Suncoke Energy, Inc. quarterly report, Q3 FY2019

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Suncoke Energy, Inc. — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019. SunCoke produces coke for steelmakers and operates coal and bulk-material handling terminals. Unless noted, figures are in U.S. dollars and millions.

Financial performance and position

  • Revenue: Q3 revenue was $404.3, up $39.8 (11%) year over year; nine-month revenue was $1,203.1, up $121.1 (11%). Growth primarily reflected higher domestic coke volumes and coal-price pass-throughs. Logistics revenue declined.
  • Profit and margins: Q3 net loss was $163.1 versus net income of $17.1; nine-month net loss was $147.6 versus net income of $41.5. Results included $247.4 of non-cash Logistics impairments. Q3 operating loss was $212.4; Adjusted EBITDA was $66.7 versus $66.0 a year earlier. Nine-month Adjusted EBITDA was $197.1, essentially unchanged from $197.3. Q3 operating margin was approximately -52.5%, heavily affected by the impairment.
  • Cash flow and capital spending: Q3 operating cash flow was $84.9 versus $85.3. For nine months, operating cash flow was $120.5 versus $170.6, with the decline attributed mainly to working capital and higher coal inventories. Nine-month capital expenditures were $81.5 versus $70.7; free cash flow was not stated as a filing measure.
  • Debt and liquidity: At September 30, cash was $93.7, total borrowings were $801.3, and reported debt and financing obligations net of discounts and issuance costs were $782.9. The $400.0 revolving facility had $143.3 drawn and $244.5 available, including the effect of letters of credit. The company reported covenant compliance. Current assets were $320.7 and current liabilities $185.3.
  • Other: The company recorded a $63.5 Q3 income tax benefit, primarily related to the impairment charges. Basic and diluted Q3 loss per share were both $1.81; weighted-average diluted shares rose to 89.9 million from 65.5 million.

Material changes versus comparable periods

  • Domestic Coke improved: Q3 Adjusted EBITDA rose to $59.8 from $49.1, with capacity utilization of 99% versus 95%. Nine-month Domestic Coke Adjusted EBITDA increased to $174.6 from $156.3.
  • Logistics weakened: Q3 Adjusted EBITDA fell to $9.6 from $21.0; nine-month results fell to $34.1 from $54.3. Nine-month handling volumes declined to 16.1 million tons from 19.7 million.
  • In June, SunCoke acquired the remaining publicly held Partnership units in a share-for-unit transaction, making the Partnership wholly owned and eliminating public-unit noncontrolling interests. It issued approximately 25.5 million shares for the transaction and final distribution. The transaction was accounted for as an equity transaction; $4.9 of Partnership transaction costs were expensed in the first nine months.
  • In August, the company refinanced revolving facilities into a $400.0 facility maturing in 2024, repaid the Partnership revolver and term loan, and repurchased $50.0 face value of 2025 Senior Notes for $46.6 cash. The refinancing extended maturities and increased borrowing capacity; it did not materially change total debt.

Outlook, risks and unusual items

  • Guidance reduced: 2019 Adjusted EBITDA guidance was cut to $240–$250 from $266–$276; operating cash-flow guidance was cut to $150–$160 from $176–$191. Management cited lower expected recognition of Logistics take-or-pay revenue. 2019 capital expenditures were expected to be $110–$120.
  • Customer and terminal risk: Murray and Foresight, significant CMT take-or-pay customers, faced financial distress. SunCoke reserved $19.7 of shortfall receivables, including $8.9 past due, and reduced related deferred revenue by the same amount, with no net-income impact. After quarter-end, Murray filed for Chapter 11 and sought to reject its CMT contract; Foresight extended the grace period on an interest payment. Lower coal export prices and reduced terminal volumes also weighed on Logistics.
  • Impairment: SunCoke recorded $73.5 to fully impair Logistics goodwill and $173.9 against CMT long-lived assets. Valuations relied on Level 3 assumptions, including forecast contract volumes, rates and discount rates. These charges reduced reported earnings and assets but were non-cash.
  • Other risks and contingencies: Coke demand is exposed to steel-industry conditions and customer concentration; Logistics is exposed to coal markets and customer credit. Environmental consent decrees require facility projects; the Granite City project was completed in June 2019, while Indiana Harbor projects were scheduled for completion in Q4 2019. Management said other pending claims were not expected to have a material adverse financial impact. Disclosure controls were reported effective.

Important facts for investors to verify

  • Whether Murray’s bankruptcy, contract rejection, and Foresight’s financial condition change CMT volumes, collections, deferred revenue, or impairment assumptions.
  • Actual 2019 Adjusted EBITDA and operating cash flow against the revised ranges, and the extent to which operating cash flow depends on working-capital movements.
  • Whether Domestic Coke performance and take-or-pay customer commitments remain resilient amid steel-market weakness and facility operating requirements.
  • Debt covenant headroom, revolver availability, maturities, and the effects of share repurchases and the declared $0.06-per-share dividend on liquidity.
  • Execution and final cost of planned capital projects, environmental obligations, and future estimates for CMT asset values and customer-related receivables.