SunCoke Energy, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. SunCoke owns and operates U.S. cokemaking and coal-mining businesses, operates a facility in Brazil, and holds a 49% equity-method interest in an India joint venture. Its consolidated results include SunCoke Energy Partners, L.P. (the Partnership), despite SunCoke owning 55.9% of its limited partner interests.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $390.5m | $480.5m | $1,248.1m | $1,422.7m |
| Operating income | $27.3m | $52.7m | $80.4m | $129.4m |
| Net income attributable to SunCoke | $6.2m | $31.6m | $14.0m | $71.2m |
| EPS, diluted | $0.09 | $0.45 | $0.20 | $1.01 |
| Adjusted EBITDA | $50.7m | $73.7m | $155.4m | $196.0m |
- Q3 revenue fell 18.7%, primarily from lower coal-price pass-through in coke contracts and lower coal sales prices. Nine-month revenue declined 12.3%.
- Q3 operating income declined $25.4m. Management cited coal-mining weakness, a larger noncontrolling-interest share following the Partnership IPO, higher depreciation and increased corporate expenses. Q3 Adjusted EBITDA decreased $23.0m, primarily due to Coal Mining.
- For the first nine months, operating cash flow was $87.6m, versus $77.8m a year earlier. Investing cash use was $191.9m, including $95.6m of capital spending, $67.7m for the India investment and $28.6m for Lake Terminal. Financing provided $133.9m; cash increased $29.6m to $268.8m.
- At September 30, total debt was $649.1m, down from $723.4m at year-end 2012. Long-term debt was $648.3m. Debt comprised $400m of 7.625% notes due 2019, $150m of Partnership notes at 7.375% due 2020, and $99.1m of term loans. The filing reports $147.9m available on SunCoke’s revolver and $149.3m available on the Partnership’s revolver, subject to facility terms.
- Current assets were $475.5m and current liabilities $195.3m. Total assets were $2,122.7m and total equity $807.1m. The filing reports no clear standalone margin figure.
Material changes and operating developments
- Coal Mining Adjusted EBITDA moved to a $2.6m loss in Q3 from $10.7m income, and to a $9.8m loss for nine months from $27.4m income. Coal selling prices fell sharply; lower cash production costs, about $20 per ton below the prior-year periods, only partly offset the pressure.
- Domestic Coke Adjusted EBITDA was $64.3m in Q3, down from $69.8m; nine-month performance was broadly flat at $186.7m versus $187.0m. Indiana Harbor refurbishment-related inefficiencies reduced volumes and increased depreciation. Accelerated depreciation was $9.0m for the first nine months.
- The Partnership IPO and related financing included repayment of $225m of SunCoke term loans and issuance of $150m of Partnership notes. The public Partnership interests increased noncontrolling-interest earnings, reducing the share attributable to SunCoke stockholders.
- SunCoke invested $67.7m for a 49% stake in VISA SunCoke in India. Its share of the venture’s losses was $2.5m for nine months, including foreign-exchange losses on coal purchases. Lake Terminal was acquired for $28.6m in August.
- On October 1, the Partnership acquired Kanawha River Terminals for $86m, funded with $46m cash and $40m of revolver borrowings. Also effective October 1, SunCoke extended its Indiana Harbor coke contract with ArcelorMittal for 10 years, covering 1.22m tons annually and providing a higher fixed fee tied to refurbishment capital.
Outlook, risks and contingencies
- Management estimated 2013 Adjusted EBITDA of $215m–$230m and GAAP net income of $51m–$57m. These are estimates, not guarantees; Adjusted EBITDA is a non-GAAP measure and includes noncontrolling interests.
- Management expected 2013 capital expenditures of about $130m, including $58m for Indiana Harbor refurbishment and $23m for Haverhill and Granite City environmental projects. It planned an additional $72m for those environmental projects during 2014–2016.
- Management expected India Coke to reach break-even Adjusted EBITDA for full-year 2013, while noting that supply, foreign-exchange, weak pricing and Indian iron-ore restrictions remained challenges.
- AK Steel’s Middletown blast-furnace outage led to lower planned coke production. Extended payment terms on December 2013 production were expected to shift about $20m of operating cash flow from 2013 to early 2014. Management estimated an Adjusted EBITDA impact of $0.6m in Q4.
- Environmental matters include a Haverhill/Granite City consent decree, with an estimated probable loss of $2.2m and planned capital work, and unresolved Indiana Harbor EPA notices for which the company could not estimate a probable or reasonably possible loss range. A Middletown air-quality notice was also disclosed.
- Other risks include coal and coke pricing, customer and supplier concentration, facility reliability and refurbishment execution, environmental compliance, foreign-exchange exposure, debt covenants, and demand and throughput for the coal-logistics business. Management stated liquidity sources should fund planned operations, capital spending and repurchases, but the KRT acquisition was not included in prior cash-flow projections.
Important facts for investors to verify
- Whether coal prices, volumes and cost reductions improve Coal Mining performance, and whether Domestic Coke operating levels recover during the Indiana Harbor refurbishment.
- Progress and final spending on Indiana Harbor and environmental projects, and any additional penalties or required work arising from the EPA matters.
- Cash-flow timing, including the expected $20m AK Steel payment shift, and funding and returns from KRT and Lake Terminal after their acquisitions.
- Whether the 2013 Adjusted EBITDA and net-income estimates are achieved; reconcile Adjusted EBITDA to GAAP results and account for noncontrolling interests.
- Available borrowing capacity, Partnership distribution restrictions, debt terms and the effect of new KRT borrowing on liquidity and leverage.