SunCoke Energy Partners' CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.26.13 | About: SunCoke Energy (SXCP)

SunCoke Energy Partners. (NYSE:SXCP)

Q1 2013 Earnings Call

April 25, 2013 10:00 am ET


Ryan Osterholm – Head of Investors Relations

Frederick A. Henderson – Chairman and Chief Executive Officer

Mark E. Newman – Senior Vice President and Chief Financial Officer


Bayina Bashtaeva – JPMorgan Securities LLC

Brett Levy – Jefferies & Co.

Andre Benjamin – Goldman Sachs& Co.

Sam Dubinsky – Wells Fargo Securities


Welcome to the First Quarter 2013 Earnings Conference Call. My name is John and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Ryan Osterholm. Mr. Osterholm you may begin.

Ryan Osterholm

Thank you. Good morning everyone. Thank you for joining us on the Suncoke Energy and Suncoke Energy Partners first quarter 2013 earnings conference call. With me are Fritz Henderson, our Chairman and Chief Executive Officer, and Mark Newman, our Senior Vice President and Chief Financial Officer.

Following the remarks made by management, the call will be opened for Q&A. This conference call is being webcast live on the investor relations section of our website at there will be a replay available on our website. If we don’t get your question during the call, please call our investor relations department at 630-824-1907.

Now, before I turn over the call to Fritz, let me remind you that the various remarks we make about future expectations constitute forward-looking statements and the cautionary language regarding forward-looking statements in our SEC filings apply to the remarks on our call today. These documents are available on our website as a reconciliation of any non-GAAP measures discussed on this call.

Now, I will turn it over to Fritz.

Frederick A. Henderson

Thanks Ryan, good morning. Our first quarter 2013, we accomplished a couple of pretty significant strategic milestones. First, executing the MLP IPO of SunCoke Energy Partners. We did recently declare the first quarterly distribution prorated for the 67 days, which the business was public.

We also given the strong performance of SunCoke Energy Partners and specifically the Middletown and Haverhill coke batteries, we do expect and we announced that we would expect to increase our quarterly distribution by about 2.5% in the next quarter anticipates an overall increase of approximately 7% for the Q4 2013 distribution, which would be paid in early 2014. We also completed and closed our joint venture with VISA Steel, called VISA SunCoke, marking our entry in India, invested our $67.7 million with a 49% stake in the business.

Our coke performance in our core business was improved and that was half of a good period last year. So we feel good and we will take you through more detail about that. That’s driven by our Middletown facility as we will talk about later the one plant where we had to struggle has been in our Indiana Harbor plant, but the rest of our operations have performed steadily relative to, I think a good period last year and Middletown continues to post back good results.

Our coal business, we did see in the quarter progress on productivity and reduce cash costs. We will take you through that. What we also saw is a significant reduction in price, which is what we expected coming into the year.

And finally, we ended the quarter with substantial flexibility about $200 million of cash attributable to SXC at the quarter even after the Indian investment in $106 million at SXCP.

Turning your attention to page 4; the EPS and adjusted EBITDA. EPS is $0.03 in the quarter, again reflected from an operating standpoint largely the decline we saw in our coal business. We also saw a number of items, which didn’t affect EBITDA, but did affect EPS, so one was some accelerated depreciation expense in Indiana Harbor as we refurbished that plant. We accelerated the depreciation associated with prior expenditures. We did see that coming into the year, so we saw that in the first quarter.

We also saw income attributable to SXCP. In other words, the earnings of the Company that we are now attributable to SXCP that was about $0.07, also was something we foresaw as we came into the year once we closed the deal.

And third, we saw some both debt issuance cost and this was basically a write-off, largely a write-off not exclusively a write-off of debt issuance cost associated when SXC went public, some portion of that debt was paid off as part of the public offering at SXCP, and we incurred some write-off of that prepaid expense.

We also saw some tax adjustments in the quarter which Mark will take you through later in the call. So we had a number of items effect EPS, but didn’t effect EBITDA and our adjusted EBITDA, it was down driven by coal and coal segment performance. But the result were really in line with our expectations as frankly as we looked at it, it was a little bit better than our expectations on operations.

And as a result of that, we do reaffirm today our 2013 consolidated adjusted EBITDA and EPS guidance for the year.

Let me turn it over to Mark.

Mark E. Newman

Thanks, Fritz. As Fritz says, this is a good quarter in line with our expectations. We started with revenue being down as all of you know coal is a pass-through in our coke business model. So with lower coal prices it affects our revenue, and so in part it was due to coal prices both in our coke business and our coal business and in part due to lower volumes in terms of coke sales primarily driven by production at Indiana Harbor.

