Suncoke Energy, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; selected fourth-quarter figures are included below. Amounts are U.S. dollars unless stated otherwise. Results consolidate SunCoke Energy Partners, L.P. (the Partnership), in which SunCoke owned 53.9% of the limited-partner interests and its general partner.
Business context
SunCoke produces coke for blast-furnace steelmaking and provides coal handling and mixing services. Its four reported segments were Domestic Coke, Brazil Coke, Coal Logistics and Coal Mining; the coal mining business was divested in April 2016. Coke sales are predominantly under long-term take-or-pay contracts. Three steel customers—ArcelorMittal, AK Steel and U.S. Steel—accounted for 92.6% of 2016 sales and other operating revenue.
Financial results and key metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $1,223.3 million | $1,362.7 million |
| Operating income | $96.6 million | $79.8 million |
| Net income (consolidated) | $59.5 million | $10.3 million |
| Net income (loss) attributable to SunCoke | $14.4 million | $(22.0) million |
| Basic and diluted EPS attributable to SunCoke | $0.22 | $(0.34) |
| Adjusted EBITDA (non-GAAP) | $217.0 million | $185.4 million |
| Cash from operating activities | $219.1 million | $141.1 million |
| Capital expenditures | $63.7 million | $75.8 million |
- Operating margin was approximately 7.9% versus 5.9% in 2015; Adjusted EBITDA margin was approximately 17.7% versus 13.6%. These are calculated from reported figures.
- Domestic Coke Adjusted EBITDA was $193.9 million, down from $210.1 million; sales volume was 3.956 million tons and Adjusted EBITDA was $49.01 per ton. Coal Logistics Adjusted EBITDA rose to $63.9 million from $38.0 million. Brazil Coke Adjusted EBITDA fell to $16.2 million from $22.4 million.
- Year-end cash and cash equivalents were $134.0 million; current assets were $316.1 million and current liabilities $172.0 million. The Company reported $195.9 million of combined available borrowing capacity under its and the Partnership’s credit facilities.
- Gross borrowings were $858.0 million, down from $1,003.8 million. Gross debt/Adjusted EBITDA leverage was 3.95x. The Company and Partnership reported compliance with applicable debt covenants.
Fourth quarter: Revenue was $325.4 million, consolidated net income $31.5 million and net income attributable to SunCoke $17.0 million. The quarter included $31.5 million of Coal Logistics take-or-pay deferred revenue recognized into revenue.
Changes versus the prior comparable period
- Revenue declined $139.4 million, or about 10%, mainly reflecting lower coal prices passed through to coke customers and lower volumes; the full-year contribution from Convent Marine Terminal (CMT), acquired in August 2015, partly offset the decline.
- Operating income improved $16.8 million. Attributable earnings improved by $36.4 million, from a loss to a profit. Results included a $25.0 million gain on extinguishment of debt, principally from the Partnership’s discounted repurchase of notes.
- Operating cash flow increased $78.0 million, aided by lower coal inventory and prices, timing of coal payments and the full-year contribution from CMT. Cash flow also benefited from working-capital changes and is not solely a measure of recurring earnings.
- Domestic Coke sales volume fell 159,000 tons and capacity utilization declined to 93% from 97%. Coal Logistics handled 4.493 million CMT tons, versus 2.212 million in 2015, which included only a partial year after acquisition.
Outlook, commentary, risks and unusual items
- Management forecast 2017 Adjusted EBITDA of $220 million to $235 million, including $130 million to $141 million attributable to SunCoke. It expected Domestic Coke production of approximately 3.9 million tons and Coal Logistics Adjusted EBITDA of $67 million to $72 million.
- Management expected an approximately $13 million Indiana Harbor Adjusted EBITDA loss in 2017 as oven rebuilding continued. It planned 53 additional rebuilds at an estimated $26 million cost and expected the initiative to be completed, with a return to profitability, in 2018. Performance and rebuild costs remain uncertain.
- Management expected approximately $80 million of 2017 capital expenditures, including about $25 million for environmental remediation. Total planned remediation spending was $140 million to $145 million, with the remaining amount expected through the first quarter of 2019.
- The proposed Partnership simplification transaction remained subject to definitive agreements, committee and shareholder approvals, and regulatory approvals. SunCoke proposed exchanging approximately 1.65 SunCoke shares per Partnership common unit. Management said completion could improve financial flexibility; the transaction was not assured. SunCoke’s dividend was suspended in 2016, with any proposed $0.0625 quarterly dividend contingent on closing and board approval.
- January 2017 IRS final regulations excluded cokemaking from qualifying income for publicly traded partnerships. SunCoke and the Partnership believed the Partnership qualified for a transition period through December 31, 2027; after that, certain cokemaking entities could face corporate-level taxation. The IRS could challenge eligibility for the transition period or the Partnership’s prior tax treatment.
- Major exposures include customer concentration and steel-market weakness; coal-market volatility and lower terminal throughput; Indiana Harbor operating reliability; variable-rate debt and substantial maturities (including $273.1 million in 2019 and $480.3 million in 2020); and environmental compliance. The Company could not reliably estimate potential costs or penalties for unresolved Indiana Harbor EPA notices. It reported $50.2 million of black-lung liabilities and $13.9 million of asset retirement obligations at year-end.
- Notable 2016 items include a $14.7 million loss associated with the coal mining divestiture; a $10.1 million favorable contingent-consideration adjustment at CMT excluded from Adjusted EBITDA; and redemption of the Brazilian investment for $41.0 million, half received in 2016 and half due in 2017 with interest. SunCoke no longer receives the $9.5 million annual preferred dividend, partly offset by $5.1 million of annual licensing fees through 2023.
Important facts for investors to verify
- Whether the Partnership simplification transaction was approved and closed, and its final exchange terms and financing effects.
- Actual 2017 Adjusted EBITDA, operating cash flow, terminal volumes and capital spending versus guidance.
- Indiana Harbor production recovery, rebuild completion, costs and any resulting impairment indicators.
- Debt refinancing and repayment capacity ahead of the 2019–2020 maturities, including covenant headroom and liquidity availability.
- Resolution and final costs of environmental matters, particularly the Indiana Harbor notices and the Haverhill/Granite City remediation program.
- Partnership tax status and transition-period eligibility under the IRS final regulations, including potential tax and distribution impacts.
- Collection of the remaining $20.5 million Brazilian redemption payment and the durability of replacement licensing income.