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Edited Transcript of SXCP earnings conference call or presentation 25-Oct-18 12:30pm GMT

Q3 2018 SunCoke Energy Partners LP Earnings Call

Lisle Nov 8, 2018 (Thomson StreetEvents) -- Edited Transcript of SunCoke Energy Partners LP earnings conference call or presentation Thursday, October 25, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andy Kellogg

SunCoke Energy Partners, L.P. - Treasurer & Director of IR

* Fay West

SunCoke Energy Partners, L.P. - Senior VP, CFO & Director of Suncoke Energy Partners GP LLC

* Michael G. Rippey

SunCoke Energy Partners, L.P. - Chairman, CEO & President of Suncoke Energy Partners GP LLC

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Conference Call Participants

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* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

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Presentation

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Operator [1]

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Good morning. My name is Matthew, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SunCoke Energy Partners' Third Quarter 2018 Earnings Call. (Operator Instructions)

Andy Kellogg, Treasurer and Director of Investor Relations, you may begin your conference.

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Andy Kellogg, SunCoke Energy Partners, L.P. - Treasurer & Director of IR [2]

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Good morning, and thank you for joining us this morning to discuss SunCoke Energy Partners' third quarter 2018 earnings. With me are Mike Rippey, President and Chief Executive Officer; and Fay West, Senior Vice President and Chief Financial Officer. Following management's prepared remarks, we'll open the call for Q&A. This conference call is being webcast live on our Investor Relations section of our website and a replay will be available there later today. If we don't get to your questions on today's call, please feel free to reach out to our Investor Relations team.

Before I turn things over to Mike, let me remind you that the various remarks we make on today's call regarding future expectations constitute forward-looking statements. The cautionary language regarding forward-looking statements in our SEC filings apply to the remarks we make today. These documents are available on our website as are reconciliations to any non-GAAP financial measures discussed on today's call.

With that, I'll now turn things over to Mike.

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Michael G. Rippey, SunCoke Energy Partners, L.P. - Chairman, CEO & President of Suncoke Energy Partners GP LLC [3]

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Thanks, Andy, and thank you all for joining the call this morning. Let's start with the third quarter performance on Slide 3. During the quarter, we generated $54.6 million of adjusted EBITDA, which reflects solid performance from our Middletown and Haverhill coke facilities and strong throughput volumes at Convent Marine Terminal. Performance at CMT has remained strong with 3.2 million tons of throughput in the third quarter. We continue to see increased demand from our customers as they leverage CMT's unique capabilities, and we expect demand to be healthy for the remainder of 2018. This quarter, we began work on a planned outage at our Granite City facility, which we do at all of our facilities from time-to-time.

Fay will discuss the financial impact in more detail later in the call, but the scope and duration of the project increased materially versus original estimates. Our evaluation process uncovered some additional repairs and improvements that will benefit our long-term operations.

To provide some context, we planned a major outage at Granite City to perform work on the flue gas desulfurization system. During an FGD outage, heat recovery steam generators are off-line. We utilize that time to thoroughly evaluate these assets to make sure they are well positioned for long-term operational efficiency. Our team performed detailed analysis in the Granite City facility. Their findings, coupled with our knowledge of HRSGs, made it clear it was necessary to pull forward various repairs and upgrades that were planned for future years in order to improve the long-term reliability and operational performance of these assets.

Additionally, as we mentioned on our second quarter conference call in July, Granite City experienced a fire on a major piece of equipment, the pusher/charger machine, which resulted in lost production and steam generation during the period of downtime. These 2 events significantly affected our third quarter financial results, and the strong performance of our other facilities will not be sufficient to overcome this impact as we look to our full year EBITDA guidance.

The focus has been and always will be on driving operational excellence and maximizing long-term performance at our facilities. While we are disappointed to revise our 2018 SXCP adjusted EBITDA guidance, the various upgrades completed at Granite City in 2018 will best position the facility for long-term operational success.

From a capital allocation perspective, we achieved our stated target to reduce SXCP's debt by $25 million in 2018 and expect additional deleveraging in 2019. In addition, last week the SXCP Board of Directors declared a Q3 2018 distribution of $0.40 per unit or $1.60 per unit annually.

With that, I'll now turn it over to Fay to review our third quarter earnings.

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Fay West, SunCoke Energy Partners, L.P. - Senior VP, CFO & Director of Suncoke Energy Partners GP LLC [4]

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Thanks, Mike, and good morning, everyone. Turning to Slide 4. Our third quarter net income attributable to SXCP of $15.3 million was down from the prior year period. Strong logistics operating performance was offset by additional cost and loss revenues at Granite City as well as higher depreciation expense.

