Suncoke Energy, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 6, 2020. SunCoke produces coke for steelmaking and operates coal and aggregate logistics terminals. Its U.S. coke sales are primarily under long-term take-or-pay agreements.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $302.2 million | $404.3 million | $1,022.9 million | $1,203.1 million |
| Operating income (loss) | $12.0 million | $(212.4) million | $64.9 million | $(160.8) million |
| Net income (loss) | $(1.4) million | $(163.1) million | $12.3 million | $(147.6) million |
| Net income (loss) attributable to SunCoke | $(2.7) million | $(163.0) million | $8.7 million | $(150.9) million |
| Adjusted EBITDA | $47.8 million | $66.7 million | $168.9 million | $197.1 million |
| Operating cash flow | $74.5 million | $84.9 million | $123.1 million | $120.5 million |
Q3 operating margin was approximately 4.0% (2019: negative 52.5%, heavily affected by impairment). Adjusted EBITDA margin was approximately 15.8% (2019: 16.5%). Nine-month operating margin was approximately 6.3%; the prior-year period was materially affected by impairment.
- Cash and liquidity: Cash was $86.0 million at September 30, 2020, down from $97.1 million at year-end 2019. The revolving facility had $104.3 million drawn and $283.9 million available; letters of credit also included $11.8 million under the facility.
- Debt: Total debt and financing obligation carrying value was $724.8 million, versus $782.9 million at year-end 2019. This included $630.5 million of 7.50% notes due 2025 and $104.3 million drawn on the revolver. The company repurchased $19.5 million face value of notes for $15.8 million during the nine months, recognizing a $3.4 million gain.
- Cash uses: Nine-month capital expenditures were $53.4 million; cash dividends were $15.0 million and share repurchases were $7.0 million. Cash declined $11.1 million over the period.
Changes versus the prior comparable period
- Revenue declined 25% in Q3 and 15% for the nine-month period. Lower coal prices reduced pass-through revenue, while customer volume relief and weaker logistics activity reduced volumes.
- Adjusted EBITDA fell $18.9 million in Q3 and $28.2 million over nine months. Domestic Coke EBITDA declined $11.1 million in Q3; Logistics EBITDA declined $5.3 million. Nine-month Logistics EBITDA fell $23.5 million.
- Domestic Coke capacity utilization was 82% in Q3 versus 99% a year earlier; sales volumes fell to 868,000 tons from 1.057 million. Rebuilt Indiana Harbor ovens supported results, partly offsetting customer supply reductions.
- Logistics tons handled fell to 3.346 million in Q3 from 4.706 million. Foresight Energy’s bankruptcy and rejection of its contract, depressed coal export markets, and pandemic-related disruption weighed on volumes.
- The 2019 comparison includes $247.4 million of non-cash Logistics impairment charges. Their absence largely explains the year-over-year improvement in GAAP operating income and net income, rather than an improvement in underlying operating trends.
Outlook, management commentary and risks
- 2020 guidance: Adjusted EBITDA of $190 million–$200 million; operating cash flow of approximately $116 million–$136 million; capital expenditures of approximately $80 million, including about $12 million for the foundry coke project. Management said pandemic impacts and economic conditions remained difficult to predict.
- Customer agreements: In exchange for near-term volume relief, SunCoke extended certain contracts. Agreements with AM USA reduced 2020 supply by approximately 300,000 tons and extended Jewell and Haverhill I contracts to December 2025. An AK Steel agreement reduced 2020 supply by 200,000 tons; Haverhill II was subsequently extended to June 2025. The company said key pricing and cost pass-through provisions remained unchanged.
- Cost actions and growth: A workforce reduction and other actions are expected to generate approximately $10 million of savings in 2021. SunCoke was testing foundry coke production and expected to be positioned to produce and sell approximately 100,000 tons in 2021.
- Liquidity and covenants: Management considered resources sufficient for foreseeable working-capital needs and reported compliance with debt covenants. Moody’s reaffirmed its B1 rating in April 2020 and changed the outlook to negative; S&P reaffirmed BB- with a stable outlook.
- Contingency: The black-lung self-insurance regulator proposed collateral of $40.4 million, up from $8.4 million. SunCoke appealed; an unsuccessful appeal could require additional collateral and reduce liquidity. Management believed other pending legal claims were not expected to have a material financial impact.
- Subsequent events: After quarter-end, SunCoke repurchased another $33.2 million face value of 2025 notes for $30.2 million. The board declared a $0.06-per-share dividend payable December 1, 2020.
- Key risks include the duration and effects of COVID-19, steel and coal market conditions, customer financial distress, logistics volumes, operating reliability, environmental obligations, and the ability to service debt and maintain liquidity.
Most important facts for investors to verify
- Whether steel demand and customer production recover, and how the negotiated volume relief affects coke volumes and margins.
- Whether the 2020 EBITDA and cash-flow guidance is achieved, given lower year-to-date EBITDA and working-capital movements.
- Outcome of the black-lung collateral appeal and any resulting liquidity requirement.
- Renewal or replacement of Foresight-related logistics business, including progress on a longer-term Javelin agreement.
- Whether planned foundry coke sales begin in 2021 as expected and deliver meaningful diversification.
- Debt reduction, available revolver capacity, covenant headroom, and the sustainability of dividends and repurchases.