SunCoke Energy, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are to the corresponding 2012 periods. SunCoke operates U.S. coke and coal-mining businesses, a Brazilian coke facility, and a 49% equity-method investment in an Indian coke joint venture. It consolidates SunCoke Energy Partners, L.P. (the Partnership), while its public unitholders’ share is reflected as noncontrolling interest.
Financial results and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $403.7 million | $460.9 million | $857.6 million | $942.2 million |
| Operating income | $26.1 million | $42.8 million | $53.1 million | $76.7 million |
| Net income | $12.7 million | $24.0 million | $19.1 million | $40.6 million |
| Net income attributable to SunCoke | $5.7 million | $22.7 million | $7.8 million | $39.6 million |
| EPS, basic and diluted | $0.08 | $0.32 | $0.11 | $0.56 |
| Adjusted EBITDA (non-GAAP) | $52.4 million | $66.8 million | $104.7 million | $122.3 million |
| Operating cash flow | Not stated separately | Not stated separately | $89.0 million | $86.7 million |
Q2 operating margin was approximately 6.5% versus 9.3% a year earlier; six-month operating margin was approximately 6.2% versus 8.1%. These percentages are calculated from reported operating income and total revenue. Interest expense was $12.1 million in Q2 and $27.9 million for the first half, up from $11.8 million and $23.8 million, respectively.
At June 30, cash was $348.1 million, current assets $551.0 million, and current liabilities $233.2 million (current ratio approximately 2.4). Total debt was $649.0 million, compared with $723.4 million at year-end 2012; cash exceeded debt by approximately $300.9 million. The reported debt and cash figures include consolidated Partnership amounts. Six-month capital expenditures were $61.4 million, and the $67.7 million India investment was a separate investing outflow. Cash increased $108.9 million during the half-year.
Material changes and operating performance
- Q2 revenue fell 12.4%; first-half revenue fell 9.0%. Management attributed the decline mainly to lower coal prices passed through to coke customers and lower coal selling prices, with Indiana Harbor volume weakness also contributing.
- SunCoke-attributable income fell sharply, reflecting weaker Coal Mining results, higher Partnership noncontrolling interests following its January 2013 IPO, and accelerated depreciation tied to the Indiana Harbor refurbishment.
- Coal Mining Adjusted EBITDA shifted to losses of $2.6 million in Q2 and $7.2 million in the first half, versus profits of $9.3 million and $16.7 million in the comparable 2012 periods. Lower coal selling prices outweighed lower production costs.
- Domestic Coke Adjusted EBITDA was $61.3 million in Q2 versus $62.4 million, but rose to $122.4 million for the first half versus $117.2 million. Indiana Harbor refurbishment and reduced output weighed on results; improved yields and performance at other domestic facilities supported the first-half comparison.
- The Partnership IPO generated approximately $231.8 million net proceeds. SunCoke retained control and consolidated the Partnership, but public ownership increased noncontrolling-interest deductions. The Partnership repaid $225 million of SunCoke’s term loan and issued $150 million of 7.375% notes due 2020.
Outlook, risks and unusual items
- Management estimated 2013 Adjusted EBITDA of $205–$230 million, including $165–$190 million attributable to SunCoke. The filing provides no numeric EPS guidance. Estimated full-year effective tax rate increased to 14%–20%, from the previous 7%–14% range.
- 2013 capital expenditures were expected to be approximately $145 million, including $68 million for Indiana Harbor refurbishment and $28 million for Haverhill and Granite City environmental projects. Additional environmental project spending of about $67 million was anticipated during 2014–2016.
- Following an AK Steel blast furnace outage, SunCoke planned to limit Haverhill production to contract maximums and temporarily reduce Middletown production to nameplate capacity in the second half. Extended payment terms on 50,000 tons of December coke were expected to shift approximately $20 million of operating cash flow from 2013 to early 2014. The company expected about $2 million of 2013 make-whole payments to the Partnership.
- Indiana Harbor’s contract had an initial term ending September 30, 2013. SunCoke was undertaking a refurbishment expected to cost up to $85 million and stated that a replacement long-term customer agreement was not assured. Accelerated depreciation was $3.1 million in Q2 and $7.4 million in the first half.
- Environmental matters include a proposed Haverhill/Granite City consent decree, with an estimated probable loss of $2.2 million, plus planned capital projects; Indiana Harbor EPA notices remain unresolved and the company could not estimate a potential loss range. The filing also describes a Middletown notice and other legal and administrative claims; management did not expect the latter matters to be material.
- The India joint venture reported $0.8 million of Adjusted EBITDA on approximately 26,000 tons of coke sales in the period. Management cited Indian iron-ore restrictions, weak coke prices amid Chinese imports, shipping delays, and coal-supply financing challenges, and expected difficulties to continue through Q3.
- The Partnership had agreed in principle to acquire Lakeshore Coal Handling for $29.6 million, subject to definitive documentation and customary conditions; closing was anticipated in Q3 2013. The filing estimated about $2 million of Adjusted EBITDA for the remainder of 2013, before a related $1.8 million payment to DTE Energy.
- Other items affecting comparability included $2.9 million of debt-cost and discount write-offs following the term-loan repayment, $0.8 million of immediately expensed Partnership debt issuance costs, and a $0.9 million Coal Mining restructuring charge. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Key investor verification points
- Track coal prices, mining costs, and whether Coal Mining can return to positive segment earnings.
- Verify Indiana Harbor’s refurbishment spending, operating performance, and renewal of its coke sales agreement.
- Assess environmental decree obligations, project costs, timing, and unresolved Indiana Harbor exposure.
- Monitor the AK Steel production changes and collection of extended-term receivables in early 2014.
- Reconcile consolidated results with Partnership noncontrolling interests and distinguish GAAP net income from non-GAAP Adjusted EBITDA.
- Check delivery against 2013 Adjusted EBITDA and capital expenditure outlook, including the expected Lakeshore transaction and India joint venture performance.