Business context and reporting period
SunCoke Energy, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2016. The company operates U.S. and Brazilian cokemaking businesses and coal-handling terminals; its consolidated results include SunCoke Energy Partners, L.P. In April 2016, SunCoke completed the divestiture of substantially all of its coal-mining business.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $311.1 million | $324.0 million |
| Operating income | $9.5 million | $25.5 million |
| Operating margin | Approximately 3.1% | Approximately 7.9% |
| Consolidated net income | $12.6 million | $0.4 million |
| Net loss attributable to SunCoke | $4.1 million | $4.0 million |
| Adjusted EBITDA | $53.0 million | $47.9 million |
| Cash from operations | $29.4 million | $11.1 million |
| Capital expenditures | $13.8 million | $8.3 million |
Consolidated net income exceeded the amount attributable to SunCoke because $16.7 million was attributable to noncontrolling interests. Diluted loss per share was $0.06 in both periods.
Revenue fell 4.0%, principally reflecting lower coal-price pass-throughs and reduced energy revenue, partly offset by CMT, acquired in 2015. Operating income declined despite lower operating costs, in part because Q1 2016 included a $10.7 million coal-business impairment and higher SG&A and depreciation. Adjusted EBITDA increased mainly due to CMT, which contributed $13.0 million; this non-GAAP measure includes amounts attributable to noncontrolling interests.
At March 31, cash and cash equivalents were $101.8 million, versus $123.4 million at year-end. Total debt was $945.9 million carrying value ($950.7 million total borrowings before unamortized costs and premium); long-term debt was $944.8 million. The Partnership repurchased $52.8 million face value of notes for $32.6 million, recognizing a $20.4 million gain. Combined revolving-facility availability was $122.5 million, subject to facility terms and outstanding letters of credit. The company and Partnership reported compliance with applicable debt covenants.
Material changes and notable items
- Coal Logistics Adjusted EBITDA rose to $15.1 million from $2.6 million, including CMT’s $13.0 million contribution. Domestic Coke Adjusted EBITDA increased to $54.3 million from $52.7 million; Brazil Coke declined to $2.3 million from $4.1 million.
- The coal-mining disposal generated a $9.2 million net loss in Q1, including the $10.7 million impairment, partly offset by a $1.5 million gain on certain permits and reclamation obligations. The April sale involved a $10.3 million payment to Revelation; management expected approximately $7 million of additional Q2 loss and approximately $14 million total cash payments for the divestiture.
- Operating cash flow improved year over year, which management attributed to lower operating and maintenance spending, lower Indiana Harbor inventories, and $7.4 million of cash from CMT. Investing cash outflow was $5.3 million and financing cash outflow was $45.7 million, principally reflecting debt repayment, Partnership distributions, and note repurchases.
- AK Steel reduced planned 2016 production at Haverhill 2 by 75,000 tons. The take-or-pay contract provides for make-whole payments; management said it did not expect the change to affect 2016 Adjusted EBITDA targets.
Outlook, risks, and contingencies
Management forecast 2016 Adjusted EBITDA of $210–$235 million and operating cash flow of $150–$170 million. It estimated approximately $45 million of 2016 capital expenditures, excluding capitalized interest and pre-funded CMT projects. Environmental projects at Haverhill and Granite City are expected to total approximately $130 million; about $90 million had been spent, with remaining spending expected through Q1 2019. Management said available resources, including revolving borrowings, should meet working-capital needs for the foreseeable future, while noting potential capital-market needs for maturities beginning in 2019.
Risks include weak and cyclical steel and coal markets, customer financial condition and demand, coal supply and logistics volumes, refinancing and covenant constraints, and environmental compliance costs. The company had EPA notices involving Haverhill and Granite City and a consent decree with approximately $130 million of related capital projects; Indiana Harbor matters remained under discussion, with the company unable to estimate a probable or reasonably possible loss range. Other pending or threatened claims were described as not expected to materially affect the consolidated financial statements. SunCoke also issued $30.8 million of letters of credit as surety collateral; management expected the mining divestiture to release approximately $10 million.
The Partnership declared a $0.5940-per-unit quarterly distribution for payment in June 2016 and said it was prioritizing debt reduction. This is a Partnership distribution, not a declared SunCoke common-stock dividend. Forward-looking estimates and plans are subject to the risks described in the filing.
Key facts for investors to verify
- Whether the coal divestiture’s expected additional loss, total cash cost, and release of letters of credit matched subsequent results.
- Progress against 2016 Adjusted EBITDA, operating-cash-flow, capital-spending, and environmental-project estimates.
- CMT’s ongoing contribution and the sustainability of Coal Logistics volumes and take-or-pay-related earnings.
- Debt reduction, facility availability, covenant headroom, and refinancing needs beginning in 2019.
- Developments in steel and coal markets, major customer activity, and unresolved environmental matters, particularly at Indiana Harbor.