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 blast furnace ("furnace") 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. To diversify our business and customer base, SunCoke has been exploring the foundry coke market and testing production capacity. We expect we will be in a position to produce and sell foundry coke and by-product industrial coke in 2021. Foundry coke is a high-quality grade of coke that is used at foundries to melt iron and various metals in cupola furnaces. 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 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 six 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. Steelmaking customers continue to operate in a challenging environment. In response to the decline in end user demand as well as in an effort to slow the spread of the novel coronavirus ("COVID-19"), inMarch 2020 , end user manufacturers began idling plants, which directly and adversely impacted our customers. As a result,U.S. steel production utilization rate declined approximately 25 percent from a stable 80 percent inDecember 2019 to approximately 55 percent in 18 -------------------------------------------------------------------------------- Table of ContentsJune 2020 . In response to this decrease in demand for steel production, certain blast furnaces have idled and other steelmaking facilities that continue to operate have turned down production. In order to help navigate through this challenging environment, SunCoke has worked with our customers to provide near-term coke supply relief for customers in exchange for extending certain contracts. See further discussion in "Recent Developments." We expect it will take substantial time to return to normalized production levels, but given current market uncertainties and uncertainty regarding the duration, severity and potential resurgence on the COVID-19 pandemic, 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 recovers. 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. Our Haverhill II facility amended agreement with AK Steel expires in 2021, at which time Haverhill II intends to continue to generate electricity for sale at prevailing market rates, either into the regional power market or to AK Steel. The following table sets forth information about our cokemaking facilities and our coke and energy sales agreements as ofJune 30, 2020 : Annual Cokemaking Nameplate Year of Contract Number of Capacity(1) Facility Location CustomerStart Up Expiration Coke Ovens (thousands of tons) Use of Waste Heat Owned and Operated: JewellVansant, Virginia AM USA 1962December 2025 (3) 142 720 Partially used for thermal coal dryingIndiana Harbor East Chicago, Indiana AM USA 1998October 2023 268 1,220 Heat for power generation Haverhill Phase IFranklin Furnace, Ohio AM USA 2005December 2025 (3) 100 550 Process steam Haverhill Phase IIFranklin Furnace, Ohio AK Steel 2008June 2023 (4) 100 550 Power generationGranite City Granite City, Illinois U.S. Steel 2009December 2024 120 650 Steam for power generationMiddletown (2)Middletown, Ohio AK Steel 2011December 2032 100 550 Power generation 830 4,240 Operated: Vitória Vitória,Brazil ArcelorMittal Brazil 2007January 2023 320 1,700 Steam for power generation 1,150 5,940 (1)Cokemaking nameplate capacity represents stated capacity for production of blast furnace coke. The minimum tons in our coke sales agreements may be lower than the annual cokemaking nameplate capacity. (2)TheMiddletown coke sales agreement provides for coke sales on a "run of oven" basis, which includes both blast furnace coke and small coke.Middletown nameplate capacity on a "run of oven" basis is 578 thousand tons per year. (3)InJuly 2020 , the Jewell and Haverhill Phase I contracts withAM USA were amended to extend contract expiration fromDecember 2020 toDecember 2025 . See "Recent Developments" for additional details. (4)InJuly 2020 , the Haverhill Phase II contract with AK Steel was amended to extend the contract expiration fromDecember 2021 toJune 2023 . See "Recent Developments" for additional details. 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 19 -------------------------------------------------------------------------------- Table of Contents 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 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. Materials are transported in numerous ways, including rail, truck, barge or ship. We do not take title of the 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 during the first half of 2020 by approximately 5 percent and 24 percent, respectively, reflecting the continued reduced demand fromEurope ,Asia and the Mediterranean regions and increased Russian coal supply. Additionally, in an effort to slow the spread of COVID-19, many international ports continue to be closed, which has put further pressure on export volumes. Challenging market conditions have also