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

Show all filings for SUNCOKE ENERGY PARTNERS, L.P.

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


30-Oct-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 are a Delaware limited partnership that 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 four 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 operations.
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 12 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 transactions. On August 30, 2013, the Partnership completed its acquisition of the assets and business operations of Lakeshore Coal Handling Corporation ("Lakeshore"), now called SunCoke Lake Terminal LLC ("Lake Terminal") for $28.6 million. Prior to the acquisition, the entity that owns SunCoke's Indiana Harbor cokemaking operations was a customer of Lakeshore and held the purchase rights to Lakeshore. Concurrent with the closing of the transaction, the Partnership paid $1.8 million to DTE Energy Company, the third party investor owning a 15 percent interest in the entity that owns Indiana Harbor in consideration for assigning its share of the Lake Terminal buyout rights to the Partnership. The Partnership recognized this payment in selling, general, and administrative expenses on the Consolidated Statement of Income during the period. We expect Adjusted EBITDA of approximately $1.3 million from Lake Terminal during the balance of 2013. Located in East Chicago, Indiana, Lake Terminal does not take possession of coal but instead derives its revenue by providing coal handling and blending services to its customers on a per ton basis. Lake Terminal has and will continue to provide coal handling and blending services to SunCoke's Indiana Harbor cokemaking operations. In September 2013, Lake Terminal and Indiana Harbor entered into a new 10 year contract with terms equivalent to those of an arm's-length transaction. The Partnership intends to maintain Lake Terminal's current operations and retain existing staff. The results of Lake Terminal have been included in the Consolidated Financial Statements since the acquisition date and are included in the new Coal Logistics segment. On October 1, 2013, the Partnership completed its acquisition of 100 percent of the ownership interest in Kanawha River Terminals LLC ("KRT") for $86.0 million utilizing $46.0 million of available cash and $40.0 million of borrowings under its existing revolving credit facility. KRT is a leading metallurgical and thermal coal blending and handling terminal service provider with the collective capacity to blend and transload more than 30 million tons of coal annually. We expect Adjusted EBITDA of approximately $2.9 million from KRT during the balance of 2013. Beginning in the fourth quarter, the results of the Partnership's acquisition of KRT will be included in the new Coal Logistics segment.
•AK Steel Middletown outage. We cooperated with AK Steel on its projected second half of 2013 coke needs after a blast furnace outage at their Middletown plant in the second quarter of 2013. Specifically, due to this outage, we 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. During the third quarter of 2013, SunCoke, through the general partner, made a capital contribution of $0.6 million to us as a result of scaled back production. 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 nine months ended September 30, 2013, the Middletown cokemaking facility produced 463 thousand tons of coke and contributed $198.9 million and $58.3 million to revenues and Adjusted EBITDA, respectively. This compares to production of 449 thousand tons of coke and contributions of $217.2 million and $42.3 million to revenues and Adjusted EBITDA, respectively, in the nine months ended September 30, 2012. Middletown revenue and Adjusted EBITDA for the nine months ended September 30, 2013 benefited from increased operating cost recovery of $4.9 million 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 expected full recovery of operational and maintenance costs. Middletown Adjusted EBITDA for the nine months ended September 30, 2012 included higher costs and lower than expected coal-to-coke yield performance of $7.0 million, of which $4.0 million related to start-up costs.

• Corporate Support Services. We incurred allocated expenses of $4.1 million and $5.3 million in the three months ended September 30, 2013 and 2012, respectively and $12.2 million and $15.2 million in the nine months ended September 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,


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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 were allocated to us by SunCoke. Concurrent with the IPO, we issued $150.0 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 2013 and 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.
Interest expense, net was $12.3 million and $7.8 million for nine months ended September 30, 2013 and 2012, respectively. The nine months ended September 30, 2013 was impacted by the $3.7 million in expenses discussed above. The remaining increase of $0.8 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 or state 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 operations. We also recorded $0.3 million of additional expense as a result of adjusting our valuation allowance associated with state and local income tax credits. All amounts are reflected in 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 nine months ended September 30, 2013, net income attributable to noncontrolling interest was $10.8 million and $30.0 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.


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Results of Operations
We derive revenues from cokemaking facilities located in Ohio, as well as coal
handling and blending services in Indiana. The following table sets forth
amounts from the Combined and Consolidated Statements of Operations and other
operating data for the three and nine months ended September 30, 2013 and 2012.

