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CorEnergy Infrastructure Trust Inc  (NYSE:CORR)
Q2 2019 Earnings Call
Aug. 01, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the CorEnergy Infrastructure Trust's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce to your host, Lesley Schorgl, Manager of Investor Relations. Thank you. Ms. Schorgl, you may begin.

Lesley Schorgl -- Manager of Investor Relations

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 filings.

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

David Schulte -- Chairman, President, and Chief Executive Officer

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 relates to the progress of the MoGas FERC rate case. On slide four, 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 increasingly stringent federal and state mandates, mitigate for the substantial decrease in volumes due to the loss of a firm transportation contract with 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 2017 Tax Cuts and Jobs Act.

During this quarter, MoGas and all interveners agreed in principle to new rates, which would provide nearly $15 million revenues annually. The settlement is pending final order by the FERC, which we expect to incur in September of this year, if not sooner. The agreed-to rates achieved 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 challenge we faced. This has been a two-year process that demonstrates our teams delivering on expectations.

Moving to our results on Slide five. Our adjusted funds from operations remained consistent over the past four quarters. The decline in revenue from the December 2018 sale of the Portland Terminal were offset by this participating rents, higher transportation and distribution margins, and lower G&A expense and interest expense related to the convertible notes. As we've said in the past, we use 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, Cor's AFFO per share adjusted dividend coverage ratio of approximately 1.4 times, which is below our target due to uninvested proceeds from the sale of Portland.

Slide six 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 seven, 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 on our balance sheet, as well as our ability to use other financing sources, such as 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've had a very busy second quarter, I'd like to congratulate my team, who has 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Michael Zuk from Oppenheimer. Please proceed with your question.

Michael Zuk -- Oppenheimer & Co. Inc. -- Analyst

Good afternoon, Dave. A Fort Leonard [Phonetic] question by me, what's the status of the Fort Leonard Wood opportunity?

David Schulte -- Chairman, President, and Chief Executive Officer

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 of the Fort prioritizes that list and evaluates our recommendation. So, we were pleased to have won the contract. We're past the stage of providing opportunities and we're now awaiting approval.

Michael Zuk -- Oppenheimer & Co. Inc. -- Analyst

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

David Schulte -- Chairman, President, and Chief Executive Officer

Mike, I think that timeframe is reasonable. We can't predict though the prioritization or speed that the Fort will act within. But they did asked for these proposals through quite an extensive 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.

Michael Zuk -- Oppenheimer & Co. Inc. -- Analyst

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?

David Schulte -- Chairman, President, and Chief Executive Officer

Well, we have done that for the past several years since the Spire contract. We had it -- 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 will pay close attention to that, Mike, and appreciate your continued asking about those efforts.

Michael Zuk -- Oppenheimer & Co. Inc. -- Analyst

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.

David Schulte -- Chairman, President, and Chief Executive Officer

Thank you, Michael.

Operator

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

Selman Akyol -- Stifel, Nicolaus & Company -- Analyst

Thank you. Good afternoon. So, on MoGas, rate increase of $14.8 million, you originally had gone out with $16 million, so was there a refund of $1.2 million, is that the difference there?

David Schulte -- Chairman, President, and Chief Executive Officer

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 announced it, it was approximately $20 million. We have been reserving some part of those rates for 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, they will be credited back but we have -- I think 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 two quarters.

Selman Akyol -- Stifel, Nicolaus & Company -- Analyst

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 will go back to the rates that are agreed?

David Schulte -- Chairman, President, and Chief Executive Officer

Technically the rates, 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 in conservatism by anticipating the potential that we would have some refund amount. And the net of those two, again over a couple quarters is immaterial.

Selman Akyol -- Stifel, Nicolaus & Company -- Analyst

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

David Schulte -- Chairman, President, and Chief Executive Officer

There's no update on Grand Isle other than what we have said in the last quarter, which is, we continue to believe that our tenant should be providing us financial information pursuant in 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 will 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.

Selman Akyol -- Stifel, Nicolaus & Company -- Analyst

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

David Schulte -- Chairman, President, and Chief Executive Officer

Sure. I'll be happy to. The 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 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 who are willing to evaluate our financing approach and their retained control of the assets. We also have a differentiation from private equity funds and 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 differentiated funding opportunity in the market and we are seeing increased interest in our -- our opportunity set actually feels robust right now.

Selman Akyol -- Stifel, Nicolaus & Company -- Analyst

Very good. Thank you.

David Schulte -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Barry Oxford with D.A. Davidson. Please proceed with your question.

Barry Oxford -- D.A. Davidson & Co. -- Analyst

Great, guys. Thanks. 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?

David Schulte -- Chairman, President, and Chief Executive Officer

Well, we have -- that's an excellent question in terms of our funding cost internally.

Barry Oxford -- D.A. Davidson & Co. -- Analyst

Right.

David Schulte -- Chairman, President, and Chief Executive Officer

And what we're seeing in the market as -- right. And -- but we are constrained by what we see in the market as well and we do believe that the reduction in 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 issuer. So, this 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 that the lower overall rate structure though in the market today does enable us to be relevant and competitive and it does seem as a good time for upstream companies to lock in long-term cost with the 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 tried to not have a lot of interest rate risk or opportunity with a significant amount of floating rate debt in our structure. But nonetheless unbalance it's a positive we think.

Barry Oxford -- D.A. Davidson & Co. -- Analyst

Okay. Great. Thank you so much guys.

David Schulte -- Chairman, President, and Chief Executive Officer

Thank you, Barry.

Operator

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

David Schulte -- Chairman, President, and Chief Executive Officer

Thanks very much. A very productive quarter, something we've been working toward a long time with a 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.

Operator

[Operator Closing Remarks]

Duration: 17 minutes

Call participants:

Lesley Schorgl -- Manager of Investor Relations

David Schulte -- Chairman, President, and Chief Executive Officer

Michael Zuk -- Oppenheimer & Co. Inc. -- Analyst

Selman Akyol -- Stifel, Nicolaus & Company -- Analyst

Barry Oxford -- D.A. Davidson & Co. -- Analyst

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