impacted the volume of coal moving through our domestic logistics terminals, including the terminals that serve our own cokemaking facilities as a result of the volume relief provided to our Domestic Coke customers. Historically, a significant portion of our logistics business was derived 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 is in the process of negotiating a longer term contract. Second Quarter Key Financial Results Our consolidated results of operations were as follows: Three Months Ended June 30, Increase Six Months Ended June 30, 2020 2019 (Decrease) 2020 2019 Increase (Decrease) (Dollars in millions) Net income$ 7.8 $ 3.3 $ 4.5 $ 13.7 $ 15.5 $ (1.8) Net cash provided by operating activities$ 21.8 $ 0.3 $ 21.5 $ 48.6 $ 35.6 $ 13.0 Adjusted EBITDA$ 59.0 $ 63.1 $ (4.1) $ 121.1 $ 130.4 $ (9.3) The three and six months endedJune 30, 2020 reflect lower Logistics volumes as well as the impact of volume relief provided to certain Domestic Coke customers beginning during the second quarter, partly offset by the ongoing success of our oven rebuild program atIndiana Harbor . 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, a non-GAAP measure. Recent Developments •COVID-19. OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. Our facilities have continued to operate during the COVID-19 pandemic due to our inclusion in the Critical Manufacturing Sector as defined by theU.S. Department of Homeland Security and the designation 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 20 -------------------------------------------------------------------------------- Table of Contents measures across our facilities and enacted a work from home program for all qualifying personnel. The majority of qualifying personnel have returned to working on-site. We have implemented screening procedures consistent withU.S. Centers for Disease Control ("CDC") recommendations at each of our sites, which may include screen questionnaires and temperature checks for employees, contractors, or other service providers. Additionally, to ensure employee safety, we have also adopted protocols consistent withCDC , state, and local guidance, which include but are not limited to increased cleaning and disinfection, social distancing, physical separations, and, in certain instances, mask-wearing. 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. 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. •Customer Contract Amendments and Revised 2020 Guidance. Throughout the second quarter of 2020, SunCoke has been engaged in discussions with its steelmaking customers regarding market challenges presented by the current COVID-19 global pandemic. These discussions have addressed near-term coke supply relief for customers in exchange for extending certain contracts. InJuly 2020 , SunCoke reached an agreement with AK Steel for a supply reduction of 200 thousand tons of coke in 2020, including a 125 thousand ton reduction at Haverhill II and a 75 thousand ton reduction atMiddletown , in exchange for extending the Haverhill II contract fromDecember 31, 2021 toJune 30, 2023 . Also inJuly 2020 , SunCoke reached an agreement withAM USA to reduce supply by approximately 300 thousand coke tons in 2020 in exchange for extending the Haverhill I and Jewell contracts toDecember 31, 2025 . Under the new contracts, SunCoke will produce a combined 800 thousand tons for the 2021 contract year and a combined 400 thousand tons on an annualized basis for the 2022 through 2025 contract years. In connection with these discussions,AM USA withdrew its notice declaring a force majeure event. As we temporarily ramp down coke production in 2020 and address market conditions in the logistics business, we have taken several steps to reduce costs and optimize our operations. The impact of these actions along with lower volumes will result in a reduction in 2020 Adjusted EBITDA of$40 million to$50 million from our previous expectations. We now expect 2020 Adjusted EBITDA to be between$190 million and$200 million . Additionally, as a result of these changes as well as anticipated changes in working capital, we now expect full year 2020 cash from operating activities of approximately$116 million to$136 million . We also expect 2020 capital expenditures of approximately$80 million . We are also evaluating our cost structure to ensure that we remain a low-cost provider. We have taken further actions, including a reduction in force, which is anticipated to result in full year savings of approximately$10 million in 2021. Our business model is built on long-term customer relationships. The actions we have taken, together with our customers, not only address all the near-term contracts that were approaching expiration, but also further strengthen our long-term customer relationships and add meaningful certainty and stability to our business. The Company expects that the impacts of