Suncoke Energy, Inc. annual report, FY2014

Business context and reporting period

SunCoke Energy, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. It produces coke for steelmakers using heat-recovery technology, operates five U.S. cokemaking facilities, operates a facility in Brazil, holds a 49% interest in an India coke joint venture, and provides coal-handling and blending services. The coal-mining business was classified as discontinued operations and held for sale. The filing also provides unaudited fourth-quarter results.

Financial and operating highlights

Metric20142013
Total revenue$1,472.7 million$1,585.5 million
Operating income$109.8 million$136.5 million
Income from continuing operations$4.2 million$65.6 million
Net income (loss) attributable to SunCoke$(126.1) million$25.0 million
Adjusted EBITDA from continuing operations$237.8 million$221.8 million
Cash from continuing operating activities$130.0 million$156.7 million
Cash and cash equivalents at year-end$139.0 million$233.6 million
Total debt at year-end$651.5 million$689.1 million

Operating margin was approximately 7.5% of revenue in 2014, versus 8.6% in 2013. Cash from continuing operations less continuing capital expenditures was approximately $11.7 million in 2014; this simple calculation is not a company-reported free-cash-flow measure. At year-end, the company reported $398.5 million of borrowing availability under its credit facilities and stated that it was in compliance with debt covenants.

Domestic Coke produced 4.175 million tons, at 98% capacity utilization, and generated $247.9 million of Adjusted EBITDA, or $59.25 per ton. Coal Logistics handled 19.037 million tons and generated $14.3 million of Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.

Fourth-quarter snapshot

2014 fourth-quarter sales and other operating revenue were $378.3 million; income from continuing operations was a loss of $15.7 million; discontinued operations recorded a net loss of $40.1 million; and net loss was $55.8 million. Net loss attributable to SunCoke was $65.4 million. The comparable 2013 quarter reported revenue of $377.4 million and net income attributable to SunCoke of $11.1 million.

Material changes versus the prior comparable period

  • Revenue declined 7.1% year over year, principally because lower coal prices reduced pass-through revenue and coke volumes fell at Indiana Harbor and Haverhill. Lower coal prices also reduced costs, while the full-year contribution from Coal Logistics partly offset the revenue decline.
  • Continuing-operations Adjusted EBITDA increased to $237.8 million from $221.8 million, supported by a full year of Coal Logistics results and improved fixed fees under the Indiana Harbor contract renewal.
  • GAAP continuing income fell sharply, reflecting a $30.5 million impairment of the India joint-venture investment, a $16.8 million impairment of a retained coal-preparation-plant asset, higher depreciation and higher interest expense.
  • Attributable net results moved from $25.0 million income to a $126.1 million loss. The discontinued coal business recorded a $106.0 million after-tax loss, including $133.5 million in impairment charges before tax, and $18.5 million in exit and disposal costs.
  • Continuing operating cash flow decreased by $26.7 million, primarily due to higher inventory and lower accounts payable. Year-end cash fell by $94.6 million overall, with share repurchases, debt repayments and discontinued-operations cash use among the relevant cash-flow items.

Outlook, commentary, risks and unusual items

  • Management forecast 2015 Domestic Coke Adjusted EBITDA of $240–$255 million, or $55–$60 per ton, on expected production of approximately 4.3 million tons. It expected Indiana Harbor to generate $25–$35 million of Adjusted EBITDA and reach a nameplate production run-rate by year-end, while acknowledging operating issues could persist into the first quarter.
  • The company planned to continue selling or otherwise exiting coal mining, reduce mine production by about 50% to approximately 600,000 tons annually using contract miners, and purchase about 500,000 tons annually to support Jewell. It expected $1.5–$4.5 million of additional 2015 exit costs and approximately $20 million of annualized cash and Adjusted EBITDA savings by late 2015, assuming current market conditions. Jewell was expected to incur about $7.5 million of annual incremental costs from separation from the mining business.
  • Management estimated 2015 continuing capital expenditures of approximately $90 million, including about $30 million for environmental projects. Environmental remediation projects were expected to total approximately $125 million overall, with about $50 million remaining for 2015–2016.
  • The January 2015 Granite City dropdown transferred a 75% interest to the Partnership for a stated transaction value of $245 million. Management expected further asset dropdowns, including the remaining domestic coke assets and Brazil operations over time.
  • Unusual charges and obligations include the coal-business impairments and restructuring, the India investment impairment, and a $14.3 million 2014 expense increase in the black-lung liability. The company also expected an approximately $13 million pension-plan settlement charge in 2015 following termination of its defined-benefit plan.
  • Environmental matters include notices of violation at Haverhill, Granite City and Indiana Harbor. A consent decree for Haverhill and Granite City included a $2.2 million civil penalty paid in December 2014 and required capital projects. For Indiana Harbor, the company could not estimate a probable or reasonably possible loss range.
  • Key risks include dependence on three steel customers (ArcelorMittal, AK Steel and U.S. Steel), steel and coke-market conditions, operational and weather disruptions, coal supply and yield performance, environmental regulation, and the execution and proceeds of the coal-business disposal. ArcelorMittal accounted for 53% of 2014 sales and other operating revenue; the filing identifies substantial customer concentration.

Investor verification priorities

  1. Track the coal-business sale, including the HKCC agreement, sale proceeds, retained legacy liabilities and remaining disposal costs.
  2. Compare 2015 Domestic Coke production and Adjusted EBITDA with guidance, especially Indiana Harbor’s ramp-up and cost-recovery terms.
  3. Verify the expected coal-rationalization savings against actual cash costs, purchased-coal costs and Jewell’s incremental costs.
  4. Review cash conversion, liquidity and debt obligations alongside capital spending, dividends, repurchases and Partnership distributions; distinguish debt principal from balance-sheet carrying value.
  5. Monitor environmental remediation spending and the resolution of Indiana Harbor notices of violation and any related penalties or required projects.
  6. Assess the India joint venture’s market recovery and whether its valuation assumptions and impairment exposure remain supportable.