Suncoke Energy, Inc. · NYSE:SXC
Suncoke Energy — Investor Day (March 2014)
72 slides from Suncoke Energy's investor day presentation, Mar 11, 2014
Slide 1: SXCP Investor Day 2014
Slide 2: Agenda
Agenda TM 2:00 pm Strategies for Value Creation Fritz Henderson, Chairman & Chief Executive Officer 2:20 pm Operations Excellence: Maximizing Asset Productivity Mike Thomson, President & Chief Operating Officer 2:50 pm Framing the Growth Opportunity Jonathan Lock, Vice President, Strategy 3:10 pm Br
Slide 3: Forward-Looking Statements
Forward-Looking Statements TM Some of the information included in this presentation constitutes “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements in this presentation tha
Slide 4: Fritz Henderson
Fritz Henderson Chairman and Chief Executive Officer
Slide 5: The SunCoke Journey
The SunCoke Journey TM 2014+: Transformation 2013: Creating the Future • Restructuring • Launched SXCP limitations lifted 2012: Operating Focus • Completed two coal • First coke asset • Executed successful logistics acquisitions dropdown planned Middletown startup • Formed India JV • Planned complet
Slide 6: Today’s News - SXC
Today’s News - SXC TM • SXC Board supports management plan to drop down Domestic Coke business into SXCP – Expect timing of dropdowns balanced with organic and M&A growth opportunities • SXC Board approved initial dropdown – 33% interest in Haverhill and Middletown – Offer made to SXCP Conflicts Com
Slide 7: Today’s News - SXC
Today’s News - SXC TM • Estimate severe weather and Indiana Harbor challenges to lower Q1 Adjusted EBITDA by ~$10-$15 million – Q1 production down ~60 thousand tons, about half of shortfall at Indiana Harbor – Indiana Harbor incurred higher O&M on additional refurbishment scope • Expect to recover p
Slide 8: Coal Business Strategic Evaluation
Coal Business Strategic Evaluation TM Developing strategic exit plan • Retained advisors to assist with restructuring plan – Have significant structuring flexibility and will evaluate all options – Preferred option is potential sale but will consider other alternatives including joint ventures, part
Slide 9: SXC Priorities
SXC Priorities TM Given domestic coke dropdown plan and coal business restructuring, evaluating strategic alternatives for SXC • Focus on maximizing value of SXC by – Increasing value of SXC’s ownership of SXCP & GP interest – Maximizing cash flow from remaining SXC level assets – Deploying capital
Slide 10: Today’s News - SXCP
Today’s News - SXCP • Intend to raise per unit cash distribution 5.3% to $0.50 for Q1 2014 payment – Expect to be above 1.15x annual cash coverage ratio on existing operations • Initial drop expected to add ~$38 million annually to distributable cash flow (pre-financing) (1) – Supports additional fu
Slide 11: SXCP Distribution Outlook
SXCP Distribution Outlook Expect dropdowns will support 8%-10% annual distribution growth Distributable Cash Flow Growth Drivers Distribution Growth Implications • Expect dropdowns alone can • ~$175 million of EBITDA support 8%-10% annual distribution Dropdowns from SXC growth through 2016 • Greenfi
Slide 12: Pathway to Value Creation
Pathway to Value Creation TM Deliver Operations • Foundation of long-term Excellence success Leverage Technology to • Maximize asset productivity Drive Results SXC Shareholder/ SXCP Unitholder • Expand presence in steel Value value chain and diversify Pursue Growth Pillars customer base • Prioritize
Slide 13: Mike Thomson
Mike Thomson President and Chief Operating Officer
Slide 14: Pathway to Shareholder Value
Pathway to Shareholder Value TM Deliver Operations Excellence Leverage Technology to Drive Results Pursue Growth Pillars Restructure & Allocate Capital Enhance Shareholder Value Investor Day 2014 14
Slide 15: Deliver Operations Excellence
Deliver Operations Excellence TM Financial Performance • Leverage operating know-how and Focus of technology to The SunCoke Way Productivity continuously improve yields, operating and maintenance costs • Rigorous discipline around systems and processes of Execution coke and coal mining operations •S
Slide 16: SunCoke Way – Production & Yield
SunCoke Way – Production & Yield TM Tangible impact on Domestic Coke Production & Yield (ex. Indiana Harbor) production & yield 105.1% 106.1% (excluding Indiana Harbor) 100.0% 99.5% 70.2% 70.5% • 1% coal-to-coke yield 69.4% improvement contributes 68.8% 3,167 3,202 ~$6 million to Adjusted EBITDA 602
Slide 17: SunCoke Way – Coke Safety