COVID-19 and related economic conditions on our future results will continue to evolve in ways that are difficult to anticipate. See "Part II - Item 1A - Risk Factors" for additional discussion. •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. •Support customer base and successful relief negotiation. SunCoke's business model is based on long-term partnerships with our coke customers. We will continue to support our customers to help them navigate through the current crisis, while providing long-term stability by navigating through successful customer relief negotiations. •Maintain asset integrity for long-term viability. SunCoke will ensure that assets are safeguarded during the current crisis situation to minimize any potential negative financial impact in the long-term. We will ensure our asset base is properly maintained, even as operating levels may fluctuate in the near term. 21 -------------------------------------------------------------------------------- Table of Contents •Achieve revised 2020 financial objectives. SunCoke is confident in our liquidity position and will remain committed to achieving our revised financial targets of Adjusted EBITDA of between$190 million and$200 million in 2020. Results of Operations The following table sets forth amounts from the Consolidated Statements of Income for the three and six months endedJune 30, 2020 and 2019, respectively: Six Months Ended Three Months Ended June 30, Increase June 30, 2020 2019 (Decrease) 2020 2019 Increase (Decrease) (Dollars in millions) Revenues Sales and other operating revenue$ 338.0 $ 407.5 $ (69.5) $ 720.7 $ 798.8 $ (78.1) Costs and operating expenses Cost of products sold and operating expenses 262.5 327.0 (64.5) 566.9 634.4
(67.5)
Selling, general and administrative expenses 16.5 21.9 (5.4) 32.7 38.6
(5.9)
Depreciation and amortization expense 34.1 37.0 (2.9) 68.2 74.2
(6.0)
Total costs and operating expenses 313.1 385.9 (72.8) 667.8 747.2 (79.4) Operating income 24.9 21.6 3.3 52.9 51.6 1.3 Interest expense, net 14.9 15.1 (0.2) 29.5 29.9 (0.4) Gain on extinguishment of debt - - - (2.9) -
(2.9)
Income before income tax expense 10.0 6.5 3.5 26.3 21.7 4.6 Income tax expense 2.2 3.2 (1.0) 12.6 6.2 6.4 Net income 7.8 3.3 4.5 13.7 15.5 (1.8) Less: Net income attributable to noncontrolling interests 1.3 1.0 0.3 2.3 3.4
(1.1)
Net income attributable to SunCoke Energy, Inc. $ 6.5$ 2.3 $ 4.2 $ 11.4 $ 12.1 $ (0.7) 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 and six months endedJune 30, 2020 compared to the same prior year period, primarily due to the pass-through of lower coal prices in our Domestic Coke segment, which also resulted in improved margins. Lower volumes in our Logistics segment decreased sales and operating revenue during the three and six months endedJune 30, 2020 . Additionally, Domestic Coke volumes decreased during the three months endedJune 30, 2020 , as a result of volume relief provided to our customers impacted by the COVID-19 pandemic. Selling, General and Administrative Expenses. Selling, general and administrative expenses benefited during the three and six months endedJune 30, 2020 due to the absence of$4.4 million and$4.9 million , respectively, of transaction costs incurred during the prior year periods. Depreciation and Amortization Expense. Depreciation and amortization expense for the three and six months endedJune 30, 2020 decreased as a result of the impairment of our Logistics assets, which was recorded in the third quarter of 2019. Depreciation expense increased$2.1 million and$4.1 million , respectively, during the three and six months endedJune 30, 2020 for the oven rebuilds atIndiana Harbor , which were completed throughout 2019. This increase was mostly offset by the absence of additional depreciation associated with the upgrades to certain heat recovery steam generators, which was recorded during the same prior year periods. Interest Expense, Net. Interest expense, net benefited during the three and six months endedJune 30, 2020 , as a result of 2025 Senior Notes repurchases, which was mostly offset by the absence of$1.1 million and$2.3 million , respectively, of capitalized interest in the current year periods. Income Tax Expense. The increase in income tax expense during the six months endedJune 30, 2020 reflects a the revaluation of certain deferred tax assets due to lower apportioned state tax rates, which resulted in deferred income tax expense of$6.5 million , partly offset by a$1.5 million benefit as result of the Coronavirus Aid, Relief, and Economic Security Act. See Note 4 to our consolidated financial statements. 