types and contract types we can pursue as qualifying for REIT treatment. Their message is that both partnerships and C-Corps should consider using the REIT structure for suitable assets to expand the investor base to include traditional, institutional, tax-exempt and foreign investors. And we began this process in 2011, giving investors direct investment opportunities in energy infrastructure assets while utilizing a REIT structure. This PLR expands that concept, such that the REIT may now look at broad applications of capacity usage revenue streams accompanying those assets that are qualifying. We're very pleased to achieve this recognition.

To sum up on Slide 10, we're in active discussions with several operators seeking transactions that are both accretive and create long-term value for CORR shareholders. We believe we're in a position to complete 1 or 2 acquisitions in the next year in our targeted size range of $50 million to $250 million.

Meanwhile, we continue pursuing measures to strengthen our balance sheet. Our financial ability to complete acquisitions is supported by our liquidity and by our ability to use other funding sources, such as asset level or corporate debt, joint ventures and private placements with institutional investors. As we demonstrated in the third quarter, the capital markets remain open for CorEnergy and our infrastructure REIT business model.

Now, operator, I'll turn it back over to you to open the call up for questions.

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Questions and Answers

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Operator [1]

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

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Dave, real quick, when you're looking at the acquisitions going into 2020, you kind of indicated that you think some more acquisition opportunities will avail itself given the lack of availability of these companies to access the capital markets. Is that what you're thinking right now? Or are you actually eyeballing some assets right now?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [3]

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Barry, we are in active review of actual asset opportunities. The ones that we are most interested in are negotiated transactions that we are originating directly with companies that have -- look like our prior -- our existing portfolio, with assets that are of the type that we previously have acquired. So they would be companies for which those market conditions we described are affecting their capital availability, and they are very interested in considering what alternatives are out there. So we're getting inbounds now, not just outbounds. And we're not talking about simply participating in auctions.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Okay, okay. So the environment is, at the margin, changing?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [5]

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We believe that it is. And we're trying to show the reasons for it on that slide, yes.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Right, right. Yes. Exactly, exactly. And Dave, I think the MoGas -- I mean, that looks like a very favorable outcome. Do you agree with that? Are you happy with it?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [7]

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It's within the parameters we expected, but of course you don't know until you're done. But we are very pleased with the outcome, yes.

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Operator [8]

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(Operator Instructions) Our next question comes from Selman Akyol with Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [9]

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First of all, just -- is there any update on Grand Island (sic) [Grand Isle]? What's going on with GIGS?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [10]

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Not from last quarter. As we described the profile last quarter, the -- we're still in deficit mode on getting financial statements from them, which are required under the lease. But there's no other update than they're paying rent on time. And as we said before, otherwise, business as usual.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [11]

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Got it. And then can you just talk a little bit about maybe some types of assets that you're seeing out there or that you're looking at?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [12]

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Sure. The types of assets that we're viewing today include gathering systems that have upstream connectivity with what we believe to be or we will expect to be long -- relatively long-lived reserves in fields where there's still active drilling taking place and expected to continue to take place. We've -- we have a handful of dedicated refinery support opportunities that are mainly storage-related infrastructure or pipelines. And finally, we have been looking at a handful of downstream assets that have contracts to -- more demand pull contracts like MoGas. Those are very -- in our experience, have been more competitive and have more likely been in auctions. And as we've described in the past, we've seen infrastructure funds be aggressive in those circumstances, but we are looking at those as well.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [13]

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Got it. And then just going back to the gathering. Can you talk about maybe geographically, which parts of the country you're focused on?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [14]

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Really, it's a variety of geographies, Selman. Nothing in an area where we currently have dedicated assets. The -- so there will be other basins that diversify us. And we are open to offshore type of assets that are broader than what we own today. The PLR that we received did include specifically the ability to own production platforms. And so we're open to considering those, but that would be different than our existing GIGS pipeline in both the scope of what they're used for and the number of customers that they're exposed to. So we've got, I would say, diversifying aspects to the upstream basins we're reviewing today.

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Operator [15]

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(Operator Instructions) There are no further questions at this time. At this point, I'd like to turn the call back to Dave Schulte for closing comments.

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [16]

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Thank you, everyone, for your continued interest in our company. And we think we had a very good quarter. And we hope to and expect to continue to deliver similar consistent results in the future.

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Operator [17]

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This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.