SunCoke Energy, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report. SunCoke completed its separation from Sunoco on January 17, 2012; pre-separation results are combined historical results and may not represent standalone costs or performance.
Business context and reporting period
SunCoke produces metallurgical coke for steelmakers and operates coal mines in Virginia and West Virginia. Its four reported segments are Jewell Coke, Other Domestic Coke, International Coke (Brazil), and Coal Mining. The Middletown, Ohio coke facility began operating in October 2011, lifting U.S. annual capacity to about 4.24 million tons. Most coke sales are under long-term take-or-pay contracts.
Financial and operating metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $1,538.9 million | $1,326.5 million |
| Operating income | $67.5 million | $174.2 million |
| Net income | $58.9 million | $146.3 million |
| Net income attributable to SunCoke / net parent investment | $60.6 million; $0.87 diluted EPS | $139.2 million; $1.99 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $140.5 million | $227.3 million |
| Cash from operating activities | $101.3 million | $296.6 million |
| Capital expenditures | $238.1 million | $215.6 million |
| Free cash flow (non-GAAP) | $(176.0) million | $61.8 million |
Revenue increased 16%, mainly from higher coal prices and pass-through costs, higher fees, and the HKCC acquisition. Operating margin was approximately 4.4% (2010: 13.1%); net margin was approximately 3.8% (2010: 11.0%). Profit fell despite higher revenue. The filing attributes the decline to amended ArcelorMittal contracts, Indiana Harbor operating challenges, public-company and relocation expenses, and new financing costs. Adjusted EBITDA is a company-defined non-GAAP measure.
At year-end, cash was $127.5 million, current assets $414.0 million, and current liabilities $281.5 million (current ratio approximately 1.47). Debt was $726.4 million; the company also had $150 million available on its revolving facility and $45 million of remaining incremental facility capacity. Stockholders’ equity was $525.5 million. Interest expense was $20.6 million, partly offset by capitalized interest. The company reported no outstanding revolver borrowings at year-end.
Coke production was 3.762 million tons domestically and 1.442 million tons at the operated Brazil facility. Coal production was 1.364 million tons, including HKCC. ArcelorMittal represented approximately 64% of 2011 revenue, U.S. Steel 18%, and AK Steel 14%.
Material changes versus the prior comparable period
- Revenue rose from $1,326.5 million to $1,538.9 million, while operating income fell $106.7 million and attributable income fell $78.6 million.
- Jewell Coke Adjusted EBITDA declined to $57.6 million from $151.5 million, substantially reflecting the January 2011 amendments to Jewell and Haverhill contracts with ArcelorMittal. Other Domestic Coke EBITDA rose to $89.4 million from $78.5 million, while Coal Mining improved to $24.0 million from a $3.6 million loss.
- Operating cash flow dropped by $195.3 million, primarily as inventories—especially coal and coke—absorbed cash. Investing outflows rose to $275.7 million, including Middletown construction and HKCC acquisition spending.
- The company raised $400 million of 7.625% senior notes due 2019 and obtained term-loan financing; total debt was $726.4 million at year-end. It acquired HKCC for approximately $52 million and increased its Indiana Harbor partnership interest to 85% for $34 million.
Outlook, risks, contingencies, and unusual items
- 2012 outlook: Management forecast attributable net income of $98–$122 million, diluted EPS of $1.30–$1.65, Adjusted EBITDA of $250–$280 million, and free cash flow above $50 million. It expected domestic coke production of 4.0–4.2 million tons and coal production of about 1.8 million tons. Forecasts depend on Middletown ramp-up, improved Indiana Harbor performance, and coal volumes and prices.
- Planned spending: 2012 capital expenditures were estimated at about $120 million, including approximately $60 million ongoing, $40 million for coal expansion, and $20 million for environmental projects. A separate $80–$100 million Haverhill and Granite City environmental project program was expected over 2012–2016, subject to regulatory discussions. Indiana Harbor refurbishment was estimated at about $50 million for 2012–2014, partly contingent on a contract extension.
- Regulatory and legal matters: EPA notices of violation concern Haverhill, Granite City, and Indiana Harbor. Haverhill/Granite City settlement negotiations could require penalties and capital work; the company could not estimate the final costs or a reasonably possible loss range. Indiana Harbor exposure was also not estimable. A Middletown permit appeal had reached an agreement in principle in February 2012; terms were described as immaterial to year-end financial position, results, and cash flow.
- Unusual items: An $18.5 million loss on firm coke purchase commitments arose from an expected Indiana Harbor production shortfall; production later met contractual requirements. A $7.0 million Indiana Harbor customer billing/contract resolution was recorded in the fourth quarter. A $3.9 million inventory adjustment was recorded in Q4 for a Q3 error; management said it was not material and did not affect full-year results. Separation-related costs included $14.9 million of incremental public-company operating costs and $7.2 million of relocation and senior-hiring costs. Tax-sharing arrangements caused substantial tax benefits to be removed from equity; Note 8 reports $98.1 million in Q3 and $45.3 million in Q4.
- Key risks: High dependence on three steel customers; cyclicality of steel and coal markets; operating and equipment issues at Indiana Harbor; coal supply, transport, labor, permitting and reserve risks; environmental compliance costs; and leverage, variable-rate borrowing, and restrictive debt covenants. The company did not plan common-stock dividends. It also identified uncertainty around tax-free separation treatment and the costs of operating independently from Sunoco.
Important facts for investors to verify
- Whether Middletown reached full production in Q2 2012 and whether domestic coke and coal volumes met management’s targets.
- Progress on the Indiana Harbor contract extension and refurbishment plan, and on EPA matters and their ultimate cost.
- Whether the 2012 earnings, EBITDA, and free-cash-flow guidance was achieved, including the cash conversion and capital spending assumptions.
- Customer concentration, take-or-pay contract protections, contract expiry dates, and the impact of the ArcelorMittal amendments on sustainable margins.
- Debt terms, covenant headroom, interest-rate exposure, and the company’s ability to fund planned investment while maintaining liquidity.
- Standalone cost trends and tax-sharing effects: historical pre-separation financials include Sunoco allocations, and the filing says SunCoke had not yet tested internal control over financial reporting under Section 404. The financial statements received an unqualified audit opinion, but the auditor did not opine on internal-control effectiveness.