U.S. Markets close in 2 hrs 51 mins

Edited Transcript of SXCP earnings conference call or presentation 20-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 SunCoke Energy Partners LP Earnings Call

Lisle Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of SunCoke Energy Partners LP earnings conference call or presentation Thursday, April 20, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Fay West

SunCoke Energy Partners, L.P. - CFO of Suncoke Energy Partners GP LLC, SVP of Suncoke Energy Partners GP LLC and Director of Suncoke Energy Partners GP LLC

* Frederick A. Henderson

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

* Kyle Bland

================================================================================

Conference Call Participants

================================================================================

* Lucas Nathaniel Pipes

FBR Capital Markets & Co., Research Division - Analyst

* Robin Russell

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SunCoke Energy Partners First Quarter 2017 Earnings Conference Call. (Operator Instructions)

Kyle Bland, Director of Investor Relations, you may begin your conference.

--------------------------------------------------------------------------------

Kyle Bland, [2]

--------------------------------------------------------------------------------

Thank you, Denise. Good morning, and thank you all for joining us to discuss SunCoke Energy Partners' first quarter 2017 earnings. With me today are Fritz Henderson, our Chairman, President and Chief Executive Officer; and Fay West, our Senior Vice President and Chief Financial Officer. Following the remarks made by management, we will open the call for Q&A. This conference call is being webcast live on the Investor Relations section of our website and a replay will be available for a few weeks. If we don't get to your questions on the call today, please feel free to reach out to our Investor Relations team.

Before I turn it over to Fritz, let me remind you that the various remarks we make on today's call regarding future expectations constitute forward-looking statements and 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 measures that we discuss on today's call.

Now I'll turn it over to Fritz.

--------------------------------------------------------------------------------

Frederick A. Henderson, SunCoke Energy Partners, L.P. - Chairman of Suncoke Energy Partners GP LLC, CEO of Suncoke Energy Partners GP LLC and President of Suncoke Energy Partners GP LLC [3]

--------------------------------------------------------------------------------

Thanks, Kyle. And thank you all for joining the call this morning. And before we discuss the first quarter results, we did announce this morning that discussions between SXC and the Conflicts Committee of SXCP regarding the proposed Simplification Transaction has been terminated. The Conflicts Committee and their independent advisers evaluated the proposal made by SXC. They gathered feedback from several unitholders along the way both before and after the finalization of the IRS qualifying income regulations. And in the end, SunCoke Energy and the committee were not able to agree on a share per unit exchange ratio that both sides were comfortable with. While disappointing, parties can disagree. And with that, both parties agreed to terminate the process to move on.

While we couldn't reach agreement on the transaction this time, we do remain encouraged about the business going forward. There are several important initiatives underway in 2017 that remain our top priorities, namely: optimizing our existing assets, including continued pursuit of incremental business at the Convent Marine Terminal; and delivering against our financial guidance targets. We see upside opportunities in our coke and logistics businesses and believe our competitive advantage has positioned us to capitalize in these opportunities and drive value for our unitholders, respectively.

With that, turning to Slide 4 and jumping into the quarter. We continue to be pleased with the overall safety and operating performance of our coke and logistics assets. We began work in the quarter on the gas sharing project at Granite City, which is on track to be completed in early 2019. At the Convent Marine Terminal, we handled record volume with nearly 2.1 million tons inbound throughput in the quarter, which contributed to a solid first quarter adjusted EBITDA for SunCoke Energy Partners in total of $51.7 million. And lastly, consistent with our commitment to maintain the distribution through the simplification negotiations, we declared a quarterly distribution of $0.594 per unit, flat with the prior quarter. Overall, with 3 months of the year behind us, we're well positioned to achieve our 2017 targets.

And with that, I'll turn it over to Fay.

--------------------------------------------------------------------------------

Fay West, SunCoke Energy Partners, L.P. - CFO of Suncoke Energy Partners GP LLC, SVP of Suncoke Energy Partners GP LLC and Director of Suncoke Energy Partners GP LLC [4]

--------------------------------------------------------------------------------

Thank you, Fritz, and hello, everybody. Looking at Slide 5. As you could see on the chart, we booked a deferred income tax expense of $148.6 million, which drove a net loss attributable to SXCP of $129.3 million in the quarter. This income tax expense was triggered by the final IRS regulations on qualifying income, which were published in January of 2017. In short, this liability is the estimated book-to-tax difference of fixed assets that we currently expect to exist upon the expiration of the 10-year transition period, at which point, certain of the cokemaking operations become taxable as corporations.

From an operational perspective, total adjusted EBITDA for the first quarter of $51.7 million is up $3.5 million from the prior year quarter. This was driven by higher volumes at CMT, partially offset by lower coke performance. These earnings drove solid distributable cash flow of $37.1 million with a 1.26x cash coverage ratio.

