CorEnergy Infrastructure Trust, Inc.

Q4 2022 Earnings Conference Call


spk01: Hello and welcome to Core Energy's conference call to discuss the fourth quarter 2022 results. At this time, all participants have been placed on listen-only mode. The floor will be open for questions and comments following the presentation. If you wish to ask a question, please press star 1 on your phone to enter the question queue at any time. I would now like to turn the call over to Matt Kreps, Investor Relations for Core Energy. Please go ahead.
spk04: Thank you, Paul, and thank you, everyone, for joining today's Core Energy Infrastructure Trust conference call. With me today are Dave Schulte, CEO and Chairman, Robert Waldron, President and CFO, and Chris Huffman, Chief Accounting Officer. Dave, Robert, and Chris will provide updates on our business operations and results, and all three will be available for Q&A. I'd also like to introduce Jeff Tiefen, our Vice President of Finance, who is joining the call today. JT has been an integral part of Core Energy for many years and will be taking over the investor relations role as Debbie, Hagan, and I exit our roles with the company. It has been a pleasure to meet many of you and to be a part of an amazing team. Earlier this morning, we published a press release announcing the fourth quarter results for 2022. We expect to follow Form 10-K at a later date. I would 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 applicable securities laws. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our findings with the SEC. These documents are available on the investor relations section of our website. We do not update our forward-looking statements. During this call, we will 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 numbers, and those non-GAAP metrics with the related reconciliations. And with that, I would now like to turn the call over to Dave Schulte. Please go ahead.
spk03: Thanks, Matt, and good morning, everyone. It's been an eventful couple of months and a period of change for Core Energy. We will discuss the challenges we're facing and our responses, including streamlining our executive team. I want to begin by introducing Robert Waldron as the new president of Core Energy. In this role, Robert will oversee both the Crimson and MoGas organizations, as well as take on increased responsibility over the day-to-day operations. Robert will continue to serve as CFO for the near term. He has a long, diverse career in the energy sector with experience as an engineer, a finance professional, and a business executive. Robert joined Crimson in 2014 as CFO and has been active in all facets of the business since that time. His knowledge of our California pipeline operations has been a valuable asset to me and I believe to our investors as we have navigated uncertain times over the past two years. When Core Energy acquired Crimson, it was an easy decision to offer Robert the Core Energy CFO role, and I believe the company and shareholders would benefit greatly from his expanding influence as president. I would also like to introduce Chris Huffman, our chief accounting officer, who will present the financial report today as we expand and enhance his leadership role at Core Energy. Chris has been an integral part of our senior leadership team since 2021. Prior to that, he served 10 years as chief accounting officer at a private E&P company and began his career at PWC. The company is fortunate to have such a knowledgeable accountant and a strong leader. I'm excited for both of these colleagues as they expand their influence at Core Energy. I'll now turn over the call to Robert, who will spend a couple of minutes updating you on our operations, and then Chris will provide the financial comments and outlook. Robert?
