SunCoke Energy, Inc.: Form 10-Q for the period ended Sep 30, 2023

This Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (this “Quarterly Report on Form 10-Q”) contains certain forward-looking statements, 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, expected future developments, expectations and intentions, and they involve known and unknown risks that are difficult to predict. As a result, 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 the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report on Form 10-K”), and as updated in this Quarterly Report on Form 10-Q, and other quarterly and current reports, which are on file with the SEC and are available at the SEC's website (www.sec.gov (http://www.sec.gov)). Additionally, please see our “Cautionary Statement Concerning Forward-Looking Statements” located elsewhere in this Quarterly Report on Form 10-Q.

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 with the 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 2.

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.

Overview

SunCoke Energy, Inc. (“SunCoke Energy,” “SunCoke,” “Company,” “we,” “our” and “us”) is the largest independent producer of high-quality coke in the Americas, as measured by tons of coke produced each year, and has more than 60 years of coke production experience. Coke is produced by heating metallurgical coal in a refractory oven, which releases certain volatile components from the coal, thus transforming the coal into coke. Our coke is primarily used as a principal raw material in the blast furnace steelmaking process as well as in the foundry production of casted iron, and the majority of our sales are derived from blast furnace coke sales made under long-term, take-or-pay agreements. We also export coke to international customers seeking high-quality product for their blast furnaces. We have designed, developed and built, and we currently own and operate, five cokemaking facilities in the United States (“U.S.”) with collective nameplate capacity to produce approximately 4.2 million tons of blast furnace coke per year. Additionally, we designed and currently operate one cokemaking facility in Brazil under licensing and operating agreements on behalf of ArcelorMittal Brasil S.A. (“ArcelorMittal Brazil”), which has approximately 1.7 million tons of annual cokemaking capacity. Our cokemaking ovens utilize efficient, modern heat recovery technology designed to combust the coal’s volatile components liberated during the cokemaking process and use the resulting heat to create steam or electricity for sale.

We also own and operate a logistics business that provides export and domestic material handling and/or mixing services to steel, coke (including some of our domestic cokemaking facilities), electric utility, coal producing and other manufacturing based customers. Our logistics terminals, which are strategically located to reach Gulf Coast, East Coast, Great Lakes and international ports, have 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.

Market Discussion

Economic uncertainty, driven by inflation and commodity pricing volatility, has resulted in continuing declines in the price of global export coke during the nine months ended September 30, 2023, reducing the sales price of our non-contracted blast coke. All non-contracted blast coke is produced utilizing capacity in excess of tons contracted in our long-term, take-or-pay Domestic Coke sales agreements, which are not impacted by the fluctuation of coke prices.

During the nine months ended September 30, 2023, decreases in European energy needs, primarily due to mild weather conditions, and the stabilization of global thermal coal supply resulted in a decline of the benchmark price for coal delivery into northwest Europe, which negatively impacted export coal volumes through Convent Marine Terminal (“CMT”).

Third Quarter Key Financial Results

Our consolidated results of operations were as follows:

(Dollars in millions)

Operating results during the three and nine months ended September 30, 2023 primarily reflect lower margins on our non-contracted blast coke sales, primarily due to export coke, unfavorable energy pricing at our Haverhill facility and lower transloading volumes in our Logistics segment. These decreases were partially offset by favorable coal-to-coke yields on our long-term, take-or-pay agreements. Net income for the three and nine months ended September 30, 2023 was further impacted by the establishment of a valuation allowance on deferred tax assets attributable to existing foreign tax credit carryforwards. Operating cash flows during the current period primarily reflect a favorable year-over-year change in primary working capital. See detailed analysis of the quarter's results throughout this MD&A. See “Non-GAAP Financial Measures” below for the definition and reconciliation of Adjusted EBITDA.

