Business context and reporting period
SunCoke Energy, Inc. (NYSE: SXC) filed its annual report for the fiscal year ended December 31, 2019. The company produces coke for blast-furnace steelmaking and operates coal and bulk-material handling terminals. Domestic coke is largely sold under long-term take-or-pay contracts; logistics performance depends more on customer volumes and coal-market conditions. Figures below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $1,600.3 million | $1,450.9 million |
| Operating income (loss) | $(144.3) million | $118.7 million |
| Net income (loss) | $(148.4) million | $47.0 million |
| Net income (loss) attributable to Suncoke | $(152.3) million; $(1.98) per share | $26.2 million; $0.40 per share |
| Adjusted EBITDA | $247.9 million | $263.2 million |
| Cash from operations | $181.9 million | $185.8 million |
| Capital expenditures | $110.1 million | $100.3 million |
Revenue rose 10.3%, largely from higher coal-cost pass-throughs and domestic coke sales volumes. GAAP operating margin was approximately negative 9.0%, versus positive 8.2% in 2018; the 2019 result includes a $247.4 million non-cash logistics impairment. Adjusted EBITDA declined about 5.8%. Domestic Coke Adjusted EBITDA increased to $226.7 million from $207.9 million; Logistics Adjusted EBITDA fell to $42.6 million from $72.6 million.
At December 31, 2019, cash and cash equivalents were $97.1 million, and revolver borrowing availability was $244.5 million. Total borrowings were $800.5 million principal ($782.9 million carrying amount after discount and issuance costs), compared with $859.0 million principal in 2018. The company reported $194.8 million of current liabilities and $308.3 million of current assets. It was in compliance with debt covenants. The 7.5% senior notes mature in 2025; the revolving facility matures in 2024.
For the fourth quarter, revenue was $397.2 million versus $368.9 million a year earlier; consolidated net loss was $0.8 million versus net income of $5.5 million. Loss attributable to Suncoke was $1.4 million, or $0.02 per share, compared with income of $1.8 million, or $0.03 per share. Quarterly gross profit was $39.4 million versus $39.7 million.
Material changes and unusual items
- In September 2019, the company recorded $247.4 million of non-cash, pre-tax impairment charges in Logistics: $73.5 million for all remaining segment goodwill and $173.9 million for CMT long-lived assets. The impairment reflected weaker customer outlooks and lower forecast volumes and rates.
- Murray American Coal filed for bankruptcy and rejected its CMT take-or-pay contract; Suncoke recorded no Murray shortfall revenue in 2019 and does not expect future Murray export volumes. This contributed to approximately $30 million of absent take-or-pay revenue. Foresight Energy was assessing restructuring options and had extended a grace period on its third-quarter interest payment to February 28, 2020.
- The June 2019 Simplification Transaction made SunCoke Energy Partners wholly owned, eliminating public partnership units and associated noncontrolling interests. Suncoke issued 24.8 million shares for the transaction. It was accounted for as an equity transaction, with no gain or loss recognized.
- In the third quarter, the company repurchased $50 million face value of senior notes for $46.6 million cash, recording a $2.2 million gain. The company also repurchased 6.3 million shares for approximately $36.1 million during 2019 and paid a $0.06-per-share dividend in the fourth quarter.
- Legacy black-lung liabilities rose to $55.1 million from $49.4 million, with 324 active claims. Expense was $10.9 million in 2019, up from $5.4 million, reflecting a lower discount rate and revised claims assumptions.
Outlook, management commentary and risks
Management projected 2020 Adjusted EBITDA of $235–$245 million and operating cash flow of $170–$185 million, with capital expenditures of $70–$80 million. It expected Indiana Harbor to operate near nameplate capacity and generate approximately $50 million of run-rate Adjusted EBITDA, while lower Logistics volumes and rates—particularly from anticipated Foresight contract renegotiation—were expected to offset much of the improvement.
Management highlighted the need to renew or renegotiate the Jewell and Haverhill Phase I coke contracts, both expiring in December 2020, and to diversify CMT beyond coal exports. Cleveland-Cliffs announced its intended acquisition of AK Steel, expected to close in 2020; Suncoke then anticipated no impact to its Haverhill or Middletown contracts.
Principal risks include customer concentration and creditworthiness, steel and coal market weakness, reduced coal-terminal throughput, contract renewal and take-or-pay enforceability, operating interruptions and oven reliability, environmental compliance and permitting, union labor, variable-rate interest exposure, debt maturities and legacy reclamation and black-lung obligations. Environmental notices and consent decrees involving Haverhill, Granite City and Indiana Harbor are described in the filing; management stated that other pending claims were not expected to have a material adverse impact.
Key facts investors should verify
- Whether Foresight’s financial condition and contract renegotiation produce the lower 2020 volumes and rates assumed in guidance, and whether replacement CMT customers can be secured.
- Progress and terms of the Jewell and Haverhill Phase I contract renewals due in December 2020.
- Whether the 2020 Adjusted EBITDA and operating-cash-flow guidance is achieved, including the expected Indiana Harbor contribution and capital spending.
- Liquidity, leverage and refinancing capacity, particularly given $143.3 million of revolving borrowings at year-end and the disclosed debt maturity schedule.
- Changes in black-lung estimates, environmental remediation or permitting obligations, and any developments in the disclosed notices, claims or contingencies.