Suncoke Energy, Inc. quarterly report, Q3 FY2014

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SunCoke Energy, Inc. — Q3 2014 Form 10-Q

Reporting period: Three and nine months ended September 30, 2014. Dollar amounts are in millions unless stated otherwise. SunCoke operates U.S. and Brazilian cokemaking businesses, holds a 49% interest in an Indian coke joint venture, and operates coal logistics terminals. Coal mining results are classified as discontinued operations while the company pursues a sale or other disposition.

Financial performance and position

  • Q3 revenue: $367.6, down 1.6% from $373.4 a year earlier. Nine-month revenue: $1,084.5, down from $1,197.5.
  • Q3 operating income: $45.8 versus $31.8; continuing-operations income was $24.9 versus $15.9. Consolidated net income was $6.4 versus $12.3, while net loss attributable to SunCoke was $3.6 versus income of $6.2. Continuing-operations EPS attributable to shareholders was $0.21 versus $0.14.
  • Nine-month operating income: $79.2 versus $95.1; continuing-operations income was $20.1 versus $42.6. Net loss was $46.0 versus net income of $31.4, and net loss attributable to SunCoke was $60.6 versus income of $14.0. Discontinued coal operations accounted for a $66.1 after-tax loss.
  • Adjusted EBITDA from continuing operations (non-GAAP) was $68.0 in Q3, up from $51.1, and $167.9 for nine months, up from $159.0. The filing cautions that this measure is not a substitute for GAAP results and excludes, among other items, interest, taxes, capital expenditures, and working-capital needs.
  • Cash flow and investment: Nine-month continuing operating cash flow was $74.1, down from $100.8. Continuing capital expenditures were $102.5, versus $87.2. Cash declined $118.8 during the period, to $114.8; continuing operations reduced cash by $98.4 and discontinued operations by $20.4.
  • Debt and liquidity: Debt totaled $652.0, compared with $689.1 at December 31, 2013. Cash was $114.8; reported availability under the company and Partnership revolvers totaled $397.8. The company and Partnership reported compliance with debt covenants.
  • Margins and operating indicators: The filing does not provide a single consolidated gross-margin measure. Domestic Coke Q3 Adjusted EBITDA was $72.4 versus $64.3, and EBITDA per ton was $67.41 versus $59.32. Nine-month Domestic Coke EBITDA was $183.5 versus $186.7; production and sales volumes fell to 3.092 million and 3.081 million tons, respectively, from 3.213 million and 3.216 million.

Material changes versus prior periods

  • Q3 Domestic Coke performance improved despite lower revenue, driven by better Indiana Harbor performance, increased contractual fixed fees, improved coal-to-coke yields, and higher operating-cost reimbursements.
  • Nine-month Domestic Coke revenue and volume were pressured by lower pass-through coal prices, severe first-quarter weather, and Indiana Harbor refurbishment-related inefficiencies. Lower coal prices also reduced operating costs.
  • Coal Logistics, following 2013 acquisitions, contributed $8.7 of Q3 revenue and $28.1 for nine months. Q3 Adjusted EBITDA was $3.8; year-over-year comparisons are affected by the timing of acquisitions.
  • Depreciation and amortization rose to $22.5 in Q3 from $18.8 and to $70.9 for nine months from $57.5, primarily reflecting Indiana Harbor asset-life revisions and investment.
  • The May 2014 Partnership drop-down of an additional 33% interest in Haverhill and Middletown generated $365.0 of consideration and changed ownership and noncontrolling-interest allocations. The related financing and debt-extinguishment costs affected comparability; nine-month interest expense increased to $51.1 from $40.0.

Outlook, risks, contingencies, and unusual items

  • Coal business disposition: Management expected a sale or other disposition in 2014. The company recorded $103.1 of second-quarter coal asset and goodwill impairment, plus a $16.4 third-quarter held-for-sale impairment. It estimated $10–$15 of additional fourth-quarter exit and disposal costs, including $10–$14 expected to be cash expenditures. If a sale does not occur, restructuring or cessation of coal production may be considered; related charges were not estimable.
  • Capital spending: 2014 total capital expenditures were estimated at $128, including approximately $120 for continuing operations, excluding a potential new Kentucky facility. Haverhill and Granite City environmental projects were expected to cost approximately $125 in total; management anticipated about $47 of spending in 2015–2016. Indiana Harbor refurbishment and oven work also involve substantial spending and additional depreciation.
  • Environmental matters: EPA notices concern Haverhill, Granite City, and Indiana Harbor. For Haverhill and Granite City, the company estimated a probable civil penalty of about $2.2 and anticipated capital projects. For Indiana Harbor, the company could not estimate potential penalties or other losses. It also recorded a $2.5 liability for claims concerning coke quality at ArcelorMittal.
  • Other exposures: Management was evaluating whether health-care-law effects and discount-rate changes could increase the black-lung obligation by approximately $8. The India joint venture remained loss-making amid weak coke pricing and Chinese imports. A sale of the coal mines would increase reliance on third-party metallurgical coal supply.
  • Capital returns: A $150 share-repurchase authorization included a $75 forward repurchase; in October, 3.2 million shares were delivered at an average $23.28, leaving $75 available. The board also declared the company’s first cash dividend, $0.0585 per share, payable November 28, 2014.
  • Management liquidity view: Management said cash and borrowing availability were expected to fund planned operations, capital expenditures, repurchases, and dividends. This is forward-looking and subject to the disclosed business, customer, coal-market, operating, environmental, and financing risks.

Most important facts for investors to verify

  • Whether the coal-business disposition was completed on expected terms and what final exit costs, retained liabilities, or supply arrangements resulted.
  • Actual cash generation, capital spending, and revolver availability after the share repurchase, dividend, and environmental commitments.
  • Whether Indiana Harbor refurbishment and oven work achieve expected operating improvements and remain within revised cost and timing estimates.
  • Developments in EPA proceedings, environmental project spending, and the potentially higher black-lung obligation.
  • The sustainability of Domestic Coke results and Coal Logistics contributions, separating operational performance from acquisitions, pass-through pricing, and non-GAAP adjustments.