SunCoke Energy, Inc. — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014; unaudited. Figures are in U.S. dollars unless stated otherwise. SunCoke operates U.S. cokemaking, Brazil and India coke operations, coal mining and coal logistics; U.S. coke sales are generally under long-term take-or-pay contracts with cost pass-throughs.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $359.6 million | $453.9 million |
| Operating income | $4.7 million | $27.0 million |
| Operating margin | 1.3% | 6.0% |
| Net income (loss) | $(3.8) million | $6.4 million |
| Net income (loss) attributable to SunCoke | $(7.8) million; $(0.11) per share | $2.1 million; $0.03 per share |
| Adjusted EBITDA | $33.6 million | $52.3 million |
| Operating cash flow | $(11.3) million | $12.8 million |
| Capital expenditures | $38.1 million | $30.5 million |
| Cash and cash equivalents, quarter-end | $178.2 million | $233.6 million at Dec. 31, 2013 |
| Total debt, quarter-end | $688.9 million | $689.1 million at Dec. 31, 2013 |
Interest expense, net was $12.1 million, down from $15.8 million; the prior-year period included $3.7 million of debt-related charges. Total current assets were $410.2 million and current liabilities $231.9 million. The company reported $257.2 million of borrowing availability across its credit facilities. Debt comprised variable-rate term loans, a $40 million partnership revolver borrowing, $400 million of 7.625% notes due 2019 and $150 million of partnership notes at 7.375% due 2020. Approximate net debt, using reported total debt less cash, was $510.7 million.
Material changes and segment performance
- Revenue fell 20.8%, primarily from lower coal-cost pass-throughs and lower domestic coke volumes; coal mining also faced lower selling prices. Adjusted EBITDA declined $18.7 million.
- Severe winter weather reduced coke production and yields. Domestic Coke sales volume was 948 thousand tons versus 1,058 thousand; capacity utilization was 90% versus 101%. Indiana Harbor refurbishment also impaired operations.
- Domestic Coke Adjusted EBITDA declined to $46.8 million from $61.1 million. Coal Mining Adjusted EBITDA worsened to a loss of $8.0 million from a loss of $4.6 million, amid lower coal prices, although production costs per ton improved.
- Coal Logistics, acquired in 2013, contributed $2.1 million of Adjusted EBITDA on 4.359 million tons handled; this business was not present in the prior-year comparison. Brazil Coke Adjusted EBITDA was $1.7 million versus $1.6 million. India Coke reported $0.1 million of Adjusted EBITDA; the equity-method investment recorded a $0.6 million loss.
- Cash declined $55.4 million during the quarter. Investing outflow was $38.1 million; financing outflow was $6.0 million. Operating cash use reflected weaker performance and working-capital timing, partly offset by a favorable comparison with a $24.5 million customer payment received just after Q1 2013 ended.
Outlook, commentary, risks and unusual items
- Management estimated 2014 consolidated Adjusted EBITDA of $220–$240 million, including $173–$188 million attributable to SunCoke, and net income of $33–$51 million. These are forward-looking estimates, not guarantees.
- Management expected approximately $138 million of 2014 capital expenditures. Haverhill and Granite City environmental projects were estimated at $125 million total, with about $32 million planned for the remainder of 2014 and $49 million in 2015–2016. Indiana Harbor refurbishment was estimated at up to $104 million; additional oven-floor and sole-flue work was expected to cost about $15 million. The filing describes separate depreciation effects from asset-life revisions.
- SunCoke expected to begin realizing the full benefits of Indiana Harbor refurbishment in the second half of 2014. A customer had notified the company of a possible Q2 blast-furnace outage, which could increase coke inventory or result in deferred payment terms.
- On April 23, 2014, after quarter-end, SunCoke agreed to contribute a 33% interest in Haverhill and Middletown to its partnership for stated consideration of $365 million, including units and general-partner interests; the partnership would also assume and repay about $271.3 million of debt and other liabilities. Closing was expected in May, subject to conditions and financing. The filing said the transaction was expected to improve cash distributions and result in no material immediate tax gain.
- EPA notices of violation at Haverhill and Granite City were being addressed through a proposed consent decree under court review. The company estimated a reasonably probable penalty of about $2.2 million and disclosed the environmental capital program noted above. For Indiana Harbor, potential penalties or injunctive relief could not yet be estimated.
- Other exposures include a $2.5 million recorded estimate for an ArcelorMittal coke-quality dispute; a possible $104 million Indiana Harbor refurbishment spend; and broader environmental, operational, customer, coal-price and steel-market risks. Management considered potential claims under certain tax indemnities remote and did not quantify possible Indiana Harbor EPA losses.
- A corporate workforce-reduction plan generated a $1.4 million Q1 charge, with no further charges expected. The Q1 tax benefit was $4.2 million, including stated benefits from an Indiana rate change and tax credits; the reported effective tax rate was 56.8%.
Most important facts for investors to verify
- Whether adverse winter-weather and Indiana Harbor refurbishment effects abate as expected, and whether the facility achieves planned production and yield improvements.
- Progress, final costs and timing of Haverhill/Granite City environmental work and Indiana Harbor refurbishment; monitor the related EPA proceedings and any unestimable Indiana Harbor exposure.
- Whether the post-quarter Haverhill/Middletown contribution closed on the disclosed terms, and its actual impact on debt, ownership, cash distributions and liquidity.
- Coal Mining economics: selling prices remained below production costs per ton, despite lower cash production costs; confirm whether pricing and volumes improve.
- Cash conversion and liquidity, including working-capital movements, capital spending, debt service and the availability of borrowing capacity.
- Use Adjusted EBITDA alongside GAAP results: it is a non-GAAP measure and excludes items including interest, taxes, capital spending and working-capital requirements.