Attached files
| file | filename |
|---|---|
| EX-95.1 - EXHIBIT 95.1 - SunCoke Energy, Inc. | sxc2018q210-qex951.htm |
| EX-32.2 - EXHIBIT 32.2 - SunCoke Energy, Inc. | sxc2018q210-qex322.htm |
| EX-32.1 - EXHIBIT 32.1 - SunCoke Energy, Inc. | sxc2018q210-qex321.htm |
| EX-31.2 - EXHIBIT 31.2 - SunCoke Energy, Inc. | sxc2018q210-qex312.htm |
| EX-31.1 - EXHIBIT 31.1 - SunCoke Energy, Inc. | sxc2018q210-qex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________
FORM 10-Q
________________________________________
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-35243
________________________________________
SUNCOKE ENERGY, INC.
(Exact name of registrant as specified in its charter)
________________________________________
Delaware | 90-0640593 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1011 Warrenville Road, Suite 600
Lisle, Illinois 60532
(630) 824-1000
(Registrant’s telephone number, including area code)
________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ý | ||||
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Emerging growth company | ¨ | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ¨ | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes ý No
As of July 20, 2018, there were 64,728,202 shares of the Registrant’s $0.01 par value Common Stock outstanding.
SUNCOKE ENERGY, INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SunCoke Energy, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Dollars and shares in millions, except per share amounts) | ||||||||||||||||
Revenues | ||||||||||||||||
Sales and other operating revenue | $ | 367.0 | $ | 323.2 | $ | 717.5 | $ | 632.9 | ||||||||
Costs and operating expenses | ||||||||||||||||
Cost of products sold and operating expenses | 282.7 | 257.0 | 553.3 | 491.2 | ||||||||||||
Selling, general and administrative expenses | 17.6 | 24.0 | 33.5 | 43.6 | ||||||||||||
Depreciation and amortization expense | 32.0 | 33.3 | 64.9 | 66.6 | ||||||||||||
Total costs and operating expenses | 332.3 | 314.3 | 651.7 | 601.4 | ||||||||||||
Operating income | 34.7 | 8.9 | 65.8 | 31.5 | ||||||||||||
Interest expense, net | 15.7 | 15.5 | 31.5 | 29.5 | ||||||||||||
Loss on extinguishment of debt | — | 20.2 | 0.3 | 20.3 | ||||||||||||
Income (loss) before income tax expense | 19.0 | (26.8 | ) | 34.0 | (18.3 | ) | ||||||||||
Income tax expense | 2.2 | 4.7 | 4.2 | 70.9 | ||||||||||||
Loss from equity method investment | 5.4 | — | 5.4 | — | ||||||||||||
Net income (loss) | 11.4 | (31.5 | ) | 24.4 | (89.2 | ) | ||||||||||
Less: Net income (loss) attributable to noncontrolling interests | 7.2 | (7.3 | ) | 11.5 | (66.0 | ) | ||||||||||
Net income (loss) attributable to SunCoke Energy, Inc. | $ | 4.2 | $ | (24.2 | ) | $ | 12.9 | $ | (23.2 | ) | ||||||
Earnings (loss) attributable to SunCoke Energy, Inc. per common share: | ||||||||||||||||
Basic | $ | 0.06 | $ | (0.38 | ) | $ | 0.20 | $ | (0.36 | ) | ||||||
Diluted | $ | 0.06 | $ | (0.38 | ) | $ | 0.20 | $ | (0.36 | ) | ||||||
Weighted average number of common shares outstanding: | ||||||||||||||||
Basic | 64.7 | 64.3 | 64.6 | 64.3 | ||||||||||||
Diluted | 65.6 | 64.3 | 65.5 | 64.3 | ||||||||||||
(See Accompanying Notes)
1
SunCoke Energy, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net income (loss) | $ | 11.4 | $ | (31.5 | ) | $ | 24.4 | $ | (89.2 | ) | ||||||
Other comprehensive income: | ||||||||||||||||
Currency translation adjustment | (1.2 | ) | (0.3 | ) | (1.3 | ) | (0.2 | ) | ||||||||
Recognition of accumulated currency translation loss upon sale of equity method investment | 9.0 | — | 9.0 | — | ||||||||||||
Comprehensive income (loss) | 19.2 | (31.8 | ) | 32.1 | (89.4 | ) | ||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | 7.2 | (7.3 | ) | 11.5 | (66.0 | ) | ||||||||||
Comprehensive income (loss) attributable to SunCoke Energy, Inc. | $ | 12.0 | $ | (24.5 | ) | $ | 20.6 | $ | (23.4 | ) | ||||||
(See Accompanying Notes)
2
SunCoke Energy, Inc.
Consolidated Balance Sheets
June 30, 2018 | December 31, 2017 | |||||||
(Unaudited) | ||||||||
(Dollars in millions, except par value amounts) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | 143.0 | $ | 120.2 | ||||
Receivables | 80.5 | 68.5 | ||||||
Inventories | 116.4 | 111.0 | ||||||
Income tax receivable | 4.8 | 4.8 | ||||||
Other current assets | 9.5 | 6.7 | ||||||
Total current assets | 354.2 | 311.2 | ||||||
Properties, plants and equipment (net of accumulated depreciation of $792.1 and $733.2 million at June 30, 2018 and December 31, 2017, respectively) | 1,487.9 | 1,501.3 | ||||||
Goodwill | 76.9 | 76.9 | ||||||
Other intangible assets, net | 162.3 | 167.9 | ||||||
Deferred charges and other assets | 3.0 | 2.8 | ||||||
Total assets | $ | 2,084.3 | $ | 2,060.1 | ||||
Liabilities and Equity | ||||||||
Accounts payable | $ | 134.8 | $ | 115.5 | ||||
Accrued liabilities | 44.4 | 53.2 | ||||||
Deferred revenue | 3.2 | 1.7 | ||||||
Current portion of long-term debt and financing obligation | 3.8 | 2.6 | ||||||
Interest payable | 4.1 | 5.4 | ||||||
Total current liabilities | 190.3 | 178.4 | ||||||
Long-term debt and financing obligation | 860.0 | 861.1 | ||||||
Accrual for black lung benefits | 45.9 | 44.9 | ||||||
Retirement benefit liabilities | 27.1 | 28.2 | ||||||
Deferred income taxes | 257.8 | 257.8 | ||||||
Asset retirement obligations | 14.2 | 14.0 | ||||||
Other deferred credits and liabilities | 16.6 | 16.1 | ||||||
Total liabilities | 1,411.9 | 1,400.5 | ||||||
Equity | ||||||||
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no issued shares at both June 30, 2018 and December 31, 2017 | — | — | ||||||
Common stock, $0.01 par value. Authorized 300,000,000 shares; issued 72,205,859 and 72,006,905 shares at June 30, 2018 and December 31, 2017, respectively | 0.7 | 0.7 | ||||||
Treasury stock, 7,477,657 shares at both June 30, 2018 and December 31, 2017 | (140.7 | ) | (140.7 | ) | ||||
Additional paid-in capital | 487.3 | 486.2 | ||||||
Accumulated other comprehensive loss | (13.5 | ) | (21.2 | ) | ||||
Retained earnings | 114.1 | 101.2 | ||||||
Total SunCoke Energy, Inc. stockholders’ equity | 447.9 | 426.2 | ||||||
Noncontrolling interests | 224.5 | 233.4 | ||||||
Total equity | 672.4 | 659.6 | ||||||
Total liabilities and equity | $ | 2,084.3 | $ | 2,060.1 | ||||
3
SunCoke Energy, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(See Accompanying Notes)
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
(Dollars in millions) | ||||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | 24.4 | $ | (89.2 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization expense | 64.9 | 66.6 | ||||||
Deferred income tax expense | 0.3 | 79.8 | ||||||
Payments in excess of expense for postretirement plan benefits | (1.1 | ) | (1.2 | ) | ||||
Share-based compensation expense | 1.6 | 3.0 | ||||||
Loss on extinguishment of debt | 0.3 | 20.3 | ||||||
Loss from equity method investment | 5.4 | — | ||||||
Changes in working capital pertaining to operating activities: | ||||||||
Receivables | (12.0 | ) | (4.6 | ) | ||||
Inventories | (5.4 | ) | (23.9 | ) | ||||
Accounts payable | 16.8 | 15.6 | ||||||
Accrued liabilities | (9.0 | ) | (6.2 | ) | ||||
Deferred revenue | 1.5 | 9.5 | ||||||
