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SXCP > SEC Filings for SXCP > Form 10-Q on 30-Jul-2013All Recent SEC Filings

Show all filings for SUNCOKE ENERGY PARTNERS, L.P. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SUNCOKE ENERGY PARTNERS, L.P.


30-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains certain forward-looking statements of expected future developments, as defined in the Private Securities Litigation Reform Act of 1995. This discussion contains forward-looking statements about our business, operations and industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations and intentions. Our future results and financial condition may differ materially from those we currently anticipate as a result of the factors we describe under "Cautionary Statement Concerning Forward-Looking Statements." The following discussion assumes that our business was operated as a separate entity prior to the IPO. The entities that own our cokemaking facilities have been acquired as a reorganization of entities under common control and have therefore been recorded at historical cost. Unless the context otherwise requires, references in this report to "the Partnership," "we," "us," or like terms, when used in a historical context (periods prior to January 24, 2013), refer to the cokemaking operations of our Predecessor. References when used in the present tense or prospectively (after January 24, 2013) refer to SunCoke Energy Partners, L.P. and its subsidiaries. Overview
We have been recently formed as a Delaware limited partnership and acquired, on January 24, 2013, at the closing of our initial public offering ("IPO"), a 65 percent interest in each of two entities that own SunCoke Energy, Inc.'s ("SunCoke") Haverhill and Middletown cokemaking facilities and related assets. The Haverhill and Middletown facilities have a combined 300 cokemaking ovens with an aggregate stated capacity of approximately 1.7 million tons per year and an average age of 4 years. We currently operate at full capacity and sell coke to two primary customers: AK Steel and ArcelorMittal.
SunCoke is the largest independent producer of high-quality coke in the Americas, as measured by tons of coke produced each year, and has more than 50 years of coke production experience. Coke is a principal raw material in the blast furnace steelmaking process. Coke is generally produced by heating metallurgical coal in a refractory oven, which releases certain volatile components from the coal, thus transforming the coal into coke. Our cokemaking ovens utilize efficient, modern heat recovery technology designed to combust the coal's volatile components liberated during the cokemaking process and use the resulting heat to create steam or electricity for sale. This differs from by-product cokemaking which seeks to repurpose the coal's liberated volatile components for other uses.
Our core business model is predicated on providing steelmakers an alternative to investing capital in their own captive coke production facilities. We direct our marketing efforts toward steelmaking customers who require coke for their blast furnace.
The following table sets forth information about our cokemaking facilities and our coke and energy sales agreements:

                                                                                                         Cokemaking
                                              Coke          Year of      Contract     Number of           Capacity
Facility               Location             Customer       Start Up     Expiration    Coke Ovens     (thousands of tons)    Use of Waste Heat
Haverhill 1     Franklin Furnace, Ohio   ArcelorMittal       2005          2020             100                     550     Process steam
Haverhill 2                              AK Steel            2008          2022             100                     550     Power
                Franklin Furnace, Ohio                                                                                      generation
Middletown(1)   Middletown, Ohio         AK Steel            2011          2032             100                     550     Power generation
Total                                                                                       300                   1,650

(1) Cokemaking capacity represents stated capacity for the production of blast furnace coke. The Middletown coke sales agreement provides for coke sales on a "run of oven" basis, which includes both blast furnace coke and small coke. Middletown capacity on a "run of oven" basis is 578 thousand tons per year.

All of our coke sales are made pursuant to long-term take-or-pay agreements. These coke sales agreements have an average remaining term of approximately 13 years and contain pass-through provisions for costs we incur in the cokemaking process, including coal procurement costs, subject to meeting contractual coal-to-coke yields, operating and maintenance expenses, costs related to the transportation of coke to our customers, taxes (other than income taxes) and costs associated with changes in regulation. The coke sales agreement and energy sales agreement with AK Steel at our Haverhill facility are subject to early termination by AK Steel beginning in January 2014 under limited circumstances and provided that AK Steel has given at least two years prior notice of its intention to terminate the agreements and certain other conditions are met. In addition, AK


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Steel is required to pay a significant termination payment to us if it exercises its termination right prior to 2018. No other coke sales contract has an early termination clause. For a five year period following the IPO, SunCoke has agreed to make us whole or purchase all of our coke production not taken by our customers in the event of a customer's default or exercise of certain termination rights, under the same terms as those provided for in the coke sales agreements with our customers.

