Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by the core energy infrastructure conference call will begin at approximately three minutes, we sell the line Corenergy infrastructure conference call will begin at approximately three minutes. Thank you.

[music].

Greetings.

Welcome to core energy fourth quarter, and yearend 2019 earnings conference call. At this time, all participants are in listen only mode.

Question answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.

I'll now turn the conference over to your host Mcwraps Investor Relations for Corenergy. Thank you you may begin.

Thank you for joining core energy infrastructure trusts fourth quarter and full year 2019 earnings call.

I'm joined today by David Salty, Chairman, President and CEO as a reminder of 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 core Energy's website core energy don't read.

Statements made during the course of this presentation, but are not purely historical maybe forward looking statements and are subject to the safe Harbor protection available under the applicable securities laws.

Important factors that could cause actual results could differ materially from does and the forward looking statements are discussed in our filings with the FCC.

These documents are available on the Investor Relations section of our website.

We do not update our forward looking statements reconciliations between GAAP and non-GAAP results, which we discussed on this call can be found in our related earnings release and 10-K filing.

I would now like turn the call over to Dave Salty, who will discuss core energy's fourth quarter and full year results.

Thanks, Matt.

Beginning on slide three we'd like to review a few highlights from a year, which provided extraordinary returns for our fellow stockholders and created new possibilities for our platform in 2020.

Reported our 18th consecutive 75 cents quarterly dividend in the fourth quarter amounting to $3 for the full year 2019.

We strengthened our balance sheet through note exchanges and a private note offering these actions enhanced our liquidity substantially going into 2020.

At a time when the capital markets are becoming increasingly expensive to energy producers, causing them to seek alternatives for financing from sources such as core energy, we produced solid financial performance in 2019.

Via with a loss of 40 cents in gap S., we posted a positive $3.83 per share in a F.F. all.

The net loss to our common stockholders for 2019 was primarily due to a onetime loss on extinguishment of debt from our convertible note exchanges, which also impacted navarrete F FFO and AFFO.

However, our adjusted funds from operations remain relatively consistent.

Additionally, the company issued common stock valued at 62 million in conjunction with these transactions.

Our Mogas pipeline completed settlement of its FERC rate case filed in 2018, which includes transportation agreements, providing stable revenues to December of 2023, and our long term contracts expire which runs until October 2030.

We broadened our company's long term market opportunity with the potential for customary industry commercial contracts to be qualified revenue for core energy. In addition to our traditional lease contracts. We believe that our market performance in 2019 was due to these factors as well as index inclusion raising the profile of our company in the capital Mark.

Yes.

Our portfolio performed well overall in 2019 in spite of industry fluctuations, which we describe on slide four this was due to the critical nature of our infrastructure assets and our focus on fixed fee contracts.

Oh, gosh, I don't make a operate critical natural gas distribution networks for their markets.

Oh gas was called on to handle a record date of delivered volume in its 31 year history. This past month, demonstrating to utility customers our reliability to meet challenges.

Hi deal and Grand I'll continue to produce steady rents, despite a challenging commodity price environment.

The stability of the revenue streams is important but so is the more than $250 million and liquidity. We have available to continue diversifying our portfolio ahead.

On slide five we look at the earnings from our contracts on a bit more detail.

As a result of the operations and financing activities undertaken in 2019 net income available to common stockholders for the fourth quarter was 7.5 million or 55 cents a share as shown in the chart on the upper left.

Adjusted funds flows from operations or AFFO was 13.3 million for 94 cents per diluted share in the chart on the lower left.

I should also note that our 2018 fourth quarter comparable includes rents from the Portland terminal, which was sold in December of 2018.

The decline in rents subsequent to that sale had been offset by higher transportation and distribution margins and lower gionee expense and interest expense in 2019.

These events netted out to to support a stable dividend in 2019.

For our stockholders at 75 cents for the fourth quarter and $3 for the full year.

Speaking of the dividend, we set our long term target.

F. owed dividend coverage ratio at 1.5 times.

That coverage ratio provides room to investing capital assets, which is necessary to sustain the dividend and offset long term decline in oil and gas production.

Industry analysts are now referring to this as sustaining capital expenditures.

For the full year course, AFFO per basic share suggests a dividend coverage ratio of approximately 1.3 slightly below our target.

With the cash on the balance sheet, we expect to run tight coverage ratios in 2020 pending deploying that capital.

Slide six provides an updated overview of our capital structure with the effect from the convertible notes offering an exchange in the third quarter. Our total liquidity increased with $257 million now available for potential investments to replace some further diversify our assets.

Total debt to total capitalization at just under 25% remains at the low end of our target range.

Corenergys balance sheet actions this year help reduce our weighted average cost of capital as illustrated on the chart on this page comparing equity yields to treasuries cores dividend yield is still very wide of broader read and utility yields.

Consistent with C Corp yields in the midstream energy sector.