Interest payable | (1.3 | ) | (9.6 | ) | ||||
Income taxes | — | (11.9 | ) | |||||
Other | (1.1 | ) | 6.2 | |||||
Net cash provided by operating activities | 85.3 | 54.4 | ||||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | (43.6 | ) | (22.4 | ) | ||||
Sale of equity method investment | 4.0 | — | ||||||
Return of Brazilian investment | — | 20.5 | ||||||
Other investing activities | 0.3 | — | ||||||
Net cash used in investing activities | (39.3 | ) | (1.9 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of long-term debt | 45.0 | 620.6 | ||||||
Repayment of long-term debt | (45.2 | ) | (532.2 | ) | ||||
Debt issuance costs | (0.5 | ) | (15.6 | ) | ||||
Proceeds from revolving credit facility | 92.5 | 128.0 | ||||||
Repayment of revolving credit facility | (92.5 | ) | (200.0 | ) | ||||
Repayment of financing obligation | (1.3 | ) | (1.2 | ) | ||||
Acquisition of additional interest in the Partnership | (4.2 | ) | (24.6 | ) | ||||
Cash distribution to noncontrolling interests | (17.7 | ) | (24.6 | ) | ||||
Other financing activities | 0.7 | (0.3 | ) | |||||
Net cash used in financing activities | (23.2 | ) | (49.9 | ) | ||||
Net increase in cash, cash equivalents and restricted cash | 22.8 | 2.6 | ||||||
Cash, cash equivalents and restricted cash at beginning of period | 120.2 | 134.5 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 143.0 | $ | 137.1 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Interest paid | $ | 31.8 | $ | 37.2 | ||||
Income taxes paid, net of refunds of $1.3 million and $0.1 million in 2018 and 2017, respectively | $ | 4.4 | $ | 3.1 | ||||
4
SunCoke Energy, Inc.
Consolidated Statements of Equity
(Unaudited)
Common Stock | Treasury Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total SunCoke Energy, Inc. Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||||||||
At December 31, 2017 | 72,006,905 | $ | 0.7 | 7,477,657 | $ | (140.7 | ) | $ | 486.2 | $ | (21.2 | ) | $ | 101.2 | $ | 426.2 | $ | 233.4 | $ | 659.6 | |||||||||||||||||
Net income | — | — | — | — | — | — | 12.9 | 12.9 | 11.5 | 24.4 | |||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | (1.3 | ) | — | (1.3 | ) | — | (1.3 | ) | |||||||||||||||||||||||||
Recognition of accumulated currency translation loss upon sale of equity method investment | — | — | — | — | — | 9.0 | — | 9.0 | — | 9.0 | |||||||||||||||||||||||||||
Cash distribution to noncontrolling interests | — | — | — | — | — | — | — | — | (17.7 | ) | (17.7 | ) | |||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | 1.6 | — | — | 1.6 | — | 1.6 | |||||||||||||||||||||||||||
Share-issuances, net of shares withheld for taxes | 198,954 | — | — | — | 0.7 | — | — | 0.7 | — | 0.7 | |||||||||||||||||||||||||||
Acquisition of additional interest in the Partnership: | |||||||||||||||||||||||||||||||||||||
Cash paid | — | — | — | — | (1.5 | ) | — | — | (1.5 | ) | (2.7 | ) | (4.2 | ) | |||||||||||||||||||||||
Deferred tax adjustment | — | — | — | — | 0.3 | — | — | 0.3 | — | 0.3 | |||||||||||||||||||||||||||
At June 30, 2018 | 72,205,859 | $ | 0.7 | 7,477,657 | $ | (140.7 | ) | $ | 487.3 | $ | (13.5 | ) | $ | 114.1 | $ | 447.9 | $ | 224.5 | $ | 672.4 | |||||||||||||||||
(See Accompanying Notes)
5
SunCoke Energy, Inc.
Notes to the Consolidated Financial Statements
1. General
Description of Business
SunCoke Energy, Inc. (“SunCoke Energy,” “Company,” “we,” “our” and “us”) is the largest independent producer of high-quality coke in the Americas, as measured by tons of coke produced each year, and has approximately 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. Additionally, we own and operate a logistics business, which primarily provides handling and/or mixing services of coal and other aggregates to third-party customers as well as to our own cokemaking facilities.
We have designed, developed, built, own and operate five cokemaking facilities in the United States (“U.S.”), which consist of our Haverhill Coke Company LLC ("Haverhill"), Middletown Coke Company, LLC ("Middletown"), Gateway Energy and Coke Company, LLC ("Granite City"), Jewell Coke Company, L.P. ("Jewell") and Indiana Harbor Coke Company ("Indiana Harbor") cokemaking facilities. Our 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 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. This differs from by-product cokemaking, which repurposes the coal’s liberated volatile components for other uses. We have constructed the only greenfield cokemaking facilities in the U.S. in approximately 30 years and are the only North American coke producer that utilizes heat recovery technology in the cokemaking process. We provide steam pursuant to steam supply and purchase agreements with our customers. Electricity is sold into the regional power market or pursuant to energy sales agreements.
Our logistics business 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. Our logistics business consists of Convent Marine Terminal ("CMT"), Kanawha River Terminals, LLC ("KRT"), SunCoke Lake Terminal, LLC ("Lake Terminal") and Dismal River Terminal, LLC ("DRT") and has collective capacity to mix and/or transload more than 40 million tons of coal and other aggregates annually and has total storage capacity of approximately 3 million tons.
On June 27, 2018, we sold our 49 percent investment in VISA SunCoke Limited ("VISA SunCoke") for cash consideration of $4.0 million. Consequently, we recognized $9.0 million of accumulated currency translation losses and incurred $0.4 million of transaction costs, resulting in a net $5.4 million loss from equity method investment during the three and six months ended June 30, 2018 on the Consolidated Statements of Operations. Our investment in VISA SunCoke was previously accounted for as an equity method investment and was fully impaired in 2015. Therefore, its financial results have not been included in our financial statements since that time.
Our consolidated financial statements include SunCoke Energy Partners, L.P. (the "Partnership"), a publicly-traded partnership. At June 30, 2018, we owned the general partner of the Partnership, which consists of a 2.0 percent ownership interest and incentive distribution rights, and owned a 60.4 percent limited partner interest in the Partnership. The remaining 37.6 percent interest in the Partnership was held by public unitholders. SunCoke is considered the primary beneficiary of the Partnership as it has the power to direct the activities that most significantly impact the Partnership's economic performance.
Incorporated in Delaware in 2010 and headquartered in Lisle, Illinois, we became a publicly-traded company in 2011 and our stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “SXC.”
Basis of Presentation
The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim reporting. Certain information and disclosures normally included in financial statements have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In management’s opinion, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. The results of operations for the periods ended June 30, 2018 are not necessarily indicative of the operating results expected for the entire year. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.