22 -------------------------------------------------------------------------------- Table of Contents Noncontrolling Interest. Net income attributable to noncontrolling interest represents a 14.8 percent third-party interest in ourIndiana Harbor cokemaking facility. Net income fromIndiana Harbor has increased in the current year periods as a result of the completion of the oven rebuild project and resulting improved performance, which therefore resulted in an increase in noncontrolling interest. Prior to the Company acquiring all of the outstanding common units of the Partnership not already owned by SunCoke (the "Simplification Transaction"), net income attributable to noncontrolling interest also represented the common public unitholders' interest in the Partnership. The following table provides details into net income attributable to noncontrolling interest: Three Months Ended June 30, Six Months Ended June 30, Increase Increase 2020 2019 (Decrease) 2020 2019 (Decrease) (Dollars in millions) Net income attributable to third-party interest in ourIndiana Harbor cokemaking facility$ 1.3 $ 0.1 $ 1.2 $ 2.3 $ 0.8 $
1.5
Net income attributable to the Partnership's common public unitholders' $ -$ 0.9 $ (0.9) $ -$ 2.6 $ (2.6) Net income attributable to noncontrolling interest$ 1.3 $ 1.0 $ 0.3 $ 2.3 $ 3.4 $ (1.1) Results of Reportable Business Segments We report our business results through three segments: •Domestic Coke consists of our Jewell facility, located inVansant, Virginia , ourIndiana Harbor facility, located inEast Chicago, Indiana , our Haverhill facility, located inFranklin Furnace, Ohio , ourGranite City facility located inGranite City, Illinois , and ourMiddletown facility located inMiddletown, Ohio . •Brazil Coke consists of operations in Vitória,Brazil , where we operate the ArcelorMittal Brazil cokemaking facility. •Logistics consists of CMT, located inConvent, Louisiana , KRT, located inCeredo andBelle, West Virginia ,Lake Terminal , located inEast Chicago, Indiana , and DRT, located inVansant, Virginia .Lake Terminal and DRT are located adjacent to ourIndiana Harbor and Jewell 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 Six Months Ended
June 30, Increase June 30,
2020 2019 (Decrease) 2020 2019 Increase (Decrease)
(Dollars in millions)
Sales and other operating revenues:
Domestic Coke $ 323.5 $ 378.0 $ (54.5) $ 688.7 $ 737.3 $ (48.6)
Brazil Coke 7.2 10.0 (2.8) 15.7 19.7 (4.0)
Logistics 7.3 19.5 (12.2) 16.3 41.8 (25.5)
Logistics intersegment sales 5.2 6.7 (1.5) 11.8 13.2 (1.4)
Elimination of intersegment sales (5.2) (6.7) 1.5 (11.8) (13.2) 1.4
Total sales and other operating revenues$ 338.0 $ 407.5 $ (69.5) $ 720.7 $ 798.8 $ (78.1) Adjusted EBITDA(1): Domestic Coke$ 61.6 $ 56.3 $ 5.3 $ 125.0 $ 114.8 $ 10.2 Brazil Coke 3.2 4.3 (1.1) 7.3 8.8 (1.5) Logistics 3.0 11.8 (8.8) 6.3 24.5 (18.2) Corporate and Other(2) (8.8) (9.3) 0.5 (17.5) (17.7) 0.2 Total Adjusted EBITDA$ 59.0 $ 63.1 $ (4.1) $ 121.1 $ 130.4 $ (9.3) Coke Operating Data: Domestic Coke capacity utilization 94 % 97 % (3) % 98 % 97 % 1 % Domestic Coke production volumes (thousands of tons) 987 1,030 (43) 2,056 2,036
20
Domestic Coke sales volumes (thousands of tons) 977 1,030 (53) 2,041 2,034
7
Domestic Coke Adjusted EBITDA per ton(3)$ 63.05 $ 54.66 $ 8.39 $ 61.24 $ 56.44 $ 4.80 Brazilian Coke production-operated facility (thousands of tons) 270 424 (154) 680 843
(163)
Logistics Operating Data: Tons handled (thousands of tons) 2,853 5,592 (2,739) 7,067 11,376
(4,309)
(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 and six months endedJune 30, 2020 and 2019. (2)Corporate and Other includes activity from our legacy coal mining business, which contributed Adjusted EBITDA losses of$2.4 million and$4.5 million during the three and six months endedJune 30, 2020 , respectively, and$2.0 million and$3.8 million during the three and six months endedJune 30, 2019 , respectively. Additionally, Corporate and Other includes foundry related research and development costs of$0.6 million and$1.4 million during the three and six months endedJune 30, 2020 , respectively. (3)Reflects Domestic Coke Adjusted EBITDA divided by Domestic Coke sales volumes. 24 -------------------------------------------------------------------------------- Table of Contents 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 Six Months Ended
June 30, 2020 vs. 2019 June 30, 2020 vs. 2019
Sales and other Sales and other
operating revenue Adjusted EBITDA operating revenue Adjusted EBITDA
(Dollars in millions)
Prior year period $ 378.0 $ 56.3 $ 737.3 $ 114.8
Volumes(1) (13.9) (4.7) 9.0 1.3
Coal cost recovery and yields(2) (42.8) 0.7 (61.3) (2.0)
Operating and maintenance
costs(3) 2.4 9.5 2.3 11.4
Energy and other (0.2) (0.2) 1.4 (0.5)
Current year period $ 323.5 $ 61.6 $ 688.7 $ 125.0
(1) Improved performance from rebuilt ovens at our Indiana Harbor facility
increased volumes during the three and six months ended June 30, 2020 . The
increase was more than offset by volume relief provided to our customers
impacted by the COVID-19 pandemic beginning during the three months ended June
30, 2020 .
(2) The pass through of lower coal prices resulted in the decline in revenues.
