SunCoke Energy, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. SunCoke produces coke at five U.S. facilities, operates a Brazilian facility, and provides coal-handling and logistics services. Results consolidate SunCoke Energy Partners, L.P. (the Partnership).
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $323.2 million | $292.7 million | $632.9 million | $603.8 million |
| Operating income | $8.6 million | $10.9 million | $30.9 million | $20.4 million |
| Net income (loss) | $(31.5) million | $1.0 million | $(89.2) million | $13.6 million |
| Net income (loss) attributable to SunCoke | $(24.2) million | $(4.6) million | $(23.2) million | $(8.7) million |
| Adjusted EBITDA | $47.5 million | $46.5 million | $103.1 million | $90.3 million |
| Operating cash flow | $24.9 million | $92.1 million | $54.4 million | $121.5 million |
Q2 operating margin was approximately 2.7%, versus 3.7% a year earlier. Revenue rose 10.4% in Q2 and 4.8% for the half; revenue growth mainly reflected higher coal-cost pass-throughs and logistics volumes. Adjusted EBITDA is a non-GAAP measure and includes earnings attributable to noncontrolling interests.
- Segments: Q2 Domestic Coke Adjusted EBITDA fell to $44.0 million from $51.0 million; Coal Logistics increased to $10.0 million from $5.4 million; Brazil Coke increased to $4.5 million from $2.4 million. Domestic Coke production was 950,000 tons, down 48,000; utilization was 90%, down five percentage points. Logistics tons handled rose 965,000 to 5.2 million.
- Cash flow and investment: First-half operating cash flow was $54.4 million; capital expenditures were $22.4 million. Cash increased $2.7 million to $136.7 million. The cash-flow decline chiefly reflected working-capital changes, higher benefit payments and taxes, accelerated interest payments, and operating impacts from oven work and a planned outage.
- Debt and liquidity: Debt and financing obligations totaled $874.0 million carrying value ($901.2 million total borrowings before discounts and issuance costs). Cash was $136.7 million, with $253.8 million of credit-facility availability. The Partnership issued $630 million of 7.5% notes due 2025 and refinanced its 2020 notes and term loan. Management expects annualized net interest expense to increase about $8 million. The Partnership planned to repay its $112.6 million promissory note in August, mainly with revolver capacity. Both borrowers reported covenant compliance.
Material changes and unusual items
- The Partnership refinancing produced a $20.2 million Q2 debt-extinguishment loss, primarily the redemption premium; prior-year comparisons included debt-extinguishment gains.
- First-half tax expense was $70.9 million, including a $148.6 million Partnership deferred-tax provision following IRS regulations that exclude cokemaking from qualifying partnership income. SunCoke reported a net incremental tax expense of $64.2 million, offset by an equal reduction in noncontrolling interest; the filing says the regulations had no effect on net income attributable to SunCoke. Partnership cokemaking entities are expected to become taxable as corporations in 2028.
- The company terminated its proposed new Kentucky coke facility and wrote off $5.3 million of capitalized engineering and land costs. It also terminated simplification-transaction discussions with the Partnership’s conflicts committee.
- Indiana Harbor oven rebuild work lowered volumes and increased operating and maintenance costs; additional depreciation was $4.7 million in Q2 and $9.5 million year to date. A coal supplier’s unfulfilled commitments raised replacement-coal costs; management estimated a roughly $6 million adverse revenue and Adjusted EBITDA effect for 2017.
Outlook, risks and contingencies
- 2017 guidance: Adjusted EBITDA of $220–$235 million, including $130–$141 million attributable to SunCoke Energy, Inc.; operating cash flow of $128–$143 million; and capital expenditures of approximately $80 million. Management expected 2018 capital expenditures to remain at a similar level.
- Management said available resources should meet working-capital needs for the foreseeable future. It cited improving steel-market signals, while noting customers had kept some steelmaking capacity idled and that market challenges remained. Existing U.S. coke sales are principally long-term take-or-pay contracts, with an average remaining term of about seven years.
- Environmental consent-decree projects at Haverhill and Granite City are expected to cost approximately $140–$145 million in total; about $101 million had been spent, with remaining spending expected through Q1 2019. Separate Indiana Harbor EPA/Indiana regulator negotiations remain unresolved; the company could not reliably estimate potential injunctive-relief costs or penalties.
- Other key risks include steel and coal-market cycles, customer and supplier concentration or default, coal supply and price volatility, facility reliability and oven degradation, environmental compliance, debt service and covenant restrictions, and the ability to renew long-term customer contracts. Management said other pending claims were not expected to have a material adverse impact.
Investor facts to verify
- Whether full-year Adjusted EBITDA and operating cash flow guidance remains achievable, given first-half operating cash flow of $54.4 million and working-capital demands.
- The realized cost and schedule of environmental remediation and the eventual scope, penalties, and expense of the Indiana Harbor regulatory matter.
- Whether the planned promissory-note refinancing and expected increase in annual interest expense occur as described, and whether covenant headroom remains adequate.
- Progress and costs on Indiana Harbor oven rebuilds, coal-supplier recovery efforts, and the expected 2017 impact of substitute coal purchases.
- The effect of the 2028 tax-status transition on the Partnership and distributions; the filing’s recorded deferred tax provision is largely attributable to public unitholders.
- Subsequent to quarter-end, the Partnership declared a $0.5940-per-unit quarterly distribution for payment September 1, 2017; SunCoke also authorized additional Partnership-unit purchases. Verify actual payments and repurchases.