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SXCP - Suncoke Energy Partners

 January 24, 2013 10:28 AM


Wow, did not realize hadn't put anything new on this board since July. I do analyze every ipo for subscribers at tradingipos.com(and have for 7 1/2 year now), however stopped marketing advertising the site as we've already a great core group of traders. Will try and add a few more of these pieces here in 2013 than I did in 2012 though.

2013-01-14

SXCP - SunCoke Energy Partners

SXCP - SunCoke Energy Partners plans on offering 14.4 million units at a range of $19-$21. Barclays, BofA Merrill Lynch, Citi, Credit Suisse and JP Morgan are leading the deal, four firms co-managing. Post-ipo SXCP will have 32 million units outstanding for a market cap of $640 million.

Note that ipo proceeds and an additional $150 million debt offering will go to repay debt with 10% also going to parent company SXC.

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SunCoke Energy(SXC) will own all non-floated units and the general partnership. SXC was spun off from Sunoco in 2011 and is the largest independent producer of coke in the Americas. SXC owns and operates five cokemaking facilities in the US(including the two in this deal).

SXC is structuring part of their coke production into this partnership structure to help the balance sheet.

Distributions - SXCP plans on distributing $0.4125 per quarter to unitholders. On an annualized $1.65, SXCP would yield 8.25% on a pricing of $20.

From the prospectus:

' We have been recently formed to acquire, at the closing of this offering, an interest in each of two entities that own our sponsor's Haverhill and Middletown cokemaking facilities and related assets, which will result in us owning a 65% interest in each of these entities.'

[Related -Are Lower Yields Signaling Higher Risk?]

65% interest in two cokemaking facilities. The two facilities are among the youngest cokemaking facilities in the US having been in operation at current capacity since 2008 and 2011 respectively. Each are expected to be in operation at least 30 years.

Coke is the principal raw material in the blast furnace steelmaking process.

300 combined cokemaking ovens at the two facilities. 1.7 million tons capacity a year. Operates at full capacity and expects to sell 1.7 million tons in 2013 to AK Steel and ArcelorMittal.

Agreements with two customers have remaining average term left of 13 years. Take or pay agreements. Agreements also include the pass through costs of coal procurement, operating and maintenance costs, transportation costs, taxes and regulation costs. In other words, SXCP has a guaranteed margin in their agreements which should help in forecasting consistent cash flows something you like to see in partnership structures.

Coke demand in the US/Canada was 19.5 million tons in 2011. Slow growth sector, expecting 1%-2% annual growth over the next five years. Approximately 24% of US/Canada capacity comes from facilities that are over 40 years old.

Future dropdowns - SXCP has been granted preferential rights to SXC growth projects and/or acquisitions. Currently SXC is seeking permits for a new facility with 660,000 tons of cokemaking capacity in Kentucky. Project at earliest is a few years away from potential start up operations.

Financials

Balance sheet here is not too bad. $129 million in cash on hand, which will help fund environmental remediation and accrued sales discounts. In addition SXCP will have $150 million in debt. All in all, not bad.

Coming just 1.1 X's book value.

Twelve months ending 9/30/12 - $694 million in revenue. Pretty solid operating margins of 10%. Pro forma interest expense ate up just 12% of operating profits. EPS of $2.00 per unit.

2013 projections - $657 million in revenues a decrease of 5% from 2012. Forecasting strong 13.6% net margins after interest expense(again 12% of operating profits). Note that a chunk of those improved net margins are due to sales discounts not included. Adjusted 2013 earnings should match 2012's $2.00 which factors in the 35% of net earnings that SXC will retain.

SXCP is forecasting 115% distribution coverage. That does include $37 million cash on hand used for environmental remediation and accrued sales discount expenses. SXCP is planning on using cash to pay for capital expenditures.

Conclusion - solid 8.25% annual yield(on a pricing of $20). SXC is setting this up to work out well mid-term+ here by not loading up the SXCP balance sheet with debt. In fact SXC is allowing SXCP to utilize 90% of the ipo proceeds to reduce debt. Would not expect much here short term, deal looks pretty solid overall though. Slight recommend here due to solid cash flows. Parent company has substantial debt, so not something to get too excited about.

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