SunCoke Energy, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; compared with the three months ended March 31, 2012. SunCoke owns and operates U.S. cokemaking and coal-mining businesses and operates a Brazilian facility. The results consolidate SunCoke Energy Partners, L.P. (the Partnership).
Financial performance and position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales and other operating revenue | $451.5 million | $480.6 million |
| Operating income | $27.0 million | $33.9 million |
| Operating margin | 5.9% | 7.0% |
| Net income | $6.4 million | $16.6 million |
| Net income attributable to SunCoke | $2.1 million; $0.03 per diluted share | $16.9 million; $0.24 per diluted share |
| Adjusted EBITDA | $52.3 million | $55.5 million |
| Operating cash flow | $12.8 million | $(3.1) million |
| Capital expenditures | $30.5 million | $9.5 million |
Lower coal prices and reduced coal sales revenue drove the decline in reported revenue. Coke sales were $412.0 million, steam and electricity sales $16.2 million, operating and licensing fees $9.8 million, and metallurgical coal sales $13.5 million. Interest expense rose to $15.8 million from $12.0 million. Net income attributable to SunCoke fell despite total net income of $6.4 million, in part because $4.3 million was attributable to noncontrolling interests following the Partnership IPO.
At March 31, 2013, cash was $307.1 million, total assets $2.167 billion, and total liabilities $1.357 billion. Debt was $649.0 million, including $400 million of 7.625% senior notes, $150 million of Partnership notes bearing 7.375%, and $99 million of term loans. Cash exceeded debt by approximately $342 million on a consolidated basis. The company reported $149.1 million available under its $150 million revolving facility, subject to its terms, and $45 million of remaining incremental term-loan capacity.
Material changes and business developments
- Revenue declined 6.1% year over year; operating income declined about 20%, and SunCoke-attributable net income fell $14.8 million.
- Domestic Coke Adjusted EBITDA increased to $61.1 million from $54.8 million, supported by stronger yields and Middletown cost recovery. Coal Mining Adjusted EBITDA moved to a $4.6 million loss from $7.4 million of income, mainly due to lower selling prices. Total Adjusted EBITDA decreased 5.8%.
- Domestic Coke production was 1.051 million tons versus 1.068 million; capacity utilization was 101% in both periods. Coal production was 349,000 tons versus 375,000, while average coal sales price fell to $121.19 per ton from $171.31.
- The January Partnership IPO generated $232 million net proceeds from public units; SunCoke retained a 55.9% limited-partner interest and the general partner, while public unitholders hold 42.1%. The Partnership issued $150 million of notes and repaid $225 million of SunCoke term loans.
- SunCoke invested $67.7 million for a 49% interest in the VISA SunCoke cokemaking joint venture in India, completed March 18. Equity earnings were to begin in Q2 2013 on a one-month lag.
Outlook, risks and unusual items
- 2013 outlook: Management estimated Adjusted EBITDA of $205–$230 million, including $165–$190 million attributable to SunCoke; net income of $40–$57 million; and an effective tax rate of 14%–20%. Expected 2013 capital expenditures were approximately $133 million, including about $58 million of ongoing capital spending, $60 million for Indiana Harbor refurbishment, and $15 million for Haverhill and Granite City environmental projects.
- Environmental matters: EPA notices concerning Haverhill and Granite City could lead to penalties and capital work. The company expected about $15 million of related 2013 spending and another $80 million during 2014–2016; estimated reasonably possible loss for penalties was approximately $2.2 million. At Indiana Harbor, a refurbishment and environmental project could cost as much as $85 million; the company anticipated spending $60 million in 2013, with scope and returns dependent partly on a new customer contract. Potential penalties and loss range were not estimable. A Middletown notice was not expected to have a material impact.
- Other unusual items: Q1 included $2.9 million of debt-cost and original-issue-discount write-offs, $0.8 million of immediately expensed Partnership debt issuance costs, and $4.3 million of accelerated Indiana Harbor depreciation. Tax expense included $1.7 million related to potential obligations under the Sunoco tax-sharing agreement, $1.4 million of additional state and local valuation allowance, and $0.6 million of prior-period local tax adjustments. A $0.9 million charge followed a coal-segment reduction in force; no further restructuring charges were anticipated.
- Management said liquidity sources—cash, operating cash flow and financing facilities—were expected to fund planned operations, capital expenditures and share repurchases. The filing cautions that Adjusted EBITDA is non-GAAP and does not reflect capital spending, working-capital requirements, interest, principal repayments or taxes.
- Key risks include coal and coke price and demand cycles, dependence on major steel customers, facility reliability and contract renewals, environmental compliance and spending, debt service and covenants, and execution and returns from international investments. The Indiana Harbor sales contract’s initial term ends September 30, 2013; the Haverhill AK Steel agreements have limited early-termination provisions beginning in 2014.
Important facts for investors to verify
- Whether Indiana Harbor secures a new long-term customer agreement and what refurbishment scope, timing and returns result.
- Progress and actual costs for EPA-related work, including potential penalties and the timing of Indiana Harbor expenditures.
- Whether coal pricing and mining economics recover from the Q1 decline and segment loss.
- Performance and cash distributions from the Partnership and the Indian joint venture, including the effects of noncontrolling interests on SunCoke shareholders.
- Delivery of the 2013 EBITDA, earnings, tax-rate and capital-spending outlook; these are estimates and actual results may differ.