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SunCoke Energy Partners LP (NYSE:SXCP)

Q1 2014 Earnings Conference Call

April 24, 2014 9:00 AM ET

Executives

Ryan Osterholm - Investor Relations

Fritz Henderson - Chairman and CEO

Mark Newman - SVP and Chief Financial Officer

Analysts

Operator

Welcome to the SXCP Earnings Call. My name is Christine and I will be the operator for today’s call. At this time all participants are in a listen-only mode. Today's call will be on listen-only. Please note that this conference is being recorded. I will now turn the call over to Mr. Ryan Osterholm, you may begin.

Ryan Osterholm

Thank you, good morning everyone. And thank you for joining us on the SunCoke Energy Partners first quarter 2014 earnings conference call. With me this morning are Fritz Henderson, the Chairman and Chief Executive Officer of our General Partner; and Mark Newman, the Senior Vice President and Chief Financial Officer of our General Partner.

Last night we announced our intent to offer additional common units in SXCP accordingly, because we are in registration, we will not be taking questions at the end of this call. This conference call is being webcast live on the Investor Relations section of our Web site, at www.sxcpartners.com. There will be a replay available on our website.

Now before I turn over the call to Fritz, let me remind you that the various remarks we make today 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 are reconciliations of any non-GAAP measures discussed on the call.

Now, I’ll turn it over to Fritz.

Fritz Henderson

Thank you and good morning. On page 2 we summarized the results from the first quarter of '14. We characterized the quarter for the Partnership with solid performance in a pretty challenging environment, typically related to a difficult winter at our plant. The weather impacted coke production yields and costs in our coke business our estimate of about $4 million. Interestingly we’re comparing versus the first quarter of last year, which is relatively benign conditions that we experienced, Mark will take you though some of that little bit later, but below our expectations. But the plants I think performed reasonably well in a challenging period.

In the coal logistics business, our KRT volumes were higher driven by spot thermal demand, but it was offset by higher costs in a number of areas, both at Lake and KRT related to addressing weather related issues and lower volumes at Lake which also had some effect we’re driven to some extent by the weather. So overall financial performance in the quarter below our expectations, but I think reasonable in light of the conditions we’re dealing with. And as we look into the second quarter our plants, our two coke plants are largely back to what we, how we expect them to run on an ongoing basis. And KRT has recovered accordingly as well, so KRT and Lake. So we have the first quarter behind us.

Relative to cash distribution, we did take the opportunity in the quarter announced that we would plan to increase our cash distributions to $0.50 per unit. Cumulatively therefore relative to the -- and on quarterly distribution we’ve delivered 21% increase in the per unit cash distribution rate, over that MQD at the time of the IPO. And relative to coverage in the quarter, while coverage is something we look at on an annual basis in the quarter. Even with the financial performance in the quarter being down relative to our target, we still achieved 1.04 cash coverage ratio, I mean even with the increased distribution per unit, so we feel good about that.

Lastly, we did announce begin and we’ve started the process related to the first dropdown transaction. This first dropdown transaction is expected to drive between 7% to 8% accretion. The transaction itself and I'll spend a little bit of time in the next chart is expected to increase the Partnership’s ownership interest in the Haverhill and Middletown coke plants from 33% to 98%. The total consideration to be paid by the Partnership to the General Partners $365 million, which represents about an 8.3 times EBITDA multiple. And the transaction is expected to close in May.

Turning to the next chart, a little bit more detail on the proposed dropdown transaction. It is expected to be immediately accretive. You can see in the diagram the remaining 33% interest is remaining 2% LP interest, which will be held by the GP as well as the GP interest. What’s paid is $365 million. In terms of the EBITDA, that comes to the Partnership, which expected to contribute approximately $44 million on adjusted EBITDA, and that’s net of importantly an incremental $5 million of corporate cost that’s being allocated as part of this transaction.

We anticipate about $23 million lift in distributable cash flow or roughly $0.17 per LP unit. The consideration to be paid -- there is two things that are going on here, one is paying for the 33% interest and second we’re doing a few things at the Partnership’s balance sheet that are important which I will spend a little bit time on here.

But in terms of the $365 million the consideration is in the form of both -- first assumption and then immediate pay down of approximately $271 million of SXCP debt, so take a move about that as deleveraging as a parent. So the Partnership will assume and then immediately pay down $271 million of the parent’s debt.

Second is it will issue to the parent approximately $80 million in common units, roughly 2.7 million units and then another 3 million of GP interest. So parent receives in consideration, both cash in the form of assumption of debt and paying it down immediately, plus the parent will receive LP units and GP units. Think of that as roughly half of the units relatively to the units that are being offered to the public. And finally the Partnership will retain cash of about $10 million in the balance sheet, $3 million of free cash and then $7 million which is prefunding of environmental projects that the parent had and otherwise obligated to indemnify the Partnership.

