SunCoke Energy Partners's (SXCP) CEO Fritz Henderson on Q2 2014 Results - Earnings Call Transcript

Jul.25.14 | About: SunCoke Energy (SXCP)

SunCoke Energy Partners LP (NYSE:SXCP)

Q2 2014 Earnings Conference Call

July 24, 2014 10:00 AM ET

Executives

Lisa Ciota - Investor Relations

Fritz Henderson - Chairman, Chief Executive Officer

Mark Newman - Senior Vice President, Chief Financial Officer

Analysts

Lucas Pipes - Brean Capital

David Grumhaus - Duff & Phelps

Operator

Welcome to the SunCoke Energy Partners Investor Call. My name is Vivian and I will be the operator for today’s call. At this time, all participants are in a 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 Ms. Lisa Ciota. Ms. Ciota, you may begin.

Lisa Ciota

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

Following remarks made by our management today, we will open the call for Q&A. Just as a reminder this conference call is being webcast live on the Investor Relations section of our Web site at www.sxcpartners.com, and there will be a replay available on our Web site. And if we don’t have a chance to get to your questions during the call, please feel free to call our Investor Relations department at 630-824-1987

Before I turn the 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 our remarks today. These documents are available on our Web site as a reconciliation of any non-GAAP measures we discuss on the call.

Now, I’d like to turn the call over to Fritz.

Fritz Henderson

Thank you and good morning. In the second quarter, it was busy quarter for SunCoke Energy Partners. We did complete the first dropdown transaction during the quarter, which provided an immediate contribution to adjusted EBITDA and distributable cash flow. It was considerable interest on the part of investors in both the debt and the equity offerings that were offered as part of that dropdown transaction. From an operating results perspective it was a solid quarter. Coke and coal logistics operations recovered from the weather impact in Q1.

We have in this quarter though trimmed our guidance slightly actually as a result of two things really. One, the first quarter impact had already put us in the lower end of prior range and second, we trimmed the guidance for two things that happened. One, our yields are favorable, they are still favorable but they are not as favorable as the original plan or as favorable they were in the prior year, and secondly we had an outage in the second quarter Haverhill. Outages, you always have outages and we had ours in the second quarter. But the cost that we incurred as a result, we have a bit more work to do than we’ve budgeted for and so we incurred that in the second quarter. That effected the second quarter and obviously effects your year, and so as a result we’ve trimmed our guidance.

Our cash distributions however, we are on plan, we increased our distribution to up 3% to 0.515 per unit. We continue to have solid cash coverage which Mark will talk about later and with the outlook for additional increases and capability for additional increases for the rest of this year.

Finally, we believe we’re well capitalized for future growth in addition to continuing to have an underlevered balance sheet we did upsize the revolver as part of the first dropdown transactions from 100 to 250 giving us dry powder to complete acquisitions and continue to move the business forward.

Let me turn over next chart for Mark to go through the more detail.

Mark Newman

Thanks, Fritz. We had a solid quarter at SunCoke Energy Partners in which adjusted EBITDA attributable to SXCP increased from the first dropdown. On a 100% basis as you will see in the chart, I am on chart three; we reported 36.6 million of EBITDA which is relatively flat to our results in the second quarter of last year. The performance is really attributable to having good quarter in Coal Logistics which we acquired if you recall last year in Q3. So we haven’t fully wrapped a full year of Coal Logistics results.

Coke making was down as Fritz indicated primarily reflecting lower yields and higher outage costs at Haverhill. And then finally corporate cost of 2.8 million in the quarter are impacted by some cost related to the dropdown as well as a change in allocation that was part of the dropdown transaction.

I will just remind that you corp costs last year were embedded in our coke segment results as we only had a single segment in 2013. On the net income front, net income was down year-over-year to 5.8 million in Q1 again on a 100% basis and really reflects the approximately 19 million of transaction costs related to the dropdown, which includes the tender premium for the SXC bonds which were tendered as part of the process. Debt extinguishment cost on SXC assumed debt as well as incremental interest in other transaction cost in the quarter.

Turning to our distribution coverage. We did increase our cash distribution by 3% in Q2 to $0.515 per unit. As we show in the chart, our distributions are up 21% since our first full quarter as an MLP in Q2 last year. Additionally, based on the accretion related to the dropdown, our outlook supports an additional 5% increase in 2014. In Q2 we reported distributable cash flow of 19.5 million. This resulted in a 0.98 times cash coverage ratio and really reflects the timing of our per unit distribution increase.

As you will note it in Chart 11, we show the as reported as well as the pro forma coverage. And the timing of our dropdown resulted in two aspects; firstly with respect to Q1, the new issue units got the benefit of the Q1 distribution because of the timing of the closure of the dropdown and the record date supported the Q1 distribution.

