SUNCOKE ENERGY, INC. 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 in our filings with theSEC , including this Quarterly Report on Form 10-Q, and under "Cautionary Statement Concerning Forward-Looking Statements." Currently, such risks and uncertainties also include: SunCoke's ability to manage its business during and after the COVID-19 pandemic; the impact of the COVID-19 pandemic on SunCoke's results of operations, revenues, earnings and cash flows; SunCoke's ability to reduce costs and capital spending in response to the COVID-19 pandemic; SunCoke's balance sheet and liquidity throughout and following the COVID-19 pandemic; SunCoke's prospects for financial performance and achievement of strategic objectives following the COVID-19 pandemic; capital allocation strategy following the COVID-19-related outbreak; and the general impact on our industry and on theU.S. and global economy resulting from COVID-19, including actions by domestic and foreign governments and others to contain the spread, or mitigate the severity, thereof. This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based on financial data derived from the financial statements prepared in accordance withthe United States generally accepted accounting principles ("GAAP") and certain other financial data that is prepared using a non-GAAP measure. For a reconciliation of the non-GAAP measure to its most comparable GAAP component, see "Non-GAAP Financial Measures" at the end of this Item and Note 13 to our consolidated financial statements. Our MD&A is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flow. OverviewSunCoke Energy, Inc. ("SunCoke Energy ," "SunCoke," "Company," "we," "our" and "us") is the largest independent producer of high-quality coke in theAmericas , as measured by tons of coke produced each year, and has over 55 years of coke production experience. Coke is a principal raw material in the blast furnace steelmaking process and is produced by heating metallurgical coal in a refractory oven, which releases certain volatile components from the coal, thus transforming the coal into coke. We also own and operate a logistics business that primarily provides handling and/or mixing services to steel, coke (including some of our domestic cokemaking facilities), electric utility, coal producing and other manufacturing based customers. Cokemaking We have designed, developed, built, own and operate five cokemaking facilities inthe United States ("U.S."), which consist of our Haverhill,Middletown ,Granite City , Jewell andIndiana Harbor cokemaking facilities. These five cokemaking facilities have collective nameplate capacity to produce approximately 4.2 million tons of coke per year. Additionally, we have designed and operate one cokemaking facility inBrazil under licensing and operating agreements on behalf ofArcelorMittal Brasil S.A. ("ArcelorMittal Brazil"), which has approximately 1.7 million tons of annual cokemaking capacity. Our core business model is predicated on providing steelmakers an alternative to investing capital in their own captive coke production facilities. We direct our marketing efforts principally towards steelmaking customers that require coke for use in their blast furnaces. OurU.S. coke sales are made pursuant to long-term, take-or-pay agreements withArcelorMittal USA LLC and/or its affiliates ("AM USA "), AK Steel Holding Corporation ("AK Steel") and United States Steel Corporation, ("U.S. Steel"), who are three of the largest blast furnace steelmakers inNorth America . These coke sales agreements have a weighted average remaining term of approximately four years based on annual nameplate capacity 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 coal component of the Jewell coke price is based on the weighted-average contract price of third-party coal purchases at our Haverhill facility applicable toAM USA coke sales. To date, our coke customers have satisfied their obligations under these agreements. InMarch 2020 , Cleveland-Cliffs Inc., a leading producer of iron ore pellets, completed the acquisition of AK Steel. We do not currently anticipate any impact to our contracts at Haverhill orMiddletown resulting from this transaction. Steelmaking customers continue to operate in a challenging environment. Demand in the steel market has declined dramatically as a result of the economic impacts of the novel coronavirus ("COVID-19"). TheU.S. steel production utilization rate declined approximately 25 percent from a stable 80 percent in December of 2019 to approximately 55 percent in April of 2020. In response to the decline in end user demand as well as in an effort to slow the spread of COVID-19, in 16
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March of 2020, manufacturers began idling plants, which has directly and adversely impacted our customers. Since the outbreak of COVID-19 in theU.S. , total blast furnace output capacity has decreased dramatically. ArcelorMittal has idled its No. 4 blast furnace at itsIndiana Harbor steel mill and the No. 6 blast furnace at itsCleveland flat-rolled steel mill. AK Steel has banked its Dearborn Works blast furnace inDetroit .U.S. Steel has idled the No. 4, No. 6 and No. 8 blast furnaces at its Gary Works flat-rolled mill inIndiana , the No. 1 blast furnace at its Mon Valley Works mill, the Blast Furnace A at its Granite City Works flat-rolled mill inIllinois and the Blast Furnace D4 at its Great Lakes Works mill inMichigan . In addition to the idling of these blast furnaces, other steelmaking facilities that continue to operate in theU.S. have turned down production. We expect it will take substantial time to return to normalized production levels, but given current market uncertainties, we cannot predict when production levels will normalize. Before steel production ramps back up, stockpiles throughout the supply chain likely will be utilized and end user demand will likely not return to its previous levels until the overall economy can recover. OurGranite City facility and the first phase of our Haverhill facility, or Haverhill I, have steam generation facilities, which use hot flue gas from the cokemaking process to produce steam for sale to customers, pursuant to steam supply and purchase agreements.Granite City sells steam toU.S. Steel and Haverhill I provides steam, at minimal cost, toAltivia Petrochemicals, LLC . OurMiddletown facility and the second phase of our Haverhill facility, or Haverhill II, have cogeneration plants that use the hot flue gas created by the cokemaking process to generate electricity, which either is sold into the regional power market or to AK Steel pursuant to energy sales agreements. The following table sets forth information about our cokemaking facilities and our coke and energy sales agreements as ofMarch 31, 2020 : Annual Cokemaking Nameplate 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 AM USA 1962 December 2020 142 720 Partially used for thermal coal drying Indiana Harbor East Chicago, Indiana AM USA 1998 October 2023 268 1,220 Heat for power generation Haverhill Franklin Furnace, Ohio AM USA 2005 December 2020 100 550 Process steam Phase I Haverhill Franklin Furnace, Ohio AK Steel 2008 December 2021 100 550 Power generation Phase II Granite City Granite City, Illinois U.S. Steel 2009 December 2024 120 650 Steam for power generation Middletown(1) Middletown, Ohio AK Steel 2011 December 2032 100 550 Power generation 830 4,240 Operated: Vitória Vitória, Brazil ArcelorMittal 2007 January 2023 320 1,700 Steam for power Brazil generation 1,150 5,940
(1) Cokemaking nameplate capacity represents stated capacity for production of
blast furnace coke. The
sales on a "run of oven" basis, which includes both blast furnace coke and
small coke.