On the EBITDA front, our coke business continued to improve. We saw an $8.8 million improvement year-over-year largely driven by a Milton, and I’ll take you through that in the EBITDA bridge later on. And then coal was negative in the quarter, again driven by a $50 per ton year-over-year price decline, which was partially offset by about $23 cash costs per ton reduction, I’ll take you through that in more detail.

On the EPS front again, a number of items that we expected, the accelerated deprecation at Indiana Harbor. Our forecast for the full-year, when we took you through our full-year guidance last quarter was $0.14. So this quarter is relatively heavy again, the refurbishment is well underway, but our full-year expectation still remains at $0.14. We did have the debt issuance related to the MLP again, we had expected this to be $0.05 to $0.06, so this came in line.

And then finally, the income attributable to SXCP is approximately $0.07 in the quarter and/or against our expectation for about $0.30 for the full-year. The one item that we did not expect that relates a number of tax items. I’ll take you through out when we go through the EPS bridge, but that was about $0.05 in the quarter.

Turning to the EBITDA Bridge on chart six, again adjusted EBITDA of $52.3 million, down slightly from the $55.5 million last year. We benefited, I just say, the comparison to last year on the coke business was that we had a great start in Q1 2012, and all of our plans ran very well and Middletown was in startup. So when you compare to last year, what you see is Middletown is up $8.8 million in part due to better cost recovery in the second year of production.

And then when we compare to Q1 of last year, we have lower, we didn’t have startup cost and we had some yield issues last year as we were starting up the plants that we don’t have this year. So Middletown was significant contributor, but compared to the other plants, has a better, has an easier comp on a year-over-year basis.

At Indiana Harbor, the refurbishment is well underway, but it is impacting our operating performance. We’re basically trained to refurbish the plant while we run it. And so, what you’ll see is on an operating basis, we are down $3.1 million year-over-year. However, last year we had $4.3 million of non-recurring items related to coke inventory and coal pad, pad coal adjustments to market.

The rest of our coke business shows a slight negative $2.2 million. I would say most of that can be attributed to one less train out of our Jewell operations being placed in the quarter. And with the drop in coal price we also had some inventory losses in the quarter at Jewell of about $1 million, that explains most of the variance.

Again, coal mining is the big negative on an EBITDA basis in the quarter and again driven primarily by price, I’ll take you through that later. Finally, corporate is favorable. We had a favorable legal settlement in the quarter. We also had some favorable hedging on the Indian rupee related to our investments. And then finally, we had year-over-year lower incentive comp related to some forfeitures in the quarter.

So net-net a good quarter where our coke business basically partially offset very weak coal earnings. On the EPS bridge on chart seven, as I mentioned earlier, the EBITDA impact on EPS is relatively small. And then the rest of the items we’ve highlighted earlier, again the Indiana Harbor refurbishment accelerated depreciation, the financing cost are relative to the MLP IPO.

On the tax items there were really three items in the quarter. They are about $3.7 million in total or about $0.05. About half of that or $1.7 million relates to provision for certain tax credits that we believe Sunoco may use under the tax sharing agreement.

As you'll recall since the IPO, Sunoco has used approximately $229 million of tax attributes of SunCoke, but those have flown through our equity account. With one year anniversary of the distribution, any further adjustments will flow through our P&L. And so what we have in this quarter is a relatively tiny adjustment of $1.7 million vis-à-vis the $229 million that have been used, but it obviously affects our EPS.

Additionally, we determined in the quarter that Middletown, the city of Middletown has a steady corporate income tax of 1.75%. And so, we had some prior period adjustments and some valuation allowances related to that item and the combination is approximately $2 million.

On a run rate basis, the city of Middletown income tax will result in about $1 million annually of tax expense. And we do not expect based on the NOLs at Middletown, that Middletown will be cash taxpaying before 2017. So no near-term cash impact, but obviously $1 million annually and it affected us in the quarter relative to valuation allowances, as well as there were some other state apportionment adjustments as a result of the MLP.

And then finally as Fritz mentioned at the beginning of the call we will see in every quarter this year a year-over-year unfavorable variance related to the income attributable to the non-controlling interest. I'll just remind you that it really relates to the public unitholders in the MLP, as well as any income that flows through to our investment partner at Indiana Harbor.