SunCoke Way – Coke Safety TM • Achieved historical best health and safety performance in 2013 – Including Brazil, SXC/SXCP represents four of five positions in top quartile Total Incident Rate – Top Quartile and SXC 1.49 1.55 1.52 1.25 1.05 0.91 0.85 0.75 2010 2011 2012 2013 Top Quartile TIR for cok
Slide 18: International Coke
International Coke TM Brazil Coke Brazil Coke • Demonstrated exceptional flexibility operating at ~50% utilization • 2013 Adj. EBITDA of $16 million on 876 thousand tons • Expect improvement in 2014 on higher volumes VISA SunCoke VISA SunCoke • Strong operating performance • Merchant market experien
Slide 19: Coal Mining Business
Coal Mining Business TM • Continued focus on decreasing cash costs per ton on productivity gains and reduced royalty rates • Maintaining focus on top quartile safety and compliance performance • Preserve assets and capabilities to maximize strategic flexibility Investor Day 2014 19
Slide 20: Leverage Technology
LEVERAGE TECHNOLOGY Investor Day 2014 20
Slide 21: Leverage Technology
Leverage Technology TM Focused on driving greater productivity from existing assets and enhancing competitive advantages Asset Environmental Technology Support Performance Advancement • Improve and • Meet current • Extend and protect optimize productive environmental our proprietary capabilities of
Slide 22: Faster Coking
Faster Coking TM Goal: Improve existing asset utilization Background: • Existing oven loading processes 1 ton of Increased Coking Rate coal per hour (coal tons processed in 48 hours) • Increase coking rate by varying charge size 54 tons and burn practices 48 tons Expected Benefits: • Flexibility to
Slide 23: Gas Sharing
Gas Sharing TM Goal: Develop and implement new technology to minimize venting Background: • Address NOVs at Haverhill and Granite City as part of U.S. EPA Consent Decree Expected Benefits: • Substantially reduces venting • Sets new emission standard for cokemaking Capital Investment: • Estimated cap
Slide 24: Improve Yield
Improve Yield TM Goal: Improve coke yield by minimizing burn loss Background: • Existing technology typically results in 2%-3% burn loss Burn Loss • Redesigning oven air flow Expected Benefits: • Reduce burn loss to drive higher coke yield Potential Value: • 1% burn loss reduction across U.S. fleet
Slide 25: Breeze Recycle
Breeze Recycle TM Goal: Repurpose low value outputs Background: Breeze Value: ~$15-$30 per ton • Breeze has limited market value • Recycling 1%-3% into coal blend Expected Benefits: • Reduces blend cost substituting low cost input (breeze) for higher cost input (coal) Coke Value: ~$320 per ton Poten
Slide 26: Indiana Harbor Refurbishment
INDIANA HARBOR REFURBISHMENT Investor Day 2014 26
Slide 27: Indiana Harbor Refurbishment
Indiana Harbor Refurbishment TM Scope and Challenges • Replace/repair doors, lintels and buckstays for 268 ovens and replace stacks Oven • Labor productivity lower than expected due to operating schedule conflicts and Externals weather • Work caused disequilibrium in plant, impacting production and
Slide 28: Indiana Harbor Refurbishment: Status and Outlook
Indiana Harbor Refurbishment TM Status and Outlook • 3 of 4 batteries complete; final battery to be completed in March 2014 Oven • All stacks replaced in 2013 Externals • Capital expenditures of $85 million; ~$15 million higher than originally expected due to productivity issues Capital Project Push
Slide 29: Refurbishment End State
Refurbishment End State TM New Oven Exterior New Tunnel/Stack New Oven Internals After Investor Day 2014 29
Slide 30: Refurbishment End State
Refurbishment End State TM New Pusher/Charger Pusher/Charger Machine at Middletown Machines • Next generation modular design with upgraded features – Targeting zero spillage – Improved operations and maintenance • ~$16M total spend; deliveries expected in June and November • Facilitates ramp-up to 1
Slide 31: Indiana Harbor Outlook
Indiana Harbor Outlook TM Indiana Harbor Ramp-up Indiana Harbor: Projected 2014 • Refurbishment project and severe Coke Production and Ovens Pushed weather impacted Q1 production and 131 125 126 costs 107 • Q2/early Q3 anticipated blast furnace outage – Expect reduced production during outage; may r
Slide 32: Potential New Coke Plant
POTENTIAL NEW COKE PLANT Investor Day 2014 32
Slide 33: New Coke Plant – South Shore, KY
New Coke Plant – South Shore, KY TM Site/Plant Attributes Permit Status • Good inbound & outbound logistics • Final permit estimate – Q2 2014 • Multi-customer site can serve • Earliest construction – Q4 2014 contract and spot markets • First coke delivery – Q1 2017 • Design enhancements Customer dia