thousand tons per year.
Logistics
Our logistics business consists ofConvent Marine Terminal ("CMT"),Kanawha River Terminal ("KRT"),Lake Terminal andDismal River Terminal ("DRT"). CMT is one of the largest export terminals on theU.S. Gulf Coast . CMT provides strategic access to seaborne markets for coal and other industrial materials. The terminal provides loading and unloading services and has direct rail access and has the current capability to transload 15 million tons annually with its top of the line shiploader. The facility serves coal mining customers as well as other merchant business, including aggregates (crushed stone) and petroleum coke. CMT's efficient barge unloading capabilities complement its rail and truck offerings and provide the terminal with the ability to transload and mix a significantly broader variety of materials, including petroleum coke and other materials from barges at its dock. KRT is a leading metallurgical and thermal coal mixing and handling 17
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terminal service provider with collective capacity to mix and transload 25 million tons annually through its two operations inWest Virginia .Lake Terminal and DRT provide coal handling and mixing services to SunCoke'sIndiana Harbor and Jewell cokemaking operations, respectively. Our logistics business has the collective capacity to mix and/or transload more than 40 million tons of coal and other aggregates annually and has storage capacity of approximately 3 million tons. Our terminals act as intermediaries between our customers and end users by providing transloading and mixing services. Materials are transported in numerous ways, including rail, truck, barge or ship. We do not take possession of materials handled but instead derive our revenues by providing handling and/or mixing services to our customers on a per ton basis. Revenues are recognized when services are provided as defined by customer contracts. Logistics services provided to our domestic cokemaking facilities are provided under contracts with terms equivalent to those of arm's-length transactions. Certain CMT customers are impacted by seaborne export market dynamics. Fluctuations in the benchmark price for coal delivery into northwestEurope , as referenced in the Argus/McCloskey's Coal Price Index report ("API2 index price"), as well as Newcastle index coal prices, as referenced in the Argus/McCloskey's Coal Price Index report ("API6 index price"), which reflect low-ash coal prices shipped fromAustralia , contribute to our customers' decisions to place tons into the export market and thus impact transloading volumes through CMT. Our KRT terminals serve two primary domestic markets: metallurgical coal trade and thermal coal trade. Metallurgical markets are primarily impacted by steel prices and blast furnace operating levels, whereas thermal markets are impacted by natural gas prices and electricity demand. API2 and API6 prices declined slightly during the first three months of 2020 by approximately 8 percent and 4 percent, respectively, reflecting the continued reduced demand fromEurope ,Asia and the Mediterranean regions and increasing Russian coal supply. Additionally, in an effort to slow the spread of COVID-19, many international ports have been closed, and therefore, tons leaving theU.S. through CMT are even lower than current API2 and API6 prices would normally indicate. A large portion of our logistics business has historically been from a long-term, take-or-pay contract withForesight Energy LLC ("Foresight"). OnMarch 10, 2020 , Foresight filed for Chapter 11 bankruptcy and our contract with Foresight was subsequently rejected. CMT is handling Foresight tons in 2020 under a new contract withJavelin Global Commodities (UK) Ltd ("Javelin") and negotiating a longer term contract. Our 2020 contract with Javelin is at a lower rate than our previous contract with Foresight, which was contemplated in our original 2020 guidance. We expect a longer term contract would also be at a lower rate, which was contemplated in the valuation assumptions that resulted in impairment charges recorded to our Logistics segment during 2019. First Quarter Key Financial Results Our consolidated results of operations were as follows: Three Months Ended March 31, 2020 2019 Decrease (Dollars in millions) Net income $ 5.9$ 12.2 $ (6.3 ) Net cash provided by operating activities $ 26.8$ 35.3 $ (8.5 ) Adjusted EBITDA $ 62.1$ 67.3 $ (5.2 ) The first quarter of 2020 was minimally impacted by COVID-19. Our Domestic Coke segment delivered strong operating results, driven by the ongoing success of our oven rebuild program atIndiana Harbor during the three months endedMarch 31, 2020 , which was more than offset by a decline in volumes in our Logistics segment. See detailed analysis of the quarter's results throughout the MD&A. See Note 13 to our consolidated financial statements for the definition and reconciliation of Adjusted EBITDA. Recent Developments • COVID-19. OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. All of SunCoke's facilities have continued to operate during shelter-in-place mandates in every state where we operate due to our inclusion in the Critical Manufacturing Sector as defined by theU.S. Department of Homeland Security and recognition as an essential business by state and local government authorities. Our top priority has been and continues to be the safety and health of our employees and contractors. In response to the outbreak, we established an internal task force of subject matter experts, initiated enhanced health and safety measures across our facilities and enacted a work from home program for all qualifying personnel. More specifically, 18