Okay, turning to liquidity, on chart 8, you will see that we ended the quarter on a consolidated basis with cash at SXC and SXCP of $307 million. And then we roughly have $250 million undrawn revolver capacity between the two entities. As you will know, we try to call out the impact of the IPO transaction after the repayment of the debt at SXC of $225 million were essentially left with $157 million of cash proceeds between the two entities.

In the quarter I wanted to draw your attention to the working capital, which was unfavorable to the tune of $17.5 million. We did have one customer who didn't pay on time in the quarter. The quarter ended March 31 was a Sunday, the prior Friday was Good Friday, and so we ended up receiving the payment on Monday on April 1 of $24.5 million, and we've called that out here in the footnotes.

In addition, we made a payment of $11.8 million to a customer on some accrued sales discounts and we paid those early and received a discount on those discounts that were owed to the customer. So in the quarter we have, I would say roughly $36 million or $37 million of items that you could normalize relative to our cash performance in the quarter.

And then finally on CapEx and investments, relatively heavy quarter of $98.2 million in total and that includes the work that we are doing at Indiana Harbor, the environmental remediation at Haverhill, and then finally, the $67.7 million investment in VISA SunCoke. So we ended the quarter I think with very strong liquidity in spite of fairly heavy CapEx and investment.

Turning to chart nine, our domestic coke business summary as you will see our production is down slightly year-over-year, mainly due to ongoing issues at Indiana Harbor where we complete the refurbishment, while we have production up in the two plants that are in the MLP; Haverhill and Middletown.

On the EBITDA per ton basis we’re up year-over-year from $51 per ton last year to $58 per ton. The other thing I’d point out on this chart on the right hand side, we have combined our Jewell coke and other domestic coke segment into a segment known as entitled Domestic Coke. As we’ve explained while they were historic differences between the Jewell coke and the other domestic coke contracts, those differences went away in early 2011, and so perspectively we’ll report all of our domestic coke as one segment going-forward.

While we were on this chart, I just maybe want to highlight that we do have some outages plan at Haverhill and Middletown in Q2. And so our expectation is Q2 based on these outages will likely be in the lower-end of our $55 to $60 EBITDA per ton guidance range for Q2. So, I just want to leave you with that before we leave this chart.

All right, turning to coal, again a tough quarter, we reported EBITDA loss of $5 million, so down $12 million from the prior year. As you’ll notice our coal price went from $171 per ton last year to $121, so down and even $50 per ton. We are though very encouraged in spite of the EBITDA performance in the quarter by the progress that we’ve made in our cash cost per ton, and what you’ll see is that in the quarter cash cost on a total basis was down from $150 per ton last year to $127 in the quarter.

And I just remind you that we’d guided this year that our Jewell cash costs per ton will be $145 and our combined cash cost would be $130. So, already in Q1, if you look at the Jewell underground cost in Q1 of $129, we’re well ahead of the guidance based on the actions that we took starting in Q4 last year, and quite frankly continuing into Q1. The coal action plan as I mentioned continues to make good progress, and I would say that clearest indicator of the progress that we’re making in coal mining is our volumes year-over-year are essentially flat, but we’re doing that with four fewer mines, and with a staff reduction of about 20%. So, I think the numbers on any level speak for themselves obviously more work to be done as we move forward, but we were very encouraged by the early progress that we have made.

And then finally, in addition to reaffirming our full-year guidance at SXE level despite a loss of $5 million in the first quarter reflect comfortable with our guidance of EBITDA somewhat in the range of zero to minus $15 million for the full-year. I would point out that in Q1 we had roughly $0.7 million of severance costs. So if were just sort of take that out of the Q1 number an annualized that if already be close to a loss of $16 million. The other thing I would point on this is this was a relatively low volume quarter for partner Revelation Energy, and we expect more contributions throughout the year from Revelation production in terms of our average cash costs, and then I would also say, we expect to make more accomplishments in our own Jewell underground mines in terms of our full-year cost.

Okay, turning to our SunCoke Energy Partners results; again this was a very, very strong start to the year. Our production was up at both Haverhill and Middletown and you will see it reflects in our financial results, again we have flagged here in footnote one; that net income will be subject to this Middletown city income tax perceptively. When we look at the profits ability measures down below, what we try to do here is provide a pro forma adjusted EBITDA, which essentially ignores this tough period through January 23. So these EBITDA numbers and distributable cash flow are essentially making the MLP effective January 1 even though it went into effect on January 24.

$26.5 million of adjusted EBITDA I’ll remind you, compares to roughly $21.8 million in Q4 of last year of predecessor entity. And then the distributable cash flow of $22 million in this quarter, compares to $14.9 million in Q4, as a result we end up with versus our minimum quarterly distribution with a distribution coverage ratio in the quarter of 1.66.