Slide 34: Proposed New Site
Proposed New Site TM Proposed new coke plant expected to have 120 ovens and annual coke production capacity of 660 thousand tons and ~60MW of power generation Investor Day 2014 34
Slide 35: Coal Logistics
COAL LOGISTICS Investor Day 2014 35
Slide 36: Coal Logistics Opportunity
Coal Logistics Opportunity Coal logistics complements existing cokemaking business, offers near-term growth opportunities and customer diversification Strategic Assets Platform for Growth • KRT strategically advantaged with Strategically access to barge, rail and truck Located Assets • Locations in
Slide 37: Coal Logistics Organic Growth Opportunity
Coal Logistics Organic Growth Opportunity Organic Growth Target Areas for Volume Growth at KRT (tons handled) • Moved ~800K internal tons ~1M from competitors to KRT ~1 – 2M • Discussion with steelmakers ~1 – 2M ~3.5 – 6M to increase met coal tonnage ~0.5 – 1M • Anticipate increased throughput from
Slide 38: Jonathan Lock
Jonathan Lock Vice President - Strategy
Slide 39: Pathway to Shareholder Value
Pathway to Shareholder Value TM Deliver Operations Excellence Leverage Technology to Drive Results Pursue Growth Pillars Restructure & Allocate Capital Enhance Shareholder Value Investor Day 2014 39
Slide 40: The Steel Value Chain
The Steel Value Chain TM Steel value chain survey identified attractive adjacent opportunities Investor Day 2014 40
Slide 41: Our Growth Priorities
Our Growth Priorities TM 1. 1 Look to generate growth which is • Similar in risk profile to core business • Consistent with existing business model • Aligned with Core Competencies 2. 2 Seek organic growth and acquisitions with focus on • Opportunities that generate qualifying income • Increased cus
Slide 42: Growth Strategy
Growth Strategy TM Area of focus Cokemaking Coal Logistics Iron Ore Processing Greenfield development Acquisition or development Investment in ferrous side and/or acquisition of of selective coal handling & of steel value chain, such existing cokemaking processing assets, as in concentrating, Summar
Slide 43: Coke – Market Dynamics
Coke – Market Dynamics TM Expect stable coke demand on rebounding steel production Domestic Steel Production & Capacity Utilization Industry Outlook (Mt Production) • Steel demand outlook driven 100 100% by automotive, construction 80 80% • EAFs expected to capture 62 53 53 56 58 majority of growth
Slide 44: Coke – Market Dynamics
Coke – Market Dynamics TM Expect coke battery retirements to reduce coke capacity over time U.S. & Canada Coke Battery Age Distribution Industry Outlook (Mtpa capacity) 4 Meter By-product • By-product coke battery 5.0 6 Meter By-product productivity falling as fleet ages 4.5 Heat Recovery 4.0 • Earl
Slide 45: Coke – Market Dynamics
Coke – Market Dynamics TM Forecast U.S. & Canada coke shortage in excess of 1M tons by 2017 U.S. & Canada Blast Furnace Demand vs. Capacity1 Industry Outlook (Kt capacity) Age & Evolving • Expect market tightening as aging 500 435 Environmental batteries shutdown MACT Standards 0 (52) (55) • Forecas
Slide 46: Coke – Prospective Economics
Coke – Prospective Economics TM Next Generation Coke Plant Economics Plant Specifications Total CAPEX: ~$375M-$440M 1 Total Capacity: 660Ktpa ~$375m- $440m Power Output: ~60MW Capital Location: South Shore, KY Outlay Contracting Strategy 4 2 • Multi-customer plant delivering Valuable Growth Low doub
Slide 47: Coal Logistics – Market Size
Coal Logistics – Market Size TM Rail Barge Truck Terminals (1) Tonnage 600M-800M tons 150M-350M tons 100M-200M tons 350M-550M tons Per Ton Rate(2) $16-$19/ton $5-$8/ton $4-$7/ton $3-$8/ton EBIT Margin(3) 25%-30% 15%-20% 5%-10% 20%-30% Profit Pool $2.4B-$4.6B $100M-$600M Up to $100M $200M-$1.3B (EBIT
Slide 48: Coal Logistics – Developing our Pipeline
Coal Logistics – Developing our Pipeline TM Applied rigorous screening process to identify high-priority, near-term coal logistics targets Competitive Mode of Commodity Geography Size Advantage Transport • Coal Biased • Advantaged • Rail • Midwest • Focus on small • MLP’able Location • Barge • East
Slide 49: Ferrous – Concentration & Pelletization
Ferrous – Concentration & Pelletization TM U.S. Iron Ore Production Cokemaking Parallels (Mtpa capacity) Essar • High capital intensity ($100- $150/ton); similar material 10 ~65 conversion process to coke 7 ~55 3 • Potential for similar commercial structure; USS 24 processing fee with return on AK/M