For Energy's investors are not primarily energy or MLP investors with an emphasis on dividend stability core has earned the trust of generalist equity income investors preferred stock investors and convertible bond funds.

And that's a good bridge on slide seven I want to point out that we believe the current capital markets environment is creating opportunities for core energy producers and Im Lps are facing a heightened focus on generating operating cash flow, while simultaneously investment capital to fuel. Those efforts is drawing up for example, producers rolling long term debt.

Our paying higher prices to do so we've seen multiple transactions already in 2020 or producers are replacing existing notes with double digit coupons going forward.

Capital constrained environment also appears to be limiting new money transactions as producers are primarily dealing with existing maturities. Our recent article in January is oil and gas investor said, it well with a headline that MPS are exploring all avenues to access capital on terms that makes sense for their situations.

One of those avenues may be not owning their infrastructure.

In an environment, where capital is increasingly scarce and investors are focused on free cash flow selling assets to core can enable producers to release cash tied up in those assets, while maintaining the ability to operate and control their critical infrastructure links between their reserves and the markets.

In doing so they can de leverage their balance sheets and focus investment dollars on free cash flow generating activities.

We believe core has the potential for further diversification, including asset subject to commercial contracts, which we'll discuss on slide eight.

In addition to enabling more favorable capital market access Corenergys REIT structure opens up additional opportunities and has been generating a lot of attention lately.

We've seen a rising number reports from experience law firms describing the private letter ruling the core energy received which broadens the contract types. So we can pursue as qualifying for re treatment.

For example, commercial storage contracts and pipeline transportation agreements can be segregated by core into those activities that are entitled to be treated the same as rent under lease and services to be provided by our taxable subsidiary.

We believe this PL our enables us to realize on division, we set out to create in 2010.

That have a tax efficient owner and operator of infrastructure assets with access to broad and deep capital markets institutional investors do not receive the K, one with you BTI and foreign investors do not receive effectively connected income.

Core operates more tax efficiently than a C corp by putting higher weighting of our investments on passive infrastructure assets and a lower waiting on services and processing.

With that in mind, we continue to pursue business development efforts regarding transactions that could enhance diversification and create long term distribution growth potential for core stockholders. We are capitalized to complete one or two acquisitions in our targeted size of 50 to 250 million for discrete assets.

Whether in pipelines storage or platform assets, we can own and lease or like mogas own and operate a significant portion of midstream infrastructure employed in critical functions across the energy value chain and we're excited about our prospects for 2020 and beyond.

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

Thank you.

At this time, we will be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad confirmation Tom will indicate your line is in the question Q you May press star to if he would like to remove your question from the Q.

For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star keys.

Our first question is from Michaels, though.

With Oppenheimer.

Good morning, Dave.

Morning.

A question can you give us a status on the Fort Leonard would opportunity and how it.

Enhance my guess.

Fort Leonard would is at the end of my guess, so if gas consumption increases at Portland onboard. That's that's also good from okay.

That's a silver has experienced.

Our gross in its utilization and therefore growth in demand for natural gas over the last decade since we've owned it.

And there are projects aren't going on base. It also give us opportunities too.

Construct new.

Additional assets, there's a hospital being constructed on base, that's giving us some additional work down there, which is positive I would say that that things appointment or where are fine. We did happen as you may recall up an award.

I've been additional energy efficiency contract, we've made several recommendations to the forward under that contract and their administration.

Yes. Those awards has had some change and personnel and so it's taken a lot longer 40 awards to be.

Put through their processes than we expected more made the announcement.

But things that in our relationship on on the base is very good we're getting a high quality or add on opportunities down there and.

It's it's one of the gems in our portfolio. It also demonstrates the opportunity under the private letter rulings are just as warm and got previously that that asset is an operating asset with one customer and we we operate that inside the right not inside a taxable subsidiary.

And then a follow up question Williams has announced that they're going to.

Offer.

Just a patients in some of their pipeline systems would those be some opportunities for core.

Hi, Mike. Thanks for that question, we have looked at joint venture type investments or from our platform and it is.

Oh, but structurally complicated for us to to have a minority equity investments in other people's operations and still maintain reached status even if.

Yes, it is qualifying and the revenue would be qualifying.

All the parties would have to treat it as such and so we haven't had an.

Of opportunity yet to be at minority equity owner or somebody else project, but it's something we continually look at.

Well I appreciate everything that you as a management team are doing and I am confident that the cash flow and the dividends will be a stable going forward.

Thanks, Mike.

Yeah.

Once again, if you like to ask your question. Please press star one on your telephone keypad.

[noise] there are no more questions at this time I'd like to now I'll turn the call back to Mr., Dave Sheltie for closing remarks.

Thank you for your.

Interesting, we have a lot of wood to chop in 2020 and.

We're excited about the opportunity to do so.

Thank you.

Today's conference you may disconnect your lines at this time and thank you for your participation.