Recent Developments

• In April 2023, the Indiana Harbor long-term, take-or-pay agreement with Cliffs Steel was extended to September 30, 2035. Under the extended agreement, Indiana Harbor will continue to supply 1,220 thousand tons to Cliffs Steel annually. Reimbursement of certain operating and maintenance expenses under the contract are fixed subject to annual adjustment based on an inflation index. Other key provisions of the agreement, including the pass-through of coal costs, remain unchanged.

Results of Operations

The following table sets forth amounts from the Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022, respectively:

(Dollars in millions)

19

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 increased for the three and nine months ended September 30, 2023 compared to the same prior year periods, primarily driven by the pass-through of higher coal prices in our Domestic Coke segment. Revenues during the three and nine months ended September 30, 2023 further benefited from higher volumes on our long-term, take-or-pay agreements. These increases to sales and other operating revenue were partially offset by lower volumes and unfavorable pricing on our non-contracted blast coke sales, primarily driven by export coke.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased slightly during the three and nine months ended September 30, 2023 as compared to the same prior year periods, primarily driven by lower employee related expenses. Additionally, the three and nine months ended September 30, 2023 decreased due to lower transaction costs incurred as part of the granulated pig iron project of approximately $0.2 million and $1.0 million, respectively.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three and nine months ended September 30, 2023 was reasonably consistent with the same prior year periods.

Interest Expense, Net. Interest expense, net, benefited during the three and nine months ended September 30, 2023 from lower average debt balances in both current year periods and higher interest income of $0.4 million and $1.4 million, respectively, as compared to the same prior year periods.

Income Tax Expense (Benefit). Income tax expense during the three and nine months ended September 30, 2023 primarily reflects the establishment of a valuation allowance on deferred tax assets attributable to existing foreign tax credit carryforwards, which was a portion of a valuation allowance released during the third quarter of 2022, resulting in $8.5 million of deferred tax expense. The establishment of the valuation allowance during the three and nine months ended September 30, 2023 was the result of changes in tax regulations. See Note 4 to our consolidated financial statements for further detail.

Noncontrolling Interest. Net income attributable to noncontrolling interests represents a 14.8 percent third-party interest in our Indiana Harbor cokemaking facility and fluctuates with the financial performance of that facility.

Results of Reportable Business Segments

We report our business results through three reportable segments:

• Domestic Coke consists of our Jewell facility, located in Vansant, Virginia, our Indiana Harbor facility, located in East Chicago, Indiana, our Haverhill facility, located in Franklin Furnace, Ohio, our Granite City facility located in Granite City, Illinois, and our Middletown facility located in Middletown, Ohio.
• Brazil Coke consists of operations in Vitória, Brazil, where we operate the ArcelorMittal Brazil cokemaking facility.
• Logistics consists of CMT, located in Convent, Louisiana, Kanawha River Terminal (“KRT”), located in Ceredo and Belle, West Virginia, and Lake Terminal, located in East Chicago, Indiana. Lake Terminal is located adjacent to our Indiana Harbor cokemaking facility.

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, which is not considered a reportable segment and therefore, not included in our segment information in Note 12. However, we have included Corporate and Other within our operating data below.

Management believes Adjusted EBITDA is an important measure of operating performance, which is used by the chief operating decision maker as one of the measurements 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 the “Non-GAAP Financial Measures” section below for both the definition of Adjusted EBITDA and the reconciliation from GAAP to the non-GAAP measurement.

Segment Financial and Operating Data

The following tables set forth financial and operating data by segment:

(Dollars in millions)

(1) See the “Non-GAAP Financial Measures” section below for both the definition of Adjusted EBITDA and the reconciliation from GAAP to the non-GAAP measurement.

(2) Corporate and Other, net is not a reportable segment.

(3) The production of foundry coke tons does not replace blast furnace coke tons on a ton for ton basis, as foundry coke requires longer coking time. The Domestic Coke capacity utilization is calculated assuming a single ton of foundry coke replaces approximately two tons of blast furnace coke.