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Recently Adopted Accounting Pronouncements
In May 2014, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this standard on January 1, 2018, using the modified retrospective method with no material impact on our revenue recognition model on an annual basis. See Note 14.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted cash.” The Company retrospectively adopted this ASU in the first quarter 2018 and modified the Company's cash flow presentation to include restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The restricted cash balance was zero at both June 30, 2018 and December 31, 2017, and was $0.4 million and $0.5 million at June 30, 2017 and December 31, 2016, respectively. Historical restricted cash balances were related to cash withheld from the 2015 acquisition of CMT to fund the completion of certain expansion capital improvements.
In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The Company adopted this ASU in the first quarter 2018 and retrospectively presented net periodic postretirement benefit cost in the income statement separately from the service cost component and outside a subtotal of income from operations. In conjunction with the adoption of this standard, expense of $0.3 million and $0.6 million was reclassified from operating income and was recorded in interest expense, net on the Consolidated Statements of Operations during the three and six months ended June 30, 2017. See Note 7.
In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The Company adopted this ASU in the first quarter 2018 and reclassified $1.1 million of deferred tax adjustments to accumulated other comprehensive income from retained earnings on the December 31, 2017 balance sheet for the tax effects resulting from the Tax Cuts and Jobs Act of 2017.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires leases to be recognized as assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. It is effective for annual and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. A multi-disciplined implementation team has gained an understanding of the accounting and disclosure provisions of the standard and is in the process of analyzing the impacts to our business, including the development of new accounting processes to account for our leases and support the required disclosures. We have selected a technology tool to assist with the accounting and reporting requirements of this standard. While we are still evaluating the impact of adopting this standard, we expect that upon adoption the right-of-use assets and lease liabilities, such as various plant equipment rentals and the lease of our corporate office space, will increase the reported assets and liabilities on our Consolidated Balance Sheets. The Company expects to adopt this standard on January 1, 2019.
Reclassifications
Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current year presentation.
2. Inventories
The components of inventories were as follows:
June 30, 2018 | December 31, 2017 | |||||||
(Dollars in millions) | ||||||||
Coal | $ | 70.1 | $ | 61.4 | ||||
Coke | 7.4 | 12.3 | ||||||
Materials, supplies and other | 38.9 | 37.3 | ||||||
Total inventories | $ | 116.4 | $ | 111.0 | ||||
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3. Goodwill and Other Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair value of net assets acquired, is tested for impairment as of October 1 of each year, or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit to below its carrying value. Goodwill allocated to our Domestic Coke and Logistics segments was $3.4 million and $73.5 million at both June 30, 2018 and December 31, 2017, respectively.
The components of other intangible assets, net were as follows:
June 30, 2018 | December 31, 2017 | ||||||||||||||||||||||||
Weighted - Average Remaining Amortization Years | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||
Customer contracts | 4 | $ | 31.7 | $ | 15.7 | $ | 16.0 | $ | 31.7 | $ | 13.8 | $ | 17.9 | ||||||||||||
Customer relationships | 14 | 28.7 | 6.6 | 22.1 | 28.7 | 5.7 | 23.0 | ||||||||||||||||||
Permits | 24 | 139.0 | 14.9 | 124.1 | 139.0 | 12.2 | 126.8 | ||||||||||||||||||
Trade name | 1 | 1.2 | 1.1 | 0.1 | 1.2 | 1.0 | 0.2 | ||||||||||||||||||
Total | $ | 200.6 | $ | 38.3 | $ | 162.3 | $ | 200.6 | $ | 32.7 | $ | 167.9 | |||||||||||||
The permits above represent the environmental and operational permits required to operate a coal export terminal in accordance with the United States Environmental Protection Agency and other regulatory bodies. Intangible assets are amortized over their useful lives in a manner that reflects the pattern in which the economic benefit of the asset is consumed. The permits’ useful lives were estimated to be 27 years at acquisition based on the expected useful life of the significant operating equipment at the facility. We have historical experience of renewing and extending similar arrangements at our other facilities and intend to continue to renew our permits as they come up for renewal for the foreseeable future. The permits were renewed regularly prior to our acquisition of CMT. These permits have an average remaining renewal term of approximately 2.9 years.
Total amortization expense for intangible assets subject to amortization was $2.8 million and $5.6 million for the three and six months ended June 30, 2018, respectively, and $2.8 million and $5.5 million three and six months ended June 30, 2017, respectively.
4. Income Taxes
At the end of each interim period, we make our best estimate of the effective tax rate expected to be applicable for the full fiscal year and the impact of discrete items, if any, and adjust the rate as necessary.
The Company recorded income tax expense of $2.2 million and $4.2 million for the three and six months ended June 30, 2018, respectively, resulting in effective tax rate of 11.6 percent and 12.4 percent, respectively, as compared to the 21.0 percent federal statutory rate, primarily due to the impact of earnings attributable to noncontrolling ownership interests in partnerships.
The Company recorded income tax expense of $4.7 million and $70.9 million during the three and six months ended June 30, 2017, respectively. Income tax expense during the three months ended June 30, 2017 was driven primarily by a valuation allowance of $4.9 million recorded as a result of changes in future state allocation assumptions partially offset by a state income tax benefit of $2.5 million related to the filing of an amended state tax return. Income tax expense during the six months ended June 30, 2017 also included the impacts of the Internal Revenue Service ("IRS") announcement of its final regulations on qualifying income in January 2017 discussed below. This incremental tax impact is solely attributable to Partnership’s public unitholders. As such, an equal reduction to noncontrolling interest was recorded. As a result, there was no impact to net income attributable to the Company.
In January 2017, the IRS announced its decision to exclude cokemaking as a qualifying income generating activity in its final regulations (the "Final Regulations") issued under section 7704(d)(1)(E) of the Internal Revenue Code relating to the qualifying income exception for publicly traded partnerships. However, the Final Regulations include a transition period for activities that were reasonably interpreted to be qualifying income and carried on by publicly traded partnerships prior to the Final Regulations. The Partnership previously received a will-level opinion from its counsel, Vinson & Elkins LLP, that the Partnership's cokemaking operations generated qualifying income prior to the Final Regulations. Therefore, the Partnership believes it had a reasonable basis to conclude its cokemaking operations were considered qualifying income before the issuance
8
of the new regulations and as such expects to maintain its treatment as a partnership through the transition period. Cokemaking entities in the Partnership will become taxable as corporations on January 1, 2028, after the transition period ends.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Legislation”) was enacted. The Tax Legislation significantly revises the U.S. corporate income tax structure, including lowering corporate income tax rates. In addition, the SEC staff released Staff Accounting Bulletin 118 on December 23, 2017, which provides for companies to record a provisional impact of the Tax Legislation during a measurement period, not to exceed one year, in situations where companies do not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under ASC 740 for certain income tax effects of the Tax Legislation for the reporting period which includes enactment. There have been no significant changes to previous estimates and amounts recorded in 2017 relating to this Tax Legislation.
