Severe Winter Weather Impacts SunCoke Energy's Quarterly Results
04/24/2014 - SunCoke Energy, Inc. (SXC) today reported first quarter 2014 net loss attributable to shareholders of US$7.8 million, down from income of US$2.1 million, in first quarter 2013.
The year-over-year decline is primarily due to the impact of severe winter weather on cokemaking yields and production as well the Indiana Harbor refurbishment.
"At US$33.6 million, our first quarter Adjusted EBITDA was weak primarily due to severe weather," said Fritz Henderson, chairman and chief executive officer of SunCoke Energy, Inc. "While overall cokemaking operations have recovered with the return of more moderate weather, we anticipate regaining only a portion of first quarter's lost production. Accordingly, we are lowering our full year 2014 Adjusted EBITDA outlook to US$220 million to US$240 million."
SXC also announced that it has entered into an contribution agreement with SunCoke Energy Partners, L.P. (SXCP) to contribute a 33% interest in its Haverhill and Middletown cokemaking facilities for total consideration of US$365 million. SXC will continue to retain a 2% interest in both facilities.
Henderson added, "Our agreement to contribute a 33% interest in our Haverhill and Middletown cokemaking facilities is a key step under our plan to drop down our entire domestic coke business to SXCP over the next few years. When this transaction closes in May, we expect to receive total consideration of US$365 million in a tax efficient manner that will consist of SXCP equity and SXCP's assumption and repayment of a significant portion of our debt."
CONTRIBUTION AGREEMENT
On 23 April 2014, we executed an agreement to contribute a 33% interest in the Haverhill and Middletown facilities to SXCP. We expect to receive total consideration of US$365 million including approximately US$80 million of SXCP common units and US$3 million of general partner interests. In addition, SXCP will assume approximately US$271 million of our outstanding debt and other liabilities and pay us about US$3 million in cash. Approximately US$7 million of the consideration will be left at SXCP to pre-fund our obligation to indemnify SXCP for the cost of the environmental remediation project at Haverhill.
We expect this transaction will benefit SXC 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.
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 SXCP.
FIRST QUARTER 2014 CONSOLIDATED RESULTS
Total revenues fell 20.7% to US$359.6 million in first quarter 2014 versus same prior year period due to the pass-through of lower coal prices and reduced coke sales volumes in our Domestic Coke segment. In addition, a US$22 per ton decline in average coal sales price, partly offset by higher coal sales volumes in our Coal Mining segment, contributed to the reduction in total revenues.
Operating income and Adjusted EBITDA were down 82.6% and 35.8% in first quarter 2014 to US$4.7 million and US$33.6 million, respectively, as compared to first quarter 2013. The decline in operating income and Adjusted EBITDA were primarily driven by the impact of severe winter weather, which resulted in lower yields and production and higher operating costs in our cokemaking operations, plus weak performance at our Indiana Harbor facility due to the refurbishment efforts there, partially offset by our new Coal Logistics segment. In addition, higher depreciation related to capital expenditures and accelerated depreciation at Indiana Harbor also contributed to the decline in operating income.
Net loss attributable to shareholders was US$7.8 million in first quarter 2014, a reduction of US$9.9 million versus the same prior year period. The major factors affecting net income was the decline in operating income described above, partly offset by lower tax and financing expense compared to prior year.
FIRST QUARTER 2014 SEGMENT RESULTS
Domestic Coke
Domestic Coke consists of cokemaking facilities and heat recovery operations at our Jewell, Indiana Harbor, Haverhill,Granite City and Middletown plants.
Brazil Coke consists of a cokemaking facility in Vitória, Brazil, which we operate for an affiliate of ArcelorMittal. Brazil Coke earns operating and technology licensing fees based on production and recognizes a dividend on a preferred stock investment assuming certain minimum production levels are achieved.
India Coke
India Coke consists of our 49% interest in VISA SunCoke, a joint venture with VISA Steel formed on March 18, 2013. VISA SunCoke owns a 440 thousand ton cokemaking facility and associated steam generation unit in Odisha, India. Financial results for VISA SunCoke are recorded on a one month lag and represent our 49% share of the joint venture's results.