Turning to the liquidity position of the MLP again what we try to do here is flag the starting cash balance after the MLP IPO transaction at SXCP. So if you net those first three numbers, our three bars on the left hand side of the chart, but we started with $118 million in cash basically after all the dust settled. And then, we ended the quarter with a $106.2 million in cash, so we’re down roughly $12 million, so you would ask well how come we’re down in cash in spite of very strong operating results.

First, you will recall that the parent SXC retained the accounts receivable so there is a build of accounts receivable. In addition, the sales discounts that were paid out early, the accrued sales discounts resulted in a net outflow of $11.8 million, and then we actually had more cash at our operating units, which we distributed out to the respective shareholders so 65% SXCP, 35% back to SXC, so you’ll see there is a distribution of cash to SunCoke SXC of $11.8 million. So it’s roughly between the discounts and the cash to SunCoke is roughly $24 million of cash leaving SXC.

In addition, we completed some of the environmental remediation in the quarter and had ongoing CapEx of $1.2 million. So we end up with a $106 million in cash, $62.5 million is really air marked for completion of the environmental remediation and you could consider $43.7 million effectively excess cash.

We ended up with a little more cash at the MLP that we intended based on our calculation of the accounts receivable unwind, but really that positions the MLP well to grow by acquisition, which is what we intend to do.

Turning to chart 14, which is our SXCP updated 2013 outlook, you will recall in the prospectus that we called for 1.15 coverage ratio, in our Q4 earnings release we updated that reflects a lower debt issuance cost at the MLP to 1.16, and as we sit here today, with Q1 behind us, our view is the 1.16 coverage ratio for the full year, which is driven up $88.3 million of EBITDA is really the low end of our outlook for the year and we expect the high-end could have $93 million of EBITDA or roughly $66.1 million of distributable cash flow, which will nearly put us behind of the range at 1.25 coverage ratio.

So, on chart 15, as Fritz outlined earlier, we have declared our first quarter cash distribution again this is prorated for the fact of the MLP IPO closed on January 24. And then given the confidence and the outlook that we have just taken you through, we expect to increase our quarterly cash distribution by approximately 2.5% for the next quarter and anticipate an overall increase of 7% for the Q4 2013 distribution, which we paid in early 2014.

So as we turn to our 2013 outlook and priorities, I’m now on chart 17. Again, we’ve laid out for you our full year guidance and we’ve tried to flag on the chart the only thing that changed from the guidance that we provided you in our Q4 earnings release. And as a result of the tax items in Q1, our expectation is that our full year effective tax rate will be 14% to 20%.

We are reaffirming our EPS, and so I think, the logical detection is that we’re more comfortable with our adjusted EBITDA outlook for the year and as such, we are reaffirming that, our EPS of $0.30 to $0.55 for the full year.

And with that, I will turn it back to Fritz to wrap up the call.

Frederick A. Henderson

Thanks Mark. Just wrapping it up, chart 18, lines of priorities for 2013. Three colors that we continue to work from and then we shared this was the number of investors over time. Starting from the left side with operational excellence, sustaining our momentum with our coke facilities, executing the Indiana Harbor plan and that really involve refurbishing the plant while we run it, involves addressing the environmental non-compliance that we had in prior periods, the NOV and a significant model of what we’re doing to refurbish the plant not [acutely], but we’ll certainly significantly improve our environmental performance as well and we have seen improved environmental performance to this year at Indiana Harbor.

And then finally, renewing the contract with ArcelorMittal and concurrently doing so with Coke Energy, which is our partner in the backend of the plant. So, Indiana Harbor is a multifaceted project, but as I think about our Pareto chart of things to do on the operating side of the business, this remains the critical operating priority for us, both refurbishing and executing the project, improving production, improving cost, improving environmental performance and renewing the contract. Discussions continue with us and Middle by the way in that regard.

Implementing the environmental project at Haverhill and Granite City with Haverhill being the lead project, the lead for that project, so Haverhill has begun to show in the CapEx for SXCP. Continuing to execute the coal mining action plan to decrease cash cost we were encouraged by what we saw. Mark mentioned the productivity factors, and I think we see that we can continue to make progress in that area and then, finally, maintaining top quartile safety performance.

In terms of growing the business, I’ve a little bit to say on this on the next chart as well. Domestically work continues to permit another site. Again our preferred location is in Kentucky, not the exclusive one. If things will workout well that is our preferred location, identifying opportunities to grow thorough acquisition and evaluating adjacent business lines, we’ll talk about in the next chart.