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we have implemented screening processes at each of our sites, which may include screening questionnaires and temperature checks for employees, contractors and other service providers, to adhere to guidance from theU.S. Centers for Disease Control and Prevention and local health and governmental authorities with respect to social distancing and physical separation. Additionally, we have increased cleaning and disinfecting programs at each of our sites. We are closely monitoring the impact of the outbreak of COVID-19 on all aspects of our business, including how it has and will impact our suppliers and customers. We have not experienced any significant impacts or interruptions with respect to our ability to procure coal as a result of COVID-19, and we will continue to closely monitor our inventory levels to mitigate the risk of any potential supply interruptions. The impacts of COVID-19 and related economic conditions on the Company's future results are uncertain at this time and outside the Company's control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving rapidly and in ways that are difficult or impossible to anticipate. In addition, because COVID-19 did not materially affect SunCoke's financial results in the first quarter of 2020, these results may not be indicative of the impact COVID-19 could have on the Company's results for the remainder of 2020. See "Part II - Item 1A - Risk Factors" for additional discussion. • 2020 Guidance. While COVID-19 did not materially impact SunCoke's results
of operations during the first quarter of 2020, the resulting economic
environment has begun to impact our customers. We are currently exploring
contract restructuring alternatives with our customers to address
short-term market challenges and long-term coke requirements. As these
discussions of short-term supply relief with our customers are ongoing,
SunCoke is withdrawing the previously described 2020 outlook, included in
our Annual Report on Form 10-K for the year ended
will provide an updated 2020 outlook when these discussions are complete.
InMay 2020 , SunCoke received notice fromAM USA declaring a force majeure event under two respective coke supply agreements: the Haverhill Coke Purchase Agreement and the Jewell Coke Supply Agreement and their related amendments (collectively, "theAM USA Agreements").AM USA claims that disruptions to the steel industry due to COVID-19 make it impossible forAM USA to accept coke as required in theAM USA Agreements or to store coke. The impact of this force majeure claim, were it found to be valid, could be material to our results of operations. However, SunCoke disputesAM USA's force majeure claim based on the terms of theAM USA Agreements and operating history. At the same time we are disputing the force majeure claim, the Company intends to work withAM USA to achieve a mutually agreeable commercial resolution. • 2020 Revised Key Initiatives. With these new challenges, SunCoke's primary focus in 2020 will be to: • Successfully navigate through the COVID-19 pandemic. SunCoke will continue to make every effort to protect the safety and well-being of employees and contractors during this health crisis. • Deliver operational excellence and optimize asset base.
SunCoke will
continue to deliver strong operational performance and asset
optimization while following all safety guidelines. We will continue
to pursue opportunities to optimize our asset base at CMT. We
anticipate this will be a multi-year process to recapture the lost
earnings of this facility, and while we expect the current
environment will pose challenges, we will continue to work
diligently in 2020 to reposition CMT from primarily a coal export
terminal to a broad based and diversified terminal.
• Support customer base and successful relief negotiation. SunCoke's
business model is based on long-term partnerships with our coke
customers. We will support our customers to help them navigate
through the current crisis, while providing long-termcertainty by
navigating through successful customer relief negotiations and our
2020 contract renewals.
• Maintain asset integrity for long-term viability. SunCoke will
ensure that assets are safeguarded during the current crisis
situation to minimize any potential negative impact in the
long-term. We will ensure our asset base is properlymaintained,
even as operating levels may fluctuate in the near term.
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Results of Operations
The following table sets forth amounts from the Consolidated Statements of
Income for the three months ended
Three Months Ended March 31,
2020 2019 Increase (Decrease)
(Dollars in millions)
Revenues
Sales and other operating revenue
(8.6 )
Costs and operating expenses
Cost of products sold and operating
expenses 304.4 307.4 (3.0 )
Selling, general and administrative
expenses 16.2 16.7 (0.5 )
Depreciation and amortization expense 34.1 37.2 (3.1 )
Total costs and operating expenses 354.7 361.3 (6.6 )
Operating income 28.0 30.0 (2.0 )
Interest expense, net 14.6 14.8 (0.2 )
Gain on extinguishment of debt (2.9 ) - (2.9 )
Income before income tax expense 16.3 15.2 1.1
Income tax expense 10.4 3.0 7.4
Net income 5.9 12.2 (6.3 )
Less: Net income attributable to
noncontrolling interests 1.0 2.4 (1.4 )
Net income attributable to SunCoke
Energy, Inc. $ 4.9 $ 9.8 $ (4.9 )
Sales and Other Operating Revenue and Costs of Products Sold and Operating
Expenses. Sales and other operating revenue and costs of products sold and
operating expenses decreased for the three months ended March 31, 2020 compared
to the same prior year period, primarily due to the pass-through of lower coal
prices in our Domestic Coke segment and lower volumes in our Logistics segment.