So, 365 million is a consideration. Beyond that however what we’re doing is two things, we’re paying fees obviously and then second thing is we are replenishing our revolver. So, the financing actions that the Partnership raised, the public offering of units approximately $80 million of common units, roughly 2.8 million units. The partnership will raise about $260 million of debt. And finally you might do the math and realize that’s more than the consideration for the assets. What we’re doing is we’re actually paying down the $40 million revolver outstanding. Recall when we closed the KRT transaction last year we used cash plus have drawn the revolver to finance that transaction, so this is basically terming out the debt that was used to finance the KRT transaction and replenishing the revolver to zero.

At this point I’ll turn it over to Mark.

Mark Newman

Thanks Fritz. As Fritz mentioned, Q1 was a solid quarter and it compares to a very strong quarter in Q1 of 2013. As you’ll note in the chart, adjusted EBITDA in the quarter was 36 million with roughly 23.6 million attributable to SXCP and that compares to 41.3 million in Q1 of last year on 100% basis. The deterioration of about 5.3 million in adjusted EBITDA is really attributable to coke making, which was down about 7 million year-over-year, largely on account of volume, yield and higher operating costs related to the weather impact in Q1 of this year.

You’ll note from our production report that we were down about 35,000 units at the MLP in coke production and at our operating capacity utilization fell from 109% last year, again very strong to 102% in the current quarter. Coal logistics is up 2.1 and as you'll know these assets have been running in line with our expectations up to now in terms of 17 million run rate for Lake and KRT, since we acquired them. But in the quarter they were up roughly 2 million, we didn’t have these assets last year and we’re estimating then about 2 million related to weather, again on lower throughput at Lake and higher cost at both Lake and KRT to operate in the colder weather. Net income in the quarter was 23.1 million with 13.2 million attributable to SXCP. Here the year-over-year comparisons we had a number of items in Q1 of '13 that are not repeated this year.

With the IPO last year, we had certain debt modification and the write off of certain debt amortization costs of about 3.7 million. And we also had a number of state and local tax items of about 2 million, again which are not repeated this year. So the net income comparison is relatively flat, because of several items in Q1 of last year. Distributable cash flow in the quarter totaled 16.9 million or roughly $0.52 per LP unit and as Fritz mentioned in spite of a weaker financial performance, we did achieve 1.04 cash coverage ratio with the approximately 5% distribution increase.

Turning to Chart 5, this chart really shows our progress on distribution growth since our IPO in January of 2013. With the distribution increase that was approved in Q1, we are now up 21% from the MQD. This is our fourth consecutive quarter of distribution increases. Our decision to increase in the quarter by 5.3% was really based on strong finish in 2013, we’ve proven what these assets can deliver and in spite of a relatively slower start to the year, our fiscal year 2014 outlook remains unchanged and we thought we could make this increase.

With the planned dropdown that we just announced, we’re targeting a further 3% increase for Q2 to 51.50 per unit or on an annualized basis about $2.06, which will just get us to the cost of our third target distribution level. So, the IDRs will go then from 15% to 25% above this level of distribution. With the 7% to 8% accretion from the dropdown, we think we can support a further 5% increase in distributions in 2014.

Chart 6 covers our liquidity position. We ended the quarter with 19.2 million in cash and 109 million available on the revolver. We consumed cash of about 27.1 million in the quarter, again based on slightly weaker EBITDA performance, but we also had some unfavorable working capital of about 18.2 million, really largely related to the timing of inbound coal purchases at a number of our coke plants. We did also in the quarter spend approximately 14 million on capital, 4 million ongoing and 10.2 million on the environmental, this is relatively ratable versus our fiscal year forecast of 17 million on an ongoing and 38 million on environmental remediation.

Recall, however that the partnership this environmental obligation was prefunded at the IPO, but the Partnership used this cash in the purchase of KRT, so it’s not surprising that our cash balance is lower in the quarter. And then finally on liquidity, as Fritz mentioned as part of the proceeds from the transaction, we plan to replenish 40 million drawn under revolver which was used to purchase, part of the consideration to purchase KRT further dropdown consideration, so our revolver will be replenished back to approximately 150 million.

On Chart 7, we cover our full year outlook. In spite of a slower start to the year our full year guidance based on our existing assets is unchanged. You'll notice our target cash coverage ratio -- we still expect to be somewhere between 1.14 and 1.25 based on estimated distributable cash flow of 74 million to 81 million. And I'd just remind everyone that this forecast is without the dropdown. Once the dropdown transaction is closed in May, we’ll provide revised guidance which reflects the impact of the dropdown and the related financing transactions.

So with that I’ll turn it back to Fritz to wrap up the call.

Fritz Henderson

Sure. So, thank you very much again. We’re not able to take questions today given the offering of units, but it’s good for us to get the first quarter behind us. Number one -- there were challenges obviously that we faced but the assets we think performed reasonably well in the quarter in tough conditions. And the coke assets and the coal handling assets as we move into second quarter are operating at normal levels. The distribution increased to $0.50 was something we thought was very justifiable and felt like we could do that and we have done that. And then it’s good to have our first dropdown transaction underway. So, thanks very much for your interest and your investment in the Partnership.

Operator

Thank you. And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. If you are interested in participating in SunCoke’s SXC call at 9:45 Easter Time, please hang up and redial back in. You may now disconnect.

Question-and-Answer Session

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