SunCoke Energy Inc Announced Plans to Form a Master Limited Partnership

SunCoke Energy Inc announced plans to form a master limited partnership, SunCoke Energy Partners LP, which will have an ownership interest in certain of its coke-making facilities.

We estimate that consolidated credit metrics will remain within our prior expectations for the rating nd thus, the proposed MLP formation will not have a negative impact on SunCoke's credit metrics. We are affirming our ratings on SunCoke including the BB- corporate credit rating, and are removing all ratings from CreditWatch negative.

The stable outlook reflects our view that SunCoke's take or pay contracts will allow it to maintain consolidated credit metrics that are in line with the current ratings and that liquidity will remain adequate for the current rating.

Rating Action

On November 26th 2012, Standard & Poor's Ratings Services affirmed its ratings including the BB- corporate credit rating, on Lisle, Ill based SunCoke Energy Inc. The outlook is stable.

At the same time, we removed all ratings from CreditWatch, where we placed them with negative implications on July 27th 2012.

Rationale

The rating actions reflect our view that the proposed formation of SunCoke's master limited partnership, despite required dividends, will not have a negative effect on the company's credit quality.

Under the proposed structure, the MLP, SunCoke Energy Partners LP, will take a 65% interest in SunCoke's Haverhill and Middletown coke making facilities, located in Franklin Furnace, Ohio and Middletown, Ohio, respectively. SunCoke plans to own the general partner of the proposed MLP, as well as all of the MLP incentive distribution rights and a portion of the units representing limited partner interests in the MLP.

According to regulatory filings associated with the initial public offering of the proposed MLP, SunCoke expects to receive net proceeds of about USD 273.5 million from the offering; the company intends to use about USD 225 million to repay term loan debt.

In addition, the MLP plans to issue USD 150 million in new senior notes. As a result, we expect consolidated book debt at both entities will be approximately USD 650 million at closing.

Our base case scenario anticipates that consolidated adjusted EBITDA in 2012 and 2013 will be between USD 225 million and USD 275 million, compared with about USD 150 million in 2011. We anticipate that EBITDA generation in 2012 and 2013 will be driven by the benefits of production at the Middletown coke facility that began operating in the Q4 of 2011, as well as relatively stable earnings from SunCoke's other coke-making facilities, slightly offset by weaker coal earnings.

As a result, we estimate that consolidated debt to EBITDA will be between 3x and 4x in 2012 and 2013 and that adjusted funds from operations to total debt in 2012 and 2013 will be above 15%. We consider these metrics to be in line with the BB- rating given SunCoke's aggressive financial risk profile.

The ratings on SunCoke reflect Standard & Poor's assessment of the company's weak business risk profile and aggressive financial risk profile. Our view of the company's business takes into consideration that, as an independent producer of high grade metallurgical coke, SunCoke has limited operating diversity, very high customer concentration, cyclical demand from customers, high capital requirements for new facilities, and a limited independent operating history.

Also, the company operates met coal mines in Central Appalachia, and typical of that region, its operations are subject to intense regulatory scrutiny, difficulties in obtaining permits, and challenging operating conditions.

The ratings also consider the company's relatively high debt and the potential that SunCoke will need to spend significant capital for new projects that won't accrue benefits for several years. However, SunCoke has adequate liquidity, in our view, to fund both its operations and capital spending during the next couple of years and it operates under take or pay contracts that provide steady operating earnings and cash flow.

Liquidity

Given our expectations, we view the company's liquidity position as adequate under our criteria. As of September 30th 012, we estimate that liquidity was about USD 307 million, consisting of USD 157.8 million in cash on the balance sheet and close to the full amount available on its USD 150 million revolving credit facility, aside from a small amount of letters of credit outstanding.

Key aspects of our liquidity assessment include the following expectations:

1. Liquidity sources, which primarily consist of FFO and availability on SunCoke's revolving credit facility, will exceed uses by more than 1.2x over the next 2 years

2. Liquidity sources will continue to exceed uses, even if EBITDA were to decline by 30%

3. Compliance with financial maintenance covenants would likely survive a 20% decline in EBITDA.

We estimate that consolidated cash flow from operations should be between USD 150 million and USD 200 million in 2012 and 2013. This amount along with balance sheet cash should cover estimated capital spending of between USD 100 million and USD 150 million in both years. We expect the MLP to make ongoing quarterly cash distributions to its shareholders; however, we expect liquidity to remain adequate, and do not expect distributions to detract from the company's planned growth initiatives.

Covenants under SunCoke's bank agreements include a leverage test of 5x and an interest coverage test of 2x. As of September 30th 2012, the company had adequate room under its covenants. As of December 31st 2012, the leverage covenant steps down to 4.25x.

In addition, we expect the MLP's proposed revolver will have a maximum leverage test of 4x. Given our operating expectations, we believe the company will have adequate cushion under its covenants.

Recovery analysis

The rating on SunCoke's secured bank debt is BB+, 2 notches above the corporate credit rating with a recovery rating of 1 indicating our expectation for very high recovery in the event of a payment default. We rate its senior notes B+ with a recovery rating of 5, indicating that lenders can expect a modest recovery in the event of a payment default.