Coal Mining
Coal Mining consists of our metallurgical coal mining activities conducted in Virginia and West Virginia. A substantial portion of the metallurgical coal produced by our coal mining operations is sold to our Jewell Coke facility for conversion into coke.
Coal Logistics
The Coal Logistics segment consists of the coal handling and blending services operated by SXCP as a result of its acquisitions of Lake Terminal in third quarter 2013 and Kanawha River Terminals, LLC (KRT) in fourth quarter 2013. SXCP's coal handling and blending terminals are located in East Chicago, Indiana and along the Ohio, Big Sandy and Kanawha Rivers in West Virginia and Kentucky.
Corporate and Other
Corporate and other expenses in first quarter 2014 were US$9.1 million, up US$3.3 million versus first quarter 2013 primarily due to corporate restructuring expenses of US$1.4 million and an unfavorable prior year comparison, which included foreign exchange gains on an India Rupee hedge.
Financing Expense, Net
Net financing expense was US$3.7 million lower at US$12.1 million in first quarter 2014 versus first quarter 2013. Prior year financing expense included costs related to the early paydown of a term loan and fees associated with the issuance of new debt in connection with the initial public offering of SXCP in January 2013.
Cash Flow
Net cash used in operations was US$11.3 million for the first quarter 2014, reflecting lower net income and working capital changes largely due to the timing of accounts payable.
Cash used in investing activities was US$38.1 million in first quarter 2014 as compared with US$98.2 million in same respective period in 2013, which included our US$67.7 million investment in the VISA SunCoke joint venture.
2014 OUTLOOK
SunCoke's 2014 guidance is as follows:
"At US$33.6 million, our first quarter Adjusted EBITDA was weak primarily due to severe weather," said Fritz Henderson, chairman and chief executive officer of SunCoke Energy, Inc. "While overall cokemaking operations have recovered with the return of more moderate weather, we anticipate regaining only a portion of first quarter's lost production. Accordingly, we are lowering our full year 2014 Adjusted EBITDA outlook to US$220 million to US$240 million."
SXC also announced that it has entered into an contribution agreement with SunCoke Energy Partners, L.P. (SXCP) to contribute a 33% interest in its Haverhill and Middletown cokemaking facilities for total consideration of US$365 million. SXC will continue to retain a 2% interest in both facilities.
Henderson added, "Our agreement to contribute a 33% interest in our Haverhill and Middletown cokemaking facilities is a key step under our plan to drop down our entire domestic coke business to SXCP over the next few years. When this transaction closes in May, we expect to receive total consideration of US$365 million in a tax efficient manner that will consist of SXCP equity and SXCP's assumption and repayment of a significant portion of our debt."
CONTRIBUTION AGREEMENT
On 23 April 2014, we executed an agreement to contribute a 33% interest in the Haverhill and Middletown facilities to SXCP. We expect to receive total consideration of US$365 million including approximately US$80 million of SXCP common units and US$3 million of general partner interests. In addition, SXCP will assume approximately US$271 million of our outstanding debt and other liabilities and pay us about US$3 million in cash. Approximately US$7 million of the consideration will be left at SXCP to pre-fund our obligation to indemnify SXCP for the cost of the environmental remediation project at Haverhill.
We expect this transaction will benefit SXC shareholders through the attractive multiple paid for these assets and higher total cash distributions we expect to receive, including payments on our incentive distribution rights. We also anticipate no material immediate tax gain as a result of the transaction structure and forms of consideration.
We expect to close on this agreement in May 2014, subject to customary closing conditions for such transactions and the completion of the associated financing transactions at SXCP.