(3) Adjusted EBITDA benefited from lower operating and maintenance costs across
the fleet as well as the absence of costs related to the Indiana Harbor oven
rebuild initiative.
Logistics
During the three and six months ended June 30, 2020 revenues were $7.3 million
and $16.3 million , respectively, and Adjusted EBITDA was $3.0 million and $6.3
million , respectively. During the three and six months ended June 30, 2019
revenues were $19.5 million and $41.8 million , respectively, and Adjusted EBITDA
was $11.8 million and $24.5 million , respectively. Declines in Logistics as
compared to the prior year periods reflect lower volumes primarily resulting
from depressed thermal coal export pricing, which has adversely impacted certain
customers at CMT and contributed to the bankruptcy of Foresight. The COVID-19
pandemic further impacted volumes during the three months ended June 30, 2020 .
Brazil
During the three and six months ended June 30, 2020 , revenues were $7.2
million and $15.7 million , respectively, and Adjusted EBITDA was $3.2 million
and $7.3 million , respectively, all of which reflect volume relief provided to
our customers impacted by the COVID-19 pandemic beginning during the six months
ended June 30, 2020 .
Corporate and Other
Corporate and Other Adjusted EBITDA was a loss of $8.8 million and $17.5
million for the three and six months ended June 30, 2020 , which reflects foundry
related research and development costs of $0.6 million and $1.4 million ,
respectfully. These costs were offset by offset by lower employee related costs
in the three months ended June 30, 2020 and further offset by the favorable
impact of period-over-period, mark-to-market adjustments in deferred
compensation driven by changes in the Company's share price during the three and
six months ended June 30, 2020 .
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. However, the Company continues
to evaluate whether any borrowings or other actions are needed to safeguard the
business amidst the fluid market conditions and the uncertainty around the
magnitude and duration of the COVID-19 pandemic. As of June 30, 2020 , we had
$81.1 million of cash and cash equivalents and $244.9 million of borrowing
availability under our credit facility.
We may, from time to time, seek to retire or purchase additional amounts of our
outstanding equity and/or debt securities through cash purchases and/or
exchanges for other securities, in open market purchases, privately negotiated
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transactions or otherwise. Such repurchases or exchanges, if any, will depend on
prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material. Refer to
Share Repurchases below and "Part II - Item 2 - Unregistered Sales of Equity
Securities and Use of Proceeds" for additional discussion.
During the first quarter of 2020, the U.S. Department of Labor'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
provided additional information supporting the Company's position in May 2020 .
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 six months ended June
30, 2020 and 2019:
Six Months Ended June 30,
2020 2019
(Dollars in millions)
Net cash provided by operating activities $ 48.6 $ 35.6
Net cash used in investing activities (36.9) (52.9)
Net cash used in financing activities (27.7) (26.2)
Net decrease in cash and cash equivalents $ (16.0) $ (43.5)
Cash Flows from Operating Activities
Net cash provided by operating activities increased by $13.0 million to $48.6
million for the six months ended June 30, 2020 as compared to the corresponding
prior year period. The current period reflects a favorable impact from primary
working capital, which is comprised of accounts receivable, inventories and
accounts payable, resulting from the timing of coal purchases and lower coal
prices as compared to the same prior year period.
Cash Flows from Investing Activities
Net cash used in investing activities decreased by $16.0 million to $36.9
million for the six months ended June 30, 2020 as compared to the corresponding
prior year period. The current year period reflects the absence of capital
spending in connection with the oven rebuild project and the environmental
remediation project, which was partially offset by capital spending for the
foundry cokemaking growth project.
Cash Flows from Financing Activities
Net cash used in financing activities was $27.7 million for the six months ended
June 30, 2020 as compared to $26.2 million in the corresponding prior year
period. The current year period reflects $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 $10.0 million . The
prior year period reflects the Partnership's distribution payments to public
unitholders of $14.2 million , the Partnership's repayment of $5.0 million on its
revolving credit facility and certain payments for the Simplification
Transaction totaling of $2.4 million . Additionally, repayments on the Financing
Obligation totaled $1.4 million in both periods. See further discussion of debt
activities in Note 7 to our consolidated financial statements.
Dividends
On May 7, 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 on June 4,
2020 , to stockholders of record on May 21, 2020 .
Additionally, on August 3, 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 on September 1, 2020 , to stockholders of record on August 18, 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 of June 30, 2020 . There were no share repurchases during the second
quarter of 2020 as the Company 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.
