Business context and reporting period
SunCoke Energy, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company operates five U.S. cokemaking facilities, a Brazil facility, and coal-handling and logistics operations; it also consolidates SunCoke Energy Partners, L.P. (the Partnership). In April 2016, SunCoke completed the sale of its coal mining business.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $292.7 million | $348.2 million | $603.8 million | $672.2 million |
| Operating income | $10.9 million | $6.4 million | $20.4 million | $31.9 million |
| Net income (loss) | $1.0 million | $(6.5) million | $13.6 million | $(6.1) million |
| Net loss attributable to SunCoke | $(4.6) million | $(13.5) million | $(8.7) million | $(17.5) million |
| Adjusted EBITDA | $46.5 million | $33.4 million | $90.3 million | $81.3 million |
Q2 operating margin was approximately 3.7%, compared with 1.8% in the prior-year quarter. SunCoke reported consolidated net income, but earnings attributable to noncontrolling interests exceeded that income, leaving a loss attributable to SunCoke shareholders. Adjusted EBITDA is a non-GAAP measure; Q2 2016 included $18.6 million attributable to noncontrolling interests, leaving $27.9 million attributable to SunCoke.
Revenue declined 15.9% in Q2, principally from lower coal-price pass-throughs and lower sales volumes. For the first half, operating cash flow was $121.5 million, up from $76.6 million. Investing cash outflow was $24.3 million and financing cash outflow was $112.6 million; cash and cash equivalents declined $15.4 million to $108.0 million.
- Operations: Domestic Coke Q2 Adjusted EBITDA was $51.0 million, down from $56.2 million; Coal Logistics was $5.4 million, up from $5.0 million, including $4.2 million from CMT. Brazil Coke was $2.4 million, versus $2.6 million.
- Balance sheet: At June 30, cash was $108.0 million, current assets $279.5 million and current liabilities $180.2 million. Total debt carrying value was $888.4 million, including $887.3 million long-term debt. Borrowing availability under the two revolving facilities was $166.4 million.
- Capital spending: First-half capital expenditures were $30.2 million, compared with $22.5 million. The company estimated 2016 capital expenditures of approximately $45 million, excluding capitalized interest and pre-funded CMT projects.
Material changes versus the prior comparable period
- Revenue fell in Q2 and the first half, primarily due to lower coal prices passed through to customers and lower coke volumes. Q2 Domestic Coke sales volume was 992 thousand tons versus 1,110 thousand; capacity utilization was 95% versus 99%.
- Adjusted EBITDA increased 39% in Q2 and 11% for the first half. CMT, acquired in 2015, contributed $4.2 million and $8.0 million, respectively; prior-year results included a $12.6 million noncash pension termination charge in Q2 2015.
- SunCoke recorded coal-business divestiture losses of $5.1 million in Q2 and $14.7 million for the first half, including a $10.7 million first-quarter impairment. SunCoke paid Revelation Energy $12.1 million as part of the disposal.
- The Partnership repurchased $69.9 million face value of senior notes for $46.4 million cash in the first half, recognizing a $23.9 million extinguishment gain. Total debt carrying value decreased from $998.8 million at year-end 2015 to $888.4 million.
- Coal Logistics throughput excluding CMT fell to 3.2 million tons in Q2 from 4.4 million. CMT handled 976 thousand tons in the quarter.
Outlook, commentary and risks
- 2016 outlook: Management estimated Adjusted EBITDA of $210 million to $235 million, net cash from operations of $150 million to $170 million, and Adjusted EBITDA attributable to SunCoke of $105 million to $124 million. The filing does not provide broader earnings-per-share guidance.
- Management said existing resources were expected to meet working-capital needs for the foreseeable future, while noting that capital markets may be needed for debt maturities beginning in 2019. The company and Partnership were in compliance with debt covenants at June 30.
- Most U.S. coke sales are under long-term take-or-pay contracts. AK Steel reduced 2016 Haverhill 2 production by 75 thousand tons; contractual make-whole payments were expected to protect Adjusted EBITDA targets.
- Coal markets remained stressed. CMT revenue and cash flow depend substantially on take-or-pay contracts with Foresight and Murray. Foresight was in default on certain debt documents and announced a proposed restructuring; consummation was uncertain. Murray had warned of possible layoffs affecting up to 80% of its workforce. Customer distress or bankruptcy could harm Coal Logistics results, goodwill and the Partnership’s ability to distribute cash.
- Management warned that worsening coal-market conditions or customer bankruptcies could lead to material goodwill or intangible-asset impairment charges. The company had $70.5 million of goodwill, principally associated with Coal Logistics.
- Environmental matters include EPA notices concerning Haverhill, Granite City and Indiana Harbor. Haverhill and Granite City remediation projects are expected to cost approximately $130 million in total; about $90 million had been spent, with the balance expected through first-quarter 2019. The company could not estimate a probable or reasonably possible loss range for the Indiana Harbor matters.
- A July 2016 sale-leaseback of equipment generated $16.2 million of proceeds and will be accounted for as a financing transaction. The Partnership declared a quarterly distribution of $0.5940 per unit, unchanged, and said it would continue evaluating distribution and capital-allocation priorities.
Investor facts to verify
- Whether Foresight’s proposed restructuring was completed and whether Foresight and Murray continued performing under CMT contracts.
- Actual operating cash flow, capital expenditures, and progress against the 2016 Adjusted EBITDA and cash-flow outlook.
- Debt reduction, revolver availability, covenant headroom, and funding needs as maturities approach in 2019.
- Whether coal-market weakness or customer credit deterioration triggers goodwill or intangible-asset impairment.
- Costs, schedule and regulatory outcomes for environmental projects, particularly the unresolved Indiana Harbor matters.