FIRST QUARTER 2014 CONSOLIDATED RESULTS
| Three Months Ended 31 March | |||||||||||||
| (In millions, except per share amounts) | 2014 | 2013 | (Decrease) | ||||||||||
| Total Revenues | US$ | 359.6 | US$ | 453.9 | US$ | (94.3) | |||||||
| Operating Income | 4.7 | 27.0 | (22.3) | ||||||||||
| Adjusted EBITDA | 33.6 | 52.3 | (18.7) | ||||||||||
| Net (Loss) Income Attributable to Shareholders | (7.8) | 2.1 | (9.9) | ||||||||||
| (Loss) Earnings Per Diluted Share | (0.11) | 0.03 | (0.14) | ||||||||||
Operating income and Adjusted EBITDA were down 82.6% and 35.8% in first quarter 2014 to US$4.7 million and US$33.6 million, respectively, as compared to first quarter 2013. The decline in operating income and Adjusted EBITDA were primarily driven by the impact of severe winter weather, which resulted in lower yields and production and higher operating costs in our cokemaking operations, plus weak performance at our Indiana Harbor facility due to the refurbishment efforts there, partially offset by our new Coal Logistics segment. In addition, higher depreciation related to capital expenditures and accelerated depreciation at Indiana Harbor also contributed to the decline in operating income.
Net loss attributable to shareholders was US$7.8 million in first quarter 2014, a reduction of US$9.9 million versus the same prior year period. The major factors affecting net income was the decline in operating income described above, partly offset by lower tax and financing expense compared to prior year.
FIRST QUARTER 2014 SEGMENT RESULTS
Domestic Coke
Domestic Coke consists of cokemaking facilities and heat recovery operations at our Jewell, Indiana Harbor, Haverhill,Granite City and Middletown plants.
| Three Months Ended 31 March | |||||||||
| (In millions, except per ton amounts) | 2014 | 2013 | (Decrease) | ||||||
| Segment Revenues | US$ | 333.5 | US$ | 428.2 | US$ | (94.7) | |||
| Adjusted EBITDA | 46.8 | 61.1 | (14.3) | ||||||
| Sales Volume (in thousands of tons) | 948 | 1,058 | (110) | ||||||
| Adjusted EBITDA per ton | US$ | 49.37 | US$ | 57.75 | (8.38) | ||||
- Segment revenues were affected by the pass-through of lower coal costs and lower coke sales volumes. The lower coke sales volumes reflect the impact of severe winter weather on production and yields across our fleet and the refurbishment effort at Indiana Harbor.
- Excluding Indiana Harbor, lower yields and production and higher operating costs across our domestic cokemaking fleet, primarily due to the severe winter weather, negatively impacted Adjusted EBITDA by approximately US$7.2 million and US$4.6 million, respectively. Partly offsetting this was higher energy sales. At Indiana Harbor, higher costs and lower productivity due to weather and our refurbishment effort drove an Adjusted EBITDA decline of US$3.9 million.
Brazil Coke consists of a cokemaking facility in Vitória, Brazil, which we operate for an affiliate of ArcelorMittal. Brazil Coke earns operating and technology licensing fees based on production and recognizes a dividend on a preferred stock investment assuming certain minimum production levels are achieved.
- Segment Adjusted EBITDA increased slightly to US$1.7 million on higher production.
India Coke
India Coke consists of our 49% interest in VISA SunCoke, a joint venture with VISA Steel formed on March 18, 2013. VISA SunCoke owns a 440 thousand ton cokemaking facility and associated steam generation unit in Odisha, India. Financial results for VISA SunCoke are recorded on a one month lag and represent our 49% share of the joint venture's results.
- Adjusted EBITDA was US$0.1 million on coke sales of approximately 60 thousand tons, representing our share of total coke sales of approximately 122 thousand tons. Adjusted EBITDA per ton was US$1.95 per ton, excluding a negative foreign currency impact of US$1.08 per ton. High industry coke inventories and import competition from China have depressed coke pricing in India, resulting in weak margins.
- India Coke recognized a net loss of US$0.6 million from equity method investment reflecting our share of earnings, depreciation, interest expense and taxes attributable to the venture.
