Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K 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 under “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors.”
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 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" in this Item and Note 19 to our consolidated financial statements.
Our MD&A is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our results of operations include reference to our business operations and market conditions, which are further described in Part I of this document.
2022 Overview
Our consolidated results of operations in 2022 were as follows:
Year Ended December 31, 2022
(Dollars in millions)
Net income $ 104.9
Net cash provided by operating activities $ 208.9
Adjusted EBITDA (1)
$ 297.7
(1) See Note 19 in our consolidated financial statements for both the definition of Adjusted EBITDA and the reconciliation from GAAP to the non-GAAP measurement.
The Company delivered strong financial results for the year ended 2022. Favorable pricing on export coke sales in our Domestic Coke segment and higher price realization and volumes within our Logistics segment drove record Adjusted EBITDA performance in 2022. We also increased our participation in the foundry coke market, while continuing to deliver on our long-term, take-or-pay coke contracts.
We returned meaningful capital to our shareholders through the declaration and payment of a dividend during each quarter of 2022, increasing from $0.06 per share during the first half of the year to $0.08 per share during the second half of the year, representing a quarterly increase of 33 percent. Additionally, we reduced total debt by approximately $83 million in 2022 .
Recent Developments
• Granulated Pig Iron Project. On June 28, 2022, the Company entered into a non-binding letter of intent with U.S. Steel. The letter of intent sets out the principal terms and conditions upon which SunCoke would acquire two blast furnaces from U.S. Steel's Granite City Works facility and construct a granulated pig iron facility with an annual capacity of 2 million tons to be sold to U.S. Steel for a ten year initial term.
Items Impacting Comparability
• 2021 Debt Refinancing. During the second quarter of 2021, the Company refinanced its debt obligations. The Company issued $500.0 million of 4.875 percent senior notes, due in 2029 ("2029 Senior Notes"), amended and extended the maturity of its revolving credit facility ("Revolving Facility") to June 2026 and reduced the Revolving Facility capacity by $50.0 million to $350.0 million. The Company used the proceeds of the 2029 Senior Notes along with borrowings under the Company's Revolving Facility to purchase and redeem all of the 7.500 percent senior notes, due in 2025 ("2025 Senior Notes"). As a result of the debt refinancing and revolver amendment, the year ended December 31, 2021 included a loss on extinguishment of debt on the Consolidated Statement of Income of $31.9 million, which consisted of the premium paid of $22.0 million and the write-off of unamortized debt issuance costs of $6.9 million and the remaining original issue discount of $3.0 million.
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Consolidated Results of Operations
The following section includes year-over-year analysis of consolidated results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021. See "Analysis of Segment Results" later in this section for further details of these results. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K for the year-over-year analysis of consolidated results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Years Ended December 31,
2022 2021 Increase (Decrease)
(Dollars in millions)
Revenues
Sales and other operating revenue
$ 1,972.5 $ 1,456.0 $ 516.5
Costs and operating expenses
Cost of products sold and operating expenses
1,604.9 1,118.8 486.1
Selling, general and administrative expenses
71.4 61.8 9.6
Depreciation and amortization expense
142.5 133.9 8.6
Total costs and operating expenses 1,818.8 1,314.5 504.3
Operating income 153.7 141.5 12.2
Interest expense, net
32.0 42.5 (10.5)
Loss on extinguishment of debt — 31.9 (31.9)
Income before income tax expense 121.7 67.1 54.6
Income tax expense 16.8 18.3 (1.5)
Net income 104.9 48.8 56.1
Less: Net income attributable to noncontrolling interests
4.2 5.4 (1.2)
Net income attributable to SunCoke Energy, Inc. $ 100.7 $ 43.4 $ 57.3
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 in 2022 as compared to 2021, primarily driven by the pass-through of higher coal prices in our Domestic Coke segment, which also resulted in lower margins. Additionally, revenues further benefited from favorable pricing on export coke sales in our Domestic Coke segment, which partially offset the impact of higher coal prices on margins.
Selling, General and Administrative Expen ses. The increase in selling, general and administrative expense primarily reflects higher employee related expenses, higher cost of professional services, and transaction costs incurred as part of the granulated pig iron project. These higher costs were partially offset by valuation adjustments as a result of changes in discount rates on certain legacy liabilities, which decreased legacy costs by $3.3 million as compared to the prior year.
Depreciation and Amortization Expense. Depreciation and amortization expense increased as a result of depreciable assets placed into service since the prior year period.
