Suncoke Energy, Inc. quarterly report, Q1 FY2015

Business context and reporting period

SunCoke Energy, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. The company operates U.S. and Brazilian cokemaking businesses, holds a 49% interest in an Indian coke joint venture, and provides coal logistics services. Coal mining operations are classified as discontinued operations and held for sale.

SunCoke consolidates SunCoke Energy Partners, L.P. (the Partnership); at quarter-end it held the Partnership’s general partner, a 2.0% general partner interest and incentive distribution rights, and a 56.1% limited partner interest.

Financial results and key metrics

Revenue declined mainly because lower coal prices were passed through to coke customers, and Indiana Harbor’s operating-cost recovery mechanism changed. Lower operating expenses and stronger operating performance lifted operating income. Adjusted EBITDA growth reflected improved domestic coal-to-coke yields, higher Brazil volumes and lower corporate costs. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.

Domestic Coke Adjusted EBITDA was $52.7 million, up from $46.8 million; Brazil Coke was $4.1 million, up from $1.7 million; India Coke recorded a $0.7 million loss versus $0.1 million income; and Coal Logistics generated $2.6 million versus $2.1 million. Domestic Coke utilization was 95% versus 90%, while Coal Logistics handled 3.794 million tons versus 4.359 million tons.

Cash and cash equivalents were $165.4 million at March 31, compared with $139.0 million at year-end. Continuing operations generated $26.6 million of operating cash; discontinued operations used $15.5 million. Total cash increased $26.4 million during the quarter. Current assets were $406.2 million and current liabilities were $168.3 million.

Long-term debt was $699.3 million, up from $633.5 million at December 31, 2014. The balance included $105.0 million of 7.625% notes due 2019 and $614.9 million of Partnership notes due 2020, including premium and net of debt issuance costs. SunCoke reported $148.5 million available under its $150 million revolver; it reported $398.5 million of total borrowing availability under its credit facilities. The company and Partnership were in compliance with their debt covenants at quarter-end.

Material changes and unusual items

• On January 13, 2015, SunCoke contributed a 75% interest in its Granite City facility to the Partnership for a stated transaction value of $245 million, retaining 25%. The transaction involved issuance of additional Partnership notes and repayment of $135 million of SunCoke notes.
• Net interest expense rose to $23.3 million from $12.1 million. Management attributed the $11.2 million increase primarily to a $9.4 million debt-extinguishment loss associated with the Granite City transaction and higher debt balances.
• The coal business remains for sale. Q1 discontinued-operation revenue was $3.6 million versus $7.1 million, and its net loss narrowed to $2.0 million from $6.0 million. The company recorded a $2.2 million benefit from a reduction in the severance accrual and incurred $1.2 million of mine-idling costs.
• A $4.0 million postretirement-benefit curtailment gain contributed to legacy income in continuing operations. SunCoke also recorded $2.0 million of additional depreciation related to coal preparation plant assets expected to be demolished; management anticipated about $3.8 million of this additional depreciation for full-year 2015.
• SunCoke repurchased $20 million of shares during the quarter, receiving 1.184 million shares at an average $16.89 per share. $55 million remained under the authorized repurchase program at quarter-end.

Outlook, commentary and risks

Management stated that cash, operating cash flow and available credit were expected to fund planned operations, capital spending, repurchases and dividends. It forecast approximately $90 million of 2015 continuing-operations capital expenditures: $45 million ongoing, $30 million environmental remediation and $15 million expansion. These are estimates, not earnings guidance; the filing provides no specific earnings or revenue guidance.

SunCoke expects to spend approximately $125 million in total on Haverhill and Granite City environmental projects, with about $78 million spent to date and remaining spending expected through Q1 2017. The 2015 capex forecast excludes potential spending on a proposed Kentucky facility. Management also expected $0.5 million to $3.5 million of additional coal-business exit and disposal costs during the rest of 2015.

U.S. Steel announced plans to temporarily idle its Granite City Works operations, subject to customer demand. SunCoke said the long-term take-or-pay contract remains in effect and the idling does not affect U.S. Steel’s contractual obligations. The company declared a $0.075-per-share dividend on April 20, payable June 10, subject to the usual conditions stated in the filing.

After quarter-end, SunCoke amended its credit agreement: the company’s maximum leverage ratio was reduced from 3.75:1.00 to 3.25:1.00, with unlimited restricted-payment capacity permitted if leverage is below 2.00:1.00 and total liquidity is at least $75 million. The Partnership’s maximum leverage ratio was increased from 4.00:1.00 to 4.50:1.00.

Environmental matters include a consent decree for alleged air-permit violations at Haverhill and Granite City, including a $2.2 million penalty already paid and required capital projects. For alleged violations at Indiana Harbor, potential penalties or injunctive relief remain unresolved and the company could not estimate a probable or reasonably possible loss range. SunCoke also disclosed a $2.5 million estimated liability related to ArcelorMittal coke-quality claims. It stated that other pending or possible legal matters were not expected to be material, while acknowledging that some claims could be resolved unfavorably.

Key risks include steel and coke market cycles, competition and Chinese coke imports, dependence on major customers and suppliers, operating reliability, environmental requirements and spending, coal-business disposal and legacy liabilities, foreign currency exposure, and the ability to service debt and comply with covenants. Management reported no material change in market-risk exposure or risk factors from the prior annual report, and concluded disclosure controls were effective as of March 31, 2015.

Important facts for investors to verify

• Whether the coal-business sale proceeds, timing and retained legacy liabilities differ materially from expectations; the filing does not specify a sale price or completion date.
• Progress, total cost and timing of the Haverhill and Granite City environmental projects, and the eventual resolution and cost of the Indiana Harbor matter.
• Whether Granite City Works’ temporary idling affects production, customer demand or the practical economics of the take-or-pay contract.
• Debt balances, liquidity, covenant headroom and the effects of the post-quarter credit amendments, particularly as interest expense increased materially.
• Whether operating improvement and Adjusted EBITDA growth translate into durable GAAP earnings and cash generation, given discontinued-operation cash needs, capital requirements and noncontrolling interests.