SunCoke Energy, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed April 24, 2019. SunCoke produces coke for steelmaking and operates coal and bulk-material handling terminals. Results consolidate SunCoke Energy Partners, L.P. (the Partnership), in which SunCoke held a 60.4% limited-partner interest plus its general-partner interest at quarter-end.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $391.3 million | $350.5 million |
| Operating income | $30.0 million | $31.1 million |
| Net income | $12.2 million | $13.0 million |
| Net income attributable to SunCoke | $9.8 million; $0.15 per diluted share | $8.7 million; $0.13 per diluted share |
| Adjusted EBITDA | $67.3 million | $64.0 million |
| Cash from operations | $35.3 million | $57.3 million |
| Capital expenditures | $20.9 million | $15.4 million |
| Cash and cash equivalents | $143.9 million | $145.7 million at December 31, 2018 |
| Total debt and financing obligation, carrying amount | $833.3 million | $838.4 million at December 31, 2018 |
Revenue increased 11.6%, while operating income declined 3.5%. Calculated operating margin was approximately 7.7%, versus 8.9% a year earlier; calculated net margin was approximately 3.1%, versus 3.7%. Adjusted EBITDA attributable to SunCoke was $48.4 million, compared with $45.0 million.
At March 31, current assets were $387.1 million and current liabilities were $218.0 million. The Company reported $261.2 million of borrowing availability across its credit facilities: $76.2 million under SunCoke’s revolver and $185.0 million under the Partnership’s revolver. The Partnership had $100.0 million drawn on its revolver; SunCoke’s revolver had no borrowings. Both entities were in compliance with debt covenants. The filing reports $853.0 million of total borrowings before discounts and issuance costs.
Changes and operating performance
- Domestic Coke revenue rose $41.2 million, principally from higher coal-price pass-throughs and volumes. Capacity utilization increased to 96% from 92%; production rose to 1.006 million tons from 962,000 tons. Segment Adjusted EBITDA increased to $58.5 million from $54.3 million.
- Domestic Coke Adjusted EBITDA per ton increased to $58.27 from $55.75. Higher coal moisture following heavy winter rainfall reduced coal-to-coke yields and EBITDA by $1.6 million.
- Logistics Adjusted EBITDA fell to $12.7 million from $13.6 million, with lower CMT export volumes partly offset by higher domestic-terminal volumes. Brazil Coke Adjusted EBITDA was $4.5 million versus $4.7 million.
- Operating cash flow fell $22.0 million, mainly because coal inventory was rebuilt at higher prices. Inventory increased to $150.7 million from $110.4 million, including coal inventory of $98.0 million versus $59.9 million.
- Depreciation and amortization increased $4.3 million to $37.2 million, including $5.7 million of additional depreciation associated with revised useful-life estimates for certain Domestic Coke assets. Cost of products sold and operating expenses rose $36.8 million, largely reflecting higher coal costs and volumes.
Outlook, management commentary, and risks
- Management expected 2019 Adjusted EBITDA of $265–$275 million, including $182–$188 million attributable to SunCoke, and operating cash flow of $180–$195 million. The filing also forecast 2019 capital expenditures of $110–$120 million, including approximately $40–$48 million for the Indiana Harbor oven rebuild.
- SunCoke continued to expect its stock-for-unit Simplification Transaction to close in late Q2 or early Q3 2019. The transaction would acquire the Partnership’s remaining publicly held common units, make it wholly owned, and eliminate the Partnership’s publicly traded units and incentive distribution rights.
- Domestic coke sales are principally under long-term take-or-pay contracts with major steelmakers, with an average remaining term of approximately five years. Management said it expected lower coal-export volumes in 2019, but take-or-pay contracts were expected to limit the effect on full-year results.
- AK Steel announced plans to permanently close its Ashland Works plant by year-end 2019. SunCoke said it believed AK Steel would not meet the additional condition required to terminate the Haverhill coke and energy agreements early.
- Environmental remediation projects at Haverhill and Granite City were expected to cost approximately $150 million in total; approximately $141 million had been spent to date. Completion of the Granite City project was expected in June 2019, later than originally planned. The Company expected remaining project spending through the first half of 2019, with additional Partnership contributions anticipated.
- Coal export demand and logistics throughput are exposed to coal-market conditions, including benchmark prices and demand in Europe and Asia. Other disclosed risks include steel-industry cyclicality, customer and supplier concentration, coal supply and yield, equipment reliability, environmental compliance and capital requirements.
- The Company recorded $0.5 million of Simplification Transaction costs in the quarter. It adopted the new lease standard on January 1, 2019, recognizing $5.1 million of right-of-use assets and lease liabilities at adoption. Management reported no unusual event significantly affecting comparability with Q1 2018.
Environmental and other contingencies include air-permit matters at Haverhill, Granite City and Indiana Harbor. The filing describes consent decrees and remediation work; related civil penalties had been paid. Management said other pending or threatened claims could be resolved unfavorably but did not expect resulting liabilities to materially affect consolidated financial statements.
Important facts for investors to verify
- Progress, final timing and total cost of the Simplification Transaction, including the share-exchange formula and Partnership distributions before closing.
- Delivery against 2019 Adjusted EBITDA and capital-spending guidance, particularly the Indiana Harbor rebuild and remaining environmental work.
- Whether coal inventory and working-capital requirements normalize, given the quarter’s sharp inventory increase and lower operating cash flow.
- Performance and contractual status of major steel-customer agreements, including the implications of the announced Ashland Works closure.
- Logistics volumes and exposure to export-market weakness, and continued compliance with debt covenants and availability under the revolvers.
- Environmental project completion and any developments in permit, litigation, black-lung or other contingent liabilities.