Recent Developments
Coal handling transaction. On June 26, 2013, the Partnership announced that it reached an agreement in principle to acquire the assets and business operations of Lakeshore Coal Handling Corporation ("Lakeshore") for a proposed purchase price of $29.6 million. This is expected to be an all cash transaction and is anticipated to close in the third quarter of 2013, subject to execution of a definitive agreement and customary closing conditions. Previously, purchase option rights to Lakeshore were held by the SunCoke entity that owns Indiana Harbor pursuant to the terms of its contract with Lakeshore. Concurrent with the closing of the transaction, the Partnership will pay $1.8 million to DTE Energy Company, the third party investor owning a 15 percent interest in the entity that owns Indiana Harbor, in exchange for the option to purchase Lakeshore. We expect Adjusted EBITDA of approximately $2 million from Lakeshore during the balance of 2013, excluding the $1.8 million payment to DTE Energy Company.

AK Steel Middletown outage. We cooperated with AK Steel on its projected second half of 2013 coke needs after a recent blast furnace outage at their Middletown plant. Specifically, due to this outage, we have agreed to manage production at our Haverhill cokemaking facility to be consistent with annual contract maximums and to temporarily scale back coke production at our Middletown facility to name plate capacity levels in the second half of 2013. In addition, we plan to provide AK Steel extended payment terms on December 2013 coke production of 50 thousand tons. Based on actual production levels, SunCoke, our general partner, pursuant to our omnibus agreement, will remit to us on a quarterly basis the amounts due under normal contract terms and hold the extended-term receivables with AK Steel. Based on these anticipated arrangements, we do not expect a material impact to our current 2013 outlook. Should we experience any adverse effects from this outage, our omnibus agreement with our general partner requires that SunCoke make us whole.

Items Impacting Comparability
Middletown Project Execution. We commenced operations at our Middletown, Ohio cokemaking facility in October 2011 and reached full production during the first quarter of 2012. In the three months ended June 30, 2013, the Middletown cokemaking facility produced 158 thousand tons of coke and contributed $65.0 million and $18.5 million to revenues and Adjusted EBITDA, respectively. This compares to production of 146 thousand tons of coke and contributions of $72.0 million and $13.4 million to revenues and Adjusted EBITDA, respectively, in the three months ended June 30, 2012. In the six months ended June 30, 2013, the Middletown cokemaking facility produced 310 thousand tons of coke and contributed $135.0 million and $38.8 million to revenues and Adjusted EBITDA, respectively. This compares to production of 288 thousand tons of coke and contributions of $140.5 million and $24.3 million to revenues and Adjusted EBITDA, respectively, in the six months ended June 30, 2012. Middletown revenue for the three and six months ended June 30, 2013 benefited from increased operating cost recovery of $1.5 million and $3.6 million, respectively, due to a change in the recovery mechanism from a fixed operating fee per ton in 2012 to a budgeted amount per ton based on the full recovery of expected operating maintenance costs in 2013. Middletown Adjusted EBITDA included higher costs and lower than expected coal-to-coke yield performance of $1.5 million and $5.5 million ($4.0 million related to start-up costs) for the three and six months ended June 30, 2012, respectively.

Corporate Support Services. We incurred allocated expenses of $4.1 million and $5.2 million in the three months ended June 30, 2013 and 2012, respectively and $8.1 million and $9.9 million in the six months ended June 30, 2013 and 2012, respectively. These allocated costs are related to general and administrative costs for services provided to us by SunCoke and include legal, accounting, tax, treasury, engineering, information technology, insurance, employee benefit costs, communications, human resources, and procurement. Corporate allocations for periods subsequent to the IPO were recorded based upon the omnibus agreement.

Interest Expense, net. The Predecessor periods include $225.0 million of term loan debt ("Term Loan") and debt related issuance costs that SunCoke allocated to us. Concurrent with the IPO, we issued $150 million in senior notes ("Partnership Notes") with an interest rate of 7.375 percent and repaid the Term Loan allocated from SunCoke. The weighted average interest rate for borrowings outstanding under the Term Loan during 2012 was 4.07 percent.

