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SXCP > SEC Filings for SXCP > Form 10-Q on 1-May-2014All Recent SEC Filings

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

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


1-May-2014

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." This "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on financial data derived from the financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and certain other financial data that is prepared using non-GAAP measures. For a reconciliation of these non-GAAP measures to the most comparable GAAP components, see "Non-GAAP Financial Measures" at the end of this Item. 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
SunCoke Energy Partners, L.P., (the "Partnership", "we", "our", and "us") is a Delaware limited partnership formed in July 2012 whose primary business is manufacturing coke used in the blast furnace production of steel. On January 24, 2013, we completed the initial public offering of our common units representing limited partner interests, which we refer to as our IPO. In connection with our IPO, we acquired from SunCoke a 65 percent interest in each of SunCoke's Haverhill Coke Company LLC ("Haverhill") and Middletown Coke Company, LLC ("Middletown") cokemaking facilities and related assets held by Haverhill and Middletown. At March 31, 2014, SunCoke owns the remaining 35 percent interest in each of Haverhill and Middletown. SunCoke, through its subsidiary, owns a 55.9 percent partnership interest in us and all of our incentive distribution rights, and indirectly owns and controls our general partner, which holds a 2.0 percent general partner interest in us.
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 Steel is required to pay a significant termination payment to us if it exercises its termination right prior to 2019. 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.
The following table sets forth information about our cokemaking facilities and our coke and energy sales agreements:

                                                                                                   Annual 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     Franklin Furnace, Ohio   AK Steel          2008         2022             100                     550     Power 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.


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Our business strategy has evolved to include the expansion of our operations into adjacent business lines within the steelmaking value chain. During 2013, we expanded our operations into coal handling and blending services through two acquisitions. On August 30, 2013, the Partnership completed its acquisition of Lakeshore Coal Handling Corporation ("Lakeshore"), now called SunCoke Lake Terminal LLC ("Lake Terminal"). Located in East Chicago, Indiana, Lake Terminal provides coal handling and blending services to SunCoke's Indiana Harbor cokemaking operations. On October 1, 2013, the Partnership acquired Kanawha River Terminals ("KRT"). KRT is a leading metallurgical and thermal coal blending and handling terminal service provider with collective capacity to blend and transload 30 million tons of coal annually through its operations in West Virginia and Kentucky. Coal is transported from the mine site in numerous ways, including rail, truck, barge or ship. Our coal terminals act as intermediaries between coal producers and coal end users by providing transloading, storage and blending services. We do not take possession of coal in our Coal Logistics business, but instead derive our revenue by providing coal handling and blending services to our customers on a per ton basis. Our coal blending and handling services are provided to steel, coke (including some of our and SunCoke's domestic cokemaking facilities), electric utility and coal producing customers.
Further, we are exploring opportunities for entry into the ferrous segments of the steel value chain, such as iron ore concentration and pelletizing and direct reduced iron production ("DRI"). Concentrating and pelletizing are processes that prepare iron ore for use in a blast furnace as part of the integrated steelmaking process and result in a more efficient blast furnace steelmaking process. The current capacity for both concentrating and pelletizing of iron ore in the United States ("U.S.") and Canada is in excess of 230 million tons and we believe acquisitions of existing facilities could potentially provide an attractive avenue for growth. DRI, an alternative method of ironmaking is used today in conventional blast furnaces and electric arc furnaces. The capital investment required to build DRI plants is low compared to integrated steel plants and operating costs can be favorable if low cost energy supplies are available. DRI is successfully manufactured in various parts of the world through either natural gas or coal-based technology. Currently, there is only one DRI operation in the U.S., but we believe demand for additional DRI capacity in the U.S. may grow by approximately 5 million tons, driven in part by the available supply of low cost natural gas as a reducing agent.
Organized in Delaware in July 2012, and headquartered in Lisle, Illinois, we are a master limited partnership whose common units, representing limited partnership interests, were first listed for trading on the New York Stock Exchange ("NYSE") in January 2013 under the symbol "SXCP." Recent Developments
Cokemaking dropdown acquisition and related financing transactions.