5. Accrued Liabilities
Accrued liabilities consisted of the following:
June 30, 2018 | December 31, 2017 | |||||||
(Dollars in millions) | ||||||||
Accrued benefits | $ | 14.5 | $ | 21.3 | ||||
Current portion of postretirement benefit obligation | 3.1 | 3.1 | ||||||
Other taxes payable | 11.9 | 10.5 | ||||||
Current portion of black lung liability | 5.4 | 5.4 | ||||||
Accrued legal | 3.6 | 5.6 | ||||||
Other | 5.9 | 7.3 | ||||||
Total accrued liabilities | $ | 44.4 | $ | 53.2 | ||||
6. Debt and Financing Obligation
Total debt and financing obligation, including the current portion of long-term debt and financing obligation, consisted of the following:
June 30, 2018 | December 31, 2017 | |||||||
(Dollars in millions) | ||||||||
7.500 percent senior notes, due 2025 ("2025 Partnership Notes") | $ | 700.0 | $ | 700.0 | ||||
7.625 percent senior notes, due 2019 ("2019 Notes") | — | 44.6 | ||||||
Term loan, due 2022 ("Term Loan") | 44.4 | — | ||||||
SunCoke's revolving credit facility, due 2022 ("Revolving Facility") | — | — | ||||||
Partnership's revolving credit facility, due 2022 as of December, 2017 ("Partnership Revolver") | 130.0 | 130.0 | ||||||
5.82 percent financing obligation, due 2021 ("Partnership Financing Obligation") | 11.4 | 12.7 | ||||||
Total borrowings | 885.8 | 887.3 | ||||||
Original issue discount | (5.6 | ) | (5.9 | ) | ||||
Debt issuance costs | (16.4 | ) | (17.7 | ) | ||||
Total debt and financing obligation | 863.8 | 863.7 | ||||||
Less: current portion of long-term debt and financing obligation | 3.8 | 2.6 | ||||||
Total long-term debt and financing obligation | $ | 860.0 | $ | 861.1 | ||||
Redemption of 2019 Notes
On January 11, 2018, the Company redeemed all of its outstanding 2019 Notes for $46.1 million, which included accrued and unpaid interest of $1.5 million. As a result of the debt extinguishment, the Company recorded a loss on extinguishment of debt on the Consolidated Statement of Operations of $0.3 million, representing a write-off of unamortized debt issuance costs. The Company funded the redemption with a Term Loan in aggregate principal amount of $45.0 million, resulting in additional debt issuance costs of $0.3 million. The Term Loan will mature on May 24, 2022. Borrowings under the Term Loan will bear interest, at the Company’s option, at either (i) a base rate plus an applicable margin or (ii) LIBOR plus an
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applicable margin. The applicable margin is based on the Company's consolidated leverage ratio, as defined in the credit agreement.
Revolving Facility
The Revolving Facility has capacity of $100.0 million. As of June 30, 2018, the Revolving Facility had letters of credit outstanding of $24.0 million and no outstanding balance, leaving $76.0 million available.
Partnership Revolver
The Partnership Revolver has capacity of $285.0 million. As of June 30, 2018, the Partnership had $1.9 million of letters of credit outstanding and an outstanding balance of $130.0 million, leaving $153.1 million available.
Covenants
Under the terms of the Revolving Facility, the Company is subject to a maximum consolidated leverage ratio of 3.25:1.00 and a minimum consolidated interest coverage ratio of 2.75:1.00. Under the terms of the Partnership's credit agreement, the Partnership is subject to a maximum consolidated leverage ratio of 4.50:1.00 prior to June 30, 2020 and 4.00:1.00 after June 30, 2020 and a minimum consolidated interest coverage ratio of 2.50:1.00. The Company's and Partnership's credit agreements contain other covenants and events of default that are customary for similar agreements and may limit our ability to take various actions including our ability to pay a dividend or repurchase our stock.
If we fail to perform our obligations under these and other covenants, the lenders' credit commitment could be terminated and any outstanding borrowings, together with accrued interest, under the Revolving Facility and Partnership Revolver could be declared immediately due and payable. The Company and the Partnership have a cross default provision that applies to our indebtedness having a principal amount in excess of $35 million.
As of June 30, 2018, the Company and the Partnership were in compliance with all applicable debt covenants. We do not anticipate violation of these covenants nor do we anticipate that any of these covenants will restrict our operations or our ability to obtain additional financing.
Maturities
As of June 30, 2018, the combined aggregate amount of maturities for long-term borrowings for each of the next five years is as follows:
(Dollars in Millions)(1) | ||||
2018 | $ | 1.8 | ||
2019 | 3.9 | |||
2020 | 10.7 | |||
2021 | 3.4 | |||
2022 | 166.0 | |||
2023-Thereafter | 700.0 | |||
Total | $ | 885.8 | ||
(1) | Assumes the Partnership Financing Obligation early buyout option is exercised in 2020. |
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7. Retirement Benefits Plans
The Company has plans which provide health care and life insurance benefits for many of its retirees (“postretirement benefit plans”). The postretirement benefit plans are unfunded and the costs are borne by the Company. The expense from these plans consisted of the following components:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Interest cost on benefit obligations | $ | 0.2 | $ | 0.3 | $ | 0.5 | $ | 0.6 | ||||||||
Amortization of: | ||||||||||||||||
Actuarial losses | 0.1 | 0.2 | 0.3 | 0.4 | ||||||||||||
Prior service benefit | (0.1 | ) | (0.2 | ) | (0.3 | ) | (0.4 | ) | ||||||||
Total expense(1) | $ | 0.2 | $ | 0.3 | $ | 0.5 | $ | 0.6 | ||||||||
(1) | In conjunction with the adoption of ASU 2017-07, the non-service type expense associated with these plans was excluded from operating income and recorded in interest expense, net on the Consolidated Statements of Operations during the periods presented. Prior year periods have been reclassified to also reflect this presentation. |
Defined Contribution Plans
The Company has defined contribution plans which provide retirement benefits for certain of its employees. The Company’s contributions, which are principally based on the Company’s pretax income and the aggregate compensation levels of participating employees are charged against income as incurred. In both 2018 and 2017, these contributions amounted to $1.5 million and $3.1 million for the three and six months ended June 30, respectively.
8. Commitments and Contingent Liabilities
Legal Matters
SunCoke Energy is party to an omnibus agreement, pursuant to which we have agreed to indemnify the Partnership for costs and expenses related to remediation of certain identified environmental matters in existence prior to the Partnership's initial public offering on January 24, 2013 ("IPO") at the Partnership’s Haverhill and Middletown facilities and certain identified environmental matters in existence prior to the Granite City Dropdown at the Partnership's Granite City facility. However, under the terms of the omnibus agreement, SunCoke Energy is not obligated to indemnify the Partnership for any new environmental matters coming into existence after the IPO at the Partnership’s Haverhill and Middletown facilities, or any new environmental matters coming into existence after the Granite City Dropdown at the Partnership's Granite City facility.
The U.S. Environmental Protection Agency ("EPA") issued Notices of Violations (“NOVs”) for our Haverhill and Granite City cokemaking facilities which stemmed from alleged violations of our air emission operating permits for these facilities. We are working in a cooperative manner with the EPA, the Ohio Environmental Protection Agency and the Illinois Environmental Protection Agency to address the allegations, and have entered into a consent decree in federal district court with these parties. The consent decree includes a $2.2 million civil penalty payment, which was paid in December 2014, as well as capital projects underway to improve the reliability of the energy recovery systems and enhance environmental performance at the Haverhill and Granite City facilities. An amendment was lodged in February 2018 and entered by the federal district court in July 2018. The amendment provides the Haverhill and Granite City facilities with additional time to perform necessary maintenance on the flue gas desulfurization systems without exceeding consent decree limits. The emissions associated with this maintenance will be mitigated in accordance with the amendment, and there are no civil penalty payments.
We anticipate spending approximately $150 million related to these projects, of which we have spent approximately $128 million to date, including $7 million spent by the Company prior to the formation of the Partnership. The remaining capital is expected to be spent through the first half of 2019. A portion of the proceeds from the Partnership's initial public offering and subsequent dropdowns were used to fund $119 million of these environmental remediation projects. Pursuant to the omnibus agreement, the Company made a capital contribution to the Partnership of $10 million during the first quarter of 2018 for these known environmental remediation projects. The Company expects to make an additional capital contribution to the Partnership of approximately $15 million for the estimated future spending related to these environmental remediation projects.