We incurred a $2.9 million charge in the first quarter of 2013 for the write-off of unamortized debt issuance costs and original issue discount related to the portion of the Term Loan extinguished in conjunction with the IPO. Additionally, $0.8 million of debt issuance costs were expensed immediately relating to the portion of the Partnership Notes that was considered a modification of the existing Term Loan.


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Interest expense, net was $9.5 million and $5.3 million for six months ended June 30, 2013 and 2012, respectively. The six months ended June 30, 2013 was impacted by the $3.7 million in expenses discussed above. The remaining increase of $0.5 million was primarily due to higher interest rates partially offset by lower debt balances after the closing of the IPO and related transactions.
Income Taxes. The historical Combined Financial Statements of our predecessor include U.S. federal income tax expense calculated on a theoretical separate-return basis. Following the IPO, we do not pay federal income taxes on the operating income generated by our cokemaking subsidiaries. During the first quarter of 2013, we recorded $0.6 million related to prior period adjustments associated with local income taxes due for our Middletown facility. We also recorded $0.5 million of additional expense as a result of adjusting our valuation allowance associated with state and local income tax credits. All amounts relate to the Predecessor period.

Noncontrolling Interest. At the closing of the IPO, we acquired a 65 percent interest in each of two entities that own the Haverhill and Middletown facilities with SunCoke continuing to hold the remaining 35 percent interest. As a result, our distributable cash flow will not include distributions on SunCoke's interest in these entities and SunCoke's retained interest is recorded as noncontrolling interest in our consolidated financial statements. For the three and six months ended June 30, 2013, net income attributable to noncontrolling interest was $10.6 million and $19.2 million, respectively. The Predecessor's combined financial statements include the results of 100 percent of Haverhill and Middletown.

Through its ownership of our general partner, SunCoke controls the operations of the two entities that own the Haverhill and Middletown facilities. The cash distribution policies of each of these two entities are to distribute all of their cash available for distribution each quarter on a pro rata basis, 35 percent to SunCoke and 65 percent to us. In determining the amounts available for distribution to our unitholders, the Board of Directors of our general partner will have the authority to consider the amount of cash reserves to be set aside, including reserves for future ongoing, environmental and replacement capital expenditures, working capital and other matters.

Results of Operations
We operate in one industry, deriving revenues from cokemaking facilities located in Ohio. Our facilities have similar long-term economic characteristics, products, production processes, types and classes of customers and methods used to distribute their products. Accordingly, we have one reportable segment. The following table sets forth amounts from the Combined and Consolidated Statements of Operations and other operating data for the three and six months ended ended June 30, 2013 and 2012.


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                                                 Three Months Ended June 30,           Six Months Ended June 30,
                                                   2013               2012              2013              2012
                                                (Unaudited)        Predecessor       (Unaudited)       Predecessor
                                                                      (Dollars in millions)
Revenues
Sales and other operating revenue            $         167.7     $       182.1     $       352.6     $       358.8
Costs and operating expenses
Cost of products sold and operating
expenses                                               126.0             147.6             264.4             291.1
Selling, general and administrative
expenses                                                 4.7               6.2               9.1              11.3
Depreciation expense                                     7.6               8.9              15.2              16.7
Total costs and operating expenses                     138.3             162.7             288.7             319.1
Operating income                                        29.4              19.4              63.9              39.7
Interest expense, net                                    2.8               2.7               9.5               5.3
Income before income tax expense                        26.6              16.7              54.4              34.4
Income tax expense                                       0.2               5.0               4.1              10.3
Net income                                   $          26.4     $        11.7     $        50.3     $        24.1

Less: Net income attributable to
noncontrolling interests                                10.6                                19.2
Net income attributable to SunCoke Energy
Partners, L.P./Predecessor                   $          15.8                       $        31.1
Less: Predecessor net income prior to
initial public offering on January 24,
2013                                                       -                                 3.5
Net income attributable to Suncoke Energy
Partners, L.P. subsequent to initial
public offering                              $          15.8                       $        27.6

Coke operating data
Capacity utilization (%)                                 111               108               110               106
Coke production volumes (thousands of
tons)                                                    455               443               897               872
Coke sales volumes (thousands of tons)                   458               430               906               854
Adjusted EBITDA                              $          37.0     $        29.7     $        78.5     $        59.1
Adjusted EBITDA per ton(1)                   $         80.79     $       69.07     $       86.64     $       69.20