                                               Three Months Ended September 30,        Nine Months Ended September 30,
                                                    2013                2012                2013               2012
                                                 (Unaudited)         Predecessor        (Unaudited)         Predecessor
                                                                        (Dollars in millions)
Revenues
Sales and other operating revenue            $           162.0     $       195.2     $          514.6     $       554.0
Costs and operating expenses
Cost of products sold and operating
expenses                                                 118.9             155.3                383.3             446.4
Selling, general and administrative
expenses                                                   7.4               5.2                 16.5              16.5
Depreciation expense                                       8.3               7.7                 23.5              24.4
Total costs and operating expenses                       134.6             168.2                423.3             487.3
Operating income                                          27.4              27.0                 91.3              66.7
Interest expense, net                                      2.8               2.5                 12.3               7.8
Income before income tax expense                          24.6              24.5                 79.0              58.9
Income tax expense                                         0.1               7.1                  4.2              17.4
Net income                                   $            24.5     $        17.4     $           74.8     $        41.5

Less: Net income attributable to
noncontrolling interests                                  10.8                                   30.0
Net income attributable to SunCoke Energy
Partners, L.P./Predecessor                   $            13.7                       $           44.8
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                              $            13.7                       $           41.3

Coke operating data
Capacity utilization (%)                                   108               109                  109               107
Coke production volumes (thousands of
tons)                                                      447               452                1,344             1,324
Coke sales volumes (thousands of tons)                     447               464                1,353             1,318
Coke Adjusted EBITDA(1)                      $            38.7     $        34.7     $          119.1     $        93.8
Coke Adjusted EBITDA per ton(2)              $           86.58     $       74.78     $          88.03     $       71.17

(1) See definition of Adjusted EBITDA and reconciliation to GAAP at the end of this Item.

(2) Reflects Adjusted EBITDA divided by sales volumes.

Revenues. Our total revenues, net of sales discounts, were $162.0 million and $195.2 million for the three months ended September 30, 2013 and 2012, respectively and $514.6 million and $554.0 million for the nine months ended September 30, 2013 and 2012, respectively. The decreases were primarily due to the pass-through of lower coal prices in our Domestic Coke segment.
Additionally, our new Coal Logistics segment contributed $1.1 million of revenue due to the Lake Terminal acquisition.
Costs and Operating Expenses. Total operating expenses were $134.6 million and $168.2 million for the three months ended September 30, 2013 and 2012, respectively and were $423.3 million and $487.3 million for the nine months ended September 30, 2013 and 2012, respectively. The decreases in cost of products sold and operating expenses were driven primarily by reduced coal costs in our Domestic Coke segment. These decreases were partially offset by acquisition related and public company costs. Additionally, our Coal Logistics segment incurred costs of $0.5 million.


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Interest Expense, net. Interest expense, net was $2.8 million and $2.5 million for the three months ended September 30, 2013 and 2012, respectively and $12.3 million and $7.8 million for the nine months ended September 30, 2013 and 2012, respectively. Comparability between periods is impacted by the financing arrangements discussed previously.
Income Taxes. Income tax expense decreased $7.0 million to $0.1 million for the three months ended September 30, 2013 compared to $7.1 million for the corresponding period. Income tax expense decreased $13.2 million to $4.2 million for the nine months ended September 30, 2013 compared to $17.4 million for the corresponding period of 2012. The periods presented were not comparable as, following the IPO, the Partnership was not subject to federal or state income taxes. Earnings from our Middletown operations, 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 operations and a $0.3 million adjustment to our valuation allowance associated with a local income tax net operating loss carryforward. We do not expect the local income tax to affect our cash distribution as we do not expect to pay cash taxes until 2017.

Results of Reportable Business Segments
We report our business results through two segments:
• Domestic Coke consists of our Haverhill and Middletown cokemaking and heat recovery operations located in Franklin Furnace, Ohio and Middletown, Ohio, respectively.

• Coal Logistics consists of our coal handling and blending services in East Chicago, Indiana and beginning in the fourth quarter 2013, will include KRT, which closed on October 1, 2013.

Management believes Adjusted EBITDA is an important measure of operating performance and is used as the primary basis for the Chief Operating Decision Maker ("CODM") to evaluate the performance of each of our reportable segments. Adjusted EBITDA should not be considered a substitute for the reported results prepared in accordance with U.S. GAAP. See "Non-GAAP Financial Measures" near the end of this Item.