On April 23, 2014, we executed an agreement to acquire an additional 33 percent interest in the Haverhill and Middletown cokemaking facilities for total consideration of $365.0 million. We expect to close on this agreement in May 2014, subject to customary closing conditions for such transactions and the completion of the associated financing transactions described below. In connection with this agreement we intend to issue, via private placement, approximately $80.0 million of common units and approximately $3.3 million of general partner interests to SunCoke in consideration for the contribution. In addition, we plan to assume and repay approximately $271.3 million of outstanding SunCoke debt and other liabilities and pay approximately $3.4 million in cash to SunCoke. We expect to retain approximately $7.0 million of the consideration to pre-fund SunCoke's obligation to indemnify us for the anticipated cost of the environmental remediation project at Haverhill. The debt assumption and repayment obligation consists of approximately $99.9 million of SunCoke's outstanding term loan debt and $171.4 million of SunCoke's senior unsecured notes, inclusive of an estimated market premium of $11.4 million to tender for the principal amount of these notes.
We expect to fund the debt assumption and cash portions of the consideration with approximately $88 million of proceeds from the sale of 3.2 million common units to the public, which was completed on April 30, 2014, and approximately $263 million of gross proceeds from the expected issuance of $250 million aggregate principal amount of 7.375 percent senior notes due 2020 through a private placement in May 2014. Proceeds from the offerings will also be used to repay approximately $40 million outstanding on our revolving credit facility, pay transaction fees and for general corporate purposes.
The additional interest in the Haverhill and Middletown cokemaking facilities we will acquire under the contribution agreement is expected to generate on an annual basis Adjusted EBITDA of approximately $44 million net of additional allocated corporate costs.
The terms of the contribution agreement, and the acquisition of the interests in Haverhill and Middletown, have been approved by the conflicts committee of our general partner's Board of Directors, which consists entirely of independent directors.


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First quarter Key Financial Results

         Total revenues decreased $23.5 million, or 12.7 percent, to $161.4
          million in the three months ended March 31, 2014 primarily due to the
          pass-through of lower coal prices in our cokemaking business partially
          offset by $11.7 million of revenues from our new Coal Logistics
          segment.


         Net income attributable to unitholders increased $1.4 million for the
          three months ended March 31, 2014, to $13.2 million, or $0.41 per
          limited partner unit, compared with the three months ended March 31,
          2013. This increase is due to the timing of the IPO in the prior year.
          During 2013, prior to the IPO, the Predecessor had earnings of $3.5
          million included in the Partnership's net income for the three months
          ended March 31, 2013. This increase was partially offset by lower
          volumes and yields in our Domestic Coke segment primarily due to severe
          winter weather.


         Adjusted EBITDA was $36.0 million in the first quarter of 2014 compared
          to $41.5 million for the same period in 2013. Adjusted EBITDA per ton
          in our Domestic Coke operations was $85.47 in the first quarter of
          2014, compared to $92.63 for the same period in 2013. The decrease was
          driven primarily by the impact of severe winter weather on our
          cokemaking operations, specifically volumes, and coal to coke yield.


         Cash generated from operating activities was $14.6 million in the first
          quarter of 2014 compared to $5.7 million for the same period in 2013.
          The increase was primarily attributable to the timing of accounts
          payable and a favorable comparison to the prior year period, which
          included the settlement of the liability for sales discounts at our
          Haverhill facility.

Items Impacting Comparability
         Coal Logistics. On August 30 and October 1, 2013, the Partnership
          acquired Lake Terminal and KRT, respectively. The results of these
          newly acquired facilities have been included in the Consolidated
          Financial Statements since the dates of acquisition and are presented
          in the Coal Logistics segment. Coal Logistics reported revenues of
          $12.8 million, of which $1.1 million are intercompany revenues,
          Adjusted EBITDA of $2.1 million and Adjusted EBITDA per ton handled of
          $0.48 for the three months ended March 31, 2014.


         Interest Expense, net. Interest expense, net was $2.9 million and $6.7
          million for three months ended March 31, 2014 and March 31, 2013,
          respectively. The first quarter of 2013 was impacted by debt
          restructuring costs of $3.7 million related to the portion of the term
          loan extinguished in conjunction with the IPO as well as the issuance
          of $150.0 million of senior notes.