spk05: Thanks, Dave. I'm grateful and humbled by the confidence and support shown by the board, Dave, and the rest of the Core Energy organization in my new role as president. The Core Energy team, from top to bottom, including a deep finance and accounting group supporting me, is best in class, and I'm excited about our future. Turning to the recent quarter, the fourth quarter saw continued steady performance from our predictable MoGas and Omega natural gas operations that serve St. Louis and the surrounding areas. We have several projects in the work for MoGas and Omega. For example, on Omega, we received a notice to proceed on the utility energy service contract project at Fort Leonard where our mega system is the natural gas local delivery system for the base. Activities are expected to begin in mid-2024. For MoGas, we are evaluating a project to support potential increasing customer demand on that system. These potential projects would add additional long-term contracted revenue to that division. Turning to our Crimson assets, on our last call, we indicated that Crimson's volumes increased in the third quarter 2022 due to operational issues elsewhere in California, which continued into the fourth quarter. However, we noted this was a temporary increase. The third-party operational issues have now been resolved in February, and volumes have returned to a lower level, closer to Q2 2022 volumes, which we believe will continue indefinitely. We believe the disruption in global supply patterns, which began a year ago, are still influencing California refiners, and we have experienced unprecedented volume shifts as a result. In order to offset the volume declines, in the first quarter of 2023, Crimson filed a 36% rate increase on its San Pablo Bay pipeline and 107% rate increase on its KLM pipeline based on the regulated cost of service tariff structure. The SPB filing was protested by shippers and will proceed through the CPC process with resolution expected in 2024 or 2025. The KLM filing is expected to be resolved shortly thereafter. However, we are always open to negotiating with our shippers to find a resolution acceptable to all parties, which could result in matters being resolved earlier. In California, we continue to believe our Crimson pipelines are a critical link in the state's energy infrastructure, operating under fixed tariffs for volumes transported with long-term investment-grade customers. While the last year has been a more challenging time for Crimson than when we had planned, We believe these assets will profitably fulfill critical energy needs in California for decades to come. Looking to the future, our Crimson assets have significant untapped value in the energy transition in California. Even as we work through these present challenges, we are advancing our readiness for the new hydrogen and carbon capture and sequestration markets emerging in California. Our Crimson systems and rights-of-way provide a critical linkage between large carbon and emission sources, and prospective storage reservoirs, an asset we believe would be difficult or even impossible to replicate today. We are working with multiple parties to determine the best path forward in these new market opportunities. The commercial case for CO2 capture is better in California than in any other state. The recent federal legislation increased carbon capture credits from $50 a ton to $85 a ton and $180 a ton for direct air capture. Plus in many cases, it's possible to also take advantage of the LCFS credit. The California Air Resources Board has set aggressive climate goals of a 40% reduction in carbon emissions by 2030 and carbon neutrality by 2045 and identified DCS as a central pillar to their target. Finally, we continue to make progress on our ESG initiatives. We intend to publish an updated ESG progress report updated update with the filing of our 10-K for 2022. Some of the highlights include scope one and two emissions have been reduced by 56% from the 2021 baseline. We have initiated a plan to reduce methane emissions by an estimated 65% by 2025, and we have implemented board oversight of wide-ranging cybersecurity and ESG programs for our critical business system. With that, I'll turn it over to Chris to address the financials and other notable items.
spk06: Thanks, Robert. 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've exhausted other avenues, such as improved cost efficiencies. We previously announced and began collecting a 10% tariff increase on Crimson's KLM system and a 10% tariff increase from the proposed 35% tariff increase on Crimson's Southern California system in Q3 2022. The company plans to file against collecting an additional 10% increase on its Southern California, SPB, and KLM systems on the anniversary dates of their original filings until the matters are resolved. We believe Crimson's cost of service fully justifies all requested increases. However, at less than $2 per barrel for most shipping routes on our system, we believe our rates are economically advantageous for our customers and the environment compared to the alternatives. Our rates are not the reason for volume shifts away from our pipelines, in our opinion. Looking at the results, fourth quarter revenue was $36.5 million, an increase from $33 million last quarter, as a result of steady performance from MoGas and Omega and improved volumes in California. We expect the Q1 2023 California volumes to be less than in Q4, as the operational issues that occurred in 2022 with a third-party pipeline have been addressed during February 2023. For the three months ended December 31st, 2022, we had adjusted EBITDA of 9.4 million and adjusted net loss of 553,000. CAD was a negative 2.8 million, impacting our ability to cover dividends. As such, the board