From an adjusted EBITDA perspective, we finished the quarter at $54.6 million, down 7% versus 2017. Solid performance at Middletown, Haverhill and CMT facilities was more than offset by increased outage cost and the impact of a machinery fire at Granite City. Distributable cash flow was approximately $22 million for the quarter, down year-over-year due primarily to the outage at Granite City, which resulted in higher O&M cost, increased ongoing CapEx and lower revenues.

Including the third quarter distribution of $0.40 per unit, our cash coverage ended at 1.19x for the third quarter.

Moving to the detailed adjusted EBITDA bridge on Slide 5, third quarter 2018 adjusted EBITDA of $54.6 million was down $3.8 million from the prior year period. Our Coke segment experienced various pluses and minuses across the fleet. Notably, our Middletown and Haverhill facilities performed in line with our expectation with an increase in production, higher coal-to-coke yield and strong cost controls. Offsetting this were 2 main drivers that materially lowered adjusted EBITDA when comparing quarters. The most significant driver, which Mike discussed earlier, was a greater-than-expected outage to perform maintenance on HRSGs and on an FGD unit at our Granite City facility.

As a reminder, the financial impact of planned outages are included in our full year guidance. Planned outages generally result in incremental operating and maintenance cost, lower energy revenues and lower coke volume. Timing and scope of outages vary year-to-year, which in turn affects year-over-year comparability. When comparing to the prior year period, it is important to note that there were no major outages in the third quarter of last year.

The total impact of the Granite City outage to Q3 adjusted EBITDA was approximately $8 million, and we anticipate an incremental $4 million impact in the fourth quarter as the maintenance work will be completed by late November.

On a full year basis, this total incremental impact is approximately $6.5 million higher compared to our original 2018 guidance.

Second driver that affected domestic coke results in the quarter was a fire that occurred in July on Granite City's pusher/charger machine. As reflected on the chart, the total impact of this onetime event was $2.6 million.

Moving on to our Logistics business. Adjusted EBITDA was up $8.6 million, due primarily to substantially higher volumes at CMT. CMT benefits from attractive coal export market dynamics and we continue to see strong demand from our customers to move a variety of bulk products through the terminal.

Looking at domestic coke results on Slide 6. As you can see from the chart, third quarter adjusted EBITDA per ton was $64 on 588,000 tons of production. We continue to be pleased with the solid performance of our Middletown and Haverhill coke facilities, which realized increased production and higher coal-to-coke yields. This solid performance was offset by the previously mentioned outage and machinery fire at Granite City, which together lowered adjusted EBITDA by approximately $11 million or $18 per ton in the quarter.

The full year adjusted EBITDA impact of the outage and the machinery fire at Granite City is approximately $9 million higher on a full year basis compared to our 2018 guidance. As a result, we are revising our coke-adjusted EBITDA guidance range to approximately $156 million to $160 million for 2018.

Moving to Slide 7. Our Logistics business generated approximately $21 million of adjusted EBITDA during the third quarter, up approximately 70% year-over-year. Our domestic logistics terminals experienced steady growth in throughput volumes, up 400,000 tons as compared to the prior year period and in line sequentially with the prior quarter.

We realized increased volumes both at KRT and Lake Terminal. Lake Terminal volumes continue to benefit from increased demand from Indiana Harbor. CMT handled 3.2 million tons and contributed $17.9 million of adjusted EBITDA, up $8.2 million. Through the third quarter, CMT has moved nearly 9 million total throughput tons and we anticipate solid demand to continue for the remainder of 2018.

At the end of Q3, we do not have any deferred revenue related to our coal export customers at CMT as they have shipped over their annual contractual obligations to date. Any deferred revenue related to our coal customers is recognized typically in the fourth quarter if throughput tons are below our 10 million tons contract.

Given throughput volumes year-to-date and unlike previous fourth quarters, we will not have any deferred revenue to recognize in the fourth quarter related to our coal export customers. We remain solidly on track to achieve our adjusted EBITDA guidance of $70 million to $75 million for 2018.

Turning to Slide 8 and looking at our liquidity position for Q3.

As you can see in the chart, we generated strong cash flow in the quarter as cash from operating activities was approximately $73 million. We anticipate a portion of the working capital benefit will reverse in the fourth quarter due to interest payments on our senior notes and higher coal inventory level. CapEx was $15 million during the quarter, which included $5 million related to the Granite City gas-sharing project and approximately $10 million of ongoing CapEx.

We estimate that 2018 ongoing CapEx will be approximately $30 million, an increase of $5 million due to asset upgrades at Granite City. Additionally, we are delaying approximately $5 million of capital investments related to the Granite City gas sharing until 2019, and therefore, expect full year gas-sharing CapEx to be approximately $30 million in 2018. We continue to make good progress on the final phase of Granite City's gas-sharing project and expect the project will be completed in the first half of 2019. On balance, we remain in line with our full year CapEx plan of approximately $61 million in 2018.

Finally, we achieved our 2018 objective to pay down debt by $25 million on a revolving credit facility. We continue to maintain our focus on strengthening the balance sheet and are targeting a 3.5 debt-to-EBITDA ratio or lower and building our cash balance to more normalized levels by year-end 2019.

In total, we ended the quarter with a cash balance of $24 million and a strong liquidity position of over $200 million.

Looking at our revised guidance on Slide 9. As we look at the full year 2018, we now expect to generate between $110 million and $115 million of distributable cash flow and end the year with a healthy cash coverage ratio between 1.46 to 1.52x. The revision to our 2018 distributable cash flow is primarily driven by the previously discussed adjustment to our Coke segment full year adjusted EBITDA as well as higher ongoing CapEx related to Granite City enhancements.

With that, I will turn it back over to Mike.

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Michael G. Rippey, SunCoke Energy Partners, L.P. - Chairman, CEO & President of Suncoke Energy Partners GP LLC [5]

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Thanks, Fay. As I said in my opening remarks, we continue to be encouraged with strong operating performance at CMT. We are on pace to achieve our highest level of throughput volumes exceeding our previous record by over 3.5 million tons. We remain focused on leveraging CMT's unique capabilities to secure further new business towards our goal of achieving $5 million to $10 million of additional EBITDA in the next few years.

In addition, we are pleased with the solid performance of our Middletown and Haverhill coke facilities as they continue to perform in line with our expectations. Finally, we remain keenly focused on driving operational performance across both our Coke and Logistics businesses as evidenced by the decision to increase the scope of repair and maintenance improvements at Granite City to maintain the long-term health of our assets.

Now that the third quarter is in the books, our focus shifts toward closing out the year with good momentum going into 2019.

With that, let's open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Matthew Fields with Bank of America Merrill Lynch.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [2]

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I'm just a little confused. I know that there was a fire and an outage at Granite City. But I thought given your take-or-pay contracts, you should have been able to sell the same amount of tons and it's sort of U.S. Steel's problem to sort of figure out how they allocate it. Is that not the case? Like, why -- were you selling over the take-or-pay amount? Or is this sort of within the bands? Like, can you just explain that a little bit to me?

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Michael G. Rippey, SunCoke Energy Partners, L.P. - Chairman, CEO & President of Suncoke Energy Partners GP LLC [3]

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Well, we continue to sell the tons to U.S. Steel for the contract. The additional cost that we incurred is not a reimbursable cost in the contract. So the reference is to the additional monies we're spending in this period to effect the repairs and improvements at the facility. If we're off-line, we generate less steam revenue during the period of outage. So we did, in fact, less billings with regard to steam that we produce.

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Fay West, SunCoke Energy Partners, L.P. - Senior VP, CFO & Director of Suncoke Energy Partners GP LLC [4]

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Yes. So I would just add that when you have an outage or you have the fire that we had, which was a onetime event, it impacts your cost, it impacts your production and it also impacts your steam production. So if you're not producing steam, I can't bill...

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Michael G. Rippey, SunCoke Energy Partners, L.P. - Chairman, CEO & President of Suncoke Energy Partners GP LLC [5]

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Sell it.

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Fay West, SunCoke Energy Partners, L.P. - Senior VP, CFO & Director of Suncoke Energy Partners GP LLC [6]

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I can't sell it.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [7]

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So I'm sorry, was the fire at U.S. Steel's portion of the plant or was the fire at your portion of the plant?

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Michael G. Rippey, SunCoke Energy Partners, L.P. - Chairman, CEO & President of Suncoke Energy Partners GP LLC [8]

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No, no, our portion.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [9]

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Okay. And then you sold the same amount of tons under the contract -- you sold sort of what you should have sold under the contract in a quarter or you sold less?

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Michael G. Rippey, SunCoke Energy Partners, L.P. - Chairman, CEO & President of Suncoke Energy Partners GP LLC [10]

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Well, they take whatever we produce. As Fay indicated, we have a loss of steam revenue because we're not producing the steam. Therefore, we can't sell it. And during an outage, we had a modest loss of coke production, which we, of course, couldn't bill. But I don't want to leave an impression that the costs are related to the loss of production. They're costs we incurred to effect the repair.

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Operator [11]

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(Operator Instructions) There are no further questions at this time. I'll turn the call back to you.

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Michael G. Rippey, SunCoke Energy Partners, L.P. - Chairman, CEO & President of Suncoke Energy Partners GP LLC [12]

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Okay. I would like to thank everyone for joining us this morning and your continued interest in SunCoke Partners. To the extent you do have additional questions, I'd invite you to reach out to our Investor Relations team and they'd be happy to answer those questions you may have. So again, thanks for your interest in SunCoke Energy Partners, and we'll talk to you again next quarter. Thank you.

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Operator [13]

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This concludes today's conference call. You may now disconnect.