SunCoke Energy has also received NOVs, Findings of Violations ("FOVs"), and information requests from the EPA related to our Indiana Harbor cokemaking facility, which allege violations of certain air operating permit conditions for this
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facility. The Clean Air Act (the "CAA") provides the EPA with the authority to issue, among other actions, an order to enforce a State Implementation Plan ("SIP") 30 days after an NOV. The CAA also authorizes EPA enforcement of other non-SIP requirements immediately after an FOV. Generally, an NOV applies to SIPs and requires the EPA to wait 30 days, while an FOV applies to all other provisions (such as federal regulations) of the CAA, and has no waiting period. The NOVs and/or FOVs were received in 2010, 2012, 2013, 2015 and 2016. After discussions with the EPA and the Indiana Department of Environmental Management (“IDEM”) in 2010, resolution of the NOVs/FOVs was postponed by mutual agreement because of ongoing discussions regarding the NOVs at Haverhill and Granite City. In January 2012, the Company began working in a cooperative manner to address the allegations with the EPA, the IDEM and Cokenergy, LLC, an independent power producer that owns and operates an energy facility, including heat recovery equipment and a flue gas desulfurization system, that processes hot flue gas from our Indiana Harbor facility to produce steam and electricity and to reduce the sulfur and particulate content of such flue gas.
The EPA, IDEM, SunCoke Energy and Cokenergy, LLC have met regularly since those discussions commenced, and continued to meet regularly in 2017 to reach a settlement of the NOVs and FOVs. Capital projects were underway during this time to address items that would be included in conjunction with a settlement of the NOVs/FOVs. A Consent Decree among the parties was lodged in federal court in January 2018 and is undergoing review. The settlement includes a $2.5 million civil penalty payment, which is included in accrued liabilities on the Consolidated Balance Sheets at both June 30, 2018 and December 31, 2017. Further, the settlement consists of capital projects already underway to improve reliability and environmental performance of the coke ovens at the facility.
The Company is a party to certain other pending and threatened claims, including matters related to commercial and tax disputes, product liability, employment claims, personal injury claims, premises-liability claims, allegations of exposures to toxic substances and environmental claims. Although the ultimate outcome of these claims cannot be ascertained at this time, it is reasonably possible that some portion of these claims could be resolved unfavorably to the Company. Management of the Company believes that any liability which may arise from claims would not have a material adverse impact on our consolidated financial statements.
Black Lung Benefit Liabilities
The Company has obligations related to coal workers’ pneumoconiosis, or black lung, benefits to certain of our former coal (miners and their dependents). Such benefits are provided for under Title IV of the Federal Coal Mine and Safety Act of 1969 and subsequent amendments, as well as for black lung benefits provided in the states of Virginia, Kentucky and West Virginia pursuant to workers’ compensation legislation. The Patient Protection and Affordable Care Act (“PPACA”), which was implemented in 2010, amended previous legislation related to coal workers’ black lung obligations. PPACA provides for the automatic extension of awarded lifetime benefits to surviving spouses and changes the legal criteria used to assess and award claims. We act as a self-insurer for both state and federal black lung benefits and adjust our liability each year based upon actuarial calculations of our expected future payments for these benefits.
Our independent actuarial consultants calculate the present value of the estimated black lung liability annually based on actuarial models utilizing our population of former coal miners, historical payout patterns of both the Company and the industry, actuarial mortality rates, disability incidence, medical costs, death benefits, dependents, discount rates and the current federally mandated payout rates. The estimated liability may be impacted by future changes in the statutory mechanisms, modifications by court decisions and changes in filing patterns driven by perceptions of success by claimants and their advisors, the impact of which cannot be estimated. The estimated liability was $51.3 million and $50.3 million at June 30, 2018 and December 31, 2017, respectively, of which the current portion of $5.4 million was included in accrued liabilities on the Consolidated Balance Sheets in both periods.
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9. Share-Based Compensation
Equity Classified Awards
During the six months ended June 30, 2018, the Company granted share-based compensation to eligible participants under the SunCoke Energy, Inc. Long-Term Performance Enhancement Plan (“SunCoke LTPEP”). All awards vest immediately upon a change in control and a qualifying termination of employment as defined by the SunCoke LTPEP.
Stock Options
The Company granted the following stock options during the six months ended June 30, 2018 with an exercise price equal to the closing price of our common stock on the date of grant.
Weighted Average Per Share | ||||||||||
No. of Shares | Exercise Price | Grant Date Fair Value | ||||||||
Traditional stock options | 78,447 | $ | 10.49 | $ | 5.38 | |||||
The stock options vest in three equal annual installments beginning one year from the date of grant. The stock options expire ten years from the date of grant.
The Company calculates the value of each employee stock option, estimated on the date of grant, using the Black-Scholes option pricing model. The weighted-average fair value of employee stock options granted during the six months ended June 30, 2018 was based on using the following weighted-average assumptions:
Six Months Ended June 30, 2018 | |||
Risk-free interest rate | 3 | % | |
Expected term | 6 years | ||
Volatility | 52 | % | |
Dividend yield | — | % | |
The risk-free interest rate assumption is based on the U.S. Treasury yield curve at the date of grant for periods which approximate the expected life of the option. The expected term of the employee options represent the average contractual term adjusted by the average vesting period of each option tranche. We determined expected volatility using our historical volatility calculated as our historical daily stock returns over the options' expected term. The dividend yield assumption is based on the Company’s expectation of dividend payouts at the time of grant.
Restricted Stock Units Settled in Shares
The Company issued 32,128 stock-settled restricted stock units (“RSUs”) to certain employees for shares of the Company’s common stock during the six months ended June 30, 2018. The weighted average grant date fair value was $10.49 per share. The RSUs vest in three annual installments beginning one year from the date of grant.
Performance Share Units
The Company granted the following performance share units ("PSUs") for shares of the Company's common stock during the six months ended June 30, 2018 that vest on December 31, 2020:
Shares | Grant Date Fair Value per Share | |||||
PSUs(1)(2) | 96,389 | $ | 11.36 | |||
(1) | The PSU awards are split 50/50 between the Company's three year cumulative Adjusted EBITDA performance measure and the Company's three-year average pre-tax return on capital performance measure for its coke and logistics businesses and unallocated corporate expenses. |
(2) | The number of PSU's ultimately awarded will be determined by the above performance versus targets and the Company's three-year total shareholder return ("TSR") as compared to the TSR of the companies making up the Nasdaq Iron & Steel Index ("TSR Modifier"). The TSR Modifier can impact the payout between 75 percent and 125 percent of the Company's final performance measure results. |
The award may vest between zero and 250 percent of the original units granted. In the event the TSR performance is negative, the overall payout of the award shall be capped at 100 percent. The fair value of the PSUs granted during the six
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months ended June 30, 2018 is based on the closing price of our common stock on the date of grant as well as a Monte Carlo simulation for the valuation of the TSR Modifier.
Liability Classified Awards
Restricted Stock Units Settled in Cash
During the six months ended June 30, 2018, the Company issued 84,759 restricted stock units to be settled in cash ("Cash RSUs"), which vest in three annual installments beginning one year from the grant date. The weighted average grant date fair value of the Cash RSUs granted during the six months ended June 30, 2018 was $10.49 and was based on the closing price of our common stock on the day of grant.
The Cash RSU liability is adjusted based on the closing price of our common stock at the end of each period and at both June 30, 2018 and December 31, 2017 was not material.
Cash Incentive Award
The Company also granted share-based compensation to eligible participants under the SunCoke Energy, Inc. Long-Term Cash Incentive Plan ("SunCoke LTCIP"), which became effective January 1, 2016. The SunCoke LTCIP is designed to provide for performance-based, cash-settled awards. All awards vest immediately upon a change in control and a qualifying termination of employment as defined by the SunCoke LTCIP.
