Suncoke Energy, Inc. quarterly report, Q3 FY2015

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Business context and reporting period

SunCoke Energy, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2015. It operates U.S. cokemaking facilities, operates a facility in Brazil, holds an equity-method interest in an Indian coke joint venture, and provides coal logistics and mining services. The consolidated results include SunCoke Energy Partners, L.P. (the Partnership).

Financial performance and position

  • Third quarter: Total revenue was $336.9 million, down 10.6% from $377.0 million. Operating income was $23.1 million versus $25.9 million. Consolidated net loss was $16.5 million, compared with net income of $6.4 million; net loss attributable to SunCoke was $23.5 million versus $3.6 million. Diluted loss per share was $0.36 versus $0.05.
  • Nine months: Revenue was $1,009.1 million versus $1,108.8 million. Operating income was $55.0 million, compared with an operating loss of $40.8 million in 2014, which included $119.5 million of impairment charges. Net loss attributable to SunCoke improved to $41.0 million from $60.6 million.
  • Adjusted EBITDA: Third-quarter Adjusted EBITDA was $50.2 million versus $64.2 million; nine-month Adjusted EBITDA was $131.5 million versus $158.8 million. These are non-GAAP measures and include amounts attributable to noncontrolling interests. Domestic Coke Adjusted EBITDA per ton was $53.60 in Q3, down from $67.41.
  • Drivers and margins: Lower coal-price pass-through reduced revenue, while lower Domestic Coke performance weighed on earnings. The filing does not provide a clear consolidated gross-margin figure. Coal Logistics Adjusted EBITDA increased to $10.4 million from $3.8 million in Q3, including the CMT contribution.
  • Cash flow: Nine-month operating cash flow was $83.0 million versus $58.4 million. Investing used $263.9 million, including $193.1 million in acquisition cash outflow and $49.3 million of capital expenditures. Financing provided $145.1 million. Cash declined $35.8 million to $103.2 million.
  • Debt and liquidity: September 30 debt carrying value was approximately $999.1 million, versus $633.5 million at year-end 2014. Cash was $103.2 million and borrowing availability under company and Partnership facilities totaled $213.5 million. The company reported compliance with debt covenants. Current liabilities were $167.8 million and current assets were $338.6 million.

Material changes versus prior period

  • Revenue declined mainly because lower coal prices passed through to coke customers; Domestic Coke revenue also reflected lower volumes and a revised Indiana Harbor cost-recovery mechanism.
  • Domestic Coke Adjusted EBITDA fell $16.5 million in Q3, principally due to Indiana Harbor underperformance and volume shortfalls, the Haverhill Chemicals steam-revenue loss, and lower coal-to-coke yields.
  • The Partnership acquired Convent Marine Terminal (CMT) on August 12 for total transaction value of $404.5 million. CMT added $5.7 million revenue and $2.6 million operating income from acquisition through quarter-end; management reported $5.4 million of Q3 Coal Logistics Adjusted EBITDA contribution.
  • A $19.4 million impairment reduced the carrying value of the VISA SunCoke investment to zero, reflecting weak Indian coke margins and low-priced Chinese imports. The company said it would suspend equity-method accounting from Q4 and had no plans for further capital contributions.
  • In 2014, the company recorded substantial Coal Mining impairment charges; no comparable impairment was recorded in 2015. The nine-month 2015 results also included a $12.6 million noncash pension settlement loss.

Outlook, commentary, and risks

  • Management revised full-year 2015 Adjusted EBITDA guidance to $180–$190 million, including an expected approximately $20 million CMT benefit, partly offset by Indiana Harbor volume shortfalls and cost under-recovery. The filing also estimated full-year operating cash flow of $125–$145 million and capital expenditures of $75–$80 million.
  • Management expects approximately $130 million of environmental projects at Haverhill and Granite City; about $88 million had been spent, with the remainder expected through Q1 2018. Estimated 2015 environmental capital expenditures were approximately $20 million.
  • AK Steel announced plans to temporarily idle portions of its Ashland facility and U.S. Steel said it might idle Granite City Works. As of the filing, neither customer had idled those operations or reduced coke purchases; the long-term take-or-pay contracts remained in force.
  • Management estimated the Haverhill Chemicals shutdown would reduce 2015 results by approximately $6 million; the impact through September was $4.2 million. New black-lung claims could increase the related obligation by up to $4 million, subject to ongoing evaluation.
  • Key risks include deteriorating Indiana Harbor oven conditions and potential production interruptions or additional costs; customer and steel-market weakness; coal and coke price conditions; debt and covenant restrictions; and environmental compliance. The company was addressing EPA notices at Haverhill and Granite City under a consent decree, with approximately $130 million of anticipated project spending. Potential Indiana Harbor penalties or required projects could not yet be estimated.
  • After quarter-end, SunCoke redeemed $60.4 million of senior notes for $63.7 million, funded with cash and revolver borrowings. It also declared a $0.15-per-share dividend payable in December, subject to the stated record date.

Important facts for investors to verify

  1. Whether the $180–$190 million Adjusted EBITDA outlook was achieved, and how much of the result depended on CMT versus core operating performance.
  2. Indiana Harbor operating reliability, cost recovery, maintenance requirements, and any impact on contracted volumes.
  3. CMT integration, capacity expansion to 15 million tons, contract commitments, and the Partnership’s plan to refinance acquisition-related revolver borrowings.
  4. Customer actions at AK Steel and U.S. Steel facilities and whether take-or-pay obligations continue to support coke revenue.
  5. Actual environmental project costs and schedule, resolution of Indiana Harbor EPA matters, and the status of new black-lung claims.
  6. Debt levels, interest costs, covenant headroom, and cash available at the parent versus the Partnership; Adjusted EBITDA is non-GAAP and is not a substitute for operating cash flow or debt-service analysis.