         Income Tax Expense. Income tax expense decreased $3.6 million to $0.3
          million for the three months ended March 31, 2014 compared to $3.9
          million for the corresponding period of 2013. 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 both periods. The three months ended March 31, 2013
          included 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.


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Results of Operations
The following table sets forth amounts from the Combined and Consolidated
Statements of Income for the three months ended March 31, 2014 and 2013:
                                                              Three Months Ended March 31,
                                                                  2014              2013
                                                                      (Unaudited)
                                                                 (Dollars in millions)
Revenues
Sales and other operating revenue                           $         161.4     $    184.9
Costs and operating expenses
Cost of products sold and operating expenses                          120.5          138.4
Selling, general and administrative expenses                            4.9            4.4
Depreciation and amortization expense                                   9.7            7.6
Total costs and operating expenses                                    135.1          150.4
Operating income                                                       26.3           34.5
Interest expense, net                                                   2.9            6.7
Income before income tax expense                                       23.4           27.8
Income tax expense                                                      0.3            3.9
Net income                                                             23.1           23.9

Less: Net income attributable to noncontrolling interests               9.9            8.6
Net income attributable to SunCoke Energy Partners,
L.P./Predecessor                                                       13.2           15.3
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                       $          13.2     $     11.8

Revenues. Our total revenues, net of sales discounts, decreased $23.5 million, or 12.7 percent to $161.4 million for the three months ended March 31, 2014 compared to $184.9 million for the corresponding period of 2013. The decreases were primarily due to the pass-through of lower coal prices in our Domestic Coke segment, as well as lower volumes. These decreases were partially offset by sales from our new Coal Logistics business of $11.7 million.
Costs and Operating Expenses. Total operating expenses decreased $15.3 million, or 10.2 percent, to $135.1 million for the three months ended March 31, 2014 compared to $150.4 million for the corresponding period of 2013. The decreases in cost of products sold and operating expenses were driven primarily by reduced coal costs and lower volumes in our Domestic Coke segment offset partly by higher costs associated with the severe winter weather. The current year period includes $11.4 million of costs and operating expenses for Coal Logistics. Interest Expense, net. Interest expense, net was $2.9 million for the three months ended March 31, 2014 compared to $6.7 million for the corresponding period of 2013. Comparability between periods is impacted by the financing activities discussed previously.
Income Taxes. Income tax expense decreased $3.6 million to $0.3 million for the three months ended March 31, 2014 compared to $3.9 million for the corresponding period of 2013. Comparability between periods is impacted by the income tax items previously discussed.
Noncontrolling Interest. Income attributable to noncontrolling interest was $9.9 million for the three months ended March 31, 2014 compared to $8.6 million in the same period the prior year. The increase in noncontrolling interest was due primarily to the timing of the IPO in the prior year period partially offset by lower performance at the Haverhill and Middletown cokemaking facilities as described above.
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.


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         Coal Logistics consists of our coal handling and blending services in
          East Chicago, Indiana; Credo, West Virginia; Belle, West Virginia; and
          Catlettsburg, Kentucky.

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.
Segment Operating Data
The following tables set forth financial and operating data for the three months ended March 31, 2014 and 2013:

                                                              Three Months Ended March 31,
                                                                 2014               2013
                                                                       (Unaudited)
                                                                  (Dollars in millions)
Sales and other operating revenues:
Domestic Coke                                              $       149.7       $       184.9
Coal Logistics                                                      11.7                   -
Coal Logistics intersegment sales                                    1.1                   -
Elimination of intersegment sales                                   (1.1 )                 -
Total                                                      $       161.4       $       184.9
Adjusted EBITDA(1):
Domestic Coke                                              $        35.3       $        41.5
Coal Logistics                                                       2.1                   -
Corporate and Other (2)                                             (1.4 )                 -
Total                                                      $        36.0       $        41.5
Coke Operating Data:
Domestic Coke capacity utilization (%)                               102                 109
Domestic Coke production volumes (thousands of tons)                 414                 442
Domestic Coke sales volumes (thousands of tons)                      413                 448
Domestic Coke Adjusted EBITDA per ton(3)                   $       85.47       $       92.63
Coal Logistics Operating Data:
Tons handled (thousands of tons)                                   4,359                   -
Coal Logistics Adjusted EBITDA per ton handled(4)          $        0.48       $           -

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

(2) Prior to the third quarter of 2013, the Partnership had only one reportable segment; therefore corporate and other expenses were included in Domestic Coke segment results.

