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SXC > SEC Filings for SXC > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for SUNCOKE ENERGY, INC.

Form 10-Q for SUNCOKE ENERGY, INC.


1-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains certain forward-looking statements of expected future developments, as defined in the Private Securities Litigation Reform Act of 1995. This discussion contains forward-looking statements about our business, operations and industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations and intentions. Our future results and financial condition may differ materially from those we currently anticipate as a result of the factors we describe under "Cautionary Statement Concerning Forward-Looking Statements." This "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on financial data derived from the financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and certain other financial data that is prepared using non-GAAP measures. For a reconciliation of these non-GAAP measures to the most comparable GAAP components, see "Non-GAAP Financial Measures" at the end of this Item. Overview
SunCoke Energy, Inc. ("SunCoke Energy", "Company", "we", "our" and "us") is the largest independent producer of high-quality coke in the Americas, as measured by tons of coke produced each year, and has more than 50 years of coke production experience. Coke is a principal raw material in the blast furnace steelmaking process. Coke is generally produced by heating metallurgical coal in a refractory oven, which releases certain volatile components from the coal, thus transforming the coal into coke.
We have designed, developed and built, and own and operate five cokemaking facilities in the United States ("U.S."). Additionally, we have designed and operate one cokemaking facility in Brazil under licensing and operating agreements on behalf of our customer and have a joint venture interest in the operations of one cokemaking facility in India. The capacity of our five U.S. cokemaking facilities is approximately 4.2 million tons of coke per year. The cokemaking facility that we operate in Brazil has capacity of approximately 1.7 million tons of coke per year. In March 2013, we formed a cokemaking joint venture with VISA Steel Limited ("VISA Steel") in India called VISA SunCoke Limited ("VISA SunCoke"). VISA SunCoke has a cokemaking capacity of 440 thousand tons of coke per year.
All of our U.S. coke sales are made pursuant to long-term take-or-pay agreements. These coke sales agreements have an average remaining term of approximately 10 years and contain pass-through provisions for costs we incur in the cokemaking process, including coal costs, (subject to meeting contractual coal-to-coke yields), operating and maintenance expenses, costs related to the transportation of coke to our customers, taxes (other than income taxes) and costs associated with changes in regulation. The coke sales agreement and energy sales agreement with AK Steel at our Haverhill facility are subject to early termination by AK Steel under limited circumstances and provided that AK Steel has given at least two years prior notice of its intention to terminate the agreements and certain other conditions are met. In addition, AK Steel is required to pay a significant termination payment to us if it exercises its termination right prior to 2018. No other coke sales contract has an early termination clause.
Our consolidated financial statements include SunCoke Energy Partners, L.P. (the "Partnership"), a publicly-traded partnership. We completed the initial public offering of the Partnership on January 24, 2013. As of March 31, 2014, we own the general partner of the partnership, which consists of a 2 percent ownership interest and incentive distribution rights, and own a 55.9 percent limited partner interest in the Partnership.


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The following table sets forth information about our cokemaking facilities and our coke and energy sales agreement:

                                                                                                  Annual Cokemaking
                                                            Year of     Contract    Number of         Capacity
Facility                  Location            Customer      Start Up   Expiration   Coke Ovens   (thousands of tons)    Use of Waste Heat

Owned and Operated:
Jewell             Vansant, Virginia        ArcelorMittal     1962        2020         142               720           Partially used for
                                                                                                                       thermal coal drying
Indiana Harbor     East Chicago, Indiana    ArcelorMittal     1998        2023         268              1,220          Heat for power
                                                                                                                       generation
Haverhill Phase I  Franklin Furnace, Ohio   ArcelorMittal     2005        2020         100               550           Process steam
Phase II           Franklin Furnace, Ohio   AK Steel          2008        2022         100               550           Power generation
Granite City       Granite City, Illinois   U.S. Steel        2009        2025         120               650           Steam for power
                                                                                                                       generation
Middletown(1)      Middletown, Ohio         AK Steel          2011        2032         100               550           Power generation
                                                                                       830              4,240
Operated:
Vitória            Vitória, Brazil          ArcelorMittal     2007        2023         320              1,700          Steam for power
                                                                                                                       generation
                                                                                      1,150             5,940
Equity Method Investment:
VISA SunCoke(2)    Odisha, India            Various           2007         NA           88               440           Steam for power
                                                                                                                       generation
Total                                                                                 1,238             6,380