(1) Reflects Adjusted EBITDA divided by sales volumes

Three Months Ended June 30, 2013 compared to Three Months Ended June 30, 2012 Revenues. Our total revenues, net of sales discounts, decreased $14.4 million, or 7.9 percent, to $167.7 million for the three months ended June 30, 2013 compared to $182.1 million for the corresponding period of 2012. Total revenues include energy revenues of $10.9 million and $10.6 million for the three months ended June 30, 2013 and 2012, respectively. The decrease in total revenues was primarily due to the pass-through of lower coal costs which declined approximately $50 per ton in the three months ended June 30, 2013 as compared to the same prior year period and contributed $27.3 million to the decrease. Increased volumes of 28 thousand tons, or 6.5 percent, contributed $11.2 million to revenues. The remaining offset of $1.4 million was primarily due to increased operating expense recovery as a result of the change from a fixed operating fee per ton to a budgeted amount per ton based on the full recovery of expected operating maintenance costs at our Middletown facility.
Costs and Operating Expenses. Total operating expenses decreased $24.4 million, or 15.0 percent, to $138.3 million for the three months ended June 30, 2013 compared to $162.7 million for the corresponding period of 2012. The decrease was primarily attributable to lower coal costs which decreased approximately $50 per ton for the three months ended June 30, 2013 as compared to the same period in 2012. Selling, general and administrative expenses decreased $1.5 million, or 24.2 percent, primarily related to decreased corporate allocations. Depreciation expense decreased $1.3 million primarily due to accelerated depreciation of certain assets in the prior period at our Haverhill facility.
Interest Expense, net. Interest expense, net was $2.8 million for the three months ended June 30, 2013 compared to $2.7 million for the corresponding period of 2012. Comparability between periods is impacted by the financing arrangements discussed above.


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Income Taxes. Income tax expense decreased $4.8 million to $0.2 million for the three months ended June 30, 2013 compared to $5.0 million for the corresponding period. The periods presented are not comparable as, following the IPO, the Partnership is not subject to federal or state income taxes. Earnings from our Middletown facility, however, are subject to a local income tax which is reflected in the current period. We do not expect the local tax to effect our cash distributions as we do not expect to pay cash taxes until 2017.

Six Months Ended June 30, 2013 compared to Six Months Ended June 30, 2012 Revenues. Our total revenues, net of sales discounts, decreased $6.2 million, or 1.7 percent, to $352.6 million for the six months ended June 30, 2013 compared to $358.8 million for the corresponding period of 2012. Total revenues include energy revenues of $22.0 million and $20.9 million for the six months ended June 30, 2013 and 2012, respectively. The decrease in total revenues was primarily due to the pass-through of lower coal costs which declined approximately $50 per ton in the six months ended June 30, 2013 as compared to the same prior year period and contributed approximately $32.3 million to the decrease. This decrease was partially offset by increased volumes of 52 thousand tons, or 6.1 percent, which contributed $20.7 million to the increase. Increased operating expense recovery of $3.3 million primarily attributable to the change from a fixed operating fee per ton to a budgeted amount per ton based on the full recovery of expected operating maintenance costs at our Middletown facility further offset the decrease. Decreased sales discounts of $1.0 million due primarily to the expiration of federal income tax credits at our Haverhill facility in June 2012 further offset the decrease in revenues.
Costs and Operating Expenses. Total operating expenses decreased $30.4 million, or 9.5 percent, to $288.7 million for the six months ended June 30, 2013 compared to $319.1 million for the corresponding period of 2012. The decrease was primarily attributable to lower coal costs which decreased approximately $50 per ton for the six months ended June 30, 2013. Also contributing to the decrease was the absence of $4.0 million of start-up costs at our Middletown facility when compared to the six months ended June 30, 2012, as well as improved coal-to-coke yields at our Haverhill facility. Selling, general and administrative expenses decreased $2.2 million, or 19.5 percent, primarily related to decreased corporate allocations. Depreciation expense decreased $1.5 million due to accelerated depreciation of certain assets in the prior period at our Haverhill facility.
Interest Expense, net. Interest expense, net was $9.5 million for the six months ended June 30, 2013 compared to $5.3 million for the corresponding period of 2012. Comparability between periods is impacted by the financing arrangements discussed above.
Income Taxes. Income tax expense decreased $6.2 million to $4.1 million for the six months ended June 30, 2013 compared to $10.3 million for the corresponding period of 2012. The periods presented are not comparable as, following the IPO, the Partnership is not subject to federal or state income taxes. Earnings from our Middletown facility, however, are subject to a local income tax which is reflected in the current period, including additional expense of $0.6 million related to prior period adjustments associated with local income taxes due for our Middletown facility and a $0.5 million adjustment to our valuation allowance associated with a local income tax net operating loss carryforward. We do not expect the local tax to effect our cash distribution as we do not expect to pay cash taxes until 2017.

