Suncoke Energy, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; compared with the corresponding 2016 periods. SunCoke operates U.S. and Brazilian cokemaking facilities and coal logistics terminals. Its U.S. coke sales are primarily under long-term take-or-pay contracts with coal-cost pass-through provisions.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $339.0 million | $293.9 million | $971.9 million | $897.7 million |
| Operating income | $33.5 million | $28.9 million | $64.4 million | $49.3 million |
| Net income (loss) attributable to SunCoke | $11.6 million | $6.1 million | $(11.6) million | $(2.6) million |
| Adjusted EBITDA | $62.1 million | $49.4 million | $165.2 million | $139.7 million |
| Operating cash flow | $73.9 million | $44.6 million | $128.3 million | $166.1 million |
Q3 operating margin was approximately 9.9% (prior year 9.8%); nine-month operating margin was approximately 6.6% (prior year 5.5%). Adjusted EBITDA is a non-GAAP measure and includes amounts attributable to noncontrolling interests; nine-month Adjusted EBITDA attributable to SunCoke was $104.2 million, versus $81.9 million.
- Cash and liquidity: Cash and cash equivalents were $148.7 million at September 30, 2017, versus $134.0 million at year-end 2016. The company reported $154.9 million of borrowing availability across its credit facilities.
- Debt: Total debt and financing obligation carrying amount was $861.6 million, including $887.9 million of borrowings before discounts, premiums and issuance costs. The company and Partnership reported covenant compliance. Refinancing is expected to increase annualized net interest expense by approximately $8 million.
- Cash investment: Nine-month capital expenditures were $49.6 million; 2017 capital spending was projected at approximately $80 million. Nine-month financing cash use was $84.6 million, including $33.6 million to buy Partnership units and $36.0 million in distributions to noncontrolling interests.
Material changes and management commentary
- Q3 revenue rose $45.1 million year over year, mainly from higher coal-price pass-through in Domestic Coke and increased Coal Logistics volumes. Adjusted EBITDA rose $12.7 million. Nine-month revenue increased $74.2 million and Adjusted EBITDA increased $25.5 million.
- Coal Logistics handled 16.0 million tons in the first nine months, up 3.2 million tons year over year; segment Adjusted EBITDA increased to $35.7 million from $18.6 million. Higher coal prices and volumes supported performance.
- Domestic Coke nine-month Adjusted EBITDA declined to $149.3 million from $157.4 million. Indiana Harbor oven rebuilding reduced output and raised operating costs; domestic utilization was 91%, versus 94% a year earlier.
- Operating cash flow fell $37.8 million for the nine months, primarily due to working-capital movements associated with coal prices and inventory, tax payments versus prior-year refunds, and higher benefit payments. These effects were partly offset by lower interest payments.
- The Partnership issued $630 million of 7.5% notes due 2025 and refinanced other obligations. The refinancing generated a $20.4 million nine-month debt-extinguishment loss, primarily the $18.7 million redemption premium. Moody’s upgraded the company’s corporate family rating from B2 to B1 in May 2017.
- SunCoke terminated a proposed Partnership simplification transaction and discontinued a proposed Kentucky cokemaking facility, writing off $5.3 million of previously capitalized costs in 2017.
Outlook, risks and contingencies
- 2017 guidance: Adjusted EBITDA of $220–$235 million, including $130–$141 million attributable to SunCoke; operating cash flow of $128–$143 million; and net loss of $50–$61 million. These are management estimates, not guarantees.
- Management cited a focus on renewing existing customer contracts. While steel-market conditions showed improvement, portions of customer facilities remained idled. The coke contracts have an average remaining term of about seven years; the Jewell contract expires in 2020.
- Environmental work under the Haverhill and Granite City consent decree is expected to total approximately $140–$145 million. About $103 million had been spent; remaining spending was expected through Q1 2019. Indiana Harbor air-permit allegations remained under settlement discussions; final injunctive relief and penalties were not determined.
- Indiana Harbor oven degradation led to higher depreciation; additional depreciation was $9.3 million for the first nine months. Rebuild-related lower volumes and higher maintenance remain operational considerations.
- IRS final regulations exclude cokemaking from qualifying income for publicly traded partnerships after a transition period. Partnership cokemaking entities are expected to become taxable as corporations on January 1, 2028. The resulting deferred tax charge contributed to the consolidated nine-month loss; the filing says its incremental impact was attributable to public unitholders and did not affect net income attributable to SunCoke.
- Other key exposures include steel and coal market cycles, dependence on a limited number of customers and logistics volumes, supplier performance and coal availability, environmental compliance, debt service and covenant restrictions. Management reported no material change in previously disclosed risk factors and no material change in market-risk exposure.
Most important facts to verify
- Whether 2017 Adjusted EBITDA and operating cash flow guidance was achieved, and how much of performance was attributable to price pass-through versus underlying volumes and margins.
- Progress and final costs for Haverhill/Granite City environmental projects and the unresolved Indiana Harbor settlement.
- Indiana Harbor oven-rebuild schedule, production recovery and any further useful-life or depreciation changes.
- Debt and interest-cost effects of the refinancing, available revolver capacity, and ongoing compliance with leverage and interest-coverage covenants.
- Customer contract renewal outcomes, particularly upcoming expirations, and the effect of steel-market conditions on customer operations and logistics throughput.