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Edited Transcript of CORR earnings conference call or presentation 1-Aug-19 6:00pm GMT

Q2 2019 CorEnergy Infrastructure Trust Inc Earnings Call

LEAWOOD Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of CorEnergy Infrastructure Trust Inc earnings conference call or presentation Thursday, August 1, 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

* Lesley Robertshaw Schorgl

CorEnergy Infrastructure Trust, Inc. - Manager of IR

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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

* Michael Zuk

Oppenheimer & Co. Inc., Research Division - 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 the CorEnergy Infrastructure Trust Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lesley Schorgl, Manager of Investor Relations. Thank you. Ms. Schorgl, you may begin.

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

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Thank you for joining CorEnergy Infrastructure Trust's Second Quarter 2019 Earnings Call. I'm joined today by David Schulte, Chairman, President and CEO. 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 press release and 10-Q filing.

I would now like to turn the call over to Dave Schulte, who will discuss CorEnergy's second quarter.

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

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Thanks, Lesley. Our team spent the second quarter looking at multiple assets to acquire as well as potential actions to further strengthen our capital structure. Last week, we declared our 16th consecutive $0.75 quarterly dividend.

The key event to occur in the quarter led to the progress of the MoGas FERC rate case. On Slide 4, we discuss this process and the conclusion that we're nearing. As you may recall, in March 2017, MoGas entered into a new 13-year agreement with its largest customer, Spire Missouri East, that was expected to maintain volumes but decreased revenue by approximately $4.5 million annually. At that time, we announced that we expected to offset at least $3 million of those lost revenues for a number of initiatives, including filing for higher rates at FERC. And MoGas filed its REIT case in May of 2018. The proposed rates thought to recover increases in capital, operating and maintenance expenditures incurred, including those necessary to comply with the increasingly stringent federal and state mandates; mitigate for the substantial decrease in volumes due to the loss of a firm transportation contract with a St. Louis natural gas marketing entity; mitigate for the substantial decrease in revenue from the new Spire contract; and finally, reflect changes in the corporate income tax rate associated with the 2017 Tax Cuts and Jobs Act.

During this quarter, MoGas and all interveners agreed in principle to new rates, which will provide nearly $15 million revenues annually. The settlement is pending final order by the FERC, which we expect to incur in September this year, if not sooner. The agreed-to rates achieved to the goal of offsetting $3 million of the $4.5 million decrease in revenue. CorEnergy picked up another incremental $1 million from the repurchase of minority equity in Pinedale LGS, which helped us mitigate virtually all of the impact of the MoGas revenue challenged we face. This has been a 2-year process that demonstrates our team's delivery on expectations.

Moving to our results on Slide 5. Our adjusted funds from operations remained consistent over the past 4 quarters. The decline in revenue from the December 2018 sale of the Portland Terminal were offset by participating rents, higher transportation and distributional margins and lower G&A expense and interest expense related to the convertible notes. As we've said in the past, we used participating rents for reinvestment and debt repayment. We use funds, including those rents, to support a consistent dividend for stockholders as our assets' terminal values are driven by the long life but nonetheless depleting reserves that they serve. For this reason, we set our long-term target AFFO to dividend coverage ratio at 1.5. For the second quarter, CORR's AFFO per share adjusted dividend coverage ratio of approximately 1.4x, which is below our target due to uninvested proceeds from the sale of Portland.

Slide 6 provides an overview of our capital structure, which looks very similar to last quarter's metrics, with small changes due to the conversion of some of our convertible bonds to common equity. CorEnergy remains well below our total debt-to-total capitalization target levels at only 18%, and below our preferred to total equity target levels at 26%. At quarter end, we again had nearly $60 million in cash and over $120 million in revolver availability. We're eager to get that $182 million of liquidity put to work, and we continue to assess assets that meet our due diligence requirements.

On Slide 7, we provide an update of our initiatives for the remainder of 2019. We expect the MoGas FERC rate case to conclude in the third quarter. We continue to believe we're positioned to complete at least one acquisition this year in our targeted size range of $50 million to $250 million, and our business development team has been busy assessing potential assets in that range. Our financial ability to complete an acquisition is supported by the liquidity we currently have in our balance sheet as well as our ability to use other financing sources, which is asset level or corporate debt, joint ventures or private placements with institutional investors. Should a transaction not materialize, we would utilize our cash on hand to continue to strengthen our capital structure.

We had a very busy second quarter, and I'd like to congratulate my team, who's worked diligently in the MoGas case, and we can see the end in sight. We expect the final months of 2019 to be equally, if not more productive, in the second quarter as we strive to complete an acquisition and address our capital structure.

With that, I'm happy to answer questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first quarter comes from the line of Michael Zuk from Oppenheimer.

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

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A Fort Leonard question by me. What's the status of the Fort Leonard Wood opportunity?

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

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Mike, we have provided the Fort leadership with a list of projects that we believe would result in acceptable savings under the energy savings contract that we were -- that we won with our partner. And right now, we're still in a waiting mode while the leadership at the Fort prioritizes that list and evaluates our recommendation. So we're pleased to have won the contract. We're past the stage of providing opportunities and we're now awaiting approval.

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

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So there's hope that maybe in the next year or so we can move from a proposal into actual final negotiations on a particular project?

