CorEnergy Infrastructure Trust, Inc. (CORR) Q4 2013 Earnings Conference Call March 20, 2014 2:00 PM ET
Greetings and welcome to the CorEnergy Fiscal Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Katheryn Mueller, Manager of Investor Relations for CorEnergy. Thank you. Ms. Mueller, you may now begin.
Thank you and welcome to CorEnergy Infrastructure Trust’s fiscal 2013 earnings call. Im joined today by CorEnergy Chairman, Rick Green; CEO and President, Dave Schulte; and Treasurer and Chief Accounting Officer, Becky Sandring. An audio replay of our conference call and information included in our press release issued Monday, as well as the presentation materials for this call, are available 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 managements 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 applicable securities law. 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 CorEnergy President and CEO, Dave Schulte.
Thank you and welcome to the CorEnergys fiscal 2013 earnings call. CorEnergy delivered another year of stable performance reflecting the quality of our assets and providing our shareholders with reliable cash dividends at a growing rate. Our investments in pipelines and electric transmission provide us with stable contracted revenue supporting our distribution. I want to focus on today is how we’re positioned to grow that distribution, and we think we have three means of doing so. Internal contracted revenue growth, capital funding for projects that we own today and new projects which we can buy or build for 10 years which are only done if it’s accretive for our long-term growth prospects. Now when you combine the low risk long-term contracted cash flows in our portfolio, with the growth potential from our positioning in the energy sector, we believe Cor offers investors a compelling opportunity to gain access to US energy infrastructure assets in a transparent tax efficient vehicle with a 1099 can be owned in any account and we’ll highlight those concepts in our remarks today.
On Slide 3, CorEnergy has come a long way in its short history. It was just June of 2012 that we became self eligible, providing a path through capital formation to start our refinancing in earnest. At the end of 2012 we completed the transformational acquisition of a Liquids Gathering System in the Pinedale Anticline executing an operating lease with Ultra Petroleum. We then built out our management team in 2013 and that effort has resulted in our ability to source and consummate additional transactions including two more since year-end.
Our other 2013 accomplishments include, increasing annualized dividend guidance. We went from $0.44 a share in 2012 to $0.50 per share annualized in 2013. Our Board of Directors have confirmed their intent to agreed to management’s recommendation to increase the dividend to $0.52 for 2014, that’s a 4% increase over the prior year run rate and an 18% increase overall run rate as a BDC, before we transitioned to a REIT. We established a $20 million line of credit of which we have approximately 5 million immediately available to provide short-term acquisition financing if need be. We made a formal election to be treated as a REIT for the 2013 tax year. And lastly we’ve expanded our asset platform and opportunity set with two new transactions subsequent to year-end. We funded the acquisition and upgrading of a petroleum products terminal on the West Coast and provided acquisition and construction funding for three saltwater disposal properties in Wyoming’s Powder River Basin and Green River Basin.
In our 2012 portfolio of assets, I want to provide concrete illustrations of our strategy and action. On Slide 4, we depict the assets we currently own and measure each asset against the investment criteria we set out. As you can see, all of the investments and their operating characteristics are consistent with our target criteria, which we utilize as a risk mitigation strategy in putting our portfolio together. Starting with the Pinedale LGS, it has 14 years of remaining lease contract providing reliable revenue for CORR with potential rent growth through CPI adjustments and volume participation features. The CPI adjustment will contribute to 2014 revenue at CORR and that allows us to be patient to our expectations for that volume growth portion of the contract. This contract illustrates below direct commodity price sensitivity of our revenue stream supporting our dividend payout. Now we would expect to pay out any meaningful CPI-based growth, but consider participating revenue to be additive to our coverage and only paid out if it’s sustainable. And with the CPI escalation alone, our rents have the potential to increase significantly over the next 14 years.
