Business context and reporting period
SunCoke Energy, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. It owns and operates five U.S. cokemaking facilities, operates a facility in Brazil, and mines metallurgical coal in Virginia and West Virginia. Coke sales are generally under long-term take-or-pay contracts with cost pass-through provisions. The company became independent of Sunoco on January 17, 2012; 2011 comparison periods include pre-separation and affiliate-related items and are not fully comparable.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $460.9 million | $377.9 million | $942.2 million | $711.3 million |
| Operating income | $42.8 million | $21.5 million | $76.7 million | $25.8 million |
| Net income | $24.0 million | $24.1 million | $40.6 million | $29.8 million |
| Net income attributable to SunCoke | $22.7 million | $22.5 million | $39.6 million | $34.4 million |
| Adjusted EBITDA | $65.5 million | $37.7 million | $121.3 million | $64.3 million |
| Operating margin, calculated | 9.3% | 5.7% | 8.1% | 3.6% |
- Q2 diluted EPS was $0.32, unchanged year over year; six-month diluted EPS rose to $0.56 from $0.49.
- Revenue rose 22% in Q2 and 32% year to date. Growth chiefly reflected Middletown, higher coal-cost and transportation pass-throughs, and increased coal-mining sales. Middletown contributed $72.0 million of Q2 revenue and $14.0 million of Q2 Adjusted EBITDA.
- Adjusted EBITDA increased substantially, led by Middletown ramp-up and improved Indiana Harbor and Granite City operations. Coal Mining Adjusted EBITDA declined to $9.3 million in Q2 from $11.5 million and to $16.7 million for the first half from $23.8 million.
- Six-month operating cash flow was $86.7 million, versus $16.4 million; investing cash use was $20.7 million, versus $165.5 million. Reported free cash flow was $66.0 million, compared with negative $150.3 million, reflecting lower investment spending and working-capital timing.
- Cash was $190.0 million at June 30, up from $127.5 million at year-end. Current assets were $450.8 million and current liabilities $259.9 million. Total debt was $724.9 million, including $400 million of 7.625% senior notes due 2019 and variable-rate term loans; debt declined modestly from $726.4 million. The $150 million revolver had $149.1 million available, subject to its terms; $45 million of incremental term-loan capacity remained.
- Six-month capital expenditures were $20.7 million, compared with $128.0 million, largely because Middletown construction was completed. Management estimated 2012 capital expenditures of about $85 million.
Material changes, outlook, and risks
- Management maintained 2012 guidance for diluted EPS of $1.30–$1.65 and Adjusted EBITDA of $250–$280 million; it expected free cash flow to exceed $100 million. Forecast coke production was more than 4.3 million tons and coal production about 1.6 million tons.
- Coal-market weakness prompted deferral of most Jewell mine expansion spending and idling of certain higher-cost mines. Management still expected to meet the 2012 Jewell production target but no longer expected the previously planned increase in 2013.
- Indiana Harbor refurbishment was expected to cost about $50 million over 2012–2014, including approximately $20 million in 2012. Its initial customer contract term ends September 2013; management said a new long-term agreement was reasonably likely but not assured.
- EPA notices of violation at Haverhill and Granite City could require $80–$100 million of environmental projects during 2012–2016, mostly in 2013–2016, plus a negotiated penalty; estimated reasonably possible penalty loss was $1.9–$2.5 million. At Indiana Harbor, refurbishment plans include work potentially related to its notice, but the company could not estimate a loss range or assess potential penalties or injunctive relief.
- The company announced plans to pursue an MLP IPO, expected no earlier than Q4 2012 and subject to market conditions, with a portion of its Haverhill and Middletown interests as expected key assets. A potential new U.S. coke facility was deferred pending permitting progress and customer commitments. International growth opportunities, including India, remained under consideration.
- Tax-sharing arrangements with Sunoco resulted in elimination of $65.1 million of tax benefits in the first half, reducing equity; the filing states $208.5 million of such benefits were eliminated after separation in total. Haverhill nonconventional fuel tax credits expired June 30, 2012.
- Other comparability items include the absence of the $18.5 million 2011 firm-purchase-commitment loss, increased stand-alone interest expense after separation, and 2012 Middletown start-up/yield costs of $5.5 million for the first half, including $4.0 million related to start-up.
- Other risks include dependence on major steel customers and cyclical steel markets, coal supply and production costs, contract renewal and facility reliability, substantial debt, environmental compliance and capital needs, and execution and financing risks in acquisitions or the proposed MLP. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating gains and 2012 guidance are sustained after separating Middletown’s contribution, cost pass-throughs, and start-up effects.
- Progress and final cost of Indiana Harbor refurbishment, renewal of its coke contract, and resolution of EPA matters at all three facilities.
- Coal-market conditions, mine-cost trends, production plans, and whether coal operations meet management’s 2012 outlook.
- Actual free cash flow and capital spending versus guidance, including timing of environmental and refurbishment investments.
- Terms, timing, regulatory approvals, and expected financial effects of the proposed MLP IPO and other growth initiatives.
- Debt-service capacity, variable-rate exposure, revolver availability, and any further effects of tax-sharing settlements or tax-attribute adjustments.