Secondly for Q2 the distribution applies to all of the new units issued, while the EBIT and distributable cash flow were prorated from the date of closure of the dropdown transaction on May 9. If you eliminate these timing aspects as shown in Chart 11 in the appendix, our pro forma Q1 distribution is 1.15 and our Q2 pro forma cash coverage is 1.11, first is the 0.98 as shown in the chart. And for the full year on an as reported basis our expectation is at the current distribution rate to be at about 1.1 times coverage ratio.

Looking at Chart 5, our liquidity; we ended the quarter with approximately 300 million in liquidity as a result of the revolver upside and some cash that was generated both in the operations and through the financing transactions in the business. As you note in the chart, we generated positive cash flow from operations of about 27.4 million. We did have ongoing and environmental CapEx of 19.2 million in line with our full year guidance.

And then the rest of the charts here really reflect the financing transactions related to the dropdown. The first being the equity issuance, our net debt was reduced by about 31 million. As you recall the revolver, we had drawn our revolver last year by about 40 million and that was fully repaid with the dropdown transaction, we’ve subsequently drawn about 9 million on the SXCP revolver.

Finally, we show here the distribution to SXC for its interest in the Haverhill and Middletown assets as well as distribution to unitholders including the public and SXC. Again we ended the quarter with 58.5 million in cash and 241 million on the newly upsized revolver of 250 million.

Turning to our full year guidance, as Fritz mentioned we have lowered our trend somewhat our guidance to reflect the weak start we had in Q1 which put us in the lower end of our advent item range as well as ongoing yields below our forecast and higher outage cost in Q2 that we incurred at Haverhill.

Our as reported coverage for Q1 to Q4 will be 1.05 to 1.13. Again, this is the new outlook using the $0.515 distribution rate for the full year. On a pro forma basis again using the same $0.515, but adjusting the timing of the 33% dropdown to January 1 of this year, it puts us at a 1.15 to 1.23 coverage. And again in view of this, our view is that we have room for further distribution increases for the rest of the year related to the dropdown transaction and our ongoing operations including, Coal Logistics which was very strong in the quarter.

With that I’ll turn it back to the operator to moderate Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Lucas Pipes from Brean Capital. Lucas, please go ahead.

Lucas Pipes - Brean Capital

My first question is on kind of a pro forma EBITDA distributable cash flow. In your presentation, you mentioned those figures kind of on adjusting for the timing of the additional 33% ownership of Haverhill and Middletown. But then and we also take into consideration that if you had some weather impacts, if you kind of know where to look forward now 12 months, where would you kind of see the pro forma 12 months EBITDA run rate and then also the distributable cash flow?

Fritz Henderson

We haven’t provided any outlook into 2015 at this point Lucas. But I think if you go back and look at Mark’s chart. What we tried to do in here is obviously do a pro forma assuming a one-on-one dropdown. So you have the full impact, the 98% of Haverhill and Middletown. You see what your coverage is. Obviously as we develop our budget and our plan for 2015, we’ll obviously update you and investors on our guidance at that point. But clearly this year our first quarter was significantly impacted by weather. I have no ability to predict the weather next year. But it was a highly unusual winter which affected us both in the coke businesses as well as in the Coal Logistics business. And we’ll just have see, we haven't updated our plans for 2015 yet. Mark do you have a comment?

Mark Newman

Yes. Just to be clear Lucas, so Fritz’s comment is spot on. Having said that the full year guidance does reflect a more normalized activity for Q3 and Q4. So the way I think about it is, on a pro forma basis my coverage was below 1.15 in the first half on the basis of weak Q1. Our full year pro forma guidance is sitting between 1.15 and 1.23, which would suggest that the second half is meaningfully above 1.15.

Lucas Pipes - Brean Capital

And on the stocks, how are you thinking about the coverage ratio going forward? You try to be conservative on that front keeping it essentially well above this rate in the second half of the year. What is kind of driving your thinking on that, given that you have quite a bit of firepower on that front?

Fritz Henderson

I think what we have said historically is we’re targeting a cash coverage ratio of 1.15. And I think our view initially was with just two assets in the MLP that we needed to stay close to that range. Obviously, we added the Coal Logistics last year and it’s had a really good year and had a very good quarter. And so as we diversify that base inside the MLP, I think that provides an opportunity to become less conservative on our coverage ratio from the 1.15. Additionally what we’ve said publicly is we believe over time we can move to 3 to 3.5 leverage ratio inside the MLP, we’re not there today. And so we have more levers overtime to increase distributions on the basis of the current business.

Lucas Pipes - Brean Capital

And if I may sneak in another last question, if I may. So on the M&A front, could you maybe update us in terms of what you have been thinking about if there is maybe a read-through from the comments of further distribution growth in the second half of the year that maybe you could be closer to some transactions now then, let's say you were at the Analyst Day?

Fritz Henderson

It wouldn’t really be appropriate for us to comment on specific transactions. Lucas I can just say we remain busy looking at opportunities to grow the MLP. Anything we do at this point that would unlikely affect 2014 in a significant way, just given how the timing of these sorts of things work. But we’re just not in a position to be able to talk about specific transactions until such time that we are able to announce them. But I can say we continue to look at areas in Coal Logistics particularly Coal Logistics as the way to grow the business. And we will brief you and update you when we have something more specific to talk about.