Interest Expen se, net. Interest expense, net, benefited in 2022 from a lower interest rate on the outstanding senior notes, which decreased to 4.875 percent from 7.500 percent as a result of the debt refinancing that occurred during the second quarter of 2021, as well as lower average debt balances during the current year period.
Income Tax Expense. Income tax expense during 2022 reflects the net impact of Foreign Tax Credit regulations signed in 2022 further described in Note 4 to our consolidated financial statements, which had a net result of an income tax benefit of $6.5 million during the current year period. Additionally, the current year period reflects the recognition of research and development credits and lower apportioned state income tax rates, which resulted in an income tax benefits of $4.0 million and $6.4 million, respectively, including the related revaluation of certain deferred tax liabilities. See Note 4 to our consolidated financial statements for further detail.
Noncontrolling Interest. Net i ncome attributable to noncontrolling interest represents a 14.8 percent third-party interest in our Indiana Harbor cokemaking facility and fluctuates with the financial performance of that facility.
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Results of Reportable Business Segments
We report our business results through three 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 Convent Marine Terminal ("CMT"), located in Convent, Louisiana, Kanawha River Terminal ("KRT"), located in Ceredo and Belle, West Virginia, SunCoke Lake Terminal ("Lake Terminal"), located in East Chicago, Indiana, and Dismal River Terminal ("DRT"), located in Vansant, Virginia. Lake Terminal and DRT are located adjacent to our Indiana Harbor and Jewell cokemaking facilities, respectively.
The operations of each of our segments are described in Part I of this document.
Corporate expenses that can be identified with a segment have been included in determining segment results. The remainder is included in Corporate and Other.
Management believes Adjusted EBITDA is an important measure of operating performance and uses it as the primary basis for the chief operating decision maker to evaluate the performance of each of our reportable segments. Adjusted EBITDA should not be considered a substitute for the reported results prepared in accordance with GAAP. See Note 19 to our consolidated financial statements.
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Segment Operating Data
The following table sets forth financial and operating data by segment for the years ended December 31, 2022 and 2021:
Years Ended December 31,
2022 2021 Increase (Decrease)
(Dollars in millions, except per ton amounts)
Sales and other operating revenue:
Domestic Coke
$ 1,856.9 $ 1,354.5 $ 502.4
Brazil Coke
38.0 36.6 1.4
Logistics
77.6 64.9 12.7
Logistics intersegment sales
28.9 27.1 1.8
Elimination of intersegment sales
(28.9) (27.1) (1.8)
Total sales and other operating revenue
$ 1,972.5 $ 1,456.0 $ 516.5
Adjusted EBITDA (1) :
Domestic Coke
$ 263.4 $ 243.4 $ 20.0
Brazil Coke
14.5 17.2 (2.7)
Logistics 49.7 43.5 6.2
Corporate and Other, net (29.9) (28.7) (1.2)
Total Adjusted EBITDA $ 297.7 $ 275.4 $ 22.3
Coke Operating Data:
Domestic Coke capacity utilization (2)
100 % 101 % (1) %
Domestic Coke production volumes (thousands of tons)
4,023 4,162 (139)
Domestic Coke sales volumes (thousands of tons)
4,031 4,183 (152)
Domestic Coke Adjusted EBITDA per ton (3)
$ 65.34 $ 58.19 $ 7.15
Brazilian Coke production—operated facility (thousands of tons) 1,585 1,685 (100)
Logistics Operating Data:
Tons handled (thousands of tons) 22,291 19,933 2,358
(1) See Note 19 in our consolidated financial statements for both the definition of Adjusted EBITDA and the reconciliation from GAAP to the non-GAAP measurement.
(2) 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.
(3) Reflects Domestic Coke Adjusted EBITDA divided by Domestic Coke sales volumes.
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Analysis of Segment Results
Domestic Coke
The following table explains year-over-year changes in our Domestic Coke segment's sales and other operating revenues and Adjusted EBITDA results:
Sales and other operating revenue Adjusted EBITDA
2022 vs 2021 2022 vs 2021
(Dollars in millions)
Beginning $ 1,354.5 $ 243.4
Volume (1)
(46.4) (13.9)
Price (2)
543.2 47.4
Operating and maintenance costs (3)
N/A (13.1)
Energy and other (4)
5.6 (0.4)
Ending $ 1,856.9 $ 263.4
(1) Volumes decreased during 2022 primarily due to changes in the mix of production.
(2) Revenues increased primarily as a result of the pass-through of higher coal prices on our long-term, take-or-pay agreements, which also had a favorable impact on Adjusted EBITDA due to higher coal-to-coke yield gains on higher coal prices. Favorable pricing on export coke sales also increased revenues and was the primary driver of the increase to Adjusted EBITDA during 2022.
