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SunCoke’s business model protects it from customer concentration risk

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SunCoke’s business model

For many steel plants, outsourcing coke production delivers more value for various reasons, including size of their operations. SunCoke Energy (SXC) acts as an independent coke producer and builds, owns, and operates coke production facilities. SunCoke Energy is part of the VanEck Vectors Coal ETF (KOL), along with Peabody Energy (BTU), Alliance Resource Partners (ARLP), and Consol Energy (CNX).

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Project structure

SunCoke Energy builds and owns coke making plants and takes care of entire projects including funding, gaining permits and approvals, constructing plants, and managing operations. The plants are generally built after receiving significant long-term offtake commitments (60%–70% of capacity) from customers. The arrangement protects the company from uncertainty and downturns.

Contracts

SunCoke Energy’s business model includes typically entering into long-term take-or-pay contracts with customers. The take-or-pay provision protects the company from a downturn in the steel industry. Most of the contracts also provide full pass-through of costs, meaning the company receives operating costs (coal costs, operations and maintenance charges, environmental compliance charges), fixed capital cost per ton, and coke and energy fee investments. The arrangement provides investment protection for the company’s coke making segment. In return, SunCoke Energy provides production and quality guarantees to customers.

Supplementary products

A significant amount of heat is generated during the coke making process. SunCoke Energy uses the heat for electricity generation. Electricity sales provide an additional source of revenue for the company apart from return on investment in coke projects. In 2013, SunCoke generated $62.5 million in revenues (or 3.8% of total revenues) from electricity sales.

The business model is suitable for the master limited partnership structure due to the predictability of cash flows it offers.

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