Suncoke Energy, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company produces coke for steelmaking and operates coal and aggregate logistics terminals. Its consolidated results include SunCoke Energy Partners, L.P. (the Partnership); SunCoke owned a 60.4% limited partner interest at quarter-end.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $367.0 million | $323.2 million | $717.5 million | $632.9 million |
| Operating income | $34.7 million | $8.9 million | $65.8 million | $31.5 million |
| Net income (loss) | $11.4 million | $(31.5) million | $24.4 million | $(89.2) million |
| Net income (loss) attributable to SunCoke | $4.2 million | $(24.2) million | $12.9 million | $(23.2) million |
| Adjusted EBITDA | $67.3 million | $47.5 million | $131.3 million | $103.1 million |
| Operating cash flow | $28.0 million | $24.9 million | $85.3 million | $54.4 million |
Q2 operating margin was approximately 9.5%, versus 2.8% a year earlier; six-month operating margin was approximately 9.2%, versus 5.0%. Revenue growth primarily reflected higher coal-price pass-throughs and greater domestic coke and logistics volumes. Domestic Coke Adjusted EBITDA rose to $52.9 million in Q2 from $44.0 million; Logistics rose to $19.7 million from $10.0 million. Brazil Coke results were broadly comparable.
Domestic Coke capacity utilization was 94% in Q2, compared with 90%; production was 999,000 tons versus 950,000. Logistics handled 6.98 million tons versus 5.17 million, including a third consecutive quarter of record CMT sales volumes. Management cited stronger Indiana Harbor oven performance and higher CMT volumes.
Cash, debt and investment
- Cash was $143.0 million at June 30, up from $120.2 million at year-end. Six-month cash flow from operations was $85.3 million; capital expenditures were $43.6 million; cash increased $22.8 million.
- Total debt and financing obligations were $863.8 million carrying value, including $860.0 million long-term and $3.8 million current. Cash exceeded year-end levels; reported borrowing availability across the company and Partnership credit facilities was $229.1 million.
- SunCoke redeemed its 7.625% 2019 Notes in January for $46.1 million, funding the redemption with a $45.0 million term loan due 2022. The Partnership revolver had $130.0 million drawn and $153.1 million available; SunCoke’s $100 million revolver had no borrowings and $76.0 million available after letters of credit. Both entities were covenant-compliant.
- Capital expenditures were $43.6 million in the first half, versus $22.4 million. Full-year 2018 capital spending guidance was approximately $95 million, including about $35 million for environmental remediation.
Changes, outlook and notable items
- Q2 and first-half results improved substantially year over year. Comparability was affected by the prior-year $20.2 million Q2 debt-extinguishment loss, the 2017 $64.2 million tax impact attributable to Partnership public unitholders, and the 2017 $5.3 million write-off related to a canceled coke-facility project.
- 2018 guidance: Adjusted EBITDA of $240–$255 million, net income of $30–$45 million, operating cash flow of $150–$165 million, and Adjusted EBITDA attributable to SunCoke of $160–$171 million. After a July fire at Granite City caused about ten days of lost production and repair costs, management expected a negative Q3 impact but maintained its full-year Adjusted EBITDA outlook.
- Environmental projects at Haverhill and Granite City are expected to cost about $150 million in total; approximately $128 million had been spent, with remaining spending expected through the first half of 2019. SunCoke contributed $10 million to the Partnership in Q1 2018 and expected to contribute approximately $15 million more.
- SunCoke sold its 49% VISA SunCoke investment on June 27 for $4.0 million. Recognition of accumulated currency translation losses and transaction costs resulted in a $5.4 million loss. The investment had been fully impaired in 2015.
- The Partnership reduced its distribution in Q1 to support debt repayment and its leverage target. Its board declared a $0.40-per-unit quarterly distribution payable September 4, 2018. SunCoke purchased $4.2 million of Partnership units during the first half; $47.1 million remained under its authorization.
- Management cited improving U.S. steel conditions and U.S. Steel’s Granite City furnace restarts. Risks include steel and coal market cyclicality, dependence on major customers and suppliers, logistics volumes and transport constraints, aging equipment, environmental compliance and remediation costs, and debt covenants. Low natural-gas prices and rail constraints continued to weigh on KRT thermal-coal volumes; Mississippi River conditions had normalized by mid-Q2.
Key facts for investors to verify
- Whether improved coke production, coal-to-coke yields and CMT throughput persist, and how much earnings growth reflects coal-cost pass-throughs versus underlying margins.
- Progress and final cost of environmental work, including the expected Partnership contribution and completion schedule.
- The Granite City fire’s actual production, repair-cost and Q3 effects, and whether full-year guidance remains achievable.
- Debt, revolver availability, covenant headroom and the Partnership’s progress toward its stated leverage target.
- Customer concentration and contract-renewal exposure; most coke sales are under take-or-pay agreements, with an average remaining term of about six years.
- Potential effects of the Partnership’s future corporate tax treatment: certain cokemaking entities are expected to become taxable as corporations after the transition period, on January 1, 2028.