Suncoke Energy, Inc. annual report, FY2017

Suncoke Energy, Inc. — FY 2017 Form 10-K

Business context and reporting period. The filing covers the fiscal year ended December 31, 2017; it is an annual report, not a standalone fourth-quarter filing. SunCoke produces coke for steelmakers, operates a coal and bulk-materials logistics business, and operates a cokemaking facility in Brazil. Results consolidate SunCoke Energy Partners, L.P. (the Partnership); SunCoke held a 59.9% limited-partner interest at year-end.

Financial performance and position

Metric	FY 2017	FY 2016
Revenue	$1,331.5 million	$1,223.3 million
Operating income	$102.9 million	$96.6 million
Net income	$103.5 million	$59.5 million
Net income attributable to SunCoke	$122.4 million	$14.4 million
Diluted earnings per share	$1.88	$0.22
Adjusted EBITDA (non-GAAP)	$234.7 million	$217.0 million
Cash from operating activities	$148.5 million	$219.1 million
Capital expenditures	$75.6 million	$63.7 million
Cash and cash equivalents at year-end	$120.2 million	$134.0 million

• Operating margin was approximately 7.7% of revenue. Revenue increased about 8.8%, while operating income rose about 6.5% year over year.
• Revenue growth mainly reflected higher coal-price pass-through in Domestic Coke and increased Logistics volumes. Higher coal costs largely pass through to coke customers under contracts, subject to yield standards.
• Adjusted EBITDA rose about 8.2%. Domestic Coke Adjusted EBITDA fell to $188.9 million from $193.9 million; Logistics increased to $70.8 million from $63.9 million; Brazil Coke increased to $18.2 million from $16.2 million. Corporate and Other losses improved to $43.2 million from $57.0 million.
• Domestic Coke sold 3.851 million tons, at $49.05 Adjusted EBITDA per ton, with 91% capacity utilization. Logistics handled 21.616 million tons, a record for CMT.
• Operating cash flow fell $70.6 million, principally due to working-capital movements, including approximately $47 million related to coal prices and inventory, higher cash interest payments, and higher tax and benefit payments.
• Year-end total borrowings were $887.3 million; reported long-term debt and financing obligation was $861.1 million. Current liabilities were $178.4 million versus current assets of $311.2 million. The company reported $226.6 million of borrowing availability across its credit facilities and compliance with debt covenants.

Material changes and unusual items

• SunCoke and the Partnership refinanced debt in 2017. The Partnership issued $700 million of 7.5% notes due 2025 and used proceeds to retire or repay several obligations. The refinancing generated a $20.4 million consolidated loss on extinguishment of debt and increased 2017 net interest expense to $60.6 million from $53.5 million.
• The 2017 net income tax benefit was $81.6 million, including a provisional $154.7 million benefit from the Tax Cuts and Jobs Act, of which $125.0 million was attributable to SunCoke. The IRS partnership-income regulations also resulted in $64.2 million of incremental deferred tax expense attributable to public Partnership unitholders; it reduced noncontrolling interest rather than SunCoke-attributable net income. Tax estimates remained provisional.
• Indiana Harbor’s oven rebuilds and faster-than-expected deterioration of some unreconstructed ovens reduced production. Fourth-quarter rebuild delays and lower production caused an additional $5.5 million of Adjusted EBITDA losses beyond guidance. SunCoke had rebuilt 144 ovens by year-end and planned 67 more in 2018.
• The company terminated a proposed Kentucky cokemaking facility project and wrote off $5.3 million of previously capitalized engineering costs and land deposits.
• SunCoke purchased 2.853 million Partnership units for $48.7 million, increasing its limited-partner ownership from 53.9% to 59.9%. The company’s own common-stock dividend remained suspended, as it had since 2015.

Outlook, risks and contingencies

• For 2018, management projected Adjusted EBITDA of $240–$255 million and operating cash flow of $150–$165 million. It expected Domestic Coke Adjusted EBITDA of about $50–$52 per ton on approximately 3.9 million tons, and Logistics Adjusted EBITDA of $71–$76 million.
• Management forecast approximately $95 million of 2018 capital expenditures, including $25–$30 million for Indiana Harbor oven rebuilds and approximately $35 million for environmental remediation. It expected Indiana Harbor to approach break-even on 870,000–900,000 tons of coke sales.
• Management cited plans to diversify CMT’s customers and products and target an additional $5–$10 million of Adjusted EBITDA over the next two years. These are forward-looking goals, not guarantees.
• Customer concentration is substantial: AM USA and ArcelorMittal Brazil represented 50.9% of revenue, AK Steel 24.9%, and U.S. Steel 16.1%. Coke sales are largely under long-term take-or-pay contracts, but operating performance, contract renewal, customer credit, and customer demand remain important risks. AK Steel has limited conditional termination rights for its Haverhill contracts.
• Key operating and market risks include the Indiana Harbor rebuild and reliability, coal-to-coke yields, coal supply and transport, steel-industry conditions, lower thermal-coal demand from natural-gas competition, and severe weather at Gulf Coast terminal CMT.
• Environmental matters include consent decrees and planned remediation at Haverhill, Granite City, and Indiana Harbor. The company estimated approximately $145 million of Haverhill and Granite City projects, with about $111 million spent and remaining work expected through the first quarter of 2019; an Indiana Harbor consent decree included a $2.5 million civil penalty accrued at year-end.
• Other significant obligations include $50.3 million of estimated black-lung liabilities and $14.0 million of asset-retirement obligations. The Partnership’s cokemaking income is excluded from qualifying activities under IRS final regulations after a stated transition period ending December 31, 2027; a challenge to eligibility for that transition could have substantial tax and cash-flow consequences.
• Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing notes no material unresolved staff comments or disagreements with accountants.

Important facts for investors to verify

• Whether Indiana Harbor rebuilds stabilize production, yields, costs, and environmental compliance, and whether the 2018 near-break-even outlook is achieved.
• Whether operating cash flow recovers from the 2017 decline after working-capital and interest-payment effects.
• Debt service, refinancing costs, revolver availability, and compliance with covenants, including the effect of the 7.5% Partnership notes and subsequent refinancing of SunCoke’s 2019 notes.
• The final accounting and cash-tax effects of the Tax Cuts and Jobs Act and the Partnership’s qualifying-income transition period.
• Customer contract performance and renewal, especially given the high revenue concentration, and whether CMT can sustain throughput and diversify business.
• Remaining remediation spending, consent-decree requirements, and the adequacy of recorded environmental and legacy-benefit liabilities.