SunCoke Energy, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. SunCoke produces coke for blast-furnace steelmaking, recovers heat to generate energy, and provides coal and bulk-material handling and mixing services. It consolidates SunCoke Energy Partners, L.P. (the Partnership), in which it held a 60.4% limited-partner interest at year-end.
Financial performance and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Revenue | $1,450.9 million | $1,331.5 million | Up $119.4 million, or 9.0% |
| Operating income | $118.7 million | $104.2 million | Up 13.9%; operating margin approximately 8.2% versus 7.8% |
| Net income | $47.0 million | $103.5 million | Down $56.5 million; prior year included substantial tax benefits |
| Net income attributable to SunCoke | $26.2 million; $0.40 per diluted share | $122.4 million; $1.88 per diluted share | Down sharply, principally reflecting 2017 tax benefits and changes in noncontrolling interests |
| Adjusted EBITDA | $263.2 million | $234.7 million | Up $28.5 million, or 12.1%; non-GAAP |
| Operating cash flow | $185.8 million | $148.5 million | Up $37.3 million |
| Capital expenditures | $100.3 million | $75.6 million | Higher spending on oven rebuilds and environmental remediation |
| Cash and cash equivalents | $145.7 million | $120.2 million | Year-end cash; cash plus reported borrowing availability was $399.9 million |
| Debt and financing obligations | $859.0 million principal borrowings; $838.4 million carrying amount | $887.3 million principal borrowings | Principal less cash implies net debt of approximately $713.3 million |
Fourth-quarter 2018 revenue was $368.9 million and net income was $5.5 million. Fourth-quarter 2017 net income of $173.9 million was heavily affected by the tax legislation benefit and is not a directly comparable operating result. The filing does not provide a clear standalone fourth-quarter Adjusted EBITDA value in the supplied text.
At year-end, current assets were $335.0 million and current liabilities were $171.1 million. Long-term debt and financing obligations were $834.5 million, in addition to $3.9 million current. The company and Partnership reported compliance with debt covenants. Outstanding borrowings included $700.0 million of Partnership notes due 2025 and $105.0 million under the Partnership revolver.
Business and material changes
- Domestic Coke generated $207.9 million of Adjusted EBITDA, up $19.0 million. Coke sales rose to 4.033 million tons from 3.851 million; capacity utilization increased to 95% from 91%. Adjusted EBITDA per ton increased to $51.55 from $49.05.
- Indiana Harbor’s rebuilt ovens improved production and cost recovery. SunCoke completed 67 rebuilds in 2018 and had rebuilt 211 of 268 ovens, about 80% of the facility.
- Logistics Adjusted EBITDA was $72.6 million, up from $70.8 million. Tons handled increased to 26.605 million; CMT processed record volumes, though near-historic Mississippi River water levels affected operations.
- Brazil Coke Adjusted EBITDA was $18.4 million, broadly steady; revenue declined to $40.4 million, primarily due to unfavorable currency translation.
- Revenue growth reflected higher coal prices passed through to coke customers, increased domestic coke volumes, and greater logistics volumes. Pass-through coal costs generally affect revenue and cost of sales in similar amounts, subject to contractual yield requirements.
- SunCoke redeemed its $44.6 million 2019 notes in January 2018, funding the redemption with a $45.0 million term loan due 2022. Weighted-average interest expense increased to $65.8 million from $62.4 million, reflecting higher borrowing rates and a full year of post-refinancing rates.
- SunCoke sold its 49% VISA SunCoke investment for $4.0 million cash and recorded a net $5.4 million loss, including accumulated currency translation losses.
Outlook, risks and contingencies
- For 2019, management forecast Adjusted EBITDA of $265 million to $275 million and operating cash flow of $180 million to $195 million. These are forward-looking, non-GAAP/management estimates, not guarantees.
- Management expected 2019 capital expenditures of $110 million to $120 million, including $40 million to $48 million for Indiana Harbor oven rebuilds. It expected the final rebuild phase to finish by year-end and projected approximately $50 million of Indiana Harbor run-rate Adjusted EBITDA after completion.
- Environmental remediation at Haverhill and Granite City was expected to total approximately $150 million; about $138 million had been spent by the filing date. Completion was expected in 2019, with Granite City timing revised to July 2019. The Indiana Harbor consent decree included a $2.5 million penalty paid in 2018 and required capital projects.
- On February 5, 2019, after the reporting period, SunCoke and the Partnership announced a proposed stock-for-unit merger. SunCoke planned to acquire remaining public units at an exchange ratio of 1.40 SunCoke shares per Partnership unit; closing was expected late Q2 or early Q3 2019, subject to approvals and other conditions. Management cited expected annual cost synergies of about $2 million and cash tax savings of $40 million over five years. SunCoke intended to initiate a $0.24 annual dividend per share after closing; this remained subject to completion and board action.
- AK Steel announced its intention to close Ashland Works by the end of 2019. SunCoke said it believed the contractual conditions for early termination of its Haverhill agreement would not be met, but investors should monitor the customer and contract developments.
- Key exposures include reliance on a small group of steel and logistics customers, aging coke ovens and operational interruptions, coal and rail availability, variable-rate debt, environmental regulation and remediation, and the Partnership’s qualifying-income tax transition. The Partnership’s cokemaking income is expected to receive transition treatment through 2027 under the company’s interpretation; certain entities may become taxable as corporations thereafter.
- Legacy obligations include a $49.4 million black-lung liability and a $14.6 million asset-retirement obligation. Surety bonds or other financial security for reclamation and performance commitments totaled approximately $24 million; the filing separately reports $10.3 million posted for reclamation purposes.
Most important facts for investors to verify
- Whether operating improvements at Indiana Harbor and Granite City deliver planned production, cost savings and EBITDA, and whether the remaining oven rebuilds finish within budget and schedule.
- Whether 2019 cash flow covers capital spending, debt service and planned deleveraging; distinguish consolidated results from amounts attributable to SunCoke shareholders and note Adjusted EBITDA is non-GAAP.
- Progress, final cost and timing of environmental projects and consent-decree requirements, particularly the Granite City schedule.
- Completion terms, approvals, exchange ratio and realized synergies/tax savings from the proposed Partnership simplification; confirm whether the proposed dividend is approved and initiated.
- Customer concentration and contract renewal or termination risks, including developments at AK Steel’s Ashland Works and performance by major logistics customers.
- Debt maturities, revolver usage, covenant headroom and exposure to interest-rate changes; also monitor the Partnership’s tax status and black-lung assumptions.