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Edited Transcript of CORR earnings conference call or presentation 2-Mar-17 7:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 CorEnergy Infrastructure Trust Inc Earnings Call

LEAWOOD Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of CorEnergy Infrastructure Trust Inc earnings conference call or presentation Thursday, March 2, 2017 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lesley Robertshaw

CorEnergy Infrastructure Trust, Inc. - IR

* David Schulte

CorEnergy Infrastructure Trust, Inc. - President and CEO

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Conference Call Participants

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* Michael Zuk

Oppenheimer & Co. - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to CorEnergy FY16 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to Lesley Robertshaw, Manager Investor Relations for CorEnergy. You may begin.

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Lesley Robertshaw, CorEnergy Infrastructure Trust, Inc. - IR [2]

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Thank you, and welcome to CorEnergy Infrastructure Trust's FY16 earnings call. I'm joined today by David Schulte, CEO and President; Rick Green, Executive Chairman; and Nate Poundstone, Chief Accounting Officer. 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.

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 and are subject to the Safe Harbor protection, available under 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 can be accessed through 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. At this time, I would like to turn the call over to President and CEO, Dave Schulte.

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David Schulte, CorEnergy Infrastructure Trust, Inc. - President and CEO [3]

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Thank you, Lesley. Slide 3 of the presentation materials, we outline a number of recent developments for CorEnergy. January, we declared a $0.75 dividend, consistent with the prior four quarters. The bankruptcy case for Ultra Petroleum continues to progress, and as previously reported, our tenant assumed the Pinedale LGS lease with no economic changes in November.

The parent company of our Grand Isle Gathering System tenant, Energy XXI, successfully emerged from bankruptcy at the end of December. The new name Energy XXI Gulf Coast. All great news.

Today, we are also announcing an amended agreement with Laclede Gas for transporting natural gas on our MoGas pipeline in eastern Missouri. This new agreement changes the annually renewable option with 13-year agreement ending October 31, 2030, and holds Laclede's firm transportation capacity on MoGas at its current level. However, in exchange for the long-term contract, Laclede will be receiving a lower rate for that capacity, beginning in November 1 of 2018.

The first affected year is basically two years away, and we will talk further about that contract on the next slide. Our confidence in the opportunities to mitigate that rate differential part in 2019 on MoGas, plus the posture of our leases, following the tumultuous year of 2016, enables us to confirm that we expect our dividend to remain intact at no less than $3 annually through 2017, subject to adverse but unforeseen consequences or circumstances from here.

Now, since it is a material asset, we want to focus the discussion on the reasons for the new contract, and slide 4 may help. It is a map that shows the connectivity of the MoGas pipeline, both with interstate pipelines, as well as with the LDC Laclede. The contract was renegotiated in response to changing market conditions affecting midcontinent gas supply.

In January of 2017 of this year, the Rockies Express pipeline, REX, announced the completion of its pipeline capacity enhancement project, which allows us to flow less expensive natural gas from the Appalachian Basin westward, with zone 3 delivery points, western Illinois and eastern Missouri. This development, plus additional pipeline and Basin developments, has cause gas companies, such as MoGas shippers, to consider sourcing supply from REX in the Eastern US, in place of Western and mid-continent supply, which has been the mainstay of MoGas volumes, and that is depicted on a large callout chart.

The amendment with Laclede would result in a future reduction in revenue of $4.5 million annually for MoGas when the reduced rate becomes effective in November 2018, if we were able to take no actions to offset the rate reduction. However, over the next 20 months, we will act on several such opportunities, including potential pipeline extensions, leveraging MoGas's multiple pipeline connections depicted in the map, exploring different supply basin optionality, and other revenue enhancement strategies, which we believe will offset at least $3 million of that decline in revenue. Furthermore, we view the extension of the agreement with MoGas's largest customer from an annually renewable contract to an agreement with a term of more than 13 years as consistent with our strategy and the other assets that we own.

On slide 5, we will discuss how our strategy paid off during the challenging environment in 2016. Now, both 2015 and 2016 were challenging years in the energy sector, due to significant declines in volatility in commodity prices. However, CorEnergy's investment strategy, as well as our reaction to the events in 2016, allowed us to validate our thesis of infrastructure as a durable asset class at our place in that asset class.

Along the left-hand side of the chart on slide 5, you see CorEnergy's underwriting criteria we established back in 2012, when we first sought shareholder approval to become a real estate investment trust. Firstly, we invest in assets which have long useful lives, and that we believe are critical to the operations of the tenants utilizing them. These assets are strategic and cannot be easily bypassed or re-created in an economic fashion. And we include provisions in our leases to prevent tenants from taking such actions.

Our contacts support predictable revenues, which have limited sensitivity to direct changes in commodity prices or volumes. And the rents we receive are treated as operating expenses for our tenants, which are senior to their debt payments, for the real estate lease has been a senior priority in bankruptcy.

