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CorEnergy Infrastructure Trust Inc (NYSE:CORR)
Q4 2019 Earnings Call
Feb 27, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to CorEnergy Fourth Quarter and Year-End 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please note this conference is being recorded.

I will now turn the conference over to your host, Matt Kreps, Investor Relations for CorEnergy. Thank you. You may begin.

Matt Kreps -- Investor Relations

Thank you for joining CorEnergy Infrastructure Trust Fourth Quarter and Full Year 2019 Earnings Call. I am 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, corenergy.reit.

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 release and 10-K filing.

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

David Schulte -- Chairman, Chief Executive Officer and President

Thanks, Matt. Beginning on Slide 3, 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.

We reported our 18th consecutive $0.75 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 CorEnergy.

We produced solid financial performance in 2019. Albeit with a loss of $0.40 in GAAP EPS, we posted a positive $3.83 per share in AFFO. 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 NAREIT, FFO -- and FFO. However, our adjusted funds from operations remained 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 contract with Spire, which runs until October of 2030.

We broadened our company's long-term market opportunity with the potential for customary industry commercial contracts to be qualified revenue for CorEnergy 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 markets.

Our portfolio performed well, overall. in 2019, in spite of industry fluctuations, which we describe on Slide 4. This was due to the critical nature of our infrastructure assets and our focus on fixed fee contracts. MoGas and Omega operate critical natural gas distribution networks for their markets. MoGas was called on to handle a record day of delivered volume in its 31-year history this past month, demonstrating to utility customers a reliability to meet challenges.

Pinedale and Grand Isle continued 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 in liquidity we have available to continue diversifying our portfolio ahead.

On Slide 5, we look at the earnings from our contracts in 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 $0.55 a share, as shown in the chart on the upper left. Adjusted funds flows from operations or FFO was $13.3 million or $0.94 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 have been offset by higher transportation and distribution margins and lower G&A expense and interest expense in 2019. These events netted out to support a stable dividend in 2019 for our stockholders at $0.75 for the fourth quarter and $3 for the full year.

Speaking of the dividend, we set our long-term target AFFO dividend coverage ratio at 1.5 times. That coverage ratio provides room to invest in 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, CORR's AFFO per basic share suggests a dividend coverage ratio of approximately 1.3 times, 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 6 provides an updated overview of our capital structure, with the effect from the convertible notes offering in exchange in the third quarter.

Our total liquidity increased with $257 million now available for potential investments to replace and further diversify our assets. Total debt to total capitalization at just under 25%, remains at the low end of our target range.

CorEnergy's balance sheet actions this year helped reduce our weighted average cost of capital, as illustrated on the chart on this page, comparing equity yields to treasuries. CORR's dividend yield is still very wide of broader REIT and utility yields and consistent with C-Corp yields in the midstream energy sector.

CorEnergy's investors are not primarily energy or MLP investors. With an emphasis on dividend stability, CORR has earned the trust of generalist equity income investors, preferred stock investors and convertible bond funds. And that's a good bridge to Slide 7.

I want to point out that we believe that current capital markets environment is creating opportunities for CorEnergy. Producers and MLPs are facing a heightened focus on generating operating cash flow, while simultaneously investment capital to fuel those efforts is drying up. For example, producers rolling long-term debt are paying higher prices to do so. We've seen multiple transactions already in 2020 where producers are replacing existing notes with double-digit coupons going forward.

This capital-constrained environment also appears to be limiting new money transactions as producers are primarily dealing with existing maturities. A recent article in January's oil and gas investors said it well with a headline: That E&Ps are exploring all avenues to access capital on terms that make 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 CORR 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 deleverage their balance sheets and focus investment dollars on free cash flow-generating activities.

We believe CORR has the potential for further diversification, including assets subject to commercial contracts, which we'll discuss on Slide 8. In addition to enabling more favourable capital market access, CorEnergy's REIT structure opens up additional opportunities and has been generating a lot of attention lately.

We've seen a rising number of reports from experienced law firms, describing the private letter ruling that CorEnergy received, which broadens the contract types we can pursue as qualifying for REIT treatment. For example, commercial storage contracts and pipeline transportation agreements can be segregated by CORR into those activities that are entitled to be treated the same as rent under a lease and services to be provided by our taxable subsidiary.

We believe this PLR enables us to realize on the vision we set out to create in 2010, that of a tax-efficient owner and operator of infrastructure assets with access to broad and deep capital markets. Institutional investors do not receive a K-1 with UBTI and foreign investors do not receive effectively connected income, yet CORR operates more tax efficiently than a C-Corp by putting higher weighting of our investments on passive infrastructure assets and a lower weighting 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 CORR stockholders. We are capitalized to complete one or two acquisitions in our targeted size of $50 million 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.

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

Questions and Answers:

Operator

Thank you [Operator Instructions]. Our first question is from Michael Zuk with Oppenheimer.

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

Good morning, Dave.

David Schulte -- Chairman, Chief Executive Officer and President

Good morning.

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

A question. Can you give us the status on the Fort Leonard Wood opportunity and how it may enhance MoGas?

David Schulte -- Chairman, Chief Executive Officer and President

The Fort Leonard Wood is at the end of MoGas. So, if gas consumption increases at Fort Leonard Wood, that's also good for MoGas. That facility has experienced growth in its utilization, and therefore, growth in demand for natural gas over the last decade since we've owned it. And there are projects ongoing on base that also give us opportunities to 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 things at Fort Leonard Wood are fine. We did have this, you may recall, an award of an additional energy efficiency contract. We've made several recommendations to the Fort under that contract. And their administration of those awards has had some change in personnel. And so, it's taken a lot longer for the awards to be put through their processes and we expected that when we made the announcement. But things -- our relationship on the base is very good. We're getting high quality add-on opportunities down there. And it's one of the gems in our portfolio.

It also demonstrates the opportunity under the private letter ruling, just as one we got previously, but that asset is an operating asset with one customer. And we operate that inside the REIT, not inside a taxable subsidiary.

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

And then a follow-up question. Williams has announced that they're going to offer participations in some of their pipeline systems. Would those be some opportunities for Cor?

David Schulte -- Chairman, Chief Executive Officer and President

Mike, thanks for that question. We have looked at joint venture type investments from our platform. And it is a bit structurally complicated for us to have minority equity investments in other people's operations and still maintain REIT status. Even if the asset 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 attractive opportunity yet to be a minority equity owner of somebody else's project, but it's something we continually look at.

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

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

David Schulte -- Chairman, Chief Executive Officer and President

Thanks, Mike.

Operator

[Operator Instructions]. There are no more questions at this time. I'd like to now turn the call back to Mr. Dave Schulte, for closing remarks.

David Schulte -- Chairman, Chief Executive Officer and President

Thank you for your interest. And we have a lot of wood to chop in 2020, and we're excited about the opportunity to do so.

Operator

[Operator Closing Remarks]

Duration: 15 minutes

Call participants:

Matt Kreps -- Investor Relations

David Schulte -- Chairman, Chief Executive Officer and President

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

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