Our EIP and Mowood are utility-based assets that also offer potential for upside. The EIP lease had a fair value purchase option that favored PNM, which when they exercised it resulted in our realization of a total return of 7% over the life of this low risk investment. Not a lot of upside but very low volatility. Omega’s sales revenue was higher in 2013 largely however attributable to overall cooler temperatures and therefore higher gas volumes in 2013 compared to 2012. Mowood also has 15% higher operating results than originally expected due to higher margins from construction projects that were completed during the year. These construction projects result in added assets on which we earn fees representing incremental growth potential.
And the Portland Terminal has ample storage capacity in a very desirable West Coast location. So we have a long-term lease with fixed-based rent payment plus participation in volume growth and we’re funding the upgrading and optimization of the facility — let’s see Arc Terminals is in-charge of the project, has a track record of successful value creation in the terminalling business which you can read more about in our SEC filings.
Our newest asset is the secured funding for Black Bison which provides water disposal services to upstream companies. While well volumes are less predictable in this business our structured financing provides us with 10 years of regular payments and increases based on activity levels at the well sites. Water disposal is an economically critical activity for production from shales and is a sane driver as we have underpinning the Pinedale LGS system, moving the water in an environmentally sensitive manner is a required activity for the production of oil and gas.
On Slide 5 we want to highlight the successful completion of our two most recent transactions Portland Terminal and Black Bison with some added information. In mid-January we raised capital efficiently to finance the $40 million acquisition of the Portland Terminal facility. We’re also funding a near-term optimization project in the range of 10 million. And this asset is in our sweet spot of sizing, where we were able to structure a long-term lease with flexible terms to meet the needs of our tenant while providing upside in the form of participating rent. Now although we have an ownership interest in the GP of our tenant, we want to assure our investors that we provided a competitive financing option for them, and that the other owners of the GP, are sophisticated energy companies and funds all which are disclosed in Arc Logistics’ public reports.
In March we closed the transaction to finance Black Bison’s acquisition of saltwater disposal properties and related capital improvement projects. The financing is secured by three water disposal properties serving oil and gas producers in the Powder River Basin and the Green River Basins in Wyoming. We have a 10 year secured financing which is a facility initially sized at 11.5 million with a base interest rate of 12% per annum which escalates every year at 2%. A variable interest component initiates after the first year contingent on volume at the well site. Additionally, the Company will purchase, or did purchase at closing, a 15% equity option in Black Bison, enabling that company to retain control, accounting and tax benefits of ownership of this network of related assets. And Black Bison’s opportunity set provides another enhancement to our growth prospects as we hope to finance their future growth.
Now that concludes our update on our portfolio of assets. And I want to take a step back just to reflect on the broader market opportunity available to CorEnergy. On Slide 6 you will see what we think is a significant driver of future growth. The renaissance in the energy sector currently underway in North America is depicted on this map. There are vast oil and gas production regions in dark green and light green which are occurring in new areas not previously exploited. The capital necessary to support moving that production from where it’s found to where it’s used are significant as are the pipeline networks illustrated by the arrows on that map. Our colleagues are Tortoise Capital Advisors project 100 billion plus in MLP pipeline and related projects through 2016.
In this capital thirsty market we provide a differentiated funding source for companies that want to retain control over their infrastructure, but prefer to dedicate their capital to higher returning projects. The Portland Terminal and Black Bison saltwater disposal assets are examples of assets that provide critical links in the supply chain. The Portland Terminal is capable of receiving, storing and shipping petroleum products from truck, rail and ship. The Black Bison water disposal assets are necessary parts of the production of the commodity and need to exist as long as the wells in the fields are producing oil and gas. Both of these assets provide CORR with long duration cash flows and with participation features providing visibility and dividend growth and opportunities for additional capital expenditures for us to fund for the continued optimization of those assets.
And with that, I’d like to turn the presentation over to our Chief Accounting Officer, Becky Sandring for an overview of our financial results.
Thank you, David. This week we filed our 10-K and issued a press release highlighting our financial results for the fiscal year ended December 31, 2013. The financial information presented in the 10-K should be considered in its entirety. For purposes of this call, we have provided you with a few key financial metrics that we think will be helpful to you in evaluating CorEnergys performance going forward.
