CorEnergy Infrastructure Trust [CORR] Conference call transcript for 2022 q3
2022-11-10 16:33:05
Fiscal: 2022 q3
Operator: Hello and welcome to CorEnergy's conference call to discuss Third Quarter 2022 Results. I would now like to turn the call over to Matt Kreps, Investor Relations for CorEnergy. Please, go ahead.
Matt Kreps: Thank you, Kelly, and thank you everyone for joining today's CorEnergy Infrastructure Trust conference call. With me today are Dave Schulte, CEO; John Grier COO; and Robert Waldron, CFO. Dave and Robert will provide updates on our business operations and results and all three will be available for Q&A. Earlier this morning we published a press release, announcing the third quarter results for 2022. We expect to file our Form 10-Q later today. I'd like to remind everyone that the statements made during the course of this presentation that are not purely historical may be forward-looking statements and 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. Those documents are available on the Investor Relations section of our website. We do not update our forward-looking statements. During this call, we will also make reference to certain non-GAAP metrics, which are reconciled in our filings as part of our results reporting. We encourage all of you to review our complete disclosures risk factors, GAAP financial numbers and those non-GAAP metrics with the related reconciliations. And with that, I would like to now turn the call over to David Schulte. Please, go ahead.
Dave Schulte: Good morning, everyone. I'll spend a couple of minutes updating you on our operations, then turn the call over to Robert for financial comments. The third quarter saw a continued steady performance from our predictable MoGas and Omega natural gas operations that serve the St. Louis and surrounding areas. We also have several projects we're evaluating for both of those systems. These include supporting potential customer demand on the MoGas system that could increase volume as well as previously discussed UESC projects at Fort Leonard Wood, where our Omega system is the last mile of distribution to US Army facilities. In California, our Crimson pipelines provide a critical link in the state's energy infrastructure, operating under fixed tariffs for volumes transported with long-term investment-grade customers. While this has been a more challenging year on Crimson than we planned, we believe these assets will fill critical energy needs in California for decades to come. On our last call, we indicated that second quarter volumes had declined due to disruptions in global supply of crude oil, following the war in Ukraine, uncertainty remains with the price cap on Russian crude taking effect in December. However, Crimson volumes increased sequentially in the third quarter due to operational issues elsewhere in California, which is continuing in the fourth quarter. Looking to the future, our Crimson assets have a significant untapped value in the energy transition process in California. As John discussed last quarter, our California footprint is well positioned to help reduce greenhouse gas emissions through carbon capture and sequestration, or CCS. The largest energy companies in the state are moving ahead with plans in this area. Crimson's pipeline network provides a critical link to bring CO2 back to the field where it can be stored using potential storage reservoirs. We believe there is significant potential for us in this application of our assets. The commercial case for CO2 capture is better in California than in any other state. The recent federal legislation increased the carbon capture credit from $50 a ton to $85 per ton and to $180 per ton for direct air capture. The California Air Resources Board, or CARB, has set aggressive climate goals of a 40% reduction in carbon emissions by 2030 and carbon neutrality by 2045 and identified CCS as a central pillar to their targets. We believe there are other low-carbon energy transition-related storage and transportation opportunities in California in addition to CCS, which we will continue to consider as we work to deploy our assets and expertise as part of the next generation of energy economy. With that, I'll turn over the call to Robert to address the financials.
Robert Waldron: Thanks, Dave. During the third quarter, we filed for a tariff increase of 34.9% on our Southern California pipeline system and 10% on our KLM pipeline. Both of these tariff filings have been protested by shippers are proceeding and are proceeding through the CPC process with a resolution expected in second half of 2023. However, we are already collecting on a 10% tariff increase on both systems subject to refund as allowed by the CPC rules. In August 2023, we plan on filing for and collecting on an additional 10% increase for a total effective increase of 21% in Southern California, which represents the anniversary date of the original filing for that system, assuming the rate case hasn't been resolved by that time. We believe our cost of service fully justifies both requested increases. We also filed a 10% increase on our SPB system, but withdrew it due to increased volumes and general volume variability on that line. We continuously monitor our cost of service and we'll file a rate increase on this system if conditions warrant. While the majority of our assets are regulated we always have the option to increase tariffs. Since the majority of our assets are regulated we always have the option to increase tariffs to offset declining volumes and/or increasing costs, but we only do so after we have exhausted other avenues such as improved cost efficiencies. However at less than $2 per barrel for most shipping routes on our system we believe we are a bargain for our customers and the environment compared to the alternatives. We are also actively engaged in discussion with pipeline companies with systems adjacent to our current assets that can further boost our revenue and adjusted EBITDA results both smaller near-term deals and larger transactions. We own the largest independent crude oil pipeline system in California and are the natural consolidator in the state. As previously discussed, P66 is still on track to convert its Rodeo Refinery to renewable diesel production in early 2024, which results in a significant amount of crude oil needing to be transferred to other refineries and should result in additional volumes on our SPB pipeline with no additional CapEx required. More to come on these opportunities. Looking at the results. Third quarter revenue was $33 million an increase from $31.5 million last quarter as a result of steady performance from MoGas and Omega and improved volumes in California. We expect the Q4 California volumes to be similar to what we saw in Q3 since the operational issues with the third-party systems are expected to last at least through