These elements allowed us to endure these bankruptcies the parent companies of two of our tenants, Energy XXI, which has since exited bankruptcy, and Ultra Petroleum, which accepted our lease and continues to work through their process. On the other hand, our investments in financing notes for the two saltwater disposal assets did not pass the test of 2015 and 2016.

Those investments, while small, were not sufficiently critical to upstream operators, or they had significant, albeit indirect, commodity price exposure. We had to suffer losses and restructure or sell those assets, and we do not plan to make similar investments in the future, and in turn waived portions of our management fee so that our management company was not being paid for not performing assets and demonstrating the pulse alignment of the management contract with the interest of our stockholders.

In the bottom portion of this chart denotes fundamentals of CorEnergy's overall corporate and financial strategy. These include responsible capital raising and utilization and maintenance of the low leverage profile. In the early part of 2016, our share price was suffering, and also we did not want to lever up the balance sheet in order to transact.

At the same time, we did have liquidity, and we repurchased common shares and convertible debt when possible. Our conservative financial structure also allowed us to refinance our Pinedale credit facility in the first quarter of 2016, which was not renewed, due to the UPL bankruptcy, by using capacity we had created under our existing revolver at the corporate level. And to tie each of these events together, our Management team reacted to these activities with the intent of the defending our dividend, thereby delivering on our promise of demonstrating the infrastructure asset class for our shareholders, and aligning our interest with theirs.

These elements all contributed to our success in enduring 2016's challenges, and they will continue to be the foundation of our Company in 2017 and beyond. On slide 6, we provide an update to a chart we provided a year ago in year-end call, which outlines our major assets and their tenants. These assets are the products of the investment fundamentals we discussed.

As you can see, they are all critical to their tenants or customers. Looking at the bottom line, the last line, our two largest assets, the Pinedale Liquids Gathering System and the Grand Isle Gathering System, differ from our other large assets in that they have finite lives, based on the decline in commodity reserves over time in the fields where they are located. We discussed this aspect of our leases as they are impacted by these declines as a key factor in crafting our lease, as well as determining our dividend policy on the that slide.

A legitimate concern for investors is how we value assets that do have terminal value decline risk, due to their dependencies on specific upstream oil or gas reserves. If not properly managed through our investment underwriting and our lease structuring, this would be a valid concern, that at the end of our lease the value of our assets could be zero and the tenant would not even renew after the first term.

On slide 7, we do provide information on the lives of the reserves in the field that our tenants operate, based on information provided by those operators, as well as on our own views, we believe demonstrate that the long-lived nature of our assets are based on significant value and longevity of the related reserves. As we have discussed, and we believe it has been demonstrated through endurance and the tenant bankruptcies, our assets are critical to our tenants' revenue-generating activities or their operations. That, coupled with the reserve inventory and well lives in the fields where our assets are operated, supports our view of the long-term value and the utilization expectations of our assets, well beyond the initial lease term.

When acquiring our assets and setting our purchase price, structuring the timing of the rents we charge, we consider field research reports and the market value of similarly-situated assets. We monitor the value of our assets, the operations of our tenant, and the reserve in production in the fields in which our assets are located throughout the term of our lease.

An update to this assessment will occur again at the end of the lease, considering the same factors, at which time the tenant can either renew the lease at share market value or purchase the asset at fair market value. The tenant cannot take actions during the term of the lease to diminish that value without compensating us for having done so.

We also include provisions in our leases for participating rent. Participating rents provide additional protection in the form of higher rents and cash flows in the event the tenant's production exceeds certain thresholds. As faster production or exploitation of the resources may shorten the economic life of the asset, participating rents are necessary to protect our investment and provide economic alignment with operations that our tenant actually conducts in the field.

Furthermore, CorEnergy retains certain levels of cash flows from these assets in order to redeploy them in new investments, including debt amortization. We view this as the return of capital from our investment over the estimated lease terms, including renewals. Remaining cash flows are paid to our shareholders through dividends. We believe our dividends, therefore, constitute only the return on capital we believe to be sustainable.

Moving to slide 8, we present our per-share financial metrics on a quarterly basis for the past year. Adjusted funds from operations, or AFFO, has remained consistent at approximately $1 per quarter through 2016. Again demonstrating the resiliency and stability of CorEnergy's performance, even in a volatile commodity market.

Our dividend has remained at $0.75 per quarter, or $3 annualized, since acquiring the Grand Isle Gathering System. CorEnergy intends to continue paying this level of dividend, pending any adverse outcome from Ultra Petroleum's bankruptcy, but at this time, again, we do not foresee any negative events associated with our lease occurring.

As mentioned earlier, the MoGas pipeline will receive discounted revenue from Laclede, beginning in November of 2018. We are confident over the next 20 months, CorEnergy will be able to significantly offset this reduction, as we mentioned, for a number of initiatives. We do not anticipate any dividend cut associated with this new agreement, nor are we recognizing any impairment of the asset, unlike we did with our disposal well investments. We further believe that any remaining shortfall in MoGas revenue by the time we get to 2019, just two years from now, can be made up with accretive acquisitions long beforehand.