Liquidity and Capital Resources
Prior to the IPO, our operations were funded from our operations and funding from SunCoke. Our cash receipts were deposited in SunCoke's bank accounts and cash disbursements were made from those accounts. Consequently, our historical financial statements for periods prior to the IPO have reflected no cash balances. Cash transactions processed on our behalf by SunCoke were reflected in parent net equity as intercompany advances between us and SunCoke. We completed the IPO on January 24, 2013 and now maintain our own bank accounts. Our sources of liquidity include the retention of approximately $118.0 million of the proceeds from the IPO, our concurrent offering of senior notes, cash generated from operations, borrowings under our new revolving credit facility and, from time to time, debt and equity offerings. We operate in a capital-intensive industry, and our primary liquidity needs are to finance the replacement of partially or fully depreciated assets and other capital expenditures, service our debt, fund investments, fund working capital, maintain cash reserves and pay distributions. We believe our current resources, including the potential borrowings under our new revolving credit facility discussed below, are sufficient to meet our working capital requirements for our current business for the foreseeable future. Because it is our intent to distribute at least the minimum quarterly distribution on all of our units on a quarterly basis, we expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and other expansion capital expenditures.


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Concurrent with the closing of the IPO, we entered into a new $100.0 million revolving credit facility, which was undrawn at the closing of the IPO. We incurred issuance costs of $2.2 million in conjunction with entering into our new revolving credit facility. We also issued approximately $150.0 million aggregate principal amount of senior notes ("Partnership Notes"). During the six months ended June 30, 2013, proceeds from the issuance of the Partnership Notes were $146.3 million, net of $3.7 million of issuance costs.
In accordance with our partnership agreement, on April 23, 2013, we declared a quarterly cash distribution totaling $9.8 million, or $0.3071 per unit. In calculating this distribution, the minimum quarterly distribution was adjusted to reflect the period beginning on January 24, 2013, the closing date of the IPO, through March 31, 2013. This distribution was paid on May 31, 2013 to unitholders of record on May 15, 2013. There were no distributions declared or paid prior to this distribution.
On July 23, 2013, the Partnership, in accordance with the partnership agreement, declared a quarterly cash distribution totaling $13.5 million, or $0.4225 per unit. The distribution will be paid on August 30, 2013 to unitholders of record on August 15, 2013.
Because we intend to distribute substantially all of our cash available for distribution, our growth may not be as fast as the growth of businesses that reinvest their available cash to expand ongoing operations. Moreover, our future growth may be slower than our historical growth. We expect that we will, in large part, rely upon external financing sources, including bank borrowings and issuances of debt and equity securities, to fund acquisitions and expansion capital expenditures. To the extent we are unable to finance growth externally, our cash distribution policy could significantly impair our ability to grow. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. The incurrence of additional debt by us would result in increased interest expense, which in turn may also affect the amount of cash that we have available to distribute to our unitholders.
The following table sets forth a summary of the net cash provided by (used in) operating, investing and financing activities for the six months ended June 30, 2013 and 2012:

                                                         Six Months Ended June 30,
                                                           2013              2012
                                                                          Predecessor
                                                           (Dollars in millions)
Net cash provided by operating activities             $       43.7       $      37.2
Net cash used in investing activities                        (10.5 )            (5.5 )
Net cash provided by (used in) financing activities           82.4             (31.7 )
Net increase in cash and cash equivalents             $      115.6       $         -

Cash Provided by Operating Activities
Net cash provided by operating activities increased by $6.5 million to $43.7 . . .

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