SunCoke Energy, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. SunCoke operates U.S. cokemaking and coal-logistics businesses, with interests or operations in Brazil and India; its consolidated results include SunCoke Energy Partners, L.P. (the Partnership).
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $348.2 million | $372.2 million | $672.2 million | $731.8 million |
| Operating income (loss) | $6.4 million | $(71.4) million | $31.9 million | $(66.7) million |
| Net loss attributable to SunCoke | $(13.5) million | $(49.2) million | $(17.5) million | $(57.0) million |
| Adjusted EBITDA | $33.4 million | $60.8 million | $81.3 million | $94.6 million |
| Operating cash flow | Six-month figure: $76.6 million | Prior-year six-month figure: $25.3 million |
Approximate operating margin was 1.8% in Q2 2015 versus negative 19.2% in Q2 2014; the prior-year quarter included a $103.1 million coal-mining impairment. Six-month operating margin was approximately 4.7% versus negative 9.1%. Adjusted EBITDA is a company-defined non-GAAP measure and includes amounts attributable to noncontrolling interests.
- Revenue fell 6.4% in Q2 and 8.1% for the first half, mainly because lower coal prices passed through to coke customers.
- Q2 Adjusted EBITDA declined $27.4 million. Management cited a $12.6 million noncash pension-settlement charge, planned maintenance timing, reduced cost recovery at Indiana Harbor, and a favorable prior-year coal contingent-consideration adjustment. Domestic Coke Q2 Adjusted EBITDA was $56.2 million versus $64.3 million; capacity utilization was 99% versus 100%.
- Cash and cash equivalents were $201.7 million at June 30, up from $139.0 million at year-end. Long-term debt was $699.1 million, compared with $633.5 million at year-end. Revolver availability was $398.5 million; cash plus stated availability was approximately $600.2 million. The company and Partnership reported compliance with debt covenants.
- First-half capital expenditures were $22.5 million versus $77.8 million a year earlier. SunCoke expected approximately $80 million of 2015 capital expenditures, excluding the proposed Convent acquisition.
Material changes and significant items
- In January, SunCoke contributed a 75% interest in Granite City to the Partnership for a stated transaction value of $245 million. The Partnership issued $200 million of additional 7.375% notes due 2020 and assumed and repaid $135 million of SunCoke’s 7.625% notes due 2019.
- In June, a Dominion Coal pension plan termination and annuity purchase triggered a $12.6 million noncash settlement loss. Remaining pension assets were $0.7 million, with no remaining pension obligation.
- SunCoke no longer considered a sale of its Coal Mining business probable, citing prolonged market challenges and sharply lower metallurgical coal prices. Mining assets returned to held-and-used presentation; no net Q2 income-statement impact was recorded. The company continued to rationalize operations.
- Haverhill Chemicals planned to shut its adjacent facility. SunCoke expected about $6 million of lost energy revenue and additional costs in 2015; the Q2 impact was $1.3 million. U.S. Steel had announced a possible temporary idling of Granite City Works, but had not idled it by the filing date and continued taking coke under its take-or-pay contract.
- After quarter-end, the Partnership agreed to acquire Convent Marine Terminal for $412 million, expected to close in Q3 2015. The stated funding plan included $214.6 million initially from cash and revolver capacity, $115 million of assumed debt, and $82.4 million in Partnership units; long-term financing was expected later, subject to market conditions. SunCoke also agreed to contribute an additional 23% Granite City interest for $67 million, expected to close alongside the acquisition financing.
Outlook, risks and contingencies
- Environmental projects at Haverhill and Granite City were expected to total approximately $125 million, with about $82 million spent and remaining spending expected through Q1 2017. The Haverhill/Granite City consent decree includes a $2.2 million civil penalty, paid in December 2014, and required capital projects.
- The EPA’s Indiana Harbor allegations remained unresolved. SunCoke could not estimate a probable or reasonably possible loss range, including potential penalties or required projects.
- Management cited depressed metallurgical-coal conditions, Chinese coke imports affecting the India venture, customer and supplier concentration, environmental and regulatory obligations, debt covenant and refinancing exposure, and risks to the pending Convent acquisition and its integration. The filing also describes uncertainty over the Partnership’s federal tax classification under proposed regulations.
- Management declared a $0.15-per-share dividend after quarter-end, payable September 10, 2015; future dividends remain subject to board approval and business, liquidity, and covenant considerations.
Important facts for investors to verify
- Whether the Convent Marine Terminal acquisition closed on the anticipated terms and how it was financed, including the effect on debt, liquidity, and distributions.
- Whether Granite City Works remained operational and whether U.S. Steel continued taking contracted coke; assess the related customer concentration and take-or-pay protections.
- Actual 2015 spending and outcomes for environmental projects, and any developments in the Indiana Harbor EPA matter.
- Whether lower coal prices, Indiana Harbor cost-recovery terms, maintenance timing, and coal-mining rationalization continued to affect segment earnings and cash generation.
- Reconcile reported debt and facility availability with subsequent financing activity, and monitor covenant compliance and the Partnership’s tax-status exposure.