(4) Reflects Domestic Coke Adjusted EBITDA divided by Domestic Coke sales volumes.

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:

(Dollars in millions)

(1) Higher volumes on our long-term, take-or-pay agreements increased both revenues and Adjusted EBITDA during the three and nine months ended September 30, 2023. These higher volumes during the three and nine months ended September 30, 2023 were more than offset and partially offset, respectively, in revenues, and more than offset in Adjusted EBITDA in both periods by lower volumes on non-contracted blast coke sales, primarily driven by export coke, and timing of shipments.

(2) The pass-through of higher coal prices on our long-term, take-or-pay agreements increased revenues for the three and nine months ended September 30, 2023. Adjusted EBITDA decreased during the three and nine months ended September 30, 2023 primarily due to lower margins on our non-contracted blast coke sales, primarily driven by export coke, and lower of cost or net realizable value adjustments recorded on purchase commitments of coal inventory. These decreases to Adjusted EBITDA during the three and nine months ended September 30, 2023 were partially offset by favorable coal-to-coke yields and favorable pricing on foundry coke sales.

(3) Operating and maintenance costs increased as a result of the inclusion of Dismal River Terminal (“DRT”) in our Domestic Coke segment beginning January 1, 2023. See Note 12 to the consolidated financial statements for further details.

(4) Energy and other decreased primarily as a result of unfavorable energy pricing at our Haverhill facility.

Logistics

During the three and nine months ended September 30, 2023, sales and other operating revenues, exclusive of intersegment sales, were $15.6 million and $56.4 million, respectively, compared to $20.2 million and $58.8 million, respectively, in the corresponding prior year periods. Adjusted EBITDA during the three and nine months ended September 30, 2023 was $8.4 million and $33.6 million, respectively, compared to $12.9 million and $38.0 million, respectively, in the corresponding prior year periods. The decreases in Logistics revenues, exclusive of intersegment sales, and Adjusted EBITDA during the three and nine months ended September 30, 2023, as compared to the same prior year periods, reflect lower transloading volumes at our CMT facility.

Brazil

During the three and nine months ended September 30, 2023, revenues were $9.1 million and $25.8 million, respectively, which was reasonably consistent with $8.9 million and $27.9 million, respectively, in the corresponding prior year periods. Adjusted EBITDA during the three and nine months ended September 30, 2023 was $2.2 million and $6.9 million, respectively, compared to $3.3 million and $11.4 million, respectively, in the corresponding prior year periods. Decreases in Adjusted EBITDA during the three and nine months ended September 30, 2023 were primarily due to the absence of technology fees, which expired at the end of 2022.

Corporate and Other

Corporate and Other Adjusted EBITDA was a loss of $9.2 million and $26.6 million, respectively, for the three and nine months ended September 30, 2023, which was reasonably consistent with $9.1 million and $27.5 million, respectively, in the corresponding prior year periods.

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.

The Company evaluates the performance of its segments based on segment Adjusted EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted for any impairments, restructuring costs, gains or losses on extinguishment of debt, and/or transaction costs (“Adjusted EBITDA”). EBITDA and Adjusted EBITDA do not represent and should not be considered alternatives to net income or operating income under GAAP and may not be comparable to other similarly titled measures in other businesses.

Management believes Adjusted EBITDA is an important measure in assessing operating performance. Adjusted EBITDA provides useful information to investors because it highlights trends in our business that may not otherwise be apparent when relying solely on GAAP measures and because it eliminates items that have less bearing on our operating performance. EBITDA and Adjusted EBITDA are not measures calculated in accordance with GAAP, and they should not be considered a substitute for net income, or any other measure of financial performance presented in accordance with GAAP. Additionally, other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Reconciliation of Non-GAAP Financial Measures

Below is a reconciliation of Adjusted EBITDA to net income, which is its most directly comparable financial measure calculated and presented in accordance with GAAP:

(Dollars in millions)

(1) Costs incurred as part of the granulated pig iron project with U.S. Steel.