(3) Reflects Domestic Coke Adjusted EBITDA divided by Domestic Coke sales volumes.

(4) Reflects Coal Logistics Adjusted EBITDA divided by Coal Logistics tons handled.

Analysis of Segment Results
Domestic Coke
Sales and Other Operating Revenue
Sales and other operating revenue decreased $35.2 million, or 19.0 percent, to $149.7 million for the three months ended March 31, 2014 compared to $184.9 million for the corresponding period of 2013. The decrease was mainly attributable to the pass-through of lower coal prices, which lowered revenues by $26.5 million. Lower overall sales volumes of 35 thousand tons, primarily due to severe winter weather, also decreased revenues by $13.2 million. These decreases were partially offset by $4.5 million of increases to revenue primarily related to higher energy revenues due to an increase in price and higher reimbursable operating and maintenance costs.


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Adjusted EBITDA
Domestic Coke Adjusted EBITDA decreased $6.2 million, or 14.9 percent, to $35.3 million for the three months ended March 31, 2014 compared to $41.5 million in the corresponding period of 2013. The decrease was primarily related to lower coal-to-coke yields and volumes, primarily due to severe winter weather in the three months ended March 31, 2014, decreasing Adjusted EBITDA $6.1 million and $3.6 million, respectively as compared to the prior year period. These decreases were partially offset by $3.5 million primarily related to higher energy sales due to higher prices in the current year period as well as a lower allocation of corporate costs as compared to the prior year period.
Depreciation expense, which was not included in segment profitability, was relatively consistent at $7.9 million for the three months ended March 31, 2014 compared to $7.6 million in the prior year period. Coal Logistics
Inclusive of intersegment sales, sales and other operating revenue on 4,359 thousand tons handled were $12.8 million and Adjusted EBITDA was $2.1 million during the three months ended March 31, 2014, reflecting impacts of the severe winter weather.
Depreciation and amortization expense, which was not included in segment profitability, was $1.8 million for the three months ended March 31, 2014. Corporate and Other
Corporate and other expenses were $1.4 million for the three months ended March 31, 2014 and included costs to operate as a public company. Since the Partnership had only one reportable segment prior to the third quarter of 2013, corporate and other expenses in those periods were included in Domestic Coke segment results.
Liquidity and Capital Resources
As of March 31, 2014, we had $19.2 million of cash and $109.3 million of borrowing availability under our revolving credit facility. Our sources of liquidity include cash generated from operations, borrowings under our new revolving credit facility and, from time to time, debt and equity offerings. As previously discussed, we expect to close the agreement to acquire an additional 33 percent interest in the Haverhill and Middletown cokemaking facilities for total consideration of $365.0 million in May 2014. In connection with this agreement we intend to issue, via private placement, approximately $80.0 million of common units and approximately $3.3 million of general partner interests to SunCoke in consideration for the contribution. In addition, we plan to assume and repay approximately $271.3 million of outstanding SunCoke debt and other liabilities and pay approximately $3.4 million in cash to SunCoke. We expect to retain approximately $7.0 million of the consideration to pre-fund SunCoke's obligation to indemnify us for the anticipated cost of the environmental remediation project at Haverhill. The debt assumption and repayment obligation consists of approximately $99.9 million of SunCoke's outstanding term loan debt and $171.4 million of SunCoke's senior unsecured notes, inclusive of an estimated market premium of $11.4 million to tender for the principal amount of these notes.
We expect to fund the debt assumption and cash portions of the consideration with approximately $88 million of proceeds from the sale of 3.2 million common units to the public, which was completed on April 30, 2014, and approximately $263 million of gross proceeds from the expected issuance of $250 million aggregate principal amount of 7.375 percent senior notes due 2020 through a private placement in May 2014. Proceeds from the offerings will also be used to repay approximately $40 million outstanding on our revolving credit facility, pay transaction fees and for general corporate purposes.
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 revolving credit facility, 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 . . .

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