(1) Cokemaking capacity represents stated capacity for production of blast furnace coke. The Middletown coke sales agreement provides for coke sales on a "run of oven" basis, which include both blast furnace coke and small coke. Middletown capacity on a "run of oven" basis is 578 thousand tons per year.

(2) Cokemaking capacity represents 100 percent of VISA SunCoke, our 49 percent joint venture formed in March 2013.

We own and operate coal mining operations in Virginia and West Virginia that sold approximately 1.5 million tons of metallurgical coal (including internal sales to our cokemaking operations) and 0.1 million tons of thermal coal in 2013.
Our business strategy has evolved to include the expansion of our operations into adjacent business lines within the steel value chain. During 2013, through our master limited partnership ("Partnership"), we expanded our operations into coal handling and blending services through two acquisitions. On August 30, 2013, our master limited partnership completed the acquisition of Lakeshore Coal Handling Corporation ("Lakeshore"), now called SunCoke Lake Terminal LLC ("Lake Terminal"). Located in East Chicago, Indiana, Lake Terminal provides coal handling and blending services to our Indiana Harbor cokemaking operations. On October 1, 2013, the Partnership completed the acquisition of Kanawha River Terminals ("KRT"). KRT is a leading metallurgical and thermal coal blending and handling service provider with collective capacity to blend and transload more than 30 million tons of coal annually through its operations in West Virginia and Kentucky.
Further, we are exploring opportunities for entry into the ferrous segments of the steel value chain, such as iron ore concentration and pelletizing and direct reduced iron production ("DRI"). Concentrating and pelletizing are processes that prepare iron ore for use in a blast furnace as part of the integrated steelmaking process and result in a more efficient blast furnace steelmaking process. The current capacity for both concentrating and pelletizing of iron ore in the U.S. and Canada is in excess of 230 million tons and we believe acquisitions of existing facilities could potentially provide an attractive avenue for growth. DRI, an alternative method of ironmaking is used today in conventional blast furnaces and electric arc furnaces ("EAF"). The capital investment required to build DRI plants is low compared to integrated steel plants and operating costs can be favorable if low cost energy supplies are available. DRI is successfully manufactured in various parts of the world through either natural gas or coal-based technology. Currently, there is only one DRI operation in the U.S., but we believe demand for additional DRI capacity in the U.S. may grow by approximately 5 million tons, driven in part by the available supply of low cost natural gas as a reducing agent.
Incorporated in Delaware in 2010 and headquartered in Lisle, Illinois, we became a publicly-traded company in 2011 and our stock is listed on the New York Stock Exchange ("NYSE") under the symbol "SXC." On July 18, 2011 (the


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"Separation Date"), Sunoco, Inc. ("Sunoco") contributed the subsidiaries, assets and liabilities that were primarily related to its cokemaking and coal mining operations to us in exchange for shares of our common stock. As of such date, Sunoco owned 100 percent of our common stock. On January 17, 2012 (the "Distribution Date"), we became an independent, publicly-traded company following our separation from Sunoco.
Recent Developments
• Cokemaking dropdowns to our master limited partnership and related financing transactions.