concurred with management's recommendation to spend dividends on both our Series A preferred and common equity. Poor Energy's 7.375% Series A cumulative redeemable preferred stock will accrue dividends during any period in which dividends are not paid. Any accrued Series A cumulative redeemable preferred dividends must be paid prior to the company resuming common dividend payments. Consistent with our practice, our board will continue to evaluate dividends each quarter, making the decision on dividend payments based upon the most current data available. It is our goal to successfully bring the business through this difficult period and resume dividend payments as soon as is practical. To wrap up our 2022 commentary, unfortunately on March 3rd, 2023, after discussion with the company's management, our audit committee determined the company's 2021 10-K and 2021 and 2022 10-Qs require restatement due to an error in its accounting for EPS arising from over-allocation of crimson net income to non-controlling interest. Their statement does not affect key metrics the company previously disclosed for these periods, including net loss, adjusted net income, CAD, and adjusted EBITDA, and had no impact on the company's evaluations or decisions, including declarations of preferred or common stock dividends. I would refer you to our 8K that was filed earlier today for additional information. We're introducing our 2023 adjusted EBITDA outlook of $33 to $35 million, inclusive of maintenance expense in the range of $9 to $10 million. Maintenance capital expenditures are expected to be in the range of $10 to $11 million. These costs are not expected to be uniform throughout the year due to project timing. In Q1 2023, in response to the tough market conditions, we have realigned our corporate structure, reduced corporate G&A, reduced 2022 incentive bonus payouts, and senior management took a 10% salary reduction. The impact of all these actions are included in both our 2023 outlook and rate case filings. The management realignment, which is expected to reduce the layers of management and streamline the organization, will result in a $1.1 million restructuring charge in Q1 2023. Liquidity at quarter end was approximately $32.8 million, including cash at $17.8 million and $15 million of undrawn revolver availability. Our credit facility does place certain restrictions on utilization of cash and revolver capacity. Finally, in February 2023, we amended our credit facility to extend the maturity to May 2024. as well as defer the step down in certain covenant ratios from Q1 2023 to Q3 2023. This will provide us additional time to manage our near-term debt maturity and pursue previously announced asset monetization and leverage reduction initiatives. At this time, we will take questions from our covering analysts or institutional stockholders before closing the call. Thank you.
spk01: Thank you. At this time, we will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, please press star 1 if you have a question at this time. And please hold while we poll for questions. And we did have a question coming from Salman Akyal from Stiefel. Salman, your line is live.
spk02: Thank you. Good morning. Is there any update, I guess, on terms of the monetization initiatives that you've undertaken and what assets you're looking at potentially to use to reduce debt?
spk05: Yes, I'll take that. We don't have anything to announce yet on that. As we think about the company, obviously one of the first things you think about is monetizing assets to decrease leverage and provide a little more breathing room from our covenants. So we're looking at all opportunities there as well as refinancing opportunities and longer-term projects, but nothing specific to announce yet on the asset monetization side.
spk02: Gotcha. And then as I think about your credit facility being extended, I guess, essentially by three months, then I guess that would become current in May of this year?
spk05: It will.
spk02: Okay. All right. And then thinking about... sort of your expenditures that you've gotten. And I noticed you said they're going to be lumpy. But is there anything you could just help us with timing in terms of how you expect to incur those expenses?
spk05: So the lumpiness and, you know, you can see how that lumpiness has occurred in our disclosure in the MD&A section. You know, we disclosed assets. maintenance expense, which is inside of EBITDA. It's an operating expense, and then maintenance capital separately. So it's hard to predict those. We actually have done a lot of work in 2023 budgeting process to try to smooth them out. So we don't anticipate it to be as lumpy as it was last year, but it's really hard to say – quarter to quarter exactly what that'll be.
spk02: Okay. And when that'll be incurred. Okay. And last one for me, when do you guys anticipate having your K out?
spk05: Chris, do you have a date, the date on that?
spk06: We don't have a specific date yet, but we don't expect it to go beyond the end of March, which would be our kind of filing deadline within the 90 days.
spk02: Got it. All right. I think that does it for me. Thank you very much. Thanks so much.
spk01: Thank you. And I would now like to hand the call back to Dave Schulte for some closing remarks. Dave?
spk03: Yep. Thank you all for joining us today. This is a challenging period, but we are moving forward to resolve the underlying issues and we'll provide updates as appropriate. Feel free to contact our IR team if you'd like to arrange a meeting time or a call. Thank you and have a great day.
spk01: Thank you. This does conclude today's conference. You may disconnect at this time and have a wonderful day. Thank you for your participation.

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