The Company issued a grant date fair value award of $1.0 million during the six months ended June 30, 2018 that vest on December 31, 2020. The awards are split 50/50 between the Company's three cumulative Adjusted EBITDA performance and the Company's three-year average per-tax return on capital for its coke and logistics businesses and unallocated corporate expense. The ultimate award value will be determined by the performance versus targets and the Company's three year TSR Modifier performance, but will be capped at 250 percent of the target award.
The cash incentive award liability at June 30, 2018 was adjusted based on the Company's three year cumulative Adjusted EBITDA performance and adjusted average pre-tax return on capital for the Company's coke and logistics businesses and unallocated corporate expenses. The cash incentive award liability at both June 30, 2018 and December 31, 2017 was not material.
Summary of Share-Based Compensation Expense
Below is a summary of the compensation expense, unrecognized compensation costs, and the period for which the unrecognized compensation cost is expected to be recognized over:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | June 30, 2018 | |||||||||||||||||
Compensation Expense(1) | Unrecognized Compensation Cost | Recognition Period | |||||||||||||||||||
(Dollars in millions) | (Years) | ||||||||||||||||||||
Equity Awards: | |||||||||||||||||||||
Stock Options | $ | 0.1 | $ | 0.2 | $ | 0.3 | $ | 0.8 | $ | 0.8 | 1.9 | ||||||||||
RSUs | 0.1 | 0.3 | 0.2 | 0.7 | $ | 0.4 | 1.8 | ||||||||||||||
PSUs | 0.5 | 0.8 | 0.9 | 1.2 | $ | 3.0 | 2.4 | ||||||||||||||
Total equity awards | $ | 0.7 | $ | 1.3 | $ | 1.4 | $ | 2.7 | |||||||||||||
Liability Awards: | |||||||||||||||||||||
Cash RSUs | $ | 0.5 | $ | 0.4 | $ | 0.6 | $ | 0.4 | $ | 1.7 | 1.7 | ||||||||||
Cash incentive award | 0.3 | 0.2 | 0.5 | 0.3 | $ | 1.1 | 2.2 | ||||||||||||||
Total liability awards | $ | 0.8 | $ | 0.6 | $ | 1.1 | $ | 0.7 | |||||||||||||
(1) | Compensation expense recognized by the Company in selling, general and administrative expenses on the Consolidated Statements of Operations. |
The Company and the Partnership issued $0.2 million and $0.3 million of shared-based compensation to the Company's and the Partnership's Board of Directors during the six months ended June 30, 2018 and 2017, respectively.
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10. Acquisition of Noncontrolling Interest
In 2017, the Company's Board of Directors authorized a program for the Company to purchase outstanding Partnership common units at any time and from time to time in the open market, through privately negotiated transactions, block transactions, or otherwise for a total aggregate cost to the Company not to exceed $100.0 million. At June 30, 2018 there was $47.1 million available under the authorized program.
The following table summarizes the Company's purchases of outstanding Partnership common units in the open market:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Units purchased | 42,706 | 1,460,404 | 231,171 | 1,460,404 | ||||||||||||
Cash paid | $ | 0.8 | $ | 24.6 | $ | 4.2 | $ | 24.6 | ||||||||
Decrease in noncontrolling interest (1) | $ | 0.5 | $ | 15.4 | $ | 2.7 | $ | 15.4 | ||||||||
Decrease in additional paid in capital (2) | $ | 0.3 | $ | 5.8 | $ | 1.2 | $ | 5.8 | ||||||||
(1) | Represents Partnership's net book value acquired by the Company. |
(2) | Represents consideration paid in excess of the net book value of the noncontrolling interest acquired net of deferred tax adjustments of $0.3 million for both the three and six months ended June 30, 2018, respectively, and $3.4 million for both the three and six months ended June 30, 2017. |
The following table summarizes the effects of the changes in the Company's ownership interest in the Partnership on SunCoke's equity:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net income (loss) attributable to SunCoke, Inc. | $ | 4.2 | $ | (24.2 | ) | $ | 12.9 | $ | (23.2 | ) | ||||||
Decrease in SunCoke Energy, Inc. equity for the purchase of additional interest in the Partnership | (0.3 | ) | (5.8 | ) | (1.2 | ) | (5.8 | ) | ||||||||
Change from net income (loss) attributable to SunCoke Energy, Inc. and transfers to noncontrolling interest | $ | 3.9 | $ | (30.0 | ) | $ | 11.7 | $ | (29.0 | ) | ||||||
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11. Earnings per Share
Basic earnings per share (“EPS”) has been computed by dividing net income available to SunCoke Energy, Inc. by the weighted average number of shares outstanding during the period. Except where the result would be anti-dilutive, diluted earnings per share has been computed to give effect to share-based compensation awards using the treasury stock method.
The following table sets forth the reconciliation of the weighted-average number of common shares used to compute basic EPS to those used to compute diluted EPS:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
(Shares in millions) | ||||||||||||
Weighted-average number of common shares outstanding-basic | 64.7 | 64.3 | 64.6 | 64.3 | ||||||||
Add: Effect of dilutive share-based compensation awards | 0.9 | — | 0.9 | — | ||||||||
Weighted-average number of shares-diluted | 65.6 | 64.3 | 65.5 | 64.3 | ||||||||
The following table shows stock options, restricted stock units, and performance stock units that are excluded from the computation of diluted earnings per share as the shares would have been anti-dilutive:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
(Shares in millions) | ||||||||||||
Stock options | 2.8 | 3.3 | 2.8 | 3.3 | ||||||||
Restricted stock units | — | 0.1 | — | 0.2 | ||||||||
Performance stock units | — | 1.0 | 0.1 | 0.9 | ||||||||
Total | 2.8 | 4.4 | 2.9 | 4.4 | ||||||||
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12. Supplemental Accumulated Other Comprehensive Loss Information
Changes in accumulated other comprehensive loss, by component, are presented below:
Benefit Plans | Currency Translation Adjustments | Total | |||||||||
(Dollars in millions) | |||||||||||
At December 31, 2017 | $ | (6.5 | ) | $ | (14.7 | ) | $ | (21.2 | ) | ||
Currency translation adjustment | — | (1.3 | ) | (1.3 | ) | ||||||
Recognition of accumulated currency translation loss upon sale of equity method investment | — | 9.0 | 9.0 | ||||||||
At June 30, 2018 | $ | (6.5 | ) | $ | (7.0 | ) | $ | (13.5 | ) | ||
Reclassifications out of the accumulated other comprehensive loss were as follows(1):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Recognition of accumulated currency translation adjustments(2) | $ | 9.0 | $ | — | $ | 9.0 | — | ||||||||
Amortization of postretirement benefit plan items to net income: | |||||||||||||||
Actuarial loss(3) | $ | 0.1 | $ | 0.2 | $ | 0.3 | $ | 0.4 | |||||||
Prior service benefit(3) | (0.1 | ) | (0.2 | ) | (0.3 | ) | (0.4 | ) | |||||||
Total expense before taxes | 9.0 | — | 9.0 | — | |||||||||||
Less income tax benefit | — | — | — | — | |||||||||||
Total expense, net of tax | $ | 9.0 | $ | — | $ | 9.0 | $ | — | |||||||
(1) | Amounts in parentheses indicate credits to net income. |
(2) | These accumulated currency translation losses were recognized into income as a result of the sale of our equity method investment in VISA SunCoke Limited. |
(3) | These accumulated other comprehensive (income) loss components are included in the computation of postretirement benefit plan expense (benefit). See Note 7. |
13. Fair Value Measurement
The Company measures certain financial and non-financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
• | Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market. |
• | Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability. |
• | Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability. |
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Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are measured at fair value on a recurring basis. The Company's cash equivalents, which amounted to $7.7 million and $5.5 million at June 30, 2018 and December 31, 2017, respectively, were measured at fair value based on quoted prices in active markets for identical assets. These inputs are classified as Level 1 within the valuation hierarchy.