On April 23, 2014, we executed an agreement to contribute a 33 percent interest in the Haverhill and Middletown facilities to the Partnership. We expect to close on this agreement in May 2014, subject to customary closing conditions for such transactions and the completion of the associated financing transactions at the Partnership described below. We expect to receive total consideration of $365.0 million including approximately $80.0 million of common units and approximately $3.3 million of general partner interests. In addition, the Partnership will assume and repay approximately $271.3 million of our outstanding debt and other liabilities and pay us approximately $3.4 million in cash. Approximately $7.0 million of the consideration will be left at the Partnership to pre-fund our obligation to indemnify the Partnership for the cost of the environmental remediation project at Haverhill. The debt assumption and repayment obligation consists of approximately $99.9 million of our outstanding term loan debt and approximately $171.4 million of our senior unsecured notes, inclusive of an estimated market premium of $11.4 million to tender for the principal amount of these notes.
The Partnership expects to fund the debt assumption and cash portions of the consideration with approximately $88 million of net proceeds from the sale of 3.2 million common units to the public, which was completed on April 30, 2014, and approximately $263 million of gross proceeds from the expected issuance of $250 million aggregate principal amount of 7.375 percent senior notes due 2020 through a private placement in May 2014. Proceeds from the offerings will also be used to repay approximately $40 million outstanding on the Partnership's revolving credit facility, pay transaction fees and for general corporate purposes.
We expect this transaction will benefit SunCoke shareholders through the attractive multiple paid for these assets, and higher total cash distributions we expect to receive, including payments on our incentive distribution rights. We also anticipate no material immediate tax gain as a result of the transaction structure and forms of consideration.
First Quarter Key Financial Results

•         Revenues decreased 20.8 percent in the three months ended March 31,
          2014 to $359.6 million primarily due to the pass-through of lower coal
          prices in our cokemaking business, lower coke sales volumes and an
          approximate $22 per ton decline in average coal sales price partly
          offset by higher coal sales volume.


•         Net income attributable to stockholders decreased $9.9 million for the
          three months ended March 31, 2014, to a loss of $7.8 million, or a loss
          of $0.11 per share, compared with the three months ended March 31,
          2013. This decrease is due to the following items:


•           severe winter weather negatively impacting volumes and yields in the
            Domestic Coke segment as well as the impact of the refurbishment of
            Indiana Harbor;

• weakness in our Coal Mining segment; and

•           higher depreciation primarily related to a change in the estimated
            useful lives of certain assets at the Indiana Harbor facility.


•         Adjusted EBITDA was $33.6 million in the three months ended March 31,
          2014 compared to $52.3 million in the same period prior year, a
          decrease of $18.7 million. This decrease was driven by the factors
          discussed above.

Items Impacting Comparability
• Coal Logistics. On August 30, and October 1, 2013, the Partnership acquired Lake Terminal and KRT, respectively. The results of these newly acquired operations have been included in the Consolidated Financial Statements since the dates of acquisition and are presented in the Coal Logistics segment. Coal Logistics reported revenues of $12.9 million, of which $4.2 million were intercompany revenues, Adjusted EBITDA of $2.1 million and Adjusted EBITDA per ton handled of $0.48 for the three months ended March 31, 2014.

•         Indiana Harbor Cokemaking Operations. During 2011, in preparation for
          negotiation of the extension of the Company's existing coke sales
          agreement, we conducted an engineering study to identify major
          refurbishment projects necessary to preserve the production capacity of
          the facility. We expect to spend approximately $104


