Suncoke Energy, Inc. quarterly report, Q3 FY2016

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Suncoke Energy, Inc. — Q3 2016 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2016. SunCoke operates U.S. cokemaking facilities and coal-handling terminals, operates a cokemaking facility in Brazil, and consolidates SunCoke Energy Partners, L.P.

Financial results and liquidity

  • Q3 revenue: $293.9 million, down 12.8% from $336.9 million. Lower coal-price pass-through and lower Domestic Coke and Coal Logistics volumes were the main drivers.
  • Q3 earnings: Operating income was $28.9 million, compared with $23.1 million. Net income attributable to SunCoke was $6.1 million, versus a $23.5 million loss; diluted EPS was $0.10 versus a $0.36 loss. The prior-year quarter included a $20.2 million loss from the India equity-method investment.
  • Nine-month results: Revenue was $897.7 million, down from $1,009.1 million. Operating income was $49.3 million versus $55.0 million. Consolidated net income was $28.0 million, compared with a $22.6 million loss; SunCoke-attributable net loss narrowed to $2.6 million from $41.0 million. Nine-month results included a $24.9 million gain on debt extinguishment and a $14.7 million coal-business divestiture loss.
  • Margins: Calculated from reported figures, Q3 operating margin was approximately 9.8%, versus 6.9% a year earlier. Nine-month operating margin was approximately 5.5% in both periods.
  • Adjusted EBITDA: Q3 was $49.4 million, broadly level with $49.1 million. Nine-month Adjusted EBITDA increased to $139.7 million from $130.4 million; the portion attributable to SunCoke was $81.9 million versus $74.1 million. This is a non-GAAP measure and includes consolidated noncontrolling interests.
  • Cash flow: Nine-month operating cash flow was $166.1 million, up from $83.0 million. Investing used $36.1 million, compared with $263.9 million, which included the prior-year CMT acquisition. Financing used $148.1 million, versus $145.1 million provided in the prior-year period. Cash and cash equivalents were $105.3 million at quarter-end, down from $123.4 million at year-end 2015.
  • Debt and liquidity: Balance-sheet debt and financing obligation totaled $864.5 million, versus $998.8 million at December 31, 2015. The company and Partnership together reported $192.0 million of available credit-facility borrowing capacity; SunCoke reported compliance with debt covenants. Current liabilities were $181.1 million and current assets $269.2 million.

Material changes and operating context

  • The coal-mining business was disposed of in April 2016. Revelation Energy assumed substantially all remaining mining assets and liabilities, including a substantial portion of reclamation obligations. SunCoke paid $12.8 million and recorded a $14.7 million divestiture loss, including a $10.7 million impairment charge.
  • Domestic Coke Q3 Adjusted EBITDA fell to $52.1 million from $55.9 million, reflecting lower volumes, transportation costs and scheduled energy-sales outages, partly offset by lower operating and maintenance spending. Capacity utilization was 94%, compared with 98%.
  • Coal Logistics Q3 Adjusted EBITDA decreased to $7.3 million from $9.3 million on weaker throughput. Nine-month segment Adjusted EBITDA rose to $18.6 million from $16.9 million, including additional CMT contribution following its 2015 acquisition.
  • Brazil Coke nine-month Adjusted EBITDA declined to $7.9 million from $10.1 million, reflecting lower volumes and unfavorable currency effects.
  • The Partnership repurchased $84.4 million face value of notes for $60.0 million cash, generating the $24.9 million gain. As of October 25, management reported approximately $80 million of 2016 debt reduction, net of sale-leaseback proceeds, and expected to reach its $60 million excess-liquidity deleveraging target during Q4.

Outlook, risks and unusual items

  • 2016 outlook: Management estimated Adjusted EBITDA of $210–$235 million, with $105–$124 million attributable to SunCoke. Estimated operating cash flow was $150–$170 million. Expected capital expenditures were approximately $45 million, excluding capitalized interest and pre-funded CMT projects.
  • Environmental spending: Haverhill and Granite City remediation projects are expected to cost approximately $130 million in total; approximately $92 million had been spent, with the remainder expected through Q1 2019. Indiana Harbor air-permit allegations remain under negotiation; the company could not reliably estimate potential injunctive relief or penalties.
  • Customer and market exposure: Steel and coal markets remain cyclical. Coal Logistics depends substantially on a limited number of customers, including Murray and Foresight. Both received 2016–2017 volume-based rebates in exchange for extending take-or-pay contracts by one year at two million tons. Management noted customer financial pressures, though Foresight completed a restructuring and Murray reported steps to reduce bankruptcy risk.
  • Goodwill and contingencies: Coal Logistics goodwill was $73.5 million; its latest impairment test showed fair value approximately 10% above carrying value. Management identified continued performance and renewal of major customer contracts as key assumptions and warned customer loss could lead to impairment.
  • Other items: AK Steel reduced planned 2016 Haverhill 2 production, with contractual make-whole payments; management said it did not expect this to affect Adjusted EBITDA targets. Haverhill 1 was providing steam to Altivia without current revenue. The Partnership recorded contingent-consideration gains of $4.6 million in Q3 and $8.3 million year to date; these were excluded from Adjusted EBITDA. Management reported no material change in risk factors and no material change in market-risk exposure.

Important facts for investors to verify

  • Whether 2016 guidance and the deleveraging target were achieved, and how much cash flow was supported by deferred take-or-pay billings and working-capital movements.
  • Actual throughput, customer payment performance and contract renewals at CMT, particularly for Murray and Foresight, and the effect of customer rebates.
  • The eventual scope, timing and cost of Indiana Harbor environmental settlement requirements and remaining Haverhill and Granite City remediation spending.
  • Whether lower coke volumes, energy-sales changes and operating performance at Indiana Harbor affect future earnings or asset recoverability.
  • The sustainability of reported earnings after separating debt-repurchase gains, contingent-consideration adjustments, divestiture costs and other nonrecurring items from operating performance.