CMT Contingent Consideration
In connection with the CMT acquisition, the Partnership entered into a contingent consideration arrangement that requires the Partnership to make future payments to The Cline Group based on future volume over a specified threshold, price and contract renewals. The fair value of the contingent consideration was estimated based on a probability-weighted analysis using significant inputs that are not observable in the market, or Level 3 inputs. Key assumptions included probability adjusted levels of handling services provided by CMT, anticipated price per ton on future sales and probability of contract renewal, including length of future contracts, volume commitment, and anticipated price per ton. The fair value of the contingent consideration was $3.1 million at June 30, 2018, with $0.4 million included in accrued liabilities and $2.7 million included in other deferred credit and liabilities on the Consolidated Balance Sheets. The fair value of the contingent consideration was $2.5 million at December 31, 2017 and was included in other deferred credits and liabilities on the Consolidated Balance Sheets. The increase in the fair value of the contingent consideration liability was primarily due to changes in expected throughput volumes related to the long-term, take-or-pay agreements.
Certain Financial Assets and Liabilities not Measured at Fair Value
At June 30, 2018 and December 31, 2017, the fair value of the Company’s total debt was estimated to be $898.7 million and $919.7 million, respectively, compared to a carrying amount of $885.8 million and $887.3 million, respectively. The fair value was estimated by management based upon estimates of debt pricing provided by financial institutions, which are considered Level 2 inputs.
14. Revenue from Contracts with Customers
Cokemaking
Substantially all our coke sales are made pursuant to long-term, take-or-pay agreements with ArcelorMittal 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 in North America. The take-or-pay provisions of our agreements require us to deliver minimum annual tonnage, which varies by contract, but covers at least 90 percent of each facility's annual capacity. The take-or-pay provisions also require our customers to purchase such volumes of coke or pay the contract price for any tonnage they elect not to take. To date, our customers have satisfied their obligations under these agreements. These coke sales agreements have an average remaining term of approximately six years, and to date, our coke customers have satisfied their obligations under these agreements.
Our coke sales prices include an operating cost component, a coal cost component and a return of capital component. Operating costs under two of our coke sales agreements are contractual, subject to an annual adjustment based on an inflation index. Under our other four coke sales agreements operating costs are passed through to the respective customers subject to an annually negotiated budget, in some cases subject to a cap annually adjusted for inflation, and generally we share any difference in costs from the budgeted amounts with our customers. Our coke sales agreements contain pass-through provisions for coal and coal procurement costs, subject to meeting contractual coal-to-coke yields. To the extent that the actual coal-to-coke yields are less than the contractual standard, we are responsible for the cost of the excess coal used in the cokemaking process. Conversely, to the extent our actual coal-to-coke yields are higher than the contractual standard, we realize gains. The reimbursement of pass-through operating and coal costs from these coke sales agreements are considered to be variable consideration components included in the cokemaking sales price. The return of capital component for each ton of coke sold to the customer is determined at the time the coke sales agreement is signed and is effective for the term of each sales agreement. This component of our coke sales prices is intended to provide an adequate return on invested capital and may differ based on investment levels and other considerations. The actual return on invested capital at any facility is also impacted by favorable or unfavorable performance on pass-through cost items. Revenues are recognized when performance obligations to our customers are satisfied in an amount that reflects the consideration that we expect to receive in exchange for the coke.
Logistics
In our logistics business, handling and/or mixing services are provided to steel, coke (including some of our domestic cokemaking facilities), electric utility, coal producing and other manufacturing based customers. Materials are transported in numerous ways, including rail, truck, barge or ship. We do not take possession of materials handled, but rather act as intermediaries between our customers and end users, deriving our revenues from services provided on a per ton basis. The handling and mixing services consist primarily of two performance obligations, unloading and loading of materials. Our logistics business has long-term, take-or-pay agreements requiring us to handle over 13 million tons annually. The take-or-pay provisions in these agreements require our customers to purchase such handling services or pay the contract price for services they elect not to take. Estimated take-or-pay revenue of approximately $340 million from all of our long-term logistics contracts is expected to be recognized over the next six years for unsatisfied or partially unsatisfied performance obligations as of June 30, 2018. To date, our customers have satisfied their obligations under these agreements. Included with these long-
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term, take-or-pay arrangements are our contracts with Murray American Coal, Inc. ("Murray") and Foresight Energy LLC ("Foresight"), which cover 10 million tons of CMT's annual transloading capacity of 15 million tons. Revenues are recognized when the customer receives the benefits of the services provided, in an amount that reflects the consideration that we will receive in exchange for those services. Billings to CMT customers for take-or-pay volume shortfalls based on pro-rata volume commitments under take-or-pay contracts that are in excess of billings earned for services provided are recorded as contract liabilities and characterized as deferred revenue on the Consolidated Balance Sheets. Deferred revenue is recognized at the earlier of i) when the performance obligation is satisfied; ii) when the performance obligation has expired, based on the terms of the contract; or iii) as a result of a remote likelihood that the customer would exercise its right to the performance obligation.
The following table provides changes in the Company's deferred revenue during the six months ended June 30:
2018 | 2017 | |||||||
(Dollars in millions) | ||||||||
Beginning balance at December 31, 2017 and 2016, respectively | $ | 1.7 | $ | 2.5 | ||||
Reclassification of the beginning contract liabilities to revenue, as a result of performance obligation satisfied | (0.6 | ) | (0.5 | ) | ||||
Billings in excess of services performed, not recognized as revenue | 2.1 | 10.0 | ||||||
Ending balance at June 30, 2018 and 2017, respectively | $ | 3.2 | $ | 12.0 | ||||
Energy
Our energy sales are made pursuant to either steam or energy supply and purchase agreements or is sold into the regional power market. 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. The energy provided under these arrangements result in transfer of control over time. Revenues are recognized over time as energy is delivered to our customers, in an amount based on the terms of each arrangement.
Operating and Licensing Fees
Operating and licensing fees are made pursuant to long-term contracts with ArcelorMittal Brazil, where we operate a Brazilian cokemaking facility. The licensing fees are based upon the level of production required by our customer as well as a fixed annual fee. Operating fees include the full pass-through of the operating costs of the Brazilian facility as well as a per ton fee based on the level of production required by our customer. Revenues are recognized over time as our customers receive and consume the benefits in an amount that corresponds directly with the value provided to the customer to date.