(3) Higher operating and maintenance costs includes the impact of planned maintenance outages and higher cost of fuel.
(4) Favorable energy pricing at our Haverhill II facility increased both revenue and Adjusted EBITDA. This increase to Adjusted EBITDA was more than offset by higher allocation of corporate costs.
Logistics
The following table explains year-over-year changes in our Logistics segment's sales and other operating revenues and Adjusted EBITDA results:
Sales and other operating revenue, inclusive of intersegment sales Adjusted EBITDA
2022 vs 2021 2022 vs 2021
(Dollars in millions)
Beginning $ 92.0 $ 43.5
Transloading volumes (1)
5.9 3.6
Price/margin impact of mix in transloading services (2)
8.9 8.9
Other (3)
(0.3) (6.3)
Ending $ 106.5 $ 49.7
(1) Volumes improved as a result of increased demand driven by the strong domestic metallurgical and thermal coal markets.
(2) Revenues and Adjusted EBITDA increased as a result of favorable pricing at CMT driven by the strong export coal market.
(3) Other decreases in Adjusted EBITDA reflect higher operating and maintenance costs.
Brazil Coke
Sales and other operating revenue increased $1.4 million, or 4 percent, to $38.0 million in 2022 compared to $36.6 million in 2021. Adjusted EBITDA decreased $2.7 million, or 16 percent, to $14.5 million in 2022 compared to $17.2 million in 2021. Sales and other operating revenue and Adjusted EBITDA reflect the impact of lower volumes, including the absence of production bonuses for meeting certain volume targets received in the prior year. The impact of lower volumes on sales and other operating revenue was more than offset by the pass-through of higher reimbursable operating and maintenance costs as well as favorable translation adjustments.
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Corporate and Other
Corporate and Other expenses, increased $1.2 million, or 4 percent, to $29.9 million in 2022 as compared to $28.7 million in 2021. The increase was driven by higher employee related expenses and higher cost of professional services. These increased costs were mostly offset by valuation adjustments as a result of changes in discount rates on certain legacy liabilities, which decreased legacy costs by $3.3 million.
Non-GAAP Financial Measures
In addition to the GAAP results provided in the Annual Report on Form 10-K, we have provided a non-GAAP financial measure, Adjusted EBITDA. Our management, as well as certain investors, uses this non-GAAP measure to analyze our current and expected future financial performance. This measure is not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies. See Note 19 in our consolidated financial statements for both the definition of Adjusted EBITDA and the reconciliation from GAAP to the non-GAAP measurement for 2022, 2021 and 2020.
Liquidity and Capital Resources
Our primary liquidity needs are to fund working capital, fund investments, service our debt, maintain cash reserves and replace partially or fully depreciated assets and other capital expenditures. Our sources of liquidity include cash generated from operations, borrowings under our Revolving 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 December 31, 2022, we had $90.0 million of cash and cash equivalents and $315.0 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 further liquidity discussion below as well as "Part II - Item 5 - Market for Registrant's Common Equity, Related Stockholders Matters 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 provide additional collateral of approximately $32 million to secure certain of its black lung obligations. SunCoke exercised its right to appeal the DCMWC’s determination and provided additional information supporting the Company’s position in May 2020 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. We will submit comments on this proposed rule and continue to monitor any impact to the Company. See further discussion in Note 12 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 years ended December 31, 2022 and 2021:
Years Ended December 31,
2022 2021
(Dollars in millions)
Net cash provided by operating activities $ 208.9 $ 233.1
Net cash used in investing activities (70.2) (99.3)
Net cash used in financing activities (112.5) (118.4)
Net increase in cash and cash equivalents $ 26.2 $ 15.4
Cash Provided by Operating Activities
Net cash provided by operating activities decreased by $24.2 million to $208.9 million in 2022 as compared to 2021. The decrease primarily reflects unfavorable year-over-year changes in primary working capital, which is comprised of accounts receivable, inventories and accounts payable, driven by higher coal prices. This decrease was partially offset by
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higher operating results in our Domestic Coke segment, primarily driven by favorable pricing on export coke sales, and in our Logistics segment, driven by favorable pricing and higher transloading volumes.
Cash Used in Investing Activities
Net cash used in investing activities decreased $29.1 million to $70.2 million in 2022 as compared to 2021 primarily driven by the timing of payments related to capital expenditures as well as the completion of certain foundry cokemaking expansion projects in 2021. Refer to Capital Requirements and Expenditures below for further detail.
