SunCoke Energy, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. SunCoke produces coke for steelmakers and operates coal and aggregate logistics terminals; results include its controlled publicly traded partnership.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $364.5 million | $339.0 million | $1,082.0 million | $971.9 million |
| Operating income | $30.1 million | $33.9 million | $95.9 million | $65.4 million |
| Net income (loss) | $17.1 million | $18.8 million | $41.5 million | $(70.4) million |
| Net income (loss) attributable to SunCoke | $11.5 million | $11.6 million | $24.4 million | $(11.6) million |
| EPS attributable to SunCoke, diluted | $0.18 | $0.18 | $0.37 | $(0.18) |
| Adjusted EBITDA | $66.0 million | $62.1 million | $197.3 million | $165.2 million |
| Cash from operations | $85.3 million | $73.9 million | $170.6 million | $128.3 million |
Q3 operating margin was approximately 8.3%, compared with 10.0% a year earlier; nine-month operating margin improved to approximately 8.9% from 6.7%. Revenue growth reflected higher coal-cost pass-throughs and coke volumes, as well as stronger logistics activity. Adjusted EBITDA is a non-GAAP measure and includes earnings attributable to noncontrolling interests.
Financial position and cash flow
- At September 30, cash was $168.4 million, total debt and financing obligations were $838.6 million carrying value ($859.9 million borrowings before unamortized costs), and current liabilities were $223.8 million. Total assets were $2,098.2 million.
- Combined available borrowing capacity under the company and Partnership facilities was $254.2 million. The company and Partnership reported compliance with debt covenants.
- Nine-month investing cash outflow was $66.4 million, including $70.7 million of capital expenditures. Financing cash outflow was $56.0 million; cash increased by $48.2 million.
- Operating cash flow improved by $42.3 million year over year, reflecting improved operations, favorable working-capital movements, and lower interest payments.
Material changes and operating drivers
- Q3 revenue rose $25.5 million year over year, but operating income fell $3.8 million and SunCoke-attributable net income was nearly unchanged. Higher operating costs and depreciation, a Granite City outage and a machinery fire weighed on results.
- Nine-month revenue increased $110.1 million and SunCoke-attributable earnings improved by $36.0 million versus a prior-year loss. The prior-year period included a $20.4 million debt-extinguishment loss and $69.4 million income-tax expense, including effects of partnership tax rules.
- Domestic Coke Q3 Adjusted EBITDA declined $6.5 million to $49.1 million, while Logistics Adjusted EBITDA increased $8.4 million to $21.0 million, mainly on higher CMT throughput. Nine-month Logistics Adjusted EBITDA rose $18.6 million to $54.3 million.
- Domestic Coke utilization was 95% in Q3 versus 92%; production was 1.011 million tons versus 0.981 million. Logistics tons handled increased to 6.943 million from 5.134 million.
- SunCoke sold its 49% VISA SunCoke investment for $4.0 million cash and recorded a $5.4 million net loss, including recognition of accumulated currency translation losses.
Outlook, risks and unusual items
- Management expected full-year 2018 Adjusted EBITDA at the top end of its $240 million–$255 million range. Guidance included a Granite City outage that expanded in scope and duration, expected to finish in late November; management cited an approximately $6.5 million incremental full-year EBITDA impact and $5 million of additional capital expenditures.
- 2018 capital expenditure guidance was approximately $100 million. Management projected $30 million–$35 million for Indiana Harbor oven rebuilds and expected the final rebuild phase—57 ovens—in 2019, at a total cost of $50 million–$60 million, including operating and maintenance costs.
- Environmental remediation work at Haverhill and Granite City was expected to cost approximately $150 million in total; about $132 million had been spent. The company expected to contribute approximately $10 million in Q4 2018 and $5 million in the first half of 2019 to the Partnership for remaining work. Granite City project completion had shifted to July 2019.
- A July 2018 fire at Granite City reduced Q3 Adjusted EBITDA by $2.6 million. Near-historic river levels earlier in 2018 and high Ohio River water and limited rail availability in Q3 affected logistics operations.
- Major risks include reliance on a limited number of steel and logistics customers, steel and coal market cyclicality, facility reliability and outages, environmental compliance and remediation costs, transportation constraints, and debt covenant requirements. Coke sales and logistics contracts generally include long-term take-or-pay protections; management reported customers had met obligations to date.
- The Partnership declared a $0.40-per-unit quarterly distribution payable December 3, 2018. Its reduced distribution policy was intended to support debt reduction and a leverage target of 3.50:1.00 or lower by the end of 2019.
- The company recorded a $4.8 million third-quarter tax benefit from revised foreign tax credit realizability estimates. The filing also noted that the Partnership’s cokemaking entities are expected to become taxable as corporations after the applicable transition period, beginning January 1, 2028.
Important facts for investors to verify
- Whether Granite City’s expanded outage and environmental work finished on the updated schedule and within cost expectations.
- Whether the full-year Adjusted EBITDA outlook was achieved, and how much resulted from operational performance versus pass-through costs and one-time items.
- Progress, cost and expected returns from the 2019 Indiana Harbor oven rebuilds and the remaining environmental remediation program.
- Liquidity, debt reduction, covenant headroom and the Partnership’s distribution and leverage trajectory.
- Customer concentration, take-or-pay contract coverage and the effect of steel-market, coal-market and transportation changes on volumes and margins.