Higher volumes in our Domestic Coke segment partly offset these decreases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2020 was consistent
with the prior year period.
Depreciation and Amortization Expense. Depreciation and amortization expense for
the three months ended March 31, 2020 decreased by $2.8 million as a result of
the impairment to our Logistics assets, which was recorded in the third quarter
of 2019. Moreover, the absence of additional depreciation associated with the
upgrades to certain heat recovery steam generators was mostly offset by
depreciation expense of $2.0 million on the completed oven rebuilds at Indiana
Harbor throughout 2019.
Interest Expense, Net. Interest expense, net benefited during the three months
ended March 31, 2020 , from lower debt balances, which was mostly offset by the
absence of $1.2 million of capitalized interest in the current year period.
Income Tax Expense. The income tax expense recorded during the three months
ended March 31, 2020 reflects a revaluation in deferred tax assets, resulting in
deferred income tax expense of $6.5 million . See Note 4 to our consolidated
financial statements.
Noncontrolling Interest. Net income attributable to noncontrolling interest
represents a 14.8 percent third-party interest in our Indiana Harbor cokemaking
facility. Prior to June 28, 2019 , when SunCoke acquired all publicly held
Partnership common units, net income attributable to noncontrolling interest
also represented the common public unitholders' interest in the SunCoke Energy
Partners, L.P. ("the Partnership").
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The following table provides details into net income attributable to
noncontrolling interest:
Three Months Ended March 31,
2020 2019 Increase (Decrease)
(Dollars in millions)
Net income attributable to third-party
interest in our Indiana Harbor cokemaking
facility $ 1.0 $ 0.7 $ 0.3
Net income attributable to the
Partnership's common public unitholders' $ - $ 1.7 $ (1.7 )
Net income attributable to noncontrolling
interest $ 1.0 $ 2.4 $ (1.4 )
Results of Reportable Business Segments
We report our business results through three segments:
• Domestic Coke consists of our Jewell facility, located in
Granite City facility located inGranite City, Illinois , and ourMiddletown facility located inMiddletown, Ohio .
• Brazil Coke consists of operations in Vitória,
the ArcelorMittal Brazil cokemaking facility.
• Logistics consists of CMT, located in
in
and DRT are located adjacent to our
cokemaking facilities, respectively.
Corporate expenses that can be identified with a segment have been included in
determining segment results. The remainder is included in Corporate and Other,
including activity from our legacy coal mining business.
Management believes Adjusted EBITDA is an important measure of operating
performance, which is used as the primary basis for the chief operating decision
maker 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 GAAP. See Note 13 to our consolidated financial statements.
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Segment Financial and Operating Data
The following tables set forth financial and operating data:
Three Months Ended March 31,
2020 2019 Increase (Decrease)
(Dollars in millions)
Sales and other operating revenues:
Domestic Coke $ 365.2 $ 359.3 $ 5.9
Brazil Coke 8.5 9.7 (1.2 )
Logistics 9.0 22.3 (13.3 )
Logistics intersegment sales 6.6 6.5 0.1
Elimination of intersegment sales (6.6 ) (6.5 ) (0.1 )
Total sales and other operating
revenues $ 382.7 $ 391.3 $ (8.6 )
Adjusted EBITDA(1):
Domestic Coke $ 63.4 $ 58.5 $ 4.9
Brazil Coke 4.1 4.5 (0.4 )
Logistics 3.3 12.7 (9.4 )
Corporate and Other(2) (8.7 ) (8.4 ) (0.3 )
Total Adjusted EBITDA $ 62.1 $ 67.3 $ (5.2 )
Coke Operating Data:
Domestic Coke capacity utilization 101 % 96 % 5 %
Domestic Coke production volumes
(thousands of tons) 1,069 1,006 63
Domestic Coke sales volumes (thousands
of tons) 1,064 1,004 60
Domestic Coke Adjusted EBITDA per
ton(3) $ 59.59 $ 58.27 $ 1.32
Brazilian Coke production-operated
facility (thousands of tons) 410 419 (9 )
Logistics Operating Data:
Tons handled (thousands of tons) 4,214 5,784 (1,570 )
(1) See Note 13 in our consolidated financial statements for both the
definition of Adjusted EBITDA and the reconciliation from GAAP to the
non-GAAP measurement for the three months ended
(2) Corporate and Other includes the activity from our legacy coal mining
business, which contributed Adjusted EBITDA losses of $2.1 million and
$1.8 million during the three months ended March 31, 2020 and 2019,
respectively.
(3) Reflects Domestic Coke Adjusted EBITDA divided by Domestic Coke sales
volumes.
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Analysis of Segment Results
Domestic Coke
The following table sets forth year-over-year changes in the Domestic Coke
segment's sales and other operating revenues and Adjusted EBITDA results:
Three Months Ended March 31, 2020 vs. 2019
Sales and other
operating revenue Adjusted EBITDA
(Dollars in millions)
Prior year period $ 359.3 $ 58.5
Volumes(1) 21.9 6.3
Coal cost recovery and yields(2) (17.7 ) (2.5 )
Operating and maintenance costs 0.1 1.5
Energy and other 1.6 (0.4 )
Current year period $ 365.2 $ 63.4
(1) The increase in volumes was driven by improved performance from rebuilt
ovens at our
(2) The pass through of lower coal prices resulted in the decline in revenues.
