Suncoke Energy, Inc. annual report, FY2023

SunCoke Energy, Inc. (NYSE: SXC) — 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023; filed February 22, 2024. This is an annual filing, not a standalone fourth-quarter report.

Business context

SunCoke produces coke for blast-furnace steelmaking and operates bulk-material handling terminals. Its three reportable segments are Domestic Coke, Brazil Coke and Logistics. Most domestic coke sales are under long-term take-or-pay contracts, with coal costs generally passed through subject to yield requirements. Domestic nameplate capacity is approximately 4.2 million tons annually; the company also operates a 1.7-million-ton facility in Brazil for ArcelorMittal.

Key financial metrics

Revenue rose 4.6%, largely reflecting higher coal-cost pass-throughs and more take-or-pay volumes; higher pass-through revenue also increased reported costs. Operating income fell 18.6% and net income fell 39.5%. Net margin was 3.1%, versus 5.3% in 2022. Management reported that operating cash flow benefited mainly from a favorable year-over-year working-capital change.

Liquidity and debt: Cash and cash equivalents were $140.1 million at year-end, with $350.0 million available under the revolving facility and no revolver borrowings outstanding. Senior notes had $500 million principal outstanding, due 2029 at 4.875%; debt and financing obligations had a $490.3 million carrying value after debt issuance costs. The company reported reducing total debt by approximately $44 million in 2023 and compliance with debt covenants. It stated that available resources should cover working capital needs for at least 12 months and thereafter for the foreseeable future.

Material changes and segment results

• Domestic Coke Adjusted EBITDA declined to $247.8 million from $263.4 million. Lower margins on non-contracted blast coke and unfavorable Haverhill energy pricing were partially offset by favorable coal-to-coke yields and foundry coke pricing. Domestic production was 4.049 million tons; sales were 4.046 million tons.
• Logistics Adjusted EBITDA declined to $44.3 million from $49.7 million. Tons handled fell to 20.483 million from 22.291 million, reflecting weaker CMT thermal-coal demand, a customer mine idling and the absence of Dismal River Terminal volumes following its segment reclassification.
• Brazil Coke Adjusted EBITDA fell to $9.1 million from $14.5 million, primarily because technology fees expired at the end of 2022.
• In April 2023, SunCoke extended the Indiana Harbor take-or-pay agreement with Cliffs Steel through September 2035, covering 1.22 million tons annually.
• Dividends increased from $0.08 per share per quarter in the first half of 2023 to $0.10 in the second half. The board declared a further $0.10 per-share dividend for payment March 1, 2024; future dividends remain subject to board discretion and applicable conditions.

Outlook, risks and unusual items

The filing provides no specific quantitative earnings or revenue guidance. Management cited continued investment in asset reliability and operational performance, including foundry-coke expansion spending. Results remain exposed to steel and coal market cycles, lower spot coke prices, energy pricing, logistics throughput, aging equipment, weather, and changes in environmental requirements. SunCoke also highlights dependence on major steel customers: Cliffs Steel represented 65.4% of 2023 revenue and U.S. Steel 14.6%.

• Income tax expense increased to $34.3 million from $16.8 million; the 2023 effective tax rate was 35.1%. An $8.4 million valuation allowance on foreign tax credit carryforwards contributed to the increase.
• Legacy black-lung liabilities were $58.2 million discounted ($96.0 million undiscounted). A pending federal self-insurance collateral determination and proposed rule could require additional collateral and reduce liquidity.
• The EPA proposed tighter coke-oven emissions requirements in 2023. Potential compliance costs are uncertain; the filing noted a court-ordered deadline for finalizing changes by May 23, 2024.
• Legal and administrative claims are pending or may arise; management stated it did not expect them to have a material adverse effect, while acknowledging some could be resolved unfavorably.
• Auditors issued an unqualified opinion on the financial statements and internal controls. The estimated black-lung liability was identified as a critical audit matter because of actuarial assumptions and estimation uncertainty.

Important facts for investors to verify

• Whether operating cash generation remains strong after adjusting for working-capital timing, and whether the higher 2023 capital spending is sustained.
• Renewal and performance of major customer contracts, customer credit quality, and exposure to Cliffs Steel and U.S. Steel concentration.
• Domestic Coke profitability as non-contracted coke pricing, coal-to-coke yields and Haverhill energy prices change.
• Logistics throughput trends, especially CMT export demand and the impact of coal-market conditions.
• Final EPA emissions requirements, related capital and operating costs, and any additional collateral required for black-lung obligations.
• Tax-credit utilization, the valuation allowance, and the assumptions underlying the black-lung liability estimate.