Coal Mining
Coal Mining consists of our metallurgical coal mining activities conducted in Virginia and West Virginia. A substantial portion of the metallurgical coal produced by our coal mining operations is sold to our Jewell Coke facility for conversion into coke.
| Three Months Ended 31 March | |||||||||
| (In millions, except per ton amounts) | 2014 | 2013 | Increase/(Decrease) | ||||||
| Total Coal Mining Revenues(1) | US$ | 40.4 | US$ | 45.8 | US$ | (5.4) | |||
| Segment Revenues (excluding sales to affiliates) | US$ | 6.5 | US$ | 13.6 | US$ | (7.1) | |||
| Adjusted EBITDA(1) | US$ | (8.0) | US$ | (4.6) | US$ | (3.4) | |||
| Coal Production (in thousands of tons)(2) | 306 | 349 | (43) | ||||||
| Sales Volumes (in thousands of tons)(3) | 398 | 373 | 25 | ||||||
| Sales Price per ton (excludes transportation costs) | US$ | 99.03 | US$ | 121.19 | US$ | (22.16) | |||
| Adjusted EBITDA per ton(1) | US$ | (20.10) | US$ | (12.33) | US$ | (7.77) | |||
| (2) Includes production from Company and contract-operated mines. | |||||||||
| (3) Includes sales to affiliates. | |||||||||
- Total Coal Mining revenues (including sales to affiliates) fell as a result of a US$22 per ton decline in average coal sales price, partly offset by higher volumes. Excluding sales to affiliates, segment revenues were down on lower average sales price and sales volumes. The difference between coal sales volumes and coal production in first quarter 2014 was due to an increase in raw coal purchases.
- Adjusted EBITDA was negatively impacted by lower average coal sales price, partly offset by approximately a US$9per ton reduction in cash production costs.
Coal Logistics
The Coal Logistics segment consists of the coal handling and blending services operated by SXCP as a result of its acquisitions of Lake Terminal in third quarter 2013 and Kanawha River Terminals, LLC (KRT) in fourth quarter 2013. SXCP's coal handling and blending terminals are located in East Chicago, Indiana and along the Ohio, Big Sandy and Kanawha Rivers in West Virginia and Kentucky.
- Coal Logistics handled 4,359 thousand tons of coal, contributing US$2.1 million to Adjusted EBITDA. This lower than expected Adjusted EBITDA performance reflects higher costs and lower volumes at Lake Terminal due to weather impact.
Corporate and Other
Corporate and other expenses in first quarter 2014 were US$9.1 million, up US$3.3 million versus first quarter 2013 primarily due to corporate restructuring expenses of US$1.4 million and an unfavorable prior year comparison, which included foreign exchange gains on an India Rupee hedge.
Financing Expense, Net
Net financing expense was US$3.7 million lower at US$12.1 million in first quarter 2014 versus first quarter 2013. Prior year financing expense included costs related to the early paydown of a term loan and fees associated with the issuance of new debt in connection with the initial public offering of SXCP in January 2013.
Cash Flow
Net cash used in operations was US$11.3 million for the first quarter 2014, reflecting lower net income and working capital changes largely due to the timing of accounts payable.
Cash used in investing activities was US$38.1 million in first quarter 2014 as compared with US$98.2 million in same respective period in 2013, which included our US$67.7 million investment in the VISA SunCoke joint venture.
2014 OUTLOOK
SunCoke's 2014 guidance is as follows:
- Domestic coke production is expected to be approximately 4.2 million tons
- Coal production is projected to be approximately 1.3 million tons
- Adjusted EBITDA is expected to be between US$220 million and US$240 million on a consolidated basis. Adjusted EBITDA attributable to SXC is expected to be between US$173 million and US$188 million, reflecting the impact of public ownership in SXCP
- Earnings per diluted share attributable to SXC is expected to be between US$0.08 and US$0.33 per diluted share, reflecting the impact of public ownership in SXCP
- Cash generated by operations is expected to be approximately US$160 million
- Capital expenditures are projected to be US$138 million. Approximately US$36 million of the projected 2014 capital expenditures were pre-funded with the proceeds from SXCP's initial public offering in January 2013