Cash Used in Financing Activities
Net cash used in financing activities decreased $5.9 million to $112.5 million in 2022 as compared to $118.4 million in 2021. T his decrease was primarily driven by the absence of costs associated with the debt refinancing that took place during the second quarter of 2021, which consisted of a $22.0 million premium and $12.0 million of debt issuance costs. These decreases were partly offset by higher current period net repayments on the Company's debt of $19.7 million, excluding the impact of funding of the debt refinancing in the prior period, and $4.4 million of cash distributions made to noncontrolling interests. Additionally, dividends paid in 2022 increased $3.5 million as compared to the dividends paid in the prior year as a result of an increase in the dividend per share amount.
Dividends
In addition to the $23.6 million in dividends paid to our shareholders during 2022, on February 2, 2023, SunCoke's Board of Directors declared a cash dividend of $0.08 per share of the Company's common stock. This dividend will be paid on March 1, 2023, to stockholders of record of February 16, 2023. See further discussion in "Item 5. Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities."
Covenants
As of December 31, 2022, 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 11 to the consolidated financial statements for details on debt covenants.
Credit Rating
In May 2022, S&P Global Ratings reaffirmed our corporate credit rating of BB- (stable). In June 2022, Moody’s Investors Service reaffirmed our corporate credit rating of B1 and upgraded the outlook from stable to positive.
Contractual Obligations
As of December 31, 2022, significant contractual obligations related to our metallurgical coal procurement contracts, which are generally based on annual coke production requirements at fixed coal prices, were $1,092.8 million and extend through 2023. As of December 31, 2022 significant contractual obligations related to debt were $543.8 m illion of principal borrowings and $166.6 million of related interest, which will be repaid through 2029. Projected interest costs on variable rate instruments were calculated using market rates at December 31, 2022. See Note 11 to our consolidated financial statements. We also have contractual obligations for leases, including land, office space, equipment, railcars and locomotives. See Note 13 to our consolidated financial statements.
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;
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• Expansion capital expenditures to acquire and/or construct complementary assets to grow our business and to expand existing facilities as well as capital expenditures made to enable the renewal of a coke sales agreement and/or logistics service agreement and on which we expect to earn a reasonable return; 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:
Years Ended December 31,
2022 2021
(Dollars in millions)
Ongoing capital $ 72.1 $ 87.6
Expansion capital (1)
3.4 11.0
Total capital expenditures (2)
$ 75.5 $ 98.6
(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 and Estimates
A summary of our significant accounting policies is included in Note 2 to the consolidated financial statements. Our management believes that the application of these policies on a consistent basis enables us to provide the users of our financial statements with useful and reliable information about our operating results and financial condition. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. The Company's black lung benefit obligations is an item that is subject to such estimates and assumptions. Although our management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results may differ to some extent from the estimates on which our consolidated financial statements have been prepared at any point in time. Despite these inherent limitations, our management believes the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and footnotes provide a meaningful and fair perspective of our financial condition.
Black Lung Benefit Liabilities
The Company has obligations related to coal workers’ pneumoconiosis, or black lung, to provide benefits to certain of its former coal miners and their dependents further described in Note 12 to our consolidated financial statements.
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, 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 by claimants and their advisors, the impact of which cannot be estimated.
The following table summarizes discount rates utilized, active claims and the total black lung liabilities:
December 31,
2022 2021
Discount rate (1)
4.9 % 2.4 %
Active claims 332 332
Total black lung liability (dollars in millions) (2)
$ 58.1 $ 63.3
(1) The discount rate is determined based on a portfolio of high-quality corporate bonds with maturities that are consistent with the estimated duration of our black lung obligations. A decrease of 25 basis points in the discount rate would have increased black lung expense by $1.1 million in 2022.
(2) The current portion of the black lung liability was $5.9 million and $5.4 million at December 31, 2022 and 2021, respectively, and was included in accrued liabilities on the Consolidated Balance Sheets.
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The following table summarizes annual black lung payments and (benefit) expense:
Years Ended December 31,
2022 2021 2020
(Dollars in millions)
Payments $ 5.0 $ 4.4 $ 6.0
(Benefit) expense (1)
$ (0.2) $ 3.1 $ 15.4
(1) Black lung (benefit) expense incurred in excess of annual accretion of the black lung liability reflects the impact of changes in discount rates, current filing and approval rate assumptions and/or other changes in our actuarial assumptions.
Recent Accounting Standards
See Note 2 to our consolidated financial statements.
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