Suncoke Energy, Inc. quarterly report, Q2 FY2014

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Suncoke Energy, Inc. — Q2 2014 Form 10-Q

Reporting period: Three and six months ended June 30, 2014. SunCoke operates U.S. coke facilities, a Brazil facility, an India joint venture, coal mines and coal-logistics businesses. Financial results include SunCoke Energy Partners, L.P.

Financial performance

  • Revenue: Q2 total revenue was $372.2 million, down 7.8% from $403.7 million. First-half revenue was $731.8 million, down 14.7% from $857.6 million. Lower coal-price pass-through and reduced coke volumes were key factors; first-half results also reflected severe winter weather and Indiana Harbor refurbishment disruptions.
  • Profit and impairment: Q2 net loss attributable to SunCoke was $49.2 million, or $0.71 per share, versus net income of $5.7 million, or $0.08 per share, a year earlier. First-half attributable net loss was $57.0 million versus income of $7.8 million. Results included a noncash $103.1 million coal-segment impairment ($97.1 million of long-lived assets and $6.0 million of goodwill), partly offset by a $50.8 million Q2 income-tax benefit.
  • Operating results and margins: Operating loss was $71.4 million in Q2 and $66.7 million for the first half, compared with operating income of $26.1 million and $53.1 million, respectively, in 2013. Depreciation, depletion and amortization rose to $28.6 million in Q2 and $57.6 million for the first half, including additional depreciation at Indiana Harbor. Adjusted EBITDA, a non-GAAP measure, increased to $60.5 million in Q2 from $52.4 million, but fell to $94.1 million for the first half from $104.7 million.
  • Segment trends: Q2 Domestic Coke Adjusted EBITDA increased to $64.3 million from $61.3 million; Coal Logistics contributed $5.0 million. First-half Domestic Coke Adjusted EBITDA fell to $111.1 million from $122.4 million. Coal Mining Adjusted EBITDA remained negative: $(1.2) million in Q2 and $(9.2) million for the first half. India Coke also reported losses.
  • Cash flow: First-half operating cash flow was $25.3 million, down from $89.0 million. Capital expenditures were $77.8 million, versus $61.4 million; investing cash use was $77.8 million. Financing provided $23.3 million, and cash declined $29.2 million to $204.4 million.
  • Debt and liquidity: Total debt was $665.5 million at June 30, including $652.5 million long-term debt. Cash was $204.4 million and reported borrowing availability under credit facilities was $389.2 million. The company and Partnership reported compliance with debt covenants. Current assets were $433.4 million and current liabilities $205.3 million.

Material changes and unusual items

  • On May 9, SunCoke transferred an additional 33% interest in Haverhill and Middletown to its Partnership for stated consideration of $365.0 million. The Partnership issued units and $250.0 million of 7.375% notes due 2020; proceeds supported the transaction and debt repayment. SunCoke’s Partnership limited-partner interest declined from 55.9% to 54.1%.
  • The Drop-Down generated $17.4 million of reported transaction and financing costs, including a $11.4 million tender premium. First-half interest expense increased to $39.2 million from $27.9 million, including $15.4 million of debt-extinguishment costs.
  • Coal Mining revenue weakened with lower prices: the reported average coal sales price was $98.64 per ton in Q2 versus $114.18 a year earlier. The impairment followed weaker market expectations and the likelihood of a sale.
  • On July 17, after quarter-end, the Board authorized sale or other disposition of the coal mining business and expected it to occur in 2014. The company anticipated $10–$13 million of pretax exit and disposal costs, mostly cash, and possible mine idling or production curtailment. The filing says the business would be presented as discontinued operations following the approval.

Outlook, risks and contingencies

  • Management forecast 2014 capital expenditures of approximately $138 million, excluding a potential Kentucky facility. Planned environmental remediation at Haverhill and Granite City totals approximately $125 million; about $58 million had been spent since 2012, with about $17 million expected in the remainder of 2014 and $50 million in 2015–2016.
  • Indiana Harbor refurbishment spending was estimated at $105 million; the company expected approximately $25 million of related spending in 2014 and anticipated completing equipment installation in the second half of 2014. Management expected the full benefits of the refurbishment to begin in Q3 2014.
  • EPA notices concern alleged air-permit violations at Haverhill, Granite City and Indiana Harbor. For Haverhill and Granite City, the company estimated a reasonably probable civil penalty of about $2.2 million and anticipated substantial environmental capital projects. For Indiana Harbor, potential penalties or injunctive relief could not yet be estimated.
  • Other disclosed matters include an estimated $2.5 million liability for a coke-quality dispute with ArcelorMittal and other legal, tax, employment and environmental proceedings; management did not expect other pending matters to be material, while acknowledging some could be resolved unfavorably.
  • Key business risks include coke and coal market prices and volumes, customer and supplier concentration, weather and operating disruptions, environmental requirements and spending, debt service and covenant restrictions, and whether the coal-business disposal can be completed on favorable terms. Leaving coal mining would increase reliance on third-party metallurgical-coal suppliers.
  • Management stated that cash, operating cash flow and credit availability were expected to fund planned operations, capital spending and stock repurchases. A new $150 million share-repurchase authorization was approved July 23; the company also planned a potential accelerated repurchase of up to $75 million.

Most important facts for investors to verify

  • Progress, timing, sale price and final exit costs for the coal-business disposition, including any mine idling and future supplier implications.
  • Whether coke volumes, yields and operating reliability recover after severe weather and Indiana Harbor refurbishment work, and whether expected refurbishment benefits materialize.
  • Cash generation against planned capital expenditures, environmental obligations and debt service; confirm available credit and covenant headroom.
  • Final financial effects of the Partnership Drop-Down and financing, and the recurring earnings impact after one-time transaction and extinguishment costs.
  • Resolution and ultimate cost of EPA matters, environmental projects and the ArcelorMittal coke-quality dispute.