Internationally we closed VISA SunCoke joint venture and our full focus really internationally today, in addition to supporting our plant in Brazil though, is to execute our plan in India and growth in India. Finally, optimizing our assets, I think we have achieved a smooth launch for SXCP MLP, from a coal perspective, leaving us maximum flexibility strategically while addressing the operating issues that we faced over the last several years, and then, effectively putting the balance sheet to SXCP to work.

A good segue to my last chart, which is page 19. How do we put the balance sheet for these companies to work? As we think about our priorities for growth, the first priority is our core business, our coke making business. Obviously we do work from another plant, because we expect that – we actually are, we believe that we will have an opportunity to build that plant. But that’s often the future and there is no guarantee in that regard and even if we execute it, it would generate EBITDA by 2016. So no earlier than that. So it’s also about opening up discussions with customers regarding the potential to acquire coke batteries.

We have been in active discussions with the [black] furnace manufacturer different levels of interest. I would say the degree of integration in still operation and environmental issues will impact complexity and timing of any transaction. And interestingly I am asked many, many times by investors about our customer concentration. Anything we do in terms of acquiring will likely will continue to be concentrated, because there is only five blast furnace manufacturers in North America today, three of which we already serve, so it gives you some sense of what we are doing in the coke making.

We are also looking at – I call this a form of backward integration within our business, although it’s not exclusively backward integration, it have to do with coal handling and processing. The chart outlines some of the things that we are looking at here. Our focus on for MLP and these are all things that overtime are intended to go on MLP.

One of the key challenge for this so, is to continue to look at opportunities that provide long-term offtake agreements with limited or no commodity exposure, so that continues to be our focus. Hence, for example of discussion with handling and processing, you wouldn’t anticipate taking any meaningful commodity exposure in that regard.

And finally, on ore processing, we are researching the opportunity to generate qualifying income in this area. This is in the Steel value chain, but obviously we participate in the carbon side of the Steel value chain today. The questions that we have are, can we participate on the ferrous side, for example concentrating or palletizing or transporting. So the work here is about discussing opportunities with potential partners and customers and continuing to do our work to ascertain and determine and confirm that it would generate qualifying income. If it didn’t generate qualifying income, we would like not to pursue those sorts of things, I think we are reasonably confident that it will.

So that wraps it up. I would say, the last point I would make on ore processing is, this is our opportunity to diversify our customer base in addition to generating opportunities to grow the MLP.

So thanks very much. We will take questions.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Dave Katz from JPMorgan Chase. Please go ahead.

Bayina Bashtaeva – JPMorgan Securities LLC

Hi, good morning. This is Bayina Bashtaeva for Dave Katz. So we appreciate your color on liquidity that you provided earlier. But we were just hoping to drill a little bit more into that. Could you please provide the revolver balance at the end of the quarter for both entities?

Frederick A. Henderson

So the revolver balances, we have $150 million at SXC, $100 million at SXCP and they are both, I think almost they are completely undrawn.

Mark E. Newman

Right. So the SXCP $100 million revolver is completely undrawn. We have a $0.9 million LC against $150 million revolver. So it’s effectively undrawn.

Bayina Bashtaeva – JPMorgan Securities LLC

And if you just, can give me like what are the debt instruments at the end of the quarter at SunCoke Energy? The debt balance? Just trying to make sure…

Frederick A. Henderson

So at the end of the quarter, as a result of $225 million pay down of term loan at SunCoke, we have approximately $100 million of that term loan I think it’s about $99 million outstanding, and then we have $400 million of senior notes. At the MLP, we have $150 million of senior notes which we issued as part of the IPO transaction.

Bayina Bashtaeva – JPMorgan Securities LLC

Thank you so much. And my second question is regarding your proposed investment in ferrous side of the fuel value chain. Where would you think about investing geographically and what choices are made when evaluating any partner investments?

Frederick A. Henderson

So geographically if we are talking about MLP investments, we will be looking at North America and in particular in the U.S. There are MLP assets today and publicly traded MLPs that are in Canada. So I would say the U.S. and Canada would be a geographic focus relative to MLP growth. Outside of MLP growth our single focus remains in growing our India presence and building on our franchise of VISA SunCoke.


Our next question comes from Brett Levy from Jefferies. Please go ahead.

Brett Levy - Jefferies & Co.

Hey, guys. You’ve got a good venture going in India and yet China is still the big monster with 700 million plus of capacity, most of it integrated. What are the challenges and have you located any opportunities on the China side of the ledger?