SunCoke Energy Inc announced plans to form a master limited partnership, SunCoke Energy Partners LP, which will have an ownership interest in certain of its coke-making facilities.

We estimate that consolidated credit metrics will remain within our prior expectations for the rating nd thus, the proposed MLP formation will not have a negative impact on SunCoke's credit metrics. We are affirming our ratings on SunCoke including the BB- corporate credit rating, and are removing all ratings from CreditWatch negative.

The stable outlook reflects our view that SunCoke's take or pay contracts will allow it to maintain consolidated credit metrics that are in line with the current ratings and that liquidity will remain adequate for the current rating.

Rating Action

On November 26th 2012, Standard & Poor's Ratings Services affirmed its ratings including the BB- corporate credit rating, on Lisle, Ill based SunCoke Energy Inc. The outlook is stable.

At the same time, we removed all ratings from CreditWatch, where we placed them with negative implications on July 27th 2012.

Rationale

The rating actions reflect our view that the proposed formation of SunCoke's master limited partnership, despite required dividends, will not have a negative effect on the company's credit quality.

Under the proposed structure, the MLP, SunCoke Energy Partners LP, will take a 65% interest in SunCoke's Haverhill and Middletown coke making facilities, located in Franklin Furnace, Ohio and Middletown, Ohio, respectively. SunCoke plans to own the general partner of the proposed MLP, as well as all of the MLP incentive distribution rights and a portion of the units representing limited partner interests in the MLP.

According to regulatory filings associated with the initial public offering of the proposed MLP, SunCoke expects to receive net proceeds of about USD 273.5 million from the offering; the company intends to use about USD 225 million to repay term loan debt.

In addition, the MLP plans to issue USD 150 million in new senior notes. As a result, we expect consolidated book debt at both entities will be approximately USD 650 million at closing.

Our base case scenario anticipates that consolidated adjusted EBITDA in 2012 and 2013 will be between USD 225 million and USD 275 million, compared with about USD 150 million in 2011. We anticipate that EBITDA generation in 2012 and 2013 will be driven by the benefits of production at the Middletown coke facility that began operating in the Q4 of 2011, as well as relatively stable earnings from SunCoke's other coke-making facilities, slightly offset by weaker coal earnings.

As a result, we estimate that consolidated debt to EBITDA will be between 3x and 4x in 2012 and 2013 and that adjusted funds from operations to total debt in 2012 and 2013 will be above 15%. We consider these metrics to be in line with the BB- rating given SunCoke's aggressive financial risk profile.

The ratings on SunCoke reflect Standard & Poor's assessment of the company's weak business risk profile and aggressive financial risk profile. Our view of the company's business takes into consideration that, as an independent producer of high grade metallurgical coke, SunCoke has limited operating diversity, very high customer concentration, cyclical demand from customers, high capital requirements for new facilities, and a limited independent operating history.

Also, the company operates met coal mines in Central Appalachia, and typical of that region, its operations are subject to intense regulatory scrutiny, difficulties in obtaining permits, and challenging operating conditions.

The ratings also consider the company's relatively high debt and the potential that SunCoke will need to spend significant capital for new projects that won't accrue benefits for several years. However, SunCoke has adequate liquidity, in our view, to fund both its operations and capital spending during the next couple of years and it operates under take or pay contracts that provide steady operating earnings and cash flow.

Liquidity

Given our expectations, we view the company's liquidity position as adequate under our criteria. As of September 30th 012, we estimate that liquidity was about USD 307 million, consisting of USD 157.8 million in cash on the balance sheet and close to the full amount available on its USD 150 million revolving credit facility, aside from a small amount of letters of credit outstanding.

Key aspects of our liquidity assessment include the following expectations:

1. Liquidity sources, which primarily consist of FFO and availability on SunCoke's revolving credit facility, will exceed uses by more than 1.2x over the next 2 years

2. Liquidity sources will continue to exceed uses, even if EBITDA were to decline by 30%

3. Compliance with financial maintenance covenants would likely survive a 20% decline in EBITDA.

We estimate that consolidated cash flow from operations should be between USD 150 million and USD 200 million in 2012 and 2013. This amount along with balance sheet cash should cover estimated capital spending of between USD 100 million and USD 150 million in both years. We expect the MLP to make ongoing quarterly cash distributions to its shareholders; however, we expect liquidity to remain adequate, and do not expect distributions to detract from the company's planned growth initiatives.

Covenants under SunCoke's bank agreements include a leverage test of 5x and an interest coverage test of 2x. As of September 30th 2012, the company had adequate room under its covenants. As of December 31st 2012, the leverage covenant steps down to 4.25x.

In addition, we expect the MLP's proposed revolver will have a maximum leverage test of 4x. Given our operating expectations, we believe the company will have adequate cushion under its covenants.

Recovery analysis

The rating on SunCoke's secured bank debt is BB+, 2 notches above the corporate credit rating with a recovery rating of 1 indicating our expectation for very high recovery in the event of a payment default. We rate its senior notes B+ with a recovery rating of 5, indicating that lenders can expect a modest recovery in the event of a payment default.