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

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Mike, I think that time frame is reasonable. We can't predict, though, the prioritization or speed that the Fort will act within. But they did ask for these proposals through quite an intensive process. And so the fact that we were able to get through that process and now they're in review mode, we think, is positive toward a potential outcome with some project that -- or projects that the leadership deems worthwhile.

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

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And then a follow-up question on MoGas. Have you initiated any type of a marketing effort through MoGas to try and attract additional customers to the system?

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

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Well, we have done that for the past several years since the Spire contract. We had several more formal and then also informal outreaches. There certainly is the opportunity for business development efforts by municipalities that we serve in the rural markets in Missouri that they are pursuing and we would benefit from. And so we'll pay close attention to that, Mike, and appreciate your continued asking about those efforts.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [8]

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Well, so far, you have stayed the course, and I'm glad that you haven't cut a deal just to be cutting a deal. Keep your criteria at a high level and we'll benefit going forward.

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Operator [9]

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Our next question comes from the line of Selman Akyol with Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [10]

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So on MoGas, rate increase of $14.8 million. You originally had gone out with $16 million. So is there a refund of $1.2 million? Is that the difference there?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [11]

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Actually, the $16 million was the run rate revenue prior to the renegotiated contract with Spire, and the -- that's the benchmark for the new rates, which are $14.8 million, so the gap there being $1.2 million. And the rates that we were able to implement upon filing the rate case were higher than $16 million. I think we've announced that it was approximately $20 million. We have been reserving some part of those rates for a potential refund. And the way the refund mechanism works is a credit over the next 12 to 24 months in that window for the increased rates that were received. It was only for a few quarters, so it's not a material amount of dollars. It will be credited back. But we have -- I think we created the funds or have the funds set aside with which to use going forward against those credits. So it's not a material adjustment, but it will be made over the ensuing 2 quarters.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [12]

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Okay. And then post that then, would you expect to see an increase in cash flow because you're, I guess, charging lower rates in order to handle the credit? And then once that expires, you'll go back to the rates that are agreed?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [13]

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Technically, the rates or our revenues will reflect the new lower rates. The credit will offset the reserve that we've already established over the last couple of quarters, where we were expecting conservatism, anticipating the potential, but we would have some refund amount. And the net of those again over a couple of quarters is immaterial.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [14]

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I get it. Okay. That makes perfect sense. And then is there any update on Grand Isle and where those things stand?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [15]

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There's no update on Grand Isle other than what we've said in the last quarter, which is we continue to believe that our tenant should be providing us financial information pursuant to the terms of the lease. And we initially had a favorable judgment in that regard and they have appealed. So the appeal status is unpredictable as to its time from here, so we'll continue to keep the market posted as to any outcome there. But right now we are continuing to receive rents at a timely basis. We are continuing to obtain access to management for information, including inspections that we routinely conduct. And so it's business as usual other than that one item.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [16]

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Got it. And then can you just maybe talk about some of the opportunities you're seeing or evaluating?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [17]

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Sure. I'd be happy to. They range from some downstream-connected assets, similar to the assets currently in our portfolio, to upstream-related assets, again, similar too. So nothing that's outside the scope of what we don't already own. But what we have seen in the past several quarters is that we are increasingly of interest to companies that have a need for internal cap -- cash flow rededication to opportunities, where the market generally is requiring or demanding that upstream producers provide discipline and live within their cash flow. So we've had an increasing interest of upstream-oriented companies.

We're willing to evaluate our financing approach and they can retain the control of the assets. We also have a differentiation from private equity funds in that our horizon is very long versus a shorter truncated liquidity requirement that private equity might have. So this is resulting in us having a differentiating funding opportunity in the market, and we are seeing increased interest in our -- our opportunity set actually feels robust right now.

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Operator [18]

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

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [19]

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Just to build on that question. Dave, with the 10-year down around 1.9%, can you be more aggressive with the 10-year down there as far as your terms that you would put in front of somebody or not necessarily?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [20]

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Well, we have -- that's an excellent question in terms of our funding cost internally and what we're seeing in the market as -- right. But we're constrained about what we see in the market as well. And we do believe that the reduction in the rates is beneficial to us from a cost standpoint. However, it also reflect -- is reflected in other potentially competitive sources of capital and their cost to issuers. So the spread isn't that different than it was a few quarters ago. And so that's where we live more is in terms of relative attractiveness. The lower overall rate structure, though, in the market today does enable us to be relevant and competitive. And it is deemed as a good time for upstream companies to lock in long-term cost with a lease like ours. We would then tend to have longer-term liability cost as well.

And you've seen our history. We've tended to have more fixed-rate debt, fixed-rate preferreds, consistent dividends on our common. So our cash cost, we try to not have a lot of interest rate risk or opportunity with a significant amount of floating rate debt in our structure. But nonetheless unbalanced, it's a positive, we think.

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Operator [21]

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There are no other questions in the queue. I'd like to hand the call back to David Schulte for closing comments.

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [22]

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Thanks very much. A very productive quarter, something we've been working towards a long time with the positive outcome for MoGas. And we're very close to achieving our dividend coverage ratio even with uninvested cash. So we feel good about our stability and outlook and the prospects for the future. Thanks again for your interest.

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Operator [23]

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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.