Frederick A. Henderson

Brett, good morning, I would say we have not identified any opportunities on the China side. There is no shortage. We’ve done a fair amount of work on research. We’ve been over to China, we’ve talked to partners, we’ve talked to steel partners, we’ve talked to steel makers. Interestingly there is about 400 million tons of coke production – actually there is coke production of about 400 million tons. I think there is coke capacity well in excess of that. And, interestingly about 30 million tons of that is heat recovery in one way, shape or form.

I would say that the market is over supplied in a pretty significant way, and we have not identified the opportunity which we think would put us in a position to be needed and wanted, in other words, I really think that the strategy in China as you need to bring something this unique and different and makes you an interesting opportunity for our partner and or for our customer. And we haven’t identified that. So our focus today therefore is on India. We continue to watch what’s happening in China, because it is the single largest with 16 of global coke production takes place in China. But when we look at the opportunity to grow our focus is not only on growing our production, it’s growing our profitability. And I really haven’t identified there is an opportunity in China that we think would result in a good investment. So at this point, it’s maintenance and we’re going to focus on making India successful.

Brett Levy - Jefferies & Co.

Okay and the second one is bit more of a bondholder question, vis-à-vis where your leverage is now and sort of as you look at your initiatives going forward. Are you kind of where you want to be from a leverage standpoint or do you seek to delever at any point or is there anything sort of even more levering that you would consider?

Mark E. Newman

So Brett, it’s Mark. What I would say is let’s start with the MLP first. The MLP today is levered at about 1.7 times. And we would say 3 to 3.5 times is probably a good ongoing leverage ratio for that entities, so the MLP is intentionally under levered to basically allow it to grow through acquisitions.

At the C Corp up at SXC, we achieved actually a very significant deleveraging with the IPO transaction, and so today I think we are approximately three times levered up at the parent, which I would say is somewhat conservative, it feels comfortable to us. So I would say, we think the parent is appropriately levered, maybe a little under levered. MLP is under levered intentionally so that we can grow it.

Brett Levy - Jefferies & Co.

Thanks very much guys. I’ll get back in queue.

Frederick A. Henderson

Thanks Brett.


Our next question comes from Andre Benjamin from Goldman Sachs. Please go ahead.

Andre Benjamin – Goldman Sachs& Co.

Good morning.

Frederick A. Henderson

Hi Andre.

Andre Benjamin – Goldman Sachs& Co.

Good morning. First is a multipart question. I was wondering if you could help us think about how to handicap how much of the 4 million tons of MLP assets you identified that you think will actually end up being suitable once all is said and done? How should we think about the likelihood of getting deals done for the coke assets versus some of the other stuff like coal and iron ore, which you identified as likely to have a shorter cycle in terms of getting deals done? And I guess the last thing is how do you think about the risks of operating some of those assets since they are not really part of your core business?

Frederick A. Henderson

Okay. One step at a time. Let’s talk about the 4 million tons of batteries that we think would potentially be acquired and I will also talk about the 4 million of batteries that we think that potentially should be retired. Let me start with the 4 million tons of batteries that could potentially be retired. The plan we’re working on – the project we’re permitting in Kentucky our preferred location to be 660,000 ton. So if these batteries – we see a pretty regularly the old and very old coke batteries continue to wear down and wear out. So again this is why we’re pursuing permitting another plant would generate EBITDA till 2016. However this is our core business; building and executing heat recovery projects, and so we continue to work on that.

On the acquisition side, I would say again there are five people to speak with. So and we know all five, so the dialog has begun, I would say, the complexity of the assets not only their environmental footprint, but their degree of integration raises, what I call it deal complications, not insurmountable. And I think we’ve shown a willingness and an ability to deal with complicated structuring issue. So I think that the issues regarding the assets themselves can be addressed, I would say the issues of customer interest is varying, I mean some customers are really not particularly interested, some are quite interested. And some are well, show me what the numbers are. So that’s the reason why we’re talking to all of them.

And so I would say as a practical matter, as I look at it, the ability to execute a deal in 2013 for example, it could be done, but not likely, just because these are going to take some time. And in terms of the operation of it, we know byproducts of batteries run. This we know, we have people in our company that have got experience with them, but reasonable chance if we do a deal, we’ll bring and manage the team as part of that. So I think that we feel confident operationally with respect to that. So what I would say is, work continues on the 4 million tons of coke plants that we think are viable acquisition candidates and we’ll keep you posted, but I really don’t as a practical matter sitting here in the end of April, if we even lower the flag today and had a deal signed up in terms of, I’ll call it the memorandum of understanding. I don’t see it closing before the end of this year because it just takes time. We don’t have that today.