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million in total for this project, an increase from our previous estimate of $100 million, as a result of higher than anticipated costs to refurbish the ovens as well as the incremental cost of managing the refurbishment to minimize disruptions to ongoing operations. We completed this oven refurbishment in the first quarter and expect the installation of new equipment (i.e. pusher-charger machines) will be completed in the second half of 2014. Our original estimated impact of the revised useful lives of certain assets associated with the refurbishment was $13.1 million, of which $9.5 million, or $0.14 per common share, was recorded in 2013 and $0.6 million, or $0.01 per common share was recorded in the first quarter of 2014. In the first quarter of 2014, we determined additional assets would be retired as part of the project. The additional depreciation recorded in the first quarter of 2014 was $0.8 million, or $0.01 per common share. The total full year impact of these changes in estimated useful lives is $8.7 million, or $0.12 per common share in 2014. In the first quarter of 2014, as a result of the refurbishment project work, we identified that approximately 30 percent of our ovens required a complete replacement of their oven floors and sole flues. We anticipate spending approximately $15 million in ongoing capital expenditures in connection with this refurbishment work, which we anticipate completing in 2014. We revised the estimated useful life of certain assets being replaced as part of this project, which resulted in additional depreciation of $4.2 million, or $0.06 per common share, for the three months ended March 31, 2014. The full year impact is anticipated to be approximately $9.7 million, or $0.14 per common share. Effective October 1, 2013, the Company entered into a 10-year extension of its existing Indiana Harbor coke sales agreement, which contains an increased fixed fee per ton of coke produced to recognize the additional capital being deployed, which increased Adjusted EBITDA $2.6 million during the three months ended March 31, 2014 compared to the same period in the prior year. Our customer has also notified us of a potential blast furnace outage in the second quarter of 2014, which may result in an increase in coke inventory during the second quarter and/or deferred payment terms with our customer. We expect to begin realizing the full benefits of the refurbishment project in the second half of 2014.
• Interest expense, net. Interest expense, net was $12.1 million and $15.8 million for the three months ended March 31, 2014 and 2013, respectively. The first quarter of 2013 was impacted by debt restructuring costs of $3.7 million related to the portion of the term loan extinguished in conjunction with the Partnership offering as well as the issuance of $150.0 million of senior notes by the Partnership.

•         Income taxes. We recorded an income tax benefit of $4.2 million in the
          three months ended March 31, 2014 compared to income tax expense of
          $4.8 million for the corresponding period of 2013. The decrease was due
          primarily to lower overall earnings partially offset by the impact of
          earnings from noncontrolling interests. Additionally, we recorded an
          income tax benefit of $2.0 million due to enacted reduction in Indiana
          statutory tax rate and an income tax benefit of $1.0 million related to
          tax credits in the three months ended March 31, 2014. The impact of
          these items was partially offset by lower nonconventional fuel tax
          credits, which expired in 2013.

During three months ended March 31, 2013, we recorded $0.6 million related to prior period adjustments associated with local income taxes due for our Middletown facility as well as $1.7 million of income tax expense to settle potential obligations under the provisions of our tax sharing agreement with Sunoco.

•         India Equity Method Investment. On March 18, 2013, we acquired a 49
          percent interest in a joint venture, VISA SunCoke, located in Odisha,
          India, with VISA Steel. We recognize our share of earnings in VISA
          SunCoke on a one-month lag and began recognizing such earnings in the
          second quarter of 2013. Our 49 percent share of Adjusted EBITDA in the
          three months ended March 31, 2014 was $0.1 million.


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Results of Operations
The following table sets forth amounts from the Consolidated Statements of
Operations for the three months ended March 31, 2014 and 2013:
                                                                   Three Months Ended March 31, 2014
                                                                      2014                    2013
                                                                         (Dollars in millions)
Revenues
Sales and other operating revenue                             $          358.0         $          451.5
Other income                                                               1.6                      2.4
Total revenues                                                           359.6                    453.9
Costs and operating expenses
Cost of products sold and operating expenses                             304.0                    382.4
Selling, general and administrative expenses                              21.9                     20.6
Depreciation, depletion and amortization                                  29.0                     23.9
Total costs and operating expenses                                       354.9                    426.9
Operating income                                                           4.7                     27.0
Interest expense, net                                                     12.1                     15.8
(Loss) income before income tax (benefit) expense and loss
from equity method investment                                             (7.4 )                   11.2
Income tax (benefit) expense                                              (4.2 )                    4.8
Loss from equity method investment                                         0.6                        -
Net (loss) income                                                         (3.8 )                    6.4
Less: Net income attributable to noncontrolling interests                  4.0                      4.3
Net (loss) income attributable to SunCoke Energy, Inc.        $           (7.8 )       $            2.1

