Suncoke Energy, Inc. quarterly report, Q1 FY2017

Business context and reporting period

SunCoke Energy, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2017. The company operates U.S. and Brazilian cokemaking businesses and coal-logistics terminals; its consolidated results include SunCoke Energy Partners, L.P. (the Partnership), in which SunCoke held a 53.9% limited-partner interest and was general partner.

Financial performance and liquidity

Metric	Q1 2017	Q1 2016
Revenue	$309.7 million	$311.1 million
Operating income	$22.3 million	$9.5 million
Net income (loss), consolidated	$(57.7) million	$12.6 million
Net income (loss) attributable to SunCoke	$1.0 million	$(4.1) million
Net cash from operating activities	$29.5 million	$29.4 million
Adjusted EBITDA	$55.6 million	$43.8 million

• Revenue was nearly flat. Higher coal-logistics and Brazil revenue was offset by lower domestic coke revenue.
• Operating income improved as total operating costs fell, including the absence of the prior-year $10.7 million impairment. Depreciation and amortization rose $5.1 million, partly reflecting an additional $4.8 million of depreciation from revised Indiana Harbor oven lives.
• The consolidated net loss mainly reflects a $66.2 million income-tax expense, driven primarily by the IRS’s final regulations on partnership qualifying income. The Partnership recorded $148.6 million of deferred tax expense; the net additional expense at SunCoke was $64.2 million, attributed to public unitholders and offset by a reduction in noncontrolling interest. SunCoke’s attributable net income was $1.0 million.
• Adjusted EBITDA increased $11.8 million. Coal Logistics contributed $13.1 million versus $5.9 million, Domestic Coke contributed $49.7 million versus $54.3 million, and Brazil Coke contributed $4.4 million versus $2.3 million. Adjusted EBITDA is a non-GAAP measure and includes amounts attributable to noncontrolling interests.
• Domestic coke sales volume fell to 946,000 tons from 1.0 million; capacity utilization was 91% versus 94%. Coal-logistics tons handled rose to 5.719 million from 4.315 million.
• Operating cash flow was stable. Investing cash flow was positive $7.9 million, including a $20.5 million return of the Brazilian investment, while capital expenditures were $12.7 million. Financing cash use was $14.2 million, including $12.4 million of distributions to public Partnership unitholders. Cash increased $23.2 million to $157.2 million.
• Debt and financing obligations totaled $853.1 million carrying value ($857.1 million total borrowings before issue premium and debt costs). At quarter-end the company had no balance on its $125 million revolver and $95.7 million available; the Partnership had $172.0 million outstanding and $76.6 million available. Together, cash and credit-facility availability were reported at $329.5 million.
• Total assets were $2.126 billion and total liabilities $1.555 billion at March 31, 2017. The company and Partnership reported compliance with debt covenants.

Material changes and management commentary

• Domestic Coke revenue and Adjusted EBITDA declined, primarily due to Indiana Harbor oven rebuilds and lower volumes. Jewell’s narrower coal-cost under-recovery improved Adjusted EBITDA by $2.4 million year over year.
• Coal Logistics improved with 1.404 million additional tons handled, principally at CMT. Management cited customer recovery and higher volumes; coal prices were generally stable in the quarter, though metallurgical coal prices had recently risen amid Australian weather-related logistics disruptions.
• Brazil Coke results benefited from additional licensing fees, favorable currency movements, higher volumes, and production bonuses.
• The company terminated discussions in April 2017 on its proposed acquisition of remaining public Partnership units. It recorded $1.5 million of related transaction costs in Q1.
• In February 2017, SunCoke extended its revolver maturity to December 2018 and reduced capacity by $25 million to $125 million. Management said liquidity was sufficient for foreseeable working-capital needs, while noting that capital markets may be needed for debt maturities beginning in 2019.

Guidance, commitments, and risks

• For 2017, management expected Adjusted EBITDA of $220–$235 million, including $130–$141 million attributable to SunCoke; operating cash flow guidance was $140–$155 million. The filing’s reconciliation indicated a projected consolidated net loss of $22–$35 million.
• Management expected approximately $80 million of 2017 capital expenditures: about $52 million ongoing, $25 million environmental remediation, and $3 million expansion. It expected spending at a similar level in 2018.
• Environmental projects at Haverhill and Granite City were expected to total approximately $140–$145 million; about $96 million had been spent, with remaining spending expected through Q1 2019. The Partnership is expected to fund up to $119 million, with SunCoke reimbursing amounts spent above that threshold.
• EPA and state-agency proceedings concerning alleged air-permit violations at Indiana Harbor remained unresolved. The scope, cost of potential injunctive relief, and any penalty could not be reliably estimated. The filing also describes other pending and threatened claims, which management did not expect to materially affect consolidated financial statements.
• The IRS regulations provide a transition period; the Partnership expects its cokemaking entities to become taxable as corporations on January 1, 2028. The filing notes this treatment is based on the Partnership’s position regarding prior qualifying-income rules.
• Key stated risks include steel and coal market cycles, customer and supplier concentration, coal-supply performance, facility reliability and oven degradation, environmental compliance and spending, debt service and covenant restrictions, and transportation or weather disruptions.

Important facts for investors to verify

• Whether the $64.2 million incremental deferred tax charge and its noncontrolling-interest offset have any implications beyond the reported period, and how the 2028 tax transition is expected to affect the Partnership.
• Progress, final cost, and funding allocation for Haverhill and Granite City environmental projects, and the potential resolution and cost of Indiana Harbor enforcement matters.
• Indiana Harbor oven-rebuild execution, production recovery, and the effect of shortened useful lives and higher depreciation.
• Coal-logistics volume and customer trends, coal-supplier performance, and the expected approximately $6 million full-year 2017 revenue and Adjusted EBITDA impact from coal-cost under-recovery arrangements.
• Debt maturities beginning in 2019, available borrowing capacity, covenant headroom, and the sustainability of distributions and planned capital spending.