SunCoke Energy Partners: A Special Kind Of MLP

This one of a kind master limited partnership offers investors a stable cash flow generative business with little to no competition. SunCoke Energy Partners (SXCP) produces metallurgical coke for integrated steelmakers using blast furnace technology. Basically, the company makes coke for the steel industry. While SXCP's customers are highly concentrated by numbers, they are inherently stable.

Company overview

So what is coke?

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SXCP is the coke producing industry's first publicly traded master limited partnership. The MLP has an intimate relationship with SunCoke Energy (SXC). The SXCP general partner is SunCoke Energy Partners GP LLC, which is a wholly owned subsidiary of SXCP's sponsor, SunCoke Energy. SXC is the largest independent producer of metallurgical coke in the Americas.

SXC holds a 55.9% limited partner interest and a 2.0% general partner interest in SXCP, while the public will hold the other 42.1% limited partner interests. SXC owns 35% of SXCP's Haverhill and Middletown (both in Ohio) facilities.

All in all, SXCP has an interest in 300 coke ovens amongst its 65% owned two facilities, with total nameplate capacity to produce 1.7 million tons of coke per year. The first facility is Haverhill, built in two phases. The first phase was commissioned in 2005 and the second in 2008. Now the plant has 200 cokemaking ovens and produces 1.1 million tons of coke annually. The Haverhill operations supply coke to ArcelorMittal (MT) and AK Steel (AKS).

Haverhill facility

SXCP's other major facility is Middletown. This facility began operations in 2011 and has 100 cokemaking ovens and produces 550,000 tons of coke per year, which is sold to AK Steel.

Middletown facility

Its Middletown facility also has a cogeneration plant that uses the hot gas produced during the cokemaking process to generate electricity. It generates approximately 45 megawatts of electrical power per hour, which is sold to AK Steel.

Company tailwinds

Long-term contracts. Outlined below are SXCP's key facilities, with the first contract expiration not coming until 2020.

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SCXP has a heavy concentration in two customers. Last year, AK Steel was the company's largest customer and accounted for 67% of contracted capacity. Meanwhile, ArcelorMittal accounted for 33%. But the beauty about its sales is they are covered via long-term take-or-pay contracts with an average remaining life of around 13 years.

What's more is that SXC (SXCP's sponsor) will purchase all of its coke production not taken by customers through 2018 following the offering at existing contract terms.

The contracts also have pass-through components for operating costs where certain operating costs are either passed through subject to annual negotiated budgets or is a fixed amount subject to an annual adjustment based on an inflation index.

As far as early termination goes, only its Haverhill (phase two) allows early termination. AK Steel can terminate at any time after January 1, 2014, with two years prior written notice if AK Steel has permanently shut down Ashland operations and has not replaced it on whole or in part. Yet, there are significant termination fees required to be paid by AK Steel if it terminates at any time prior to January 1, 2018.

Strong leadership. Fritz Henderson is at the helm as CEO for SXCP. Henderson is also the CEO for SXC. Henderson was the SVP of Sunoco before the company spun off SXC in 2011. Prior to Sunoco, Henderson held a variety positions across his 25-plus year career at General Mills, including COO, CFO and CEO.

Newer facilities. SXCP has much newer facilities relative to its peers, meaning operating expenses and maintenance CapEx should be lower for the company. The company believes that around 27% of the total cokemaking capacity in the U.S. and Canada (some 19 million tons) are produced via facilities that are over 40 years old.

The real advantage here is that many of these facilities will need to be replaced in the near- to interim-term, where, with its new facilities (average age of 10 years old versus the industry average of 38 years old), SXCP can grab some market share from peers.

Other growth opportunities include the potential to snatch up existing facilities owned by steel mills or competitors. The company believes that there could be over 4 million tons of cokemaking capacity in the U.S. and Canada up for grabs over the coming years.

Strong distribution. Its current dividend yield 7.2% and the MLP plans on growing this distribution at a 7% CAGR up to its February 2014 payout. Based on a $0.4415 anticipated payout, SXCP's yield would be over 7.5%.

Recent Events

Suncoke Energy Partners just increased its quarterly cash distribution by 2.4%. The cash distribution rate is now $0.4225 per limited partnership unit.

SXCP announced the distribution increase along with its quarterly results. Second quarter net income attributable to SXCP increased $4.1 million to $15.8 million compared to last year's second quarter. CEO Fritz Henderson cited sustained strong operations at the Haverhill and Middletown facilities.

SXCP just reached an agreement to purchase Lakeshore Coal Handling Corporation for $29.6 million. Lakeshore provides coal handling and blending services to Suncoke Energy's Indiana Harbor cokemaking operations. SXCP plans to maintain Lakeshore's current operations and staff. The Lakeshore acquisition is expected to boost distributable cash flow per unit by about 6% on an annualized basis.

CEO Fritz Henderson said of the Lakeshore acquisition:

"The acquisition of Lakeshore is consistent of our overall vision to grow SXCP by increasing our presence across the steel value chain. We expect this acquisition will be accretive to SXCP's cash flows and earnings, supporting future increases in distributable cash flow per unit."

Industry overview

Steel demand has a big bearing on the coke producing industry. CRU International has pegged coke demand in the U.S. and Canada at 19.5 million tons in 2011, but is expected to grow by 2 million tons, or 11% by 2016. The industry looks solid for future growth, with rising GDP lifting auto sales. S&P expects that auto sales will be up to 15.6 million units in 2013, up from 14.4 million in 2012.

Financials

We think that SXCP offers stable revenues, which translates into solid distributable free cash flow. Based on its projected distributions, the company has a solid distribution coverage ratio. The payout of distributions to distributable cash flow should remain around 85% over the next couple years.

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Bottom line

SXCP offers investors an impressive dividend yield at over 7%, not to mention it's trading at less than 5.5x EV/EBITDA. For MLP investors looking for a new type of investment, SXCP is a great choice, being the first cokemaking MLP.

The cokemaking business has a lack of competition and solid/stable customer base. We also think the five-year window that SXC will guarantee cash flow provides an inherent floor for the stock. Thanks to its agreements, SXCP is also able to pass down any unforeseen increases in operating costs. We also like how SXCP is expanding its presence across the steel value chain. Look for further strategic acquisitions to boost distributable cash floor similar to the Lakeshore acquisition.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Source: http://seekingalpha.com/article/1581622-suncoke-energy-partners-a-special-kind-of-mlp?source=feed

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