Because the majority of the Company’s assets are now re-qualifying 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 CorEnergy’s operational performance. FFO for the year ended December 31, 2013 totaled approximately $13 million or $0.54 per share. AFFO for the quarter ended totaled approximately $12.7 million or $0.52 per share. These measures are after payments made to our non-controlling interests that were applicable to our common shareholders.
In the MDamp;A we have provided results from operations in a revised format that management believes provides additional information related to the Company’s operational performance. Turning to pro forma column on Slide 7, we have assumed the completion as of January 1, 2013 of the Portland Terminal acquisition. The pro forma column includes the purchase of the Portland Terminal facility, execution of the Portland lease agreement and the sale of 7.5 million shares of our common stock which includes shares issued in the over allotment option. On a pro forma basis FFO totaled approximately $18 million or $0.57 per share and AFFO totaled approximately $17.5 million or $0.56 per share. Due to a shift in our calendar year-end, our fourth quarter dividend of $.0125 was declared on January 3, 2014. Going forward, we anticipate making four dividend payments in each calendar year, starting with 2014.
The graph on Slide 8 showing total revenue and dividend distributions or detections of CorEnergy’s recurring sustained performance quarter-over-quarter. With privately held investment securities now representing less than 10% of our asset portfolio, we believe that in 2013 sequential comparisons rather than prior year comparisons are more relevant to assessing dividend payments. The fourth quarter dividend was again supported by steady and recurring revenue streams from our asset portfolios. The graph showing total assets illustrates the growth of our asset portfolio. The increase in 2012 and pro forma 2014 are results of our Pinedale and Portland acquisitions. We continue to maintain a conservative leverage range of 25% to 50% of total assets which we expect to help fund our target 8% to 10% hurdle rate on investing capital.
And with that overview, I will turn it back to Dave to conclude the presentation and lead us into the Qamp;A.
I want to turn you to slide that we call overheard in the quarter wherein use this opportunity to give you a sense for what’s on our mind as the backdrop for 2014. And with two transactions completed in the last two months, it’s important to highlight how and why these particular assets illustrate the market potential for CorEnergy. The asset for re-financing are critical [indiscernible] of the value chain, which is shown here. On left side of the diagram you will see a ship or offshore oil field, onshore oilfield and a gas field. And I just want to point out where our assets are located in this chart. The Arc Terminals would be representative of the storage tanks that service the ship and pipeline on the top part of the chart.
On the oilfield side you will see that there are for oil producing wells and on the gas field side, gas producing wells. Both the Pinedale LGS and the Black Bison operations served operators in those fields. And if you remember back at the map we showed earlier, those are very large areas that demand a tremendous amount of capital. And we also own Mowood, a utility which would be on the right side of the chart an EIP transmission line. But the amount of infrastructure assets necessary to support the upstream growth in United States generates ripple effects of asset development needs, almost all of which could be characterized as real property assets under current rig rules. And by attaching long-term leases to those assets, we’re able to identify and develop long duration predictable cash flows with multiple growth opportunities serving those assets.
On Page 10, our enterprise value at December 31 was approximately $252 million, but giving effect to the transaction we completed in January for approximately $286 million of enterprise value. This represents a 15% increase in the enterprise value over the prior quarter of course giving effect to the equity offering. The dividend yield of CorEnergy is approximately 7.3%, significantly higher than the average yields on a NAREIT equity index and a Dow Jones utilities index and the Samp;P global infrastructure index.
And these benchmark yields include growth expectations from widely held institutional investors. And we’ve tried to illustrate on this call how we have derived our growth. 1% to 3% solely from contractual rent increases, through escalators and participations that I mentioned. We get added growth from construction based financing on assets we already own. And we augment all of that from new assets which are accretive to our existing shareholders. And we add growth to our dividend rate and compare it to other similarly risked assets, we believe CORR offers investors a compelling return opportunity.
With that, I’d like to open the line to questions, operator?