So, let's turn to our financing capacity on slide 9. CorEnergy's leveraging coverage ratios remain well within targeted ranges, and we are compliant with our debt covenants. Our total debt to total capitalization ratio of 33.4% is well within our target range of 25% to 50%.

And our total preferred to total equity ratio of nearly 14% is well below our target of 33%. Indicating capacity to issue additional preferred.

At the end of 2016, CorEnergy had approximately $52 million of availability in its line, plus unrestricted cash of $8 million or a total of $60 million of liquidity. Assuming a one-to-one debt equity ratio, we could acquire nearly $200 million of additional assets by using that preferred equity as a funding source, plus drawing our line of credit.

With this in mind, let's turn to slide 10, which discusses our outlook for 2017. During last year, we found ourselves focused on the bankruptcies of our two largest tenants. Based on the events in the energy sector and the status of our leases, we did not believe it was a sensible time to raise capital, pending the outcome of those proceedings, or lever up, pending the outcome of those proceedings to do an acquisition.

Now, in 2017, we are excited to again focus on growing our portfolio of assets. Our team is a assessing a number of opportunities, and we anticipate transacting on one or two of them this year. Based on our current size, our sweet spot is $50 million to $200 million per project.

We have several ways to raise that capital. In addition to the cash in availability on our credit line, we could secure bank debt to purchase assets, we have partners to potentially co-invest in projects with us, which could provide us with opportunities to transact on an even larger scale. And finally, with the energy markets recovering, accessing debt and equity markets has again become a viable option.

(Inaudible) the call, we'd like to thank everyone for their continued support during 2016. CorEnergy has long maintained the focus of providing our investors with stable and growing dividends, and we were able to do so during a period of great industry tumult. We remain well-positioned with critical assets, supported by long-term contracts and ample liquidity options for future transactions.

Moving into 2017 and looking forward rather than backwards, we are refocused on growth initiatives and excited by the potential deals we are seeing in our pipeline today. Operator, please open the line for any questions.

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions).

Our first question comes from the line of Michael Zuk from Oppenheimer. Please proceed with your question.

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Michael Zuk, Oppenheimer & Co. - Analyst [2]

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Good afternoon, Dave and Rick. Just a question on potential future investments. Can you give us a little color on what they might be if they would be outside the traditional pipeline delivery system?

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David Schulte, CorEnergy Infrastructure Trust, Inc. - President and CEO [3]

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Mike, I think that in answering what might lie in front of us, it actually is, in this case, helpful to look at what we have already done as the best way to think about it. We can own, as a real estate investment trust, passive assets.

We think of them as conduits, like a pipeline, or vessels, like storage. And virtually every asset we have has one or both of those attributes. The GIGS, for example, has pipelines, as well as onshore storage and terminals.

So, the other attribute I think is important is that those facilities are critical to upstream operators. They're infrastructure assets that are supporting upstream production, and during times of distress, as we have realized, those assets are necessary for the production of revenue for the upstream companies, and therefore have critical economic functionality. They, however, may not may be best used solely by the operator.

In other words, the control of those operations is important to the incumbent tenant. So, we believe that the best predictor at this point of future asset acquisitions is looking at what we have been successful at in the past, and enabling upstream companies to better utilize their limited capital, their limited margin dollars, in more productive CapEx than owning their infrastructure assets.

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Michael Zuk, Oppenheimer & Co. - Analyst [4]

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As a slight follow-up, have you thought about expanding into maybe assets that would be in the power transmission or delivery system outside of oil and gas?

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David Schulte, CorEnergy Infrastructure Trust, Inc. - President and CEO [5]

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The first asset we purchased in the restructure, actually, was an electric transmission line in New Mexico. And at the end of that lease, the incumbent utility wanted to own 100% of the asset back, so we sold it back to them.

We have found that acquiring those assets is challenging, given the relatively low risk profile and rate-based nature of those assets to utilities. And so, we have been focusing on assets where we can be more impactful to the operator, and we haven't found as much interest by regulated utilities in selling their transmission and distribution to us. So, as much as those assets are coveted, unlikely that we would be successful in those undertakings, Mike.

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Michael Zuk, Oppenheimer & Co. - Analyst [6]

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Fair enough, then. Thanks for the answers.

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David Schulte, CorEnergy Infrastructure Trust, Inc. - President and CEO [7]

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You bet. Thank you.

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Operator [8]

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(Operator Instructions)

There are no further questions in the queue. I would like to hand the call back over to Management for closing comments.

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David Schulte, CorEnergy Infrastructure Trust, Inc. - President and CEO [9]

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Well, thank goodness 2016 is over. We are very excited to be looking forward again in 2017, and frankly, I've been asked many times what keeps you up at night; 2016 kept me up at night for a year. And it is good to have had that behind us.

But also, the conviction of resilience of our revenue streams now being proven is also, I would think, a great benefit for our stockholders. It certainly is for us. Thanks, everybody, and we will talk to you again at the end of the first quarter.

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Operator [10]

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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.