Suncoke Energy, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; this is an annual report, not a standalone fourth-quarter filing. Unless noted, amounts are in U.S. dollars.
Business context
SunCoke produces coke for steelmakers, recovers heat to generate steam or electricity, and provides coal handling and mixing services. It operates five U.S. coke plants with annual nameplate capacity of approximately 4.2 million tons, operates a Brazilian facility for a customer, and has an equity-method joint venture in India. Its Coal Logistics business expanded into export coal handling with the 2015 acquisition of Convent Marine Terminal (CMT). SunCoke consolidates SunCoke Energy Partners, L.P. (the Partnership), in which it held a 53.9% limited-partner interest at year-end.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $1,362.7 million | $1,503.8 million |
| Operating income (loss) | $79.8 million | $(62.4) million |
| Net income (loss), consolidated | $10.3 million | $(101.8) million |
| Net loss attributable to SunCoke | $(22.0) million; $(0.34) per share | $(126.1) million; $(1.83) per share |
| Adjusted EBITDA, non-GAAP | $185.8 million | $210.7 million |
| Cash from operating activities | $141.1 million | $112.3 million |
| Capital expenditures | $75.8 million | $125.2 million |
| Cash and cash equivalents at year-end | $123.4 million | $139.0 million |
| Total borrowings, before debt issuance costs and premium | $1,003.8 million | $640.0 million |
Revenue fell about 9% year over year, primarily from lower coal-price pass-throughs and weaker Indiana Harbor performance. Adjusted EBITDA declined about 12%; its approximate margin on total revenue was 13.6%, versus 14.0% in 2014. Operating income improved from a loss, while the parent-level net loss remained partly attributable to the Partnership’s noncontrolling interests. Operating cash flow improved, aided by lower inventory and coal prices; investing cash outflow was $285.2 million, including the CMT acquisition.
Year-end total assets were $2,255.5 million and SunCoke stockholders’ equity was $289.9 million. Total debt maturities included $842.8 million due in 2019–2020, largely Partnership notes due 2020. The filing reported $154.8 million of credit-facility availability at December 31, 2015. The Company and Partnership were in compliance with applicable debt covenants at year-end.
Material changes versus 2014
- SunCoke acquired CMT in August for a stated transaction value of $403.1 million. CMT contributed $28.6 million in revenue and $21.0 million in Adjusted EBITDA after acquisition; the Partnership financed the deal with debt, units, and cash.
- Granite City was contributed to the Partnership in two transactions during 2015, for stated transaction values of $244.4 million and $65.2 million. SunCoke retained a 2% interest in each of its Haverhill, Middletown, and Granite City facilities.
- Domestic Coke Adjusted EBITDA fell to $210.1 million from $247.9 million. Indiana Harbor underperformance and a changed cost-recovery mechanism were major pressures; the segment produced 4.122 million tons versus 4.175 million in 2014.
- Coal Logistics Adjusted EBITDA rose to $38.4 million from $14.3 million, primarily reflecting CMT and improved margins and costs at the existing business. Coal Mining production fell to 0.555 million tons from 1.230 million as the business shifted to contractor mining and reduced operations.
- SunCoke recorded a further $19.4 million impairment of its India joint-venture investment, reducing its carrying value to zero; the 2014 impairment was $30.5 million. It stopped including its share of the venture’s results from fourth-quarter 2015.
- The 2014 comparison included $150.3 million of Coal Mining impairment charges. In 2015, a $12.6 million noncash pension-settlement loss and $9.8 million of black-lung expense were notable items.
Outlook, management commentary, risks and contingencies
- Management forecast 2016 consolidated Adjusted EBITDA of $210 million to $235 million. It expected Domestic Coke output of about 4.1 million tons and Coal Logistics Adjusted EBITDA of $50 million to $55 million from CMT plus $15 million to $20 million from the remaining business. These are forward-looking, non-GAAP estimates.
- Management prioritized stabilizing Indiana Harbor rather than reaching its full 1.22 million-ton capacity target, projecting 2016 Adjusted EBITDA of $3 million to $13 million there. The outlook assumes operational improvement and a full-year CMT contribution.
- The Company suspended its common-stock dividend to preserve liquidity and prioritize debt reduction. Management expected at least $60 million of Partnership liquidity for deleveraging through operating cash flow and potential sponsor support. The Partnership held its quarterly distribution flat at $0.594 per unit.
- Steel-industry oversupply, weak steel prices, imports, and lower utilization are key demand and customer-credit risks. Coke revenue is highly concentrated: ArcelorMittal, AK Steel, and U.S. Steel represented approximately 49%, 29%, and 16% of 2015 sales and other operating revenue, respectively. Their take-or-pay contracts mitigate, but do not eliminate, performance, force-majeure, and credit risks.
- Indiana Harbor’s operating problems and the potential for additional repair costs remain material. CMT throughput is exposed to coal-export conditions and customer concentration; its goodwill valuation assumes continued performance under long-term contracts. Management noted CMT’s goodwill impairment headroom was approximately 15%.
- Environmental matters include consent-decree remediation at Haverhill and Granite City, with total project spending expected to be approximately $130 million; about $93 million had been spent by year-end. Indiana Harbor notices of violation remained unresolved, and the Company could not estimate a probable or reasonably possible loss range. Management stated other pending claims were not expected to be material.
- Other exposures include extensive environmental and mine-safety regulation, unfunded reclamation and benefit obligations, labor negotiations, variable-rate debt, foreign-exchange exposure, and the Partnership’s tax classification. The Company’s black-lung liability was $49.9 million; its mine asset-retirement obligation was $13.8 million in the business discussion and $22.2 million for total reported asset-retirement obligations.
- Subsequent to year-end, Moody’s downgraded SunCoke’s corporate credit rating to B2 from Ba3. In February 2016, the Partnership also repurchased $22.0 million principal amount of notes for $12.7 million. These developments underscore the focus on liquidity and deleveraging.
Most important facts for investors to verify
- Whether Indiana Harbor stabilizes, and whether its output, costs, and projected 2016 EBITDA improve as management expects.
- Whether steel customers continue performing under take-or-pay agreements, and the status of customer idlings, labor issues, and credit quality.
- CMT’s realized throughput, take-or-pay payments, customer credit, ship-loader completion, and the final acquisition purchase-price allocation.
- Debt and liquidity after the rating downgrade, subsequent letters of credit, maturities, covenant headroom, and actual Partnership debt reduction.
- Progress and remaining costs for environmental remediation, the outcome of Indiana Harbor regulatory matters, and whether the suspended Company dividend remains in place.
KPMG issued an unqualified opinion on the 2015 financial statements and internal control over financial reporting. Raven Energy, acquired in 2015, was excluded from management’s internal-control assessment for the acquisition year; integration was expected to be completed in 2016.