Liquidity and Capital Resources

Our primary liquidity needs are to fund working capital and 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 (“Revolving 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 at least the next 12 months and thereafter for the foreseeable future. As of September 30, 2023, we had $125.9 million of cash and cash equivalents and $350.0 million of borrowing availability under our Revolving 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 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 “Part II Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.”

During the first quarter of 2020, the U.S. Department of Labor's Division of Coal Mine Workers' Compensation (“DCMWC”) requested SunCoke to provide additional collateral of approximately $32.0 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 and February 2021. 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. Additionally, on January 19, 2023, the Department of Labor issued a new proposed rule that would require self-insured companies to post collateral in the amount of 120 percent of the company's total expected lifetime black lung obligations as determined by the DCMWC. While this new proposed rule is not effective, if finalized, it could potentially reduce the Company's liquidity. SunCoke submitted written comments on the proposed rule and will continue to monitor any impact to the Company. See further discussion in Note 7 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 nine months ended September 30, 2023 and 2022:

(Dollars in millions)

Cash Flows from Operating Activities

Net cash provided by operating activities increased by $72.0 million to $192.6 million for the nine months ended September 30, 2023 as compared to the corresponding prior year period. The increase primarily reflects a favorable year-over-year change in primary working capital, which is comprised of accounts receivable, inventories, and accounts payable, driven by the timing of receipts from customers and the impact of the changes in coal prices. The current year period was further impacted by an increase in deferred tax income expense relating to new regulations impacting foreign tax credit utilization. See Note 4 to our consolidated financial statements for further detail on the change in deferred tax income expense. These favorable impacts were partially offset by lower operating results.

Cash Flows from Investing Activities

Net cash used in investing activities increased $33.3 million to $85.4 million during the nine months ended September 30, 2023 as compared to the corresponding prior year period. The increase was primarily driven by ongoing capital expenditures related to upgrades of our assets in order to improve long-term reliability and operational performance as well as increased spending on the foundry expansion project in the current year period.

Cash Flows from Financing Activities

Net cash used in financing activities was $71.3 million and $73.0 million for the nine months ended September 30, 2023 and 2022, respectively. This decrease in net cash used in financing activities was primarily driven by lower net repayments of $13.0 million on the Revolving Facility in the current year period. This decrease was offset by an increase in dividends paid of $5.4 million as compared to the prior year period, primarily as a result of an increase in the dividend per share amount, as well as higher cash distributions made to noncontrolling interests of $3.7 million in the current year period.

Dividends

On August 1, 2023, SunCoke's Board of Directors declared a cash dividend of $0.10 per share of the Company's common stock. This dividend was paid on September 1, 2023, to stockholders of record on August 17, 2023.

Additionally, on November 1, 2023, SunCoke's Board of Directors declared a cash dividend of $0.10 per share of the Company's common stock. This dividend will be paid on December 1, 2023, to stockholders of record on November 15, 2023.

Covenants

As of September 30, 2023, 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 6 to the consolidated financial statements for details on debt covenants.

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;
• 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; and
• Environmental remediation project expenditures required to implement design changes to ensure that our existing facilities operate in accordance with existing environmental permits.

The following table summarizes our capital expenditures:

(Dollars in millions)

(1) Includes capital spending in connection with the foundry cokemaking growth project.

(2) Reflects actual cash payments during the periods presented for our capital requirements.

Critical Accounting Policies

There have been no significant changes to our accounting policies during the nine months ended September 30, 2023. Please refer to our Annual Report on Form 10-K filed for the year ended December 31, 2022 for a summary of these policies.

Recent Accounting Standards

There have been no new accounting standards material to SunCoke Energy that have been adopted during the nine months ended September 30, 2023.

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 ended December 31, 2022.

Management’s Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

The Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended September 30, 2023.

There have been no material changes with respect to risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.