Business context and reporting period
SunCoke Energy, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. It produces coke for steelmakers using heat-recovery technology, operates five U.S. cokemaking facilities, operates a facility in Brazil, holds a 49% interest in an India coke joint venture, and provides coal-handling and blending services. The coal-mining business was classified as discontinued operations and held for sale. The filing also provides unaudited fourth-quarter results.
Financial and operating highlights
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $1,472.7 million | $1,585.5 million |
| Operating income | $109.8 million | $136.5 million |
| Income from continuing operations | $4.2 million | $65.6 million |
| Net income (loss) attributable to SunCoke | $(126.1) million | $25.0 million |
| Adjusted EBITDA from continuing operations | $237.8 million | $221.8 million |
| Cash from continuing operating activities | $130.0 million | $156.7 million |
| Cash and cash equivalents at year-end | $139.0 million | $233.6 million |
| Total debt at year-end | $651.5 million | $689.1 million |
Operating margin was approximately 7.5% of revenue in 2014, versus 8.6% in 2013. Cash from continuing operations less continuing capital expenditures was approximately $11.7 million in 2014; this simple calculation is not a company-reported free-cash-flow measure. At year-end, the company reported $398.5 million of borrowing availability under its credit facilities and stated that it was in compliance with debt covenants.
Domestic Coke produced 4.175 million tons, at 98% capacity utilization, and generated $247.9 million of Adjusted EBITDA, or $59.25 per ton. Coal Logistics handled 19.037 million tons and generated $14.3 million of Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Fourth-quarter snapshot
2014 fourth-quarter sales and other operating revenue were $378.3 million; income from continuing operations was a loss of $15.7 million; discontinued operations recorded a net loss of $40.1 million; and net loss was $55.8 million. Net loss attributable to SunCoke was $65.4 million. The comparable 2013 quarter reported revenue of $377.4 million and net income attributable to SunCoke of $11.1 million.
Material changes versus the prior comparable period
- Revenue declined 7.1% year over year, principally because lower coal prices reduced pass-through revenue and coke volumes fell at Indiana Harbor and Haverhill. Lower coal prices also reduced costs, while the full-year contribution from Coal Logistics partly offset the revenue decline.
- Continuing-operations Adjusted EBITDA increased to $237.8 million from $221.8 million, supported by a full year of Coal Logistics results and improved fixed fees under the Indiana Harbor contract renewal.
- GAAP continuing income fell sharply, reflecting a $30.5 million impairment of the India joint-venture investment, a $16.8 million impairment of a retained coal-preparation-plant asset, higher depreciation and higher interest expense.
- Attributable net results moved from $25.0 million income to a $126.1 million loss. The discontinued coal business recorded a $106.0 million after-tax loss, including $133.5 million in impairment charges before tax, and $18.5 million in exit and disposal costs.
- Continuing operating cash flow decreased by $26.7 million, primarily due to higher inventory and lower accounts payable. Year-end cash fell by $94.6 million overall, with share repurchases, debt repayments and discontinued-operations cash use among the relevant cash-flow items.
Outlook, commentary, risks and unusual items
- Management forecast 2015 Domestic Coke Adjusted EBITDA of $240–$255 million, or $55–$60 per ton, on expected production of approximately 4.3 million tons. It expected Indiana Harbor to generate $25–$35 million of Adjusted EBITDA and reach a nameplate production run-rate by year-end, while acknowledging operating issues could persist into the first quarter.
- The company planned to continue selling or otherwise exiting coal mining, reduce mine production by about 50% to approximately 600,000 tons annually using contract miners, and purchase about 500,000 tons annually to support Jewell. It expected $1.5–$4.5 million of additional 2015 exit costs and approximately $20 million of annualized cash and Adjusted EBITDA savings by late 2015, assuming current market conditions. Jewell was expected to incur about $7.5 million of annual incremental costs from separation from the mining business.
- Management estimated 2015 continuing capital expenditures of approximately $90 million, including about $30 million for environmental projects. Environmental remediation projects were expected to total approximately $125 million overall, with about $50 million remaining for 2015–2016.
- The January 2015 Granite City dropdown transferred a 75% interest to the Partnership for a stated transaction value of $245 million. Management expected further asset dropdowns, including the remaining domestic coke assets and Brazil operations over time.
- Unusual charges and obligations include the coal-business impairments and restructuring, the India investment impairment, and a $14.3 million 2014 expense increase in the black-lung liability. The company also expected an approximately $13 million pension-plan settlement charge in 2015 following termination of its defined-benefit plan.
- Environmental matters include notices of violation at Haverhill, Granite City and Indiana Harbor. A consent decree for Haverhill and Granite City included a $2.2 million civil penalty paid in December 2014 and required capital projects. For Indiana Harbor, the company could not estimate a probable or reasonably possible loss range.
- Key risks include dependence on three steel customers (ArcelorMittal, AK Steel and U.S. Steel), steel and coke-market conditions, operational and weather disruptions, coal supply and yield performance, environmental regulation, and the execution and proceeds of the coal-business disposal. ArcelorMittal accounted for 53% of 2014 sales and other operating revenue; the filing identifies substantial customer concentration.
Investor verification priorities
- Track the coal-business sale, including the HKCC agreement, sale proceeds, retained legacy liabilities and remaining disposal costs.
- Compare 2015 Domestic Coke production and Adjusted EBITDA with guidance, especially Indiana Harbor’s ramp-up and cost-recovery terms.
- Verify the expected coal-rationalization savings against actual cash costs, purchased-coal costs and Jewell’s incremental costs.
- Review cash conversion, liquidity and debt obligations alongside capital spending, dividends, repurchases and Partnership distributions; distinguish debt principal from balance-sheet carrying value.
- Monitor environmental remediation spending and the resolution of Indiana Harbor notices of violation and any related penalties or required projects.
- Assess the India joint venture’s market recovery and whether its valuation assumptions and impairment exposure remain supportable.