Adjusted EBITDA was negatively impacted by lower coal cost recovery at our
Jewell cokemaking facility.
Logistics
The following table sets forth year-over-year changes in the Logistics segment's sales and other operating revenues and Adjusted EBITDA results:
Three Months Ended March 31, 2020 vs. 2019
Sales and other
operating
revenue,
inclusive of
intersegment
sales Adjusted EBITDA
(Dollars in millions)
Prior year period $ 28.8 $ 12.7
Transloading volumes(1) (8.1 ) (7.3 )
Price/margin impact of mix in transloading services(2) (1.7 ) (1.7 )
Other(3) (3.4 ) (0.4 )
Current year period $ 15.6 $ 3.3
(1) Lower volumes were the result of depressed thermal coal export pricing,
which has adversely impacted certain customers at CMT and contributed to
the bankruptcy of Foresight.
(2) Reflects lower rates on CMT's contract with Javelin as compared to the
contract with Foresight in the prior year period.
(3) Other decreased due to lower ancillary revenue, which decreased with lower
tons at CMT.
Revenues were$8.5 million and Adjusted EBITDA was$4.1 million during the three months endedMarch 31, 2020 , both of which reflect lower sales volumes. Corporate and Other Corporate and Other Adjusted EBITDA was a loss of$8.7 million for the three months endedMarch 31, 2020 , which was comparable to results in the prior year period. 23
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Liquidity and Capital Resources Our primary liquidity needs are to fund working capital, fund investments, service our debt, maintain cash reserves and replace partially or fully depreciated assets and other capital expenditures. Our sources of liquidity include cash generated from operations, borrowings under our revolving credit facility and, from time to time, debt and equity offerings. We believe our current resources are sufficient to meet our working capital requirements for our current business for the foreseeable future. As ofMarch 31, 2020 , we had$235.8 million of cash and cash equivalents and$88.2 million of borrowing availability under our credit facility. During the first quarter of 2020, the Company increased its borrowings under its Revolving Facility by$156.7 million in order to enhance its cash position and preserve financial flexibility. This action safeguards the business, as well as the Company's customers, suppliers, workforce and investors and ensures that the Company will maintain the cash and balance sheet strength required to navigate the current market conditions. The proceeds from the Revolving Facility are being held as cash on the Company's balance sheet and may be used for working capital or other corporate purposes. During the first quarter of 2020, the U.S. Department ofLabor's Division of Coal Mine Workers' Compensation ("DCMWC") requested SunCoke provide additional collateral of approximately$32 million to secure certain of its black lung obligations. SunCoke exercised its right to appeal the DCMWC's determination and will provide additional information supporting the Company's position. If the Company's appeal is unsuccessful, the Company may be required to provide additional collateral to receive its self-insurance reauthorization from the DCMWC, which could potentially reduce the Company's liquidity. See further discussion in Note 8 to our consolidated financial statements. Cash Flow Summary The following table sets forth a summary of the net cash provided by (used in) operating, investing and financing activities for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (Dollars in millions) Net cash provided by operating activities $ 26.8 $ 35.3 Net cash used in investing activities (22.8 ) (20.9 ) Net cash provided by (used in) financing activities 134.7
(16.2 )
Net increase (decrease) in cash and cash equivalents
Cash Flows from Operating Activities Net cash provided by operating activities decreased by$8.5 million to$26.8 million for the three months endedMarch 31, 2020 as compared to the corresponding prior year period, reflecting lower operating results primarily in our logistics business. Primary working capital, which is comprised of accounts receivable, inventories and accounts payable, reflects timing of coal purchases but was reasonably consistent with the same prior year period. Cash Flows from Investing Activities Net cash used in investing activities increased by$1.9 million to$22.8 million for the three months endedMarch 31, 2020 as compared to the corresponding prior year period. The current year period included an increase in capital spending on certain upgrades in order to improve the long-term reliability and operational performance of our assets, which was partially offset by the absence of capital spending in connection with the environmental remediation project. Cash Flows from Financing Activities Net cash provided by financing activities was$134.7 million for the three months endedMarch 31, 2020 as compared to net cash used in financing activities of$16.2 million in the corresponding prior year period. During the first quarter of 2020, the Company borrowed an additional$156.7 million on its Revolving Facility, as described above. These cash proceeds were partially offset by$8.9 million of cash payments to redeem$12.0 million face value of 2025 Senior Notes, repurchases of the Company's shares for total cash payments of$7.0 million under the repurchase programs discussed below and dividend payments to stockholders of$5.0 million . Additionally, the current period benefited from the absence of distribution payments to public unitholders of$7.1 million prior to the Simplification Transaction, which is described in Note 2 to our consolidated financial statements. See further discussion of debt activities in Note 7 to our consolidated financial statements. Dividends OnJanuary 29, 2020 , SunCoke's Board of Directors declared a cash dividend of$0.06 per share of the Company's common stock. This dividend was paid onMarch 2, 2020 , to stockholders of record onFebruary 18, 2020 . 24