Q4 of this year. For the three months ended September 30, 2022 we had adjusted EBITDA of $8.9 million and adjusted net income of $1.1 million. We also had adjusted cash available for distribution per share or adjusted CAD per share of negative $0.04. However year-to-date adjusted CAD per share is $0.14 or 0.96 coverage. All of these results are adjusted for the $16.2 million goodwill impairment incurred during the quarter as a result of the decline of our market capitalization. The third quarter was impacted by unusual items, which when normalized result in what I believe is a CAD number that is more indicative of the business's ability to pay its common dividend. In Q3, we spent $950,000 to clean up a minor crude oil pipeline leak that occurred during the quarter. The quarterly average expense incurred between 2018 and today is $135,000. So the expense in Q3 is an outlier. The other expense is related to the tariff rate increases previously mentioned. In Q3, we spent $462,000 on professional services related to our rate filing. Our quarterly average expense incurred between 2019 and today is $116,000. After normalizing these two expenses to historical average, we had normalized adjusted CAD per share of $0.04 or 0.74 coverage for the quarter and year-to-date normalized CAD per share of $0.20 or 1.36 coverage. The Board â the company's Board declared dividends on all preferred obligations during the third quarter and a $0.05 per share dividend on our common stock. Our Board evaluates dividends each quarter using a longer-term view of coverage, given the quarterly variability that can occur with our asset. We are maintaining our 2022 adjusted EBITDA outlook of $42 million to $44 million and still expect $8 million to $9 million of maintenance capital expenditures for the year. While we expect fourth quarter volumes and revenue to be similar to Q3, we expect the expenditure on our rate case proceedings to be above the historical quarterly average, which is accounted for as a period expense but what would benefit future periods. We also expect to have higher maintenance expenditures during compared to Q3. We have provided a table of the historical and expected Q4 maintenance expenditures on Page 51 of our 10-Q to be filed later today. Based on historical experience permitting and fourth quarter holiday schedule, some of our anticipated fourth quarter maintenance projects may move into 2023. We expect to provide 2023 guidance in connection with the filing of our Form 10-K for 2022. Liquidity at quarter end was approximately $39.8 million including cash of $21.8 million and $18 million of undrawn revolver availability. Our credit facility does place certain restrictions on utilization of the cash and revolver capacity. At this time, we'll take questions from our covering analysts and institutional stockholders before closing the call. Thank you.
Operator: Certainly. The floor is now open for questions. Your first question is coming from Selman Akyol with Stifel. Please pose your question. Your line is live.
Selman Akyol: Thank you. Good morning. I was wondering maybe if you could just expand a little bit more in terms of carbon capture and where you are and sort of what opportunities you're seeing there? Maybe any industries in particular you're talking about connecting to and to capture the carbon.
Dave Schulte: Thank you, Selman. We've got John Grier on the call, particularly for that expertise. He's been spending most of the last year and a half focusing our efforts on identifying developers and opportunities in California. And so, I'd like to let John respond to that question.
John Grier: Thanks Dave. Selman, the company with whom we had an agreement continues to work forward on getting permitting and things in place, so that they can start their sequestration. We are working with other companies -- multiple other companies on projects that we can do -- use and do in the state whether they're joint ventures or just agreements in which we build out but we're continuing to make progress on those issues.
Selman Akyol: Got it. Anything -- in terms of sequestration, I presume someone else would own the sequestration side from that standpoint. And then, would it be -- and I know it's still early, but would it be using existing pipe or would you be building new pipe?
John Grier: We would be making an upgrade to our pipe. You're correct in the sense of meeting effectively three different companies. One would do the sequestration one does transportation that's us one does capture. And that's -- that could be the emitting company or it could be somewhere that they've contracted, but you're correct. And our plan is to be able to use our rights-of-way and our pipe with some upgraded investment to improve the ability of the pipe to transport the CO2 and we charge a fee for that -- really do our crude oil.
Selman Akyol: Got it. And then just in terms of having a Class 6 well can you just -- and I know again that wouldn't be your responsibility but any just high-level thoughts on how that's going for California because I guess that has to come from the Fed. Or--
Dave Schulte: We do know that there are companies in California who have made that submission. I can't comment on the progress that they've made except that we've got no reason to believe or not going according to their plan. I do know there are other companies that intend on also making future submissions to the EPA permits to eject Class six sequestration permits.
Selman Akyol: Got you. And then maybe you could just talk a little bit about potential settlements or just how you're viewing pushing through these rate increases for the transportation of oil and just how should we think about?
John Grier: We feel -- right. We feel very confident about our ability on those. We've got a long history of success in asking for those permits. The CPUC works on its own timeframe. We've got an estimate in our -- when we think about the timeframe but it's largely out of our control. I mean we're responsive to all of their requests.
Selman Akyol: Okay. Well, thank you very much.
John Grier: Yes, thank you.
Operator: There appear to be no further questions in queue at this time. I would now like to turn the floor back over to David Schulte for any closing remarks.
Dave Schulte: Thank you all for joining us today. We continue to execute on our company's vision to safely deliver energy critical to the communities we serve while advancing new energy projects that can extend and add value to our existing portfolio of assets. We've been operating safely for a very long time and with our lower carbon activities we see exciting opportunities to advance environmental stewardship for future generations. Please contact our IR team directly if you'd like to arrange a meeting or a call and have a great day.
Operator: Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
