SunCoke Energy, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in millions of dollars unless stated otherwise. SunCoke operates U.S. and Brazilian cokemaking facilities and eastern U.S. metallurgical coal mines. It became independent of Sunoco in January 2012; 2011 comparisons include combined historical results and may not be fully comparable.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $480.5 | $403.5 | $1,422.7 | $1,114.8 |
| Operating income | $52.7 | $30.0 | $129.4 | $55.8 |
| Net income | $32.9 | $21.6 | $73.5 | $51.4 |
| Net income attributable to SunCoke | $31.6 | $18.2 | $71.2 | $52.6 |
| Diluted EPS | $0.45 | $0.26 | $1.01 | $0.75 |
| Adjusted EBITDA | $72.4 | $44.8 | $193.7 | $109.1 |
- Q3 revenue rose 19.1%; attributable net income increased $13.4 million. Management cited Middletown’s contribution and stronger domestic coke operations, partly offset by higher standalone-company interest costs.
- For the first nine months, revenue increased 27.6% and operating income more than doubled. Adjusted EBITDA increased $84.6 million. Middletown, which began operating in October 2011 and reached full production in Q1 2012, contributed $76.7 million of Q3 revenue and $16.9 million of Q3 Adjusted EBITDA; nine-month contributions were $217.2 million and $42.3 million.
- Approximate operating margin was 11.0% in Q3 versus 7.4% a year earlier, and 9.1% for nine months versus 5.0%. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Q3 domestic coke capacity utilization was 103%; domestic coke Adjusted EBITDA per ton was $61.38, versus $49.79. Nine-month total coke production was 3.26 million tons versus 2.75 million. Coal Mining Adjusted EBITDA fell to $27.4 million from $33.0 million for nine months as cash production costs increased.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $77.8 million, versus $58.7 million. Capital expenditures were $40.6 million, compared with $184.2 million, which included Middletown construction and the prior-year acquisition of HKCC. Company-defined Free Cash Flow was $37.2 million versus negative $164.3 million.
- Cash was $157.8 million at September 30, up from $127.5 million at year-end. Current assets were $438.9 million and current liabilities $220.1 million (current ratio approximately 2.0).
- Total debt was $724.1 million: $324.1 million in variable-rate term loans and $400 million of 7.625% senior notes due 2019. The revolving facility had $149.1 million available after letters of credit; another $45 million of incremental term-loan capacity was available subject to conditions.
- Capital expenditures were $40.6 million year to date. The company expected approximately $75 million for full-year 2012, substantially all ongoing capital.
Outlook, material developments and risks
- Management’s 2012 guidance was diluted EPS of $1.30–$1.40, Adjusted EBITDA of $255–$270 million and Free Cash Flow exceeding $100 million. It expected domestic coke production above 4.3 million tons and coal production of approximately 1.4 million tons. These are forward-looking estimates, not guarantees.
- Management said coal markets had weakened and expected continued weakness in 2013. It was idling some higher-cost mines, shifting labor and equipment to more productive operations, deferring Jewell mine expansion and anticipating 2013 coal pricing significantly below 2012; it expected the Coal Mining segment to contribute minimally to 2013 results.
- The Indiana Harbor coke contract’s initial term ends September 30, 2013. The company expected about $50 million of reliability and maintenance spending during 2012–2014, including about $10 million in 2012. A new long-term customer agreement was not assured, and spending could depend on its terms.
- EPA notices concerning Haverhill and Granite City could lead to penalties and environmental projects estimated at approximately $100 million over 2012–2016, with most spending expected in 2013–2016. The company estimated a reasonably possible penalty loss of about $2.2 million. For Indiana Harbor notices, it could not estimate a loss range; related reliability projects were expected to cost about $50 million over 2012–2014.
- The company’s $33.5 million black-lung obligation was under review; management estimated it could rise by $4–$5 million under current assumptions. A 25-basis-point decrease in the discount rate was estimated to increase the liability by about $1 million.
- The company planned a master limited partnership IPO, expected in Q4 2012 subject to market conditions, with interests in 65% of Haverhill and Middletown expected to be contributed. Timing and completion were uncertain. It was also exploring a potential Kentucky coke plant, but deferred customer commitments pending permitting progress, and continued to pursue international growth opportunities.
- Other comparability factors included the 2011 $18.5 million loss on firm coke purchase commitments, absent in 2012; the expiration of Haverhill nonconventional fuel tax credits in June 2012; and a 2012 tax-sharing-related reduction of $88.2 million in equity for tax benefits no longer realizable by SunCoke. The filing also recorded $5.0 million of unrecognized tax benefits during Q3.
Important facts for investors to verify
- Whether Indiana Harbor secures a renewed long-term coke contract and how that affects its planned capital spending.
- The final scope, schedule and cost of EPA-related work and any penalties, particularly at Indiana Harbor, where the loss range was not estimable.
- Whether the MLP offering closes, on what terms, and how any Credit Agreement amendment affects liquidity and debt covenants.
- Whether coal pricing, mine productivity and production costs develop as assumed in management’s 2013 commentary and 2012 guidance.
- Whether 2012 cash generation and Free Cash Flow meet guidance after capital spending, pension contributions and other cash requirements.