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Additionally, onMay 7, 2020 , SunCoke's Board of Directors declared a cash dividend of$0.06 per share of the Company's common stock. This dividend will be paid onJune 4, 2020 , to stockholders of record onMay 21, 2020 . Share Repurchases During the first quarter of 2020, the Company repurchased$7.0 million of our common stock, or 1.6 million shares, in the open market for an average share price of$4.29 , leaving$96.3 million available under the authorized repurchase program as ofMay 8, 2020 . SunCoke has temporarily suspended additional repurchases under the authorized repurchase program. Refer to Item 2 of Part II to this Quarterly Report on Form 10-Q for additional details on the repurchase program. Covenants As ofMarch 31, 2020 , we were in compliance with all applicable debt covenants. We do not anticipate a violation of these covenants nor do we anticipate that any of these covenants will restrict our operations or our ability to obtain additional financing. See Note 7 to the consolidated financial statements for details on debt covenants. Credit Rating InMarch 2020 , S&P Global Ratings reaffirmed our corporate credit rating of BB- (stable). InApril 2020 , Moody's Investors Service reaffirmed our corporate credit rating of B1 and changed the rating outlook to negative. Capital Requirements and Expenditures Our operations are capital intensive, requiring significant investment to upgrade or enhance existing operations and to meet environmental and operational regulations. The level of future capital expenditures will depend on various factors, including market conditions and customer requirements, and may differ from current or anticipated levels. Material changes in capital expenditure levels may impact financial results, including but not limited to the amount of depreciation, interest expense and repair and maintenance expense. Our capital requirements have consisted, and are expected to consist, primarily of: • Ongoing capital expenditures required to maintain equipment reliability, the integrity and safety of our coke ovens and steam generators and to comply with environmental regulations. Ongoing
capital expenditures are made to replace partially or fully depreciated
assets in order to maintain the existing operating capacity of the
assets and/or to extend their useful lives and also include new
equipment that improves the efficiency, reliability or effectiveness of
existing assets. Ongoing capital expenditures do not include normal
repairs and maintenance expenses, which are expensed as incurred;
• Environmental remediation project expenditures required to implement
design changes to ensure that our existing facilities operate in
accordance with existing environmental permits; and
• Expansion capital expenditures to acquire and/or construct
complementary assets to grow our business and to expand existing
facilities as well as capital expenditures made to enable the renewal
of a coke sales agreement and/or logistics service agreement and on
which we expect to earn a reasonable return.
The following table summarizes ongoing capital expenditures and environmental
remediation projects:
Three Months Ended March 31,
2020 2019
(Dollars in millions)
Ongoing capital(1) $ 22.8 $ 16.4
Environmental remediation projects(2) - 4.5
Total capital expenditures(3) $ 22.8 $ 20.9 (1) Includes
rebuild initiative at our
ended
(2) Includes
environmental remediation projects during the three months ended
2019. The environmental project at
2019.
(3) Reflects actual cash payments during the periods presented for our capital
requirements.
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Off-Balance Sheet Arrangements We have letters of credit, short term operating leases and outstanding surety bonds to secure reclamation and other performance commitments. There have been no material changes to these arrangements during the three months endedMarch 31, 2020 . Please refer to our Annual Report on Form 10-K filed onFebruary 20, 2020 for further disclosure of these arrangements. Other than these arrangements, the Company has not entered into any transactions, agreements or other contractual arrangements that would result in material off-balance sheet liabilities. Critical Accounting Policies There have been no significant changes to our accounting policies during the three months endedMarch 31, 2020 . Please refer to our Annual Report on Form 10-K filed onFebruary 20, 2020 for a summary of these policies. Recent Accounting Standards There have been no new accounting standards applicable toSunCoke Energy, Inc. that have been adopted during the three months endedMarch 31, 2020 . Non-GAAP Financial Measures In addition to the GAAP results provided in this Quarterly Report on Form 10-Q, we have provided a non-GAAP financial measure, Adjusted EBITDA. Our management, as well as certain investors, use this non-GAAP measure to analyze our current and expected future financial performance. This measure is not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies. See Note 13 in our consolidated financial statements for both the definition of Adjusted EBITDA and its reconciliation from GAAP to the non-GAAP measurement for the three months endedMarch 31, 2020 and 2019, respectively. Guarantor Financial and Non-Financial Disclosures The Company has an existing shelf registration statement, which was filed onNovember 8, 2019 , upon the expiration of the prior shelf registration statement, for the offering of debt and/or securities on a delayed or continuous basis and is presenting these guarantor financial and non-financial disclosures in connection therewith. The following information has been prepared and presented pursuant to amended SEC Rule 3-10 of Regulation S-X and new SEC Rule 13-01 of Regulation S-X, which were adopted by theSEC onMarch 2, 2020 . Although the amendment and new rule do not become effective untilJanuary 4, 2021 , early adoption is permitted. The Company early adopted these amendments onMarch 31, 2020 . For purposes of the following information,SunCoke Energy, Inc. is referred to as "Issuer." All 100 percent owned subsidiaries of the Company, includingFinance Corp. and its consolidated subsidiaries, are expected to serve as guarantors of obligations ("Guarantor Subsidiaries") included in the shelf registration statement, other than theIndiana Harbor partnership and certain of the Company's corporate financing, international and legacy coal mining subsidiaries ("Non-Guarantors"). These guarantees will be full and unconditional (subject, in the case of the Guarantor Subsidiaries, to customary release provisions as described below) and joint and several. The guarantee of a Guarantor Subsidiary will terminate upon: • a sale or other disposition of the Guarantor Subsidiary or of all or substantially all of its assets;
• a sale of the majority of the capital stock of a Guarantor Subsidiary
to a third-party, after which the Guarantor Subsidiary is no longer a
"Restricted Subsidiary" in accordance with the indenture governing the
notes;
• the liquidation or dissolution of a Guarantor Subsidiary so long as no
"Default" or "Event of Default", as defined under the indenture
governing the notes, has occurred as a result thereof;
• the designation of a Guarantor Subsidiary as an "unrestricted
subsidiary" in accordance with the indenture governing the notes;
• the requirements for defeasance or discharge of the indenture governing
the notes having been satisfied; or
• the release, other than the discharge through payments by a Guarantor
Subsidiary, from other indebtedness that resulted in the obligation of
the Guarantor Subsidiary under the indenture governing the notes.