And then the other areas operationally it is true we are not in those businesses operational today. What part of it for example the handling, we are in those businesses. We do so in a small way and obviously the transportation of coal into our coke plant and the management of the logistics associated with that we know that business, where key customer, I think we’re the second largest purchaser for example net coal in the U.S., so it’s something we know reasonably well and again if we’re doing acquisition, generally bring the management team abroad with it.

On the ore side, that’s further a feel for us operationally. In part as we said in the chart, Andre, we’re doing research in terms of the nature of qualifying income which is for us kind of a threshold issue for us to pursue this initiative and my sense is that if we find something attractive and interesting here, we very well could do so in some form of partnership and we certainly would acquire some management because we wouldn’t necessarily this is not something we’ve just build on to my existing coke management team. We need to augment our resources and do it.

Andre Benjamin – Goldman Sachs& Co.

Very, very helpful and then a complete answer. I guess the shorter follow-up would be maybe an update on where you stand in VISA SunCoke just in terms of management and Board appointments and coming up with the strategy and kind of when you hope to maybe update us on all of that?

Frederick A. Henderson

So Andre, the VISA SunCoke board will be three members from each of the two shareholders, so while we hold a 49% stake, the company will essentially have a dead lock board. In addition, our VISA steel partner will appoint the managing director or the CEO as we’d call it in the U.S., we will appoint the CFO. So CFO will be a SunCoke employee and stay conduct to the venture. And both the CEO and CFO will sit on the Board of VISA SunCoke. In addition, from our side Mike Thompson our COO and Nelson Garcez, our Head of our Venture Development, will sit on the Board. And then from the VISA Steel side, I think both sons of the founder will be on the board as well. So the board will be well represented and we will appoint a key senior leadership in the venture.

We are still working on our CFO appointment, we’re getting very close. At the current we have an interim person who is part of the SunCoke team on the ground in India.

Fritz Henderson

Yeah, just to fill that out, Mark is right. We actually are also going to be augmenting the operating resources at the venture, not on a board level, but the intention is to bring aboard some operating talent to second them the venture as well. And the objective here is to build a bridge if you will from technology, from SunCoke into our venture in India, but do so within Indian nationals. So there will be a fair amount of support here from while, but nonetheless we think having assets on the ground, people on the ground is going to be helpful. So I would say, the CEO is named, Mark is correct, we're very close to naming the permanent CFO and the board is basically constituted. The one thing I would add is that, we have a 50-50 board, our objective is to not deadlock it. But it can be deadlocked if it needs to be so, but it's a true 50-50 venture notwithstanding our 49% interest.


(Operator Instructions) Our next question comes from Sam Dubinsky from Wells Fargo. Please go ahead.

Sam Dubinsky – Wells Fargo Securities

Hey, guys, thanks for taking my question, just a couple of quick ones. Can you walk me through the $93 EBITDA per ton SXCP again? What in there was one-time, what should we model for Q2 based on maintenance outages, and then I I have a couple of follow-ups.

Mark Newman

Well nothing in the 90 – I wouldn't, Sam, it’s Mark. Nothing in the $93 per ton is clinical one time. We did have a very strong quarter and obviously on a year-over-year basis, Middletown is benefiting from not having startup costs and having better cost recovery in the quarter. The outages that I referred to are in Q2 and let me just check my notes here, I think are both at – actually at Haverhill and Middletown, related to (inaudible) work, work on our heat recovery steam generators.

So I guess what I was flagging is really two things. One that at SXC level, I would expect our EBITDA per ton to be down again, within the range, but maybe at the lower end of the range in Q2. With respect to SXCP what you shouldn't do based on our full-year guidance is annualize Q1 based on relatively strong start on a year-over-year basis.

Sam Dubinsky – Wells Fargo Securities

Okay. And then on maintenance CapEx for the MLP, it looked pretty low in Q1. I assume that uptick's in Q2 and then trends down with the maintenance?

Mark Newman

Yeah, usually outages draw in maintenance CapEx, and so I would expect both our EBITDA and distributable cash in Q2 to be lower than Q1, albeit it on a full-year basis, we do feel like the range of coverage is between 1.16 and 1.25, the current MQD.

Sam Dubinsky – Wells Fargo Securities

Okay. And then one last housekeeping question on that. I think your interest expense at the MLP level looked a little bit high, the financing. What is that going forward? I think it was in the $6 million range. What is that going forward?