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Covenants
As of June 30, 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
In March 2020 , S&P Global Ratings reaffirmed our corporate credit rating of
BB- (stable). In April 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 grow our business through new markets or 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:
Six Months Ended June 30,
2020 2019
(Dollars in millions)
Ongoing capital(1) $ 31.5 $ 39.8
Environmental remediation projects(2) - 13.3
Expansion capital(3) 5.4 -
Total capital expenditures(4) $ 36.9 $ 53.1
(1)Includes $15.4 million of capital expenditures in connection with the oven
rebuild initiative at our Indiana Harbor facility during the six months ended
June 30, 2019 . This initiative was completed at the end of 2019.
(2)Includes $2.3 million of capitalized interest in connection with the
environmental remediation projects during the six months ended June 30, 2019 .
The environmental project at Granite City was completed in June 2019 .
(3)Includes capital spending in connection with the foundry cokemaking growth
project.
(4)Reflects actual cash payments during the periods presented for our capital
requirements.
In 2020, we expect our capital expenditures to be approximately $80 million , of
which approximately $12 million will be spent on the foundry cokemaking growth
project.
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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 six months ended June
30, 2020 . Please refer to our Annual Report on Form 10-K filed on February 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
six months ended June 30, 2020 . Please refer to our Annual Report on Form 10-K
filed on February 20, 2020 for a summary of these policies.
Recent Accounting Standards
There have been no new accounting standards material to SunCoke Energy, Inc.
that have been adopted during the six months ended June 30, 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 and six
months ended June 30, 2020 and 2019, respectively.
Below is a reconciliation of 2020 Adjusted EBITDA guidance from its closest GAAP
measure:
2020
Low High
(Dollars in millions)
Net income $ - $ 10
Add:
Depreciation and amortization expense 132 128
Interest expense, net 57 57
Gain on extinguishment of debt (3) (3)
Income tax expense 2 5
Restructuring charges(1) 2 3
Adjusted EBITDA $ 190 $ 200
Subtract:
Adjusted EBITDA attributable to noncontrolling interest(2) 7 7
Adjusted EBITDA attributable to SunCoke Energy, Inc. $ 183 $ 193
(1)Charges related to a company-wide restructuring and cost-reduction
initiative.
(2)Reflects noncontrolling interest in Indiana Harbor .
Guarantor Financial and Non-Financial Disclosures
The Company has an existing shelf registration statement, which was filed on
November 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 the SEC on March 2, 2020 . Although the
amendment and new rule do not become effective until January 4, 2021 , early
adoption is permitted. The Company early adopted these amendments on March 31,
2020 .
For purposes of the following information, SunCoke Energy, Inc. is referred to
as "Issuer." All 100 percent owned subsidiaries of the Company, including
Finance Corp. and its consolidated subsidiaries, are expected to serve as
guarantors of
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obligations ("Guarantor Subsidiaries") included in the shelf registration
statement, other than the Indiana 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.
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
Six Months Ended Year Ended
June 30, 2020 December 31, 2019
(Dollars in millions)
Revenues $ 528.1 $ 1,224.9
Long-lived asset and goodwill impairment - 247.5
Costs and operating expenses 482.7 1,114.7
Operating income (loss) 45.4 (137.3)
Net income (loss) $ 6.1 $ (139.6)
Balance Sheets Issuerand Guarantor Subsidiaries
June 30, 2020 December 31, 2019
(Dollars in millions)
Assets:
Cash $ 77.3 $ 93.3
Current receivables from Non-Guarantor subsidiaries 163.0 149.3
Other current assets 167.5 193.6
Properties, plants and equipment, net 1,179.7 1,210.0
Other non-current assets 52.9 54.2
Total assets $ 1,640.4 $ 1,700.4
Liabilities:
Current liabilities $ 82.7 $ 150.8
Long-term debt and financing obligation 768.1 780.0
Long-term payable to Non-Guarantor subsidiaries 140.8 127.2
Other long-term liabilities 239.8 226.0
Total liabilities $ 1,231.4 $ 1,284.0
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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, the anticipated expansion into the foundry coke market 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
U.S. and global economy, resulting from COVID-19 or 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 cokemaking operations, 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 yield standards
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;
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•effects of geologic conditions, weather, natural disasters and other inherent
risks beyond our control;
•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;
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Table of Contents •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; •our ability to develop, design, permit, construct, start up, or operate new cokemaking facilities in theU.S. or in foreign countries; •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 in connection 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the Company's exposure to market risk disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
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