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The following tables present summarized financial information for the Issuer and
the Guarantor Subsidiaries on a combined basis after intercompany balances and
transactions between the Issuer and Guarantor Subsidiaries have been eliminated
and excluding investment in and equity in earnings from the Non-Guarantor
Subsidiaries:
Statements of Operations Issuer and Guarantor Subsidiaries
Three Months Ended Year Ended December
March 31, 2020 31, 2019
(Dollars in millions)
Revenues $ 283.3 $ 1,224.9
Long-lived asset and goodwill impairment - 247.5
Costs and operating expenses 258.4 1,114.7
Operating income (loss) 24.9 (137.3 )
Net income (loss) $ 3.0 $ (139.6 )
Balance Sheets Issuer and Guarantor Subsidiaries
March 31, 2020 December 31, 2019
(Dollars in millions)
Assets:
Cash $ 232.0 $ 93.3
Current receivables from Non-Guarantor subsidiaries 154.8 149.3
Other current assets 190.0 193.6
Properties, plants and equipment, net 1,194.5 1,210.0
Other non-current assets 53.0 54.2
Total assets $ 1,824.3 $ 1,700.4
Liabilities:
Current liabilities $ 132.6 $ 150.8
Long-term debt and financing obligation 924.8 780.0
Long-term payable to Non-Guarantor subsidiaries 123.7 127.2
Other long-term liabilities 236.1 226.0
Total liabilities $ 1,417.2 $ 1,284.0
Cyber Security Update
On February 19, 2020 , we announced that on February 18, 2020 we detected a
security incident affecting several servers within certain data centers.
Immediately, we took steps to identify and contain the situation, which included
engaging a third-party incident response team to conduct the investigation. We
assessed the impact of the incident and did not identify any impact to our
financial reporting systems. As of March 31, 2020 , all material remediation and
investigation activities have been completed. We incurred immaterial costs to
perform these necessary remediation efforts during the three months ended March
31, 2020 . We are not aware of any evidence that any customer, supplier, or
employee data has been improperly misused or transferred by any third party.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Quarterly Report on Form 10-Q,
including, among others, in the sections entitled "Risk Factors," "Quantitative
and Qualitative Disclosures About Market Risk" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Such forward-looking
statements are based on management's beliefs and assumptions and on information
currently available. Forward-looking statements include, but are not limited to,
the information concerning our expectations regarding the future impact of
COVID-19 and the related economic conditions on our business, financial
condition and results of operations, possible or assumed future results of
operations, business strategies, financing plans, competitive position,
potential growth opportunities, potential operating performance, the effects of
competition and the effects of future legislation or regulations.
Forward-looking statements include all statements that are not historical facts
and may be identified by the use of forward-looking terminology such as the
words "believe," "expect," "plan," "intend," "anticipate," "estimate,"
"predict," "potential," "continue," "may," "will," "should" or the negative of
these terms or similar expressions. In particular, statements in this Quarterly
Report on Form 10-Q concerning future dividend declarations are subject to
approval by our Board of Directors and will be based upon circumstances then
existing.
Forward-looking statements involve risks, uncertainties and assumptions. Actual
results may differ materially from those expressed in these forward-looking
statements. You should not put undue reliance on any forward-looking statements.
We do not have any intention or obligation to update any forward-looking
statement (or its associated cautionary language), whether as a result of new
information or future events, after the date of this Quarterly Report on Form
10-Q, except as required by applicable law.