Fritz Henderson

I am advised that we don’t have any other questions in the queue. So I would close the call by thanking everyone for your interest. We have one more. Go ahead.

Operator

Our last question comes from David Grumhaus from Duff & Phelps. David, please go ahead.

David Grumhaus - Duff & Phelps

Can you talk a little bit about the outage at Haverhill, what caused that? And is everything back on track? And just what you're seeing there generally?

Fritz Henderson

Yes. First of all things are back on track. When you have an outage, they are regularly scheduled, so it’s not like they are non-recurring, they are recurring each year, they usually occur in specific quarter. But not on the same quarter, we’re not even the same quarter for a plant in any give year for them to schedule them, but often they are in the second quarter or the third quarter. Once in a while we do one on October 1. So they can bounce around, number one.

Number two, you plan for work that you intend to do and then you budget for it when you set your plan for the calendar year. When you open up the boilers or do the work on the FTD however the scrubbers, once you get them, once you open the stacks and you begin the work sometimes you end up doing more work than you thought.

I mean you anticipate what you have to do, but frankly you can’t really know with certainty until you actually get in and start doing the work. In the case of Haverhill we had to do more work than we had originally planned and budgeted for. But you do it, because those sacks are open that’s how the permits work. You just jump in and you use that opportunity to do as much work as you can in order to re-tube boilers, repair boilers, repair FTDs or the scrubber and yes we did, it was higher costs then we had planned for. But the outage was pretty much completed on time and the operation is back up and running. It is not unusual for us to have a little bit of lumpiness in outage cost, because you don’t know with high precision what it is. On the other hand this particular outage is little more expensive than we would normally see.

David Grumhaus - Duff & Phelps

Second question. Can you provide a little bit more detail on the Coal Logistics business? It seems like that it was a good quarter, but what you are seeing there, what you're expecting down there on the growth side, et cetera?

Fritz Henderson

Good quarter. We thought is on both steam and met at KRT which is -- we had two things going on the Coal Logistics business. One, on a sequential basis versus the first quarter, our Lake Terminal business performed much better than it did in the first quarter, first quarter impact with Lake was pretty significant from the weather and from our own Indiana Harbor Coke Plant which it supports.

KRT what we saw is strong demand for both met and steam as the power companies were replenishing diminished stocks. We haven’t seen any abatement in that as we’ve gone into the third quarter and our outlook is pretty positive for the coal handling business as we get into second half of this year.

David Grumhaus - Duff & Phelps

And then lastly, just anything on overall coke demand and what you're seeing in the market?

Fritz Henderson

No real change. Our plants are running well, the only thing that I did point out is that the yield itself at Haverhill is favorable but not as favorable as it was in the prior year nor as favorable as what we had in our plan which is one of the reasons we trimmed our guidance. But demand itself is quite healthy and we haven’t seen any significant changes.

Lucas Pipes - Brean Capital

Hello, again. Just wanted to follow up on the replacement accrual. I continued to receive a lot of questions on this issue, and I think one of the reasons that is the case is that in a way it's a non-cash charge. So can you remind us on the rationale for kind of taking that out of the distributions, and if in your peer group is that generally the case as well as if you could maybe provide us an update on all of that?

Mark Newman

So Lucas this is Mark. Every MLP is supposed to take this replacement accrual as part of its calculation of distributable cash flow or operating surplus from where distributions are made. A number of MLPs lumps that into their maintenance CapEx and we specifically call it out because we have the construct of maintenance for ongoing CapEx prior to the formation of the MLP. And so we thought it would be confusing to not break it out separately. So I think there are other MLPs who break it out, but most of them include it in their ongoing CapEx as part of the number.

Fritz Henderson

The other is Lucas, our ongoing capital spending not cash, we actually spend that. The accrual for replacement of capital expenditures is exactly that it’s an accrual. You don’t spend it, you just withhold the funds from distributable cash flow which over time means it accumulates if not sequestered, if not otherwise restricted and is used, but it is a provision that we make prior to determining distributable cash flow and prior to determining coverage. So I think of it as kind of a long-term replacement funds and these are very long-term like 30 and 40 years for coke plants that you basically withhold from your distributable cash flow on the distributions. It is different from ongoing capital spending, ongoing capital spending we spend the money in any given quarter or year.

Lucas Pipes - Brean Capital

Well, then, hopefully these coke ovens will run a lot longer than you thought, and then you will have a nice little cash to expect.

Fritz Henderson

Well, if that’s the case in 40 years, I may not be briefing you on it.

Fritz Henderson

We don’t have any more questions. Again, thanks very much for your interest in SunCoke Energy Partners. The SunCoke Energy call for those of you who participate will be a little bit later in a different dial-in number. And again, thanks very much for your interest. Bye.

Operator

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

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