Suncoke Energy, Inc. annual report, FY2021

Business context and reporting period

SunCoke Energy, Inc. filed this Form 10-K for the fiscal year ended December 31, 2021. It produces coke for blast-furnace steelmaking, operates a coal and bulk-materials logistics business, and runs a cokemaking facility in Brazil under agreements with ArcelorMittal Brazil. In 2021 it began commercial foundry coke production and selling blast-furnace coke into export markets.

Its five U.S. coke facilities have about 4.24 million tons of annual nameplate capacity; the operated Brazil facility has about 1.7 million tons. Domestic coke sales are primarily under long-term take-or-pay contracts. Logistics terminals have annual handling and mixing capacity exceeding 40 million tons.

Financial and operating performance

Operating margin was approximately 9.7% in 2021 versus 5.2% in 2020; net margin was approximately 3.4% versus 0.7%. These percentages are calculated from reported revenue and income.

At December 31, 2021, cash and cash equivalents were $63.8 million, current assets were $271.9 million, and current liabilities were $182.2 million (a current ratio of approximately 1.49). Debt borrowings totaled $627.0 million principal, plus a $12.0 million financing obligation; reported debt and financing obligations, net of issuance costs, were $613.6 million. Revolver availability was $228.8 million. Total assets were $1,615.4 million and total equity was $535.4 million.

Domestic Coke Adjusted EBITDA increased to $243.4 million from $217.0 million; Logistics rose to $43.5 million from $17.3 million; and Brazil Coke increased to $17.2 million from $13.5 million. Domestic Coke production was 4.162 million tons, with 101% capacity utilization, and sales were 4.183 million tons. Logistics handled 19.933 million tons, up from 14.678 million.

Material changes versus 2020

• Revenue increased $123.0 million, while operating income rose $71.8 million and net income attributable to SunCoke rose $39.7 million.
• Higher domestic coke volumes reflected the return to full capacity, the absence of 2020 customer volume relief, and new foundry and export sales. Logistics benefited from stronger export-coal activity, higher volumes, iron ore handling, and improved pricing.
• Operating cash flow increased $75.3 million, reflecting stronger operating results, lower interest payments, and income tax refunds.
• In June 2021, SunCoke issued $500 million of 4.875% senior notes due 2029, redeemed all $587.3 million principal of its 7.5% notes due 2025, and extended its $350 million revolving facility to June 2026. Management estimated annual interest savings of about $17 million. The refinancing resulted in a $31.9 million loss on extinguishment of debt.
• Capital expenditures rose $24.7 million to $98.6 million as spending returned toward a more normalized level after pandemic-related delays and reductions in 2020.

Outlook, risks, contingencies and unusual items

The filing provides no specific quantified earnings or revenue guidance. Management said existing resources were sufficient for working capital needs for at least the next 12 months and thereafter for the foreseeable future. It highlighted stable contracted coke operations, full-capacity domestic production, market opportunities in foundry and export coke, and the new five-year Algoma Steel take-or-pay contract beginning in 2022, averaging approximately 150,000 tons annually.

Risks include customer concentration: Cliffs Steel accounted for 68.3% of 2021 revenue and U.S. Steel 14.4%. Other material exposures include steel and coal market cycles, customer credit and contract performance, aging equipment and production reliability, coal and rail supply, environmental regulation and permitting, climate-related transition and physical risks, and competition from alternative steelmaking processes. Several environmental standards and permit matters could increase operating or capital costs; the filing says impacts are not yet determinable.

Legacy obligations include a $63.3 million black lung liability, based on actuarial assumptions, and a $12.3 million asset retirement obligation. SunCoke was appealing a Department of Labor collateral requirement that could require additional collateral of up to approximately $32 million and reduce liquidity. The company reported it was in compliance with debt covenants. Management considered pending legal matters unlikely to have a material adverse effect, while noting that some claims could be resolved unfavorably. No long-lived asset impairment was recorded in 2021 or 2020.

SunCoke paid dividends of $0.06 per share each quarter in 2021 and declared a further $0.06 per share dividend in February 2022. Future dividends remain subject to Board approval and financial, liquidity, covenant, and other considerations.

Important facts for investors to verify

• Whether the 2021 improvement in earnings and record Adjusted EBITDA is sustained, especially given exposure to export and foundry coke prices and logistics volumes.
• Cliffs Steel and U.S. Steel’s ongoing financial condition, contract performance, and renewal or expiration terms; several major coke contracts expire from 2023 through 2032.
• Production reliability, coal-to-coke yields, maintenance spending, and the ability to sustain capacity utilization above 100% without unplanned costs.
• The outcome of the black lung collateral appeal and any resulting liquidity impact, alongside the assumptions underlying the $63.3 million benefit liability.
• Progress on environmental permits and potential new air-emissions requirements, including the scheduled review of coke-oven standards, and any resulting capital or operating costs.
• Debt repayment and refinancing needs, variable-rate exposure, revolver availability, and continued compliance with financing covenants.
• Whether the declared dividend can be maintained in light of capital requirements, debt obligations, and business conditions.