Mark Newman

Yeah, three is – I think there is roughly $800,000 in Q1 related to the debt issuance. It's about $3 million, it's basically the – we'll get it for you offline, I don't have any details.

Sam Dubinsky – Wells Fargo Securities

Offline, okay. But it does go down, okay. And then my last question is just conceptual. If you look at import pricing for coke, it has declined pretty significantly. Do you think this causes the acceleration of retired age of coke plants that are set for retirement? Do you think some of your steel customers may shutdown or any steel company may shutdown some of their aged plants because imported coke is cheap or do steel companies tend to look much, much longer-term than that?

Frederick A. Henderson

We tend to look longer-term. They don't like the import seaborne coke in part from a quality perspective. It’s highly uncertain with long logistics pipelines and if there is anything wrong with the coke shipment, you will have no ability to react. So they generally don't like to do that. Our customers have actually all perused strategy to be self-sufficient including us.

So I would say though that what you have seen is, in a place like India we’ve seen the Chinese Coke that come into that market. We’ve also seen in Europe, Ukrainian Coke be excepted. The Italian blast furnace, for example, that just recently was shutting down, its byproduct elements, I think you will see some more imported coke into Europe. Our view is the logical place for that to come in is from the Ukraine. Interestingly today, what you’ve seen is the significant downdraft in Chinese prices and I look at that and I think of it as a timing issue.

China still imports a reasonable amount of hard coking coal and/or long coke. So they are trying to get rid of it. Once you get rid of it, the question is do you reorder it to take more losses and I think that’s part of the reason why our customers think longer term. You can have short-term fluctuations in the price of coke, but over time the production cost and the coal cost will be the key driver and not certain if I think about U.S. customer. They’re going to prefer coke sourced here with coke sourced here.

Sam Dubinsky – Wells Fargo Securities

Yep, yep, yep. Okay, great. Thank you very much.

Frederick A. Henderson

You’re welcome.


Our next question comes from the line of Lucas Pipes from Brean Capital. Please go ahead.

Derek Hernandez – Brean Murray, Carret & Co.

Hello. Good morning. This is Derek Hernandez for Lucas Pipes

Frederick A. Henderson

Hi, Derek.

Derek Hernandez – Brean Murray, Carret & Co.

Hi. I guess my first question would be on your coal mining recheck rate. If there is any anticipation of on an improvement on that metric going forward?

Frederick A. Henderson

I would say it was 56% in the first quarter, was improved from the first quarter of last year. It was in line with where it has been running. We have made some investments in our prep plant to improve, put a new cyclone into circuit. We have very fine coals and it’s helped us. I would say though that the principal driver of the low cash cost has more to do with productivity in the mines and man power equipment productivity that has been redecorate. So, if we do see improvement and I do think we can you’re not going to go from 66 basis points to 60 basis points or 58 basis points. It will be measured in basis points, if you will, rather than in 4 percentage points.

Derek Hernandez – Brean Murray, Carret & Co.

I see. Very good. And then, I was just wondering if you had any further commentary on your Indiana Harbor contract negotiations?

Frederick A. Henderson

No, not really. Nothing to add from what I mentioned in my presentation. The dialogue continues with ArcelorMittal and SunCoke Energy. The contract reaches expiry at the end of September. I can’t say that ours is in the middle. I mean, it’s a very productive, constructive dialogue. I mean I think the challenges we face at that plant operationally have been considerable and frankly have been more than we thought. We thought we’re going to have challenges coming in to trying to refurbish the plant and run at the same time. We don’t have the experience doing that. And so, it’s been a pretty significant challenge for us. We’ll get our arms around it. We’ll get behind it and then in the meantime kind of along side you have the dialogue with ArcelorMittal and SunCoke Energy. That continues. I’m quite comfortable we’ll reach an acceptable, reasonable outcome with them. Their blast point continues to be strategic to them. There are no other alternatives. It’s a practical matter and as a practical matter this is the highest to best use for us the supply the platforms there. So one of these were we need them, they need us and I think we’ll come to a reasonable outcome.

Derek Hernandez – Brean Murray, Carret & Co.

Very good. Thank you very much.

Frederick A. Henderson

You’re welcome.


We have no further questions at this time.

Frederick A. Henderson

Yep. Well, thank you, operator. I think it wraps it up. Appreciate everybody’s interest and participation today in the call and look forward to talking with you regular basis and reporting next quarter. Thanks very much.


Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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