Slide 50: Ferrous – DRI Market Size
Ferrous – DRI Market Size TM U.S. & Canadian DRI market in early stages; expect need-based demand will dominate near term 2013E Global DRI Production Potential U.S. & Canada Demand (Mtpa) (Mtpa) Mid. East 31 SunCoke focus on 3-5 Mtpa medium- Asia Pacific 18 term demand 6 -9 ~10 Latin America 12 CIS/
Slide 51: Ferrous – DRI Near-Term Demand
Ferrous – DRI Near-Term Demand TM DRI demand fragmented and driven by different needs Drivers of DRI Demand Size of Opportunity by Region Customer #1 1.5 Raw • DRI an alternative to Customer #2 0.9 Material pig iron and premium Great Flexibility scrap Customer #3 0.8 Lakes Customer #4 0.4 & West Oth
Slide 52: Ferrous – DRI Project Scale and Economics
Ferrous – DRI Project Scale and Economics TM Opportunity to aggregate demand to achieve economic scale and leverage SXCP cost of capital DRI Project Capital Cost per Ton DRI Project Characteristics ($/mt) • Substitute pig iron and hedge scrap due to low natural gas 500 Most Attractive Economic Scale
Slide 53: Mark Newman
Mark Newman Senior Vice President & Chief Financial Officer
Slide 54: Pathway to Shareholder Value
Pathway to Shareholder Value TM Deliver Operations Excellence Leverage Technology to Drive Results Pursue Growth Pillars Restructure & Allocate Capital Enhance Shareholder Value Investor Day 2014 54
Slide 55: Value Creation to Date
Value Creation to Date TM SXC and SXCP delivered value since IPOs Since SXC IPO (07/21/11) Since SXCP IPO (01/18/13) 75% 75% SXCP +67% S&P 600 +50% 50% 50% SXC 25% +44% 25% Alerian +10% 0 0 Integrated -25% -25% Integrated Steel (7%) Steel (60%) -50% -50% -75% -75% Jul ‘11 Jan ‘12 Jul ‘13 Jan ‘14 Mar
Slide 56: Future Value Creation
Future Value Creation TM Intend to continue to create value by optimizing structure and efficiently allocating capital 1 2 3 Drop down Restructure Coal Optimize Capital Domestic Coke Mining Business Allocation Assets to SXCP • Board supports drop • Potential exit from coal • Invest in existing asset
Slide 57: Dropdown Value Drivers
Dropdown Value Drivers TM Expected Impact from Impact to SXC Expected End Result Dropdown Plan Equity Value 1 • Higher achievable LP unit Multiple Value of SXCP distribution growth rate expansion on LP Units leads to increased SXCP existing assets unit price Maximum value of GP/IDR 2 interests V
Slide 58: Asset Considerations
Asset Considerations TM All SXC Domestic Coke assets are good candidates; Haverhill and Middletown are most attractive initial dropdown - Relative attractiveness Haverhill & Granite City Indiana Harbor Jewell Coke Middletown Ease of Execution / Asset Readiness Customer / Asset Diversification DCF /
Slide 59: Tax Efficiency Illustration
Tax Efficiency Illustration TM Simplified Example of Tax Implications for Sale to SXCP Implications for SXC Asset Fair Value = $150 SXC • Assumption of debt and/or ~58% Sold to Tax Basis =0 Interest taking back units provides SXCP Tax Life = 15 years in SXCP (pre-transaction) significant tax benefit
Slide 60: Dropdown Considerations and SXCP Impact
Dropdown Considerations and SXCP Impact Variable Considerations Drop • Balance accretion to SXCP with providing SXC appropriate value Multiple • Subject to SXCP Conflict Committee approval SXCP • Excess leverage capacity at SXCP provides flexibility; expect to move Financing toward target 3 – 3.5x l
Slide 61: Dropdown Considerations and SXC Impact
Dropdown Considerations and SXC Impact TM Variable Considerations Drop • Drop value to SXC includes direct multiple received plus indirect value from SXCP stake and GP/IDR cash flows; provides SXC flexibility Multiple Form of • Expect to take back portion of proceeds in SXCP units for tax efficiency
Slide 62: Illustrative Dropdown Scenario
Illustrative Dropdown Scenario TM Illustrative Dropdown Assumptions Potential SXC Value • EBITDA: ~$175M total over several years SXC LP interest in SXCP: • Multiple: reasonable range Relatively unchanged from current • SXCP Financing: 50/50 Debt/Equity (~58%) but with higher unit count (~ half of
Slide 63: Initial Dropdown Key Points
Initial Dropdown Key Points TM Expect to drop 33% interest in Haverhill and Middletown into SXCP • Subject to SXCP Conflicts Committee approval – Expect 33% interest in Haverhill and Middletown to be dropped into SXCP subject to market conditions – SXCP Conflicts Committee reviewing offer; have reta
Slide 64: Fritz Henderson
Fritz Henderson Chairman & Chief Executive Officer