Revenues. Total revenues, net of sales discounts, were $359.6 million and $453.9 million for the three months ended March 31, 2014 and 2013, respectively. The decreases were due primarily to the pass-through of lower coal prices and lower coke sales volumes in our Domestic Coke segment. The lower coke sales volumes reflect the impacts of severe winter weather on production and yields across our fleet as well as the impact of operational inefficiencies caused by the refurbishment project at the Indiana Harbor facility. In addition, a $22 per ton decrease in coal sales prices in our Coal Mining segment, partly offset by higher coal sales volumes, contributed to the reduction in total revenues. The current year period reflects the contribution of $8.7 million from the Coal Logistics business.
Costs and Operating Expenses. Total operating expenses were $354.9 million and $426.9 million for the three months ended March 31, 2014 and 2013, respectively. The decrease in cost of products sold and operating expenses was driven primarily by reduced coal costs in our Domestic Coke segment partly offset by higher operating expenses associated with the severe winter weather. In addition, costs and operating expenses in the Coal Mining segment decreased in the current year due to the continued benefit of prior year's cost containment initiatives and investments in mine planning, equipment and training. The current year period includes $8.4 million of costs and operating expenses for Coal Logistics.
Interest Expense, Net. Interest expense, net was $12.1 million and $15.8 million for the three months ended March 31, 2014 and 2013, respectively. Comparability between periods was impacted by the financing activities previously discussed. Income Taxes. We recorded an income tax benefit of $4.2 million in the three months ended March 31, 2014 compared to income tax expense of $4.8 million for the corresponding period of 2013. The decrease was due primarily to lower overall earnings as well as higher earnings attributable to noncontrolling interests resulting from the Partnership offering in January 2013. Comparability between periods is impacted by the income tax items previously discussed. Loss from Equity Method Investment. We recognize our share of earnings in VISA SunCoke on a one-month lag and began recognizing such earnings in the second quarter of 2013. In the three months ended March 31, 2014, we recognized a loss from equity method investment of $0.6 million. Performance in the period was affected by a weak coke pricing environment due to the impact of Chinese coke imports.
Noncontrolling Interest. Income attributable to noncontrolling interest was $4.0 million and $4.3 million for the three months ended March 31, 2014 and 2013, respectively. The decreases are primarily due to decreased performance at Indiana Harbor, which reduced noncontrolling interest by approximately $1.0 million for the three months ended March 31, 2014 compared to the same period in the prior year. Despite decreased volumes and lower coal-to-coke yield performance at our Haverhill and


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Middletown facilities, income attributable to the noncontrolling interest in the Partnership increased $0.7 million due to the timing of the Partnership initial public offering in the prior year period. Results of Reportable Business Segments
We report our business results through five segments:

•         Domestic Coke consists of our Jewell, Indiana Harbor, Haverhill,
          Granite City and Middletown cokemaking and heat recovery operations
          located in Vansant, Virginia, East Chicago, Indiana, Franklin Furnace,
          Ohio, Granite City, Illinois, and Middletown, Ohio, respectively.


•         Brazil Coke consists of our operations in Vitória, Brazil, where we
          operate a cokemaking facility for a Brazilian subsidiary of
          ArcelorMittal;


•         India Coke consists of our cokemaking joint venture with Visa Steel in
          Odisha, India.


•         Coal Mining consists of our metallurgical coal mining activities
          conducted in Virginia and West Virginia.


•         Coal Logistics consists of our coal handling and blending services in
          East Chicago, Indiana and will include KRT which closed on October 1,
          2013.

Management believes Adjusted EBITDA is an important measure of operating performance and is used as the primary basis for the Chief Operating Decision Maker (CODM) to evaluate the performance of each of our reportable segments. Adjusted EBITDA should not be considered a substitute for the reported results prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). See "Non-GAAP Financial Measures" near the end of this Item.


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Segment Financial and Operating Data
The following tables set forth financial and operating data for the three months ended March 31, 2014 and 2013:
                                                                     Three Months Ended March 31,
                                                                        2014               2013
                                                                         (Dollars in millions)
Sales and other operating revenues:
Domestic Coke                                                     $       333.5       $       428.2
Brazil Coke                                                                 9.3                 9.7
Coal Mining                                                                 6.5                13.6
Coal Mining intersegment sales                                             33.9                32.2
Coal Logistics                                                              8.7                   -
. . .
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