SunCoke Energy, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless noted. The company produces coke and related steam/electricity, and mines metallurgical and thermal coal. Its 2012 results include a full year of operations at the Middletown coke facility. SunCoke completed its separation from Sunoco in January 2012.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $1,914.1 million | $1,538.9 million |
| Operating income | $173.7 million | $67.5 million |
| Net income | $102.5 million | $58.9 million |
| Net income attributable to SunCoke | $98.8 million; diluted EPS $1.40 | $60.6 million; diluted EPS $0.87 |
| Adjusted EBITDA (non-GAAP) | $265.7 million | $138.8 million |
| Cash from operating activities | $206.1 million | $101.3 million |
| Capital expenditures | $80.6 million | $238.1 million |
| Cash and cash equivalents at year-end | $239.2 million | $127.5 million |
| Total debt at year-end | $723.4 million | $726.4 million |
- 2012 operating margin was approximately 9.1% and net margin approximately 5.4%, calculated from reported revenue and income.
- Current assets were $471.9 million and current liabilities $247.0 million at year-end 2012. The company reported no borrowings under its $150 million revolving facility at year-end; it also had $45 million of remaining uncommitted incremental facility capacity.
- Debt comprised $323.4 million of term loans and $400 million of 7.625% senior notes due 2019. The term loan was variable-rate debt; interest-rate swaps were used to manage rate exposure.
- Operating cash flow rose largely with Middletown’s full-year contribution and lower working capital, including reduced coal and consigned-coke inventory. Investing cash use fell as Middletown construction spending subsided.
Material changes versus prior periods
- Revenue increased 24%, principally from Middletown, higher coal and transportation cost pass-throughs, and increased coal sales. Coke production rose to 4.342 million tons from 3.762 million; domestic capacity utilization reached 102%.
- Other Domestic Coke Adjusted EBITDA increased to $198.9 million from $87.7 million, including a $59.9 million contribution from Middletown. Domestic coke Adjusted EBITDA per ton rose to $57.40 from $35.49.
- Coal Mining Adjusted EBITDA declined to $33.4 million from $35.5 million despite higher coal prices and volume. Higher mining costs, labor costs, royalties and trucking contributed to the decline.
- Net financing expense increased to $47.8 million from $1.4 million as the company moved to a standalone debt structure. Operating income and net income remained below 2010 levels; 2011 included an $18.5 million loss on firm coke purchase commitments.
- Fourth-quarter 2012 sales and other operating revenue were $480.6 million, gross profit $54.3 million, net income $29.0 million, and net income attributable to SunCoke $27.6 million (diluted EPS $0.39). In fourth-quarter 2011, the corresponding figures were $413.9 million, $25.4 million, $7.5 million, and $8.0 million (diluted EPS $0.12).
Outlook, risks and unusual items
- 2013 outlook: Management forecast net income attributable to SunCoke of $43–$60 million, diluted EPS of $0.30–$0.55, Adjusted EBITDA of $205–$230 million, operating cash flow of approximately $140 million, and capital expenditures of approximately $133 million. It expected coke production above 4.3 million tons and coke Adjusted EBITDA per ton of $55–$60.
- Management expected coal mining Adjusted EBITDA to range from break-even to a $15 million loss in 2013. Coal sale prices were expected to decline approximately $45–$50 per ton; production was not expected to increase.
- Environmental obligations and spending: Haverhill and Granite City projects were expected to require about $15 million in 2013 and a further $80 million during 2014–2016. The company estimated a probable penalty of approximately $2.2 million. Indiana Harbor regulatory exposure remained unquantified; management could not estimate a probable or reasonably possible loss range.
- Indiana Harbor: The coke sales agreement’s initial term ends September 30, 2013. Planned refurbishment spending could reach $85 million; $14 million was spent in 2012 and approximately $60 million was anticipated in 2013. A new long-term customer agreement was considered reasonably likely, but not assured.
- Post-year-end MLP transaction: On January 24, 2013, SunCoke completed a master limited partnership offering with $233.1 million in net proceeds. The company retained a 55.9% interest and consolidated the partnership; it used $225 million to repay term debt. The partnership retained $67 million for environmental remediation and $12.4 million for customer tax-credit discounts. SunCoke expected a $4.7 million charge for writing off debt issuance costs and discount related to the repayment.
- Key risks include dependence on three steel customers (2012 revenue shares: ArcelorMittal 54%, AK Steel 28%, U.S. Steel 16%), steel and coal market weakness, environmental regulation and permitting, operating reliability, coal supply and transport, labor, and substantial debt. Coke sales are generally under long-term take-or-pay contracts, but customer concentration and contractual exceptions remain material exposures.
- SunCoke reported no common-stock dividends paid and no current plan to pay them. Its financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Indiana Harbor’s coke contract was renewed and the final scope, cost and return on its refurbishment.
- Actual environmental remediation spending, regulatory settlements and any penalties or additional obligations, particularly at Indiana Harbor, Haverhill and Granite City.
- 2013 coke and coal segment performance against guidance, including coal pricing, mining costs and coke-to-coal yield results.
- The MLP’s post-offering debt, cash flows, distributions, environmental funding and effect on SunCoke’s consolidated results and obligations under the omnibus agreement.
- Customer creditworthiness and continued performance under take-or-pay agreements, given the concentration of revenue in ArcelorMittal, AK Steel and U.S. Steel.
- Cash conversion and debt-service capacity alongside planned capital spending; Adjusted EBITDA is a non-GAAP measure and does not reflect capital expenditures, working capital needs, interest or principal payments.