The risk factors discussed in "Risk Factors" in our Annual Report on Form 10-K
and this Quarterly Report on Form 10-Q could cause our results to differ
materially from those expressed in the forward-looking statements made in this
Quarterly Report on Form 10-Q. There also may be other risks that are currently
unknown to us or that we are unable to predict at this time. Such risks and
uncertainties include, without limitation:
• the potential operating and financial impacts on our operations, or
those of our customers and suppliers, and the general impact on our
industry and on the
any other widespread contagion, including actions by foreign and
domestic governments and others to contain the spread, or mitigate the
severity, thereof;
• volatility and cyclical downturns in the steel industry and in other
industries in which our customers and/or suppliers operate;
• changes in the marketplace that may affect our cokemaking business,
including the supply and demand for our coke products, as well as
increased imports of coke from foreign producers;
• volatility, cyclical downturns and other change in the business climate
and market for coal, affecting customers or potential customers for our
logistics business;
• changes in the marketplace that may affect our logistics business,
including the supply and demand for thermal and metallurgical coal;
• severe financial hardship or bankruptcy of one or more of our major
customers, or the occurrence of a customer default or other event
affecting our ability to collect payments from our customers;
• our ability to repair aging coke ovens to maintain operational performance;
• age of, and changes in the reliability, efficiency and capacity of the
various equipment and operating facilities used in our cokemakingoperations, and in the operations of our subsidiaries major customers,
business partners and/or suppliers;
• changes in the expected operating levels of our assets;
• changes in the level of capital expenditures or operating expenses,
including any changes in the level of environmental capital, operating
or remediation expenditures;
• changes in levels of production, production capacity, pricing and/or
margins for coal and coke;
• changes in product specifications for the coke that we produce or the
coals we mix, store and transport;
• our ability to meet minimum volume requirements, coal-to-coke yieldstandards and coke quality standards in our coke sales agreements;
• variation in availability, quality and supply of metallurgical coal
used in the cokemaking process, including as a result of
non-performance by our suppliers;
• effects of geologic conditions, weather, natural disasters and other
inherent risks beyond our control;
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• effects of adverse events relating to the operation of our facilities
and to the transportation and storage of hazardous materials or
regulated media (including equipment malfunction, explosions, fires,
spills, impoundment failure and the effects of severe weather
conditions);
• the existence of hazardous substances or other environmental
contamination on property owned or used by us;
• required permits and other regulatory approvals and compliance with
contractual obligations and/or bonding requirements in connection with
our cokemaking, logistics operations, and/or former coal mining
activities;
• the availability of future permits authorizing the disposition of
certain mining waste and the management of reclamation areas;
• risks related to environmental compliance;
• our ability to comply with applicable federal, state or local laws and
regulations, including, but not limited to, those relating to
environmental matters;
• risks related to labor relations and workplace safety;
• availability of skilled employees for our cokemaking, and/or logistics
operations, and other workplace factors;
• our ability to service our outstanding indebtedness;
• our indebtedness and certain covenants in our debt documents;
• our ability to comply with the covenants and restrictions imposed by
our financing arrangements;
• changes in the availability and cost of equity and debt financing;
• impacts on our liquidity and ability to raise capital as a result of
changes in the credit ratings assigned to our indebtedness;
• competition from alternative steelmaking and other technologies that
have the potential to reduce or eliminate the use of coke;
• our dependence on, relationships with, and other conditions affecting
our customers;
• our dependence on, relationships with, and other conditions affecting
our suppliers;
• nonperformance or force majeure by, or disputes with, or changes in
contract terms with, major customers, suppliers, dealers, distributors
or other business partners;
• effects of adverse events relating to the business or commercial
operations of our customers and/or suppliers;
• changes in credit terms required by our suppliers;
• our ability to secure new coal supply agreements or to renew existing
coal supply agreements;
• effects of railroad, barge, truck and other transportation performance
and costs, including any transportation disruptions;
• our ability to enter into new, or renew existing, long-term agreements
upon favorable terms for the sale of coke, steam, or electric power, or
for handling services of coal and other aggregates (including
transportation, storage and mixing);
• our ability to enter into new, or renew existing, agreements upon
favorable terms for logistics services;
• our ability to successfully implement domestic and/or international
growth strategies;
• our ability to identify acquisitions, execute them under favorable
terms, and integrate them into our existing business operations;
• our ability to realize expected benefits from investments and acquisitions;
• our ability to enter into joint ventures and other similar arrangements
under favorable terms;
• our ability to consummate assets sales, other divestitures and
strategic restructuring in a timely manner upon favorable terms, and/or
realize the anticipated benefits from such actions;
• our ability to consummate investments under favorable terms, including
with respect to existing cokemaking facilities, which may utilize
by-product technology, and integrate them into our existing businesses
and have them perform at anticipated levels;
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• our ability to develop, design, permit, construct, start up, or operate
new cokemaking facilities in the
• disruption in our information technology infrastructure and/or loss of
our ability to securely store, maintain, or transmit data due to
security breach by hackers, employee error or malfeasance, terrorist
attack, power loss, telecommunications failure or other events;
• the accuracy of our estimates of reclamation and other environmental
obligations;
• risks related to obligations under mineral leases retained by us inconnection with the divestment of our legacy coal mining business;
• risks related to the ability of the assignee(s) to perform in
compliance with applicable requirements under mineral leases assigned
in connection with the divestment of our legacy coal mining business;
• proposed or final changes in existing, or new, statutes, regulations,
rules, governmental policies and taxes, or their interpretations,
including those relating to environmental matters and taxes;
• proposed or final changes in accounting and/or tax methodologies, laws,
regulations, rules, or policies, or their interpretations, including
those affecting inventories, leases, post-employment benefits, income,
or other matters;
• changes in federal, state, or local tax laws or regulations, including
the interpretations thereof;
• claims of noncompliance with any statutory or regulatory requirements;
• changes in insurance markets impacting cost, level and/or types of
coverage available, and the financial ability of our insurers to meet
their obligations;
• inadequate protection of our intellectual property rights;
• volatility in foreign currency exchange rates affecting the markets and
geographic regions in which we conduct business; and
• historical consolidated financial data may not be reliable indicators
of future results.
The factors identified above are believed to be important factors, but not
necessarily all of the important factors, that could cause actual results to
differ materially from those expressed in any forward-looking statement made by
us. Other factors not discussed herein also could have material adverse effects
on us. All forward-looking statements included in this Quarterly Report on Form
10-Q are expressly qualified in their entirety by the foregoing cautionary
statements.
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