Analysis of Segment Results
Three Months Ended September 30, 2013 compared to Three Months Ended September 30, 2012
Domestic Coke
Sales and Other Operating Revenue
Sales and other operating revenue decreased $34.3 million, or 17.6 percent, to $160.9 million for the three months ended September 30, 2013 compared to $195.2 million for the corresponding period of 2012. The decrease was due primarily to the pass-through of lower coal costs, which lowered revenues by $28.6 million. Slightly lower volumes also contributed $6.4 million to the decrease in Domestic Coke revenues. These decreases were partially offset by $0.7 million of increases to revenues primarily related to higher energy revenues. Adjusted EBITDA
Domestic Coke Adjusted EBITDA increased $4.0 million, or 11.5 percent, to $38.7 million for the three months ended September 30, 2013 compared to $34.7 million in the same period of 2012.
Adjusted EBITDA increased $3.0 million due primarily to higher operating cost recovery at Middletown related to the change from a fixed operating fee per ton to a budgeted amount per ton based on the expected full recovery of operational and maintenance costs. This increase was partially offset by lower volumes of 17 thousand tons from the same prior year period which decreased Adjusted EBITDA by $1.0 million. The remaining increase of $2.0 million relates primarily to lower corporate allocations of $1.2 million and higher energy revenues of $0.8 million in the current period.
Depreciation expense, which was not included in segment profitability, increased $0.4 million, from $7.7 million in 2012 to $8.1 million in 2013, primarily due new additions.
Coal Logistics
Lake Terminal was acquired on August 30, 2013. Sales and other operating revenue on 136 thousand tons handled were $1.1 million and Adjusted EBITDA was $0.7 million during the three months ended September 30, 2013.


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Corporate and Other
Corporate expenses were $3.7 million for the three months ended September 30, 2013 and included costs to operate as a public company as well as acquisition related costs. The prior year results were not comparable as the Partnership did not exist.
Nine Months Ended September 30, 2013 compared to Nine Months Ended September 30, 2012
Domestic Coke
Sales and Other Operating Revenue
Sales and other operating revenue decreased $40.5 million, or 7.3 percent, to $513.5 million for the nine months ended September 30, 2013 compared to $554.0 million for the corresponding period of 2012. The decrease was due primarily to the pass-through of lower coal costs at our Domestic Coke segment, which decreased revenues by approximately $60.6 million. Lower transportation reimbursements further decreased revenues by $2.2 million. These decrease were partially offset by slightly higher volumes, which contributed $14.0 million in additional revenues over the prior year period. Increased operating expense recovery of $4.5 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 increased revenues. Sales discounts were also lower by approximately $3.0 million as compared to the prior year period due primarily to the expiration of federal income tax credits at our Haverhill facility in June 2012. The remaining increase of $0.8 million was due primarily to higher energy revenues as compared to the prior year period.
Adjusted EBITDA
Domestic Coke Adjusted EBITDA increased $25.3 million, or 27.0 percent, to $119.1 million for the nine months ended September 30, 2013 compared to $93.8 million in the same period of 2012. Improved coal-to-coke yields increased Adjusted EBITDA by $9.8 million over the prior year period while higher volumes of 35 thousand tons increased Adjusted EBITDA by $2.9 million. Adjusted EBITDA was further increased $8.0 million due primarily to higher operating cost recovery at Middletown related to the change from a fixed operating fee per ton to a budgeted amount per ton based on the expected full recovery of operational and maintenance costs. Increased energy revenues also contributed $1.9 million in Adjusted EBITDA. The remaining increase of $2.7 million was due primarily to lower corporate allocations in the current period as compared to the prior year period.
Depreciation expense, which was not included in segment profitability, decreased $1.1 million, from $24.4 million in 2012 to $23.3 million in 2013, primarily due to accelerated depreciation at our Haverhill facility in the prior year period of $1.0 million, or $0.03 per unit.
Coal Logistics
Lake Terminal was acquired on August 30, 2013. Sales and other operating revenue on 136 thousand tons handled were $1.1 million and Adjusted EBITDA was $0.7 million during the nine months ended September 30, 2013. Corporate and Other
Corporate expenses were $5.6 million for the nine months ended September 30, 2013 and included costs to operate as a public company as well as acquisition related costs. The prior year results were not comparable as the Partnership did not exist.
Liquidity and Capital Resources
Prior to the IPO, our operations were funded with cash 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 . . .

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