Disaggregated sales and other operating revenue
The following table provides disaggregated sales and other operating revenue by product or service, excluding intersegment revenues:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Sales and other operating revenue: | ||||||||||||||||
Cokemaking | $ | 313.7 | $ | 284.8 | $ | 616.2 | $ | 547.4 | ||||||||
Energy | 13.1 | 10.9 | 26.7 | 24.6 | ||||||||||||
Logistics | 28.0 | 14.2 | 50.1 | 33.8 | ||||||||||||
Operating and licensing fees | 10.2 | 10.5 | 20.3 | 21.3 | ||||||||||||
Other | 2.0 | 2.8 | 4.2 | 5.8 | ||||||||||||
Sales and other operating revenue | $ | 367.0 | $ | 323.2 | $ | 717.5 | $ | 632.9 | ||||||||
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The following table provides disaggregated sales and other operating revenue by customer:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Sales and other operating revenue: | ||||||||||||||||
AM USA | $ | 173.0 | $ | 160.1 | $ | 337.1 | $ | 305.2 | ||||||||
AM Brazil | 10.2 | 10.5 | 20.3 | 21.3 | ||||||||||||
AK Steel | 94.8 | 83.4 | 187.7 | 166.9 | ||||||||||||
U.S. Steel | 55.4 | 51.4 | 107.1 | 99.1 | ||||||||||||
Foresight and Murray | 17.4 | 8.0 | 31.5 | 19.5 | ||||||||||||
Other | 16.2 | 9.8 | 33.8 | 20.9 | ||||||||||||
Sales and other operating revenue | $ | 367.0 | $ | 323.2 | $ | 717.5 | $ | 632.9 | ||||||||
Shipping and Handling Costs
Shipping and handling costs are included in cost of products sold and operating expenses on the Consolidated Statements of Operations and are generally passed through to our customers. The Company has elected to account for shipping and handling activities as a promise to fulfill the transfer of coke.
15. Business Segment Information
The Company reports its business through three segments: Domestic Coke, Brazil Coke and Logistics. The Domestic Coke segment includes the Jewell, Indiana Harbor, Haverhill, Granite City and Middletown cokemaking facilities. Each of these facilities produces coke, and all facilities except Jewell recover waste heat, which is converted to steam or electricity through a similar production process.
The Brazil Coke segment includes the licensing and operating fees payable to us under long-term contracts with ArcelorMittal Brazil, under which we operate a cokemaking facility located in Vitória, Brazil through at least 2023.
Logistics operations are comprised of CMT, KRT, Lake Terminal, which provides services to our Indiana Harbor cokemaking facility, and DRT, which provides services to our Jewell cokemaking facility. Handling and mixing results are presented in the Logistics segment.
Corporate expenses that can be identified with a segment have been included in determining segment results. The remainder is included in Corporate and Other. Corporate and Other also includes activity from our legacy coal mining business, which was historically presented as a separate reportable segment.
Segment assets are those assets utilized within a specific segment and exclude deferred taxes and current tax receivables.
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The following table includes Adjusted EBITDA, which is the measure of segment profit or loss and liquidity reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Sales and other operating revenue: | ||||||||||||||||
Domestic Coke | $ | 328.7 | $ | 296.5 | $ | 646.8 | $ | 575.2 | ||||||||
Brazil Coke | 10.2 | 10.5 | 20.3 | 21.3 | ||||||||||||
Logistics | 28.1 | 16.2 | 50.4 | 36.4 | ||||||||||||
Logistics intersegment sales | 5.5 | 5.1 | 10.9 | 10.2 | ||||||||||||
Elimination of intersegment sales | (5.5 | ) | (5.1 | ) | (10.9 | ) | (10.2 | ) | ||||||||
Total sales and other operating revenues | $ | 367.0 | $ | 323.2 | $ | 717.5 | $ | 632.9 | ||||||||
Adjusted EBITDA: | ||||||||||||||||
Domestic Coke | $ | 52.9 | $ | 44.0 | $ | 107.2 | $ | 93.7 | ||||||||
Brazil Coke | 4.8 | 4.5 | 9.5 | 8.9 | ||||||||||||
Logistics | 19.7 | 10.0 | 33.3 | 23.1 | ||||||||||||
Corporate and Other(1) | (10.1 | ) | (11.0 | ) | (18.7 | ) | (22.6 | ) | ||||||||
Total Adjusted EBITDA | $ | 67.3 | $ | 47.5 | $ | 131.3 | $ | 103.1 | ||||||||
Depreciation and amortization expense: | ||||||||||||||||
Domestic Coke | $ | 25.5 | $ | 26.8 | $ | 50.8 | $ | 53.4 | ||||||||
Brazil Coke | 0.1 | 0.1 | 0.3 | 0.3 | ||||||||||||
Logistics | 6.0 | 6.1 | 13.0 | 12.2 | ||||||||||||
Corporate and Other | 0.4 | 0.3 | 0.8 | 0.7 | ||||||||||||
Total depreciation and amortization expense | $ | 32.0 | $ | 33.3 | $ | 64.9 | $ | 66.6 | ||||||||
Capital expenditures: | ||||||||||||||||
Domestic Coke | $ | 26.8 | $ | 7.9 | $ | 41.9 | $ | 19.9 | ||||||||
Logistics | 1.3 | 0.7 | 1.6 | 1.3 | ||||||||||||
Corporate and Other | 0.1 | 1.1 | 0.1 | 1.2 | ||||||||||||
Total capital expenditures | $ | 28.2 | $ | 9.7 | $ | 43.6 | $ | 22.4 | ||||||||
(1) | Corporate and Other includes the activity from our legacy coal mining business, which contributed Adjusted EBITDA losses of $2.4 million and $4.7 million during the three and six months ended June 30, 2018, respectively, as well as $2.7 million and $6.2 million during the three and six months ended June 30, 2017, respectively. |
The following table sets forth the Company's segment assets:
June 30, 2018 | December 31, 2017 | |||||||
(Dollars in millions) | ||||||||
Segment assets | ||||||||
Domestic Coke | $ | 1,454.6 | $ | 1,439.7 | ||||
Brazil Coke | 14.9 | 10.9 | ||||||
Logistics | 487.2 | 491.9 | ||||||
Corporate and Other | 122.8 | 112.8 | ||||||
Segment assets, excluding tax assets | 2,079.5 | 2,055.3 | ||||||
Tax assets | 4.8 | 4.8 | ||||||
Total assets | $ | 2,084.3 | $ | 2,060.1 | ||||
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, loss (gain) on extinguishment of debt, changes to our contingent consideration liability related to our acquisition of CMT and/or loss on the disposal of our interest in VISA SunCoke. EBITDA and Adjusted EBITDA do not represent and should not be considered
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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 of the operating performance and liquidity of the Company's net assets and its ability to incur and service debt, fund capital expenditures and make distributions. 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 and liquidity. EBITDA and Adjusted EBITDA are not measures calculated in accordance with GAAP, and they should not be considered a substitute for net income, operating cash flow or any other measure of financial performance presented in accordance with GAAP. Set forth below is additional discussion of the limitations of Adjusted EBITDA as an analytical tool.
Limitations. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Adjusted EBITDA also has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP. Some of these limitations include that Adjusted EBITDA:
• | does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
• | does not reflect items such as depreciation and amortization; |
• | does not reflect changes in, or cash requirement for, working capital needs; |
• | does not reflect our interest expense, or the cash requirements necessary to service interest on or principal payments of our debt; |
• | does not reflect certain other non-cash income and expenses; |
• | excludes income taxes that may represent a reduction in available cash; and |
• | includes net income attributable to noncontrolling interests. |
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Below is a reconciliation of Adjusted EBITDA to net income and net cash provided by operating activities, which are its most directly comparable financial measures calculated and presented in accordance with GAAP:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net cash provided by operating activities | $ | 28.0 | $ | 24.9 | $ | 85.3 | $ | 54.4 | ||||||||
Subtract: | ||||||||||||||||
Depreciation and amortization expense | 32.0 | 33.3 | 64.9 | 66.6 | ||||||||||||
Deferred income tax expense | 0.1 | 14.0 | 0.3 | 79.8 | ||||||||||||
Loss on extinguishment of debt | — | 20.2 | 0.3 | 20.3 | ||||||||||||
Loss from equity method investment | 5.4 | — | 5.4 | — | ||||||||||||
Changes in working capital and other | (20.9 | ) | (11.1 | ) | (10.0 | ) | (23.1 | ) | ||||||||
Net income (loss) | $ | 11.4 | $ | (31.5 | ) | |||||||||||