Moving on to the next slide. On a 100% basis, we ended the first quarter with adjusted EBITDA of $51.7 million, up $3.5 million versus the prior period. In the coke segment, we were down $3.8 million, driven primarily by Middletown's performance reverting back to a more normalized run rate after a record 2016 performance. The period was also impacted by unfavorable coal cost recovery stemming from a pricing dispute with a coal vendor. At Coal Logistics, the $7.1 million improvement is driven primarily by higher volumes at CMT.

On Slide 7, we delivered solid first quarter adjusted EBITDA per ton of $75 on 567,000 tons of production. These results were in line with our expectation. At Granite City, we are gearing up for a major plant outage here in Q2 and expect it will impact second quarter results. This outage was contemplated as part of our 2017 plan. And we remain on track to deliver our full year guidance.

Turning to our Coal Logistics segment on the next slide. In the quarter, we had higher volumes in our Coal Logistics business year-over-year with approximately 3.4 million tons at KRT and Lake and 2.1 million tons at Convent. On the domestic Coal Logistics side, volumes were slightly tempered due to mild winter weather. But we are tracking to our 2017 guidance of 15 million tons for the year. At Convent, we earned $11 million of adjusted EBITDA in the first quarter. And this does not include the $3.2 million of deferred revenue recognized during the quarter. We are on track to achieve our 2017 guidance of 8.5 million tons at this facility. We continued to move merchant volumes in the quarter, albeit at a slower rate than Q4 of 2016. But we expect to achieve our 500,000 ton merchant target through increased volumes in the back half of the year.

As we look at our liquidity position for Q1, as expected, our cash balance remained relatively flat at $46 million as cash flow from operations was used to fund capital expenditures and distributions to unitholders. We ended the quarter with over $120 million in liquidity, including $76 million of revolver capacity.

And looking at our capital priorities on Slide 10. We declared our first quarter 2017 distribution of $0.594 per unit, marking our 17th consecutive distribution. Moving forward from the Simplification Transaction, we are focused on evaluating and optimizing our capital allocation priorities to ensure we deploy our capital in the most efficient manner going forward. As the debt markets remain attractive, we expect to refinance our capital structure here in the second quarter. Our goal is to push out maturities and maintain flexibility to repay a portion of our debt, all while keeping our borrowing costs reasonably flat.

We continue to believe that targeting a lower long-term leverage target, around 3.5x on a gross basis, is the prudent thing to do, given our customer concentration and the cyclicality in the end markets that we serve. We are evaluating various ways to get there over time, alongside our debt refinancing. With today's debt outstanding and using the midpoint of our 2017 EBITDA guidance range, we would need approximately $15 million of EBITDA growth or would need to reduce gross debt by about $60 million in order to hit this leverage target. And ultimately, we need to formulate the best path forward for SXCP post the finalization of the qualifying income regulation. There are a number of factors to consider, but the 10-year transition period provides time for us to evaluate and evolve in order to maximize value for SXCP stakeholders.

Flipping to our 2017 outlook. After our solid Q1 performance, we reaffirm our full year 2017 adjusted EBITDA and distributable cash flow guidance. And assuming we continue to pay $0.594 in quarterly distributions throughout the remainder of 2017, you can see that we have adequate cash coverage to support this distribution.

With that, I'll turn it back over to Fritz.

--------------------------------------------------------------------------------

Frederick A. Henderson, SunCoke Energy Partners, L.P. - Chairman of Suncoke Energy Partners GP LLC, CEO of Suncoke Energy Partners GP LLC and President of Suncoke Energy Partners GP LLC [5]

--------------------------------------------------------------------------------

Thanks, Fay. Wrapping up on Slide 12. Our goals in 2017 remain unchanged. We're going to be keenly focused on operational execution, maximizing the capabilities and performance of our coke and logistics assets and ensuring the focus day in and day out on delivering against our track record of operational excellence at SunCoke Energy Partners. Accomplishing each of these objectives will position us to achieve our full year financial targets.

With that, we'll open it up for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Lucas Pipes with FBR & Co.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, FBR Capital Markets & Co., Research Division - Analyst [2]

--------------------------------------------------------------------------------

Fay, I wanted to follow up on your comments regarding leverage ratios and debt reduction. And specifically, what sort of avenues do you see for taking down that, call it, $60 million? And over what sort of time frame do you think that's achievable? That's my first question. I would appreciate your comments.

--------------------------------------------------------------------------------

Fay West, SunCoke Energy Partners, L.P. - CFO of Suncoke Energy Partners GP LLC, SVP of Suncoke Energy Partners GP LLC and Director of Suncoke Energy Partners GP LLC [3]

--------------------------------------------------------------------------------

So we outlined 2 ways that you could achieve that. And one was kind of an increase in adjusted EBITDA. And while we've not provided 2018 guidance, a $15 million increase would help us achieve that target. Also we could go the route of repaying $60 million of debt outstanding in 2017 and 2018. We know that we have limited cash flow right now to do that, given kind of the funding for the Granite City project. But we could see achieving that in the '18, '19 time frame.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, FBR Capital Markets & Co., Research Division - Analyst [4]

--------------------------------------------------------------------------------

Got it. And then with the distribution at your current level you're trading at, call it, a yield of 15%, I think one reason for the Simplification Transaction was that this is a high cost of capital. How do you think about the distribution? And is there maybe a way to prioritize debt reduction over that distribution? I would appreciate your comments.

--------------------------------------------------------------------------------

Frederick A. Henderson, SunCoke Energy Partners, L.P. - Chairman of Suncoke Energy Partners GP LLC, CEO of Suncoke Energy Partners GP LLC and President of Suncoke Energy Partners GP LLC [5]

--------------------------------------------------------------------------------

Let me take that one, Lucas. I'd say as we think about the distribution we committed through the simplification negotiations that we would maintain it, that's what we've done. As Fay mentioned in her comment, we'll look at optimizing our structure going forward and balancing between distributions and achieving the right capital structure and investing in the business and doing the things we need to do. We think a couple of things. First of all, if you just look at the numbers for the year, we think that maintaining distribution is supportable. There's nothing that compels us from a coverage perspective to say the distribution isn't supportable. So that would be the first point. The second point is we have some levers, principally operational execution and performance, I mean, debt-to-EBITDA. If we can optimize our EBITDA prospectively, we think that, that would be quite powerful actually for us to be able to hit our goals. So we think we have time. We think we have levers. Relative to what the best interest of the unitholders and SXCP, to be honest, we haven't made that judgment yet. I think we have some levers available to us. As Fay mentioned, post '18 and post the completion of the Granite City project, the MLP once again is expected to be a significant cash flow generator, even maintaining distribution. So we just think that it's something that we need to assess over time.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Robin Russell with Bennett.

--------------------------------------------------------------------------------

Robin Russell, [7]

--------------------------------------------------------------------------------

Just with respect to the 10-year grandfather on the MLP status, I know it was kind of a two-pronged test. One, it's automatic if you had the private letter ruling. And if you didn't, which is your case, then there's a bunch of different ways that you can meet that. I'm just wondering, have you have the confidence that you fall into that second category of getting the 10-year grandfather? And can you get a letter or something from the IRS or something to designate you guys as having that 10-year grandfather?

--------------------------------------------------------------------------------

Fay West, SunCoke Energy Partners, L.P. - CFO of Suncoke Energy Partners GP LLC, SVP of Suncoke Energy Partners GP LLC and Director of Suncoke Energy Partners GP LLC [8]

--------------------------------------------------------------------------------

So SXCP, we are confident that we reasonably interpreted the statute. In addition to that, we have received a will level opinion from our counsel, Vinson & Elkins, indicating that we do qualify for that 10-year transition period.

--------------------------------------------------------------------------------

Robin Russell, [9]

--------------------------------------------------------------------------------

Right. But I'm just wondering, so that you don't get blindsided by the IRS in a year or 2 years down the road, is there another step that you could take with respect to the IRS? Because you have that highly confident letter going into this ruling and that didn't help you for the ruling.

--------------------------------------------------------------------------------

Frederick A. Henderson, SunCoke Energy Partners, L.P. - Chairman of Suncoke Energy Partners GP LLC, CEO of Suncoke Energy Partners GP LLC and President of Suncoke Energy Partners GP LLC [10]

--------------------------------------------------------------------------------

Well, I would say we haven't ruled anything out. We haven't -- that we hadn't frankly had this on our radar screen. The focus has been more about the Simplification Transaction. If we pursued that and it was completed, then the issue was taken off the table, respectively, would rule that out. It just hasn't been on our list. What we have done though is reconfirm with our counsel, as Fay mentioned, their view that we did reasonably interpret the statute when we took the MLP public. And we feel quite confident in our ability to afford -- avail ourselves of the 10-year grandfathering rule.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

And there are no further questions at this time. I'll turn the call back over to the presenters.

--------------------------------------------------------------------------------

Frederick A. Henderson, SunCoke Energy Partners, L.P. - Chairman of Suncoke Energy Partners GP LLC, CEO of Suncoke Energy Partners GP LLC and President of Suncoke Energy Partners GP LLC [12]

--------------------------------------------------------------------------------

Okay. With that, thanks again very much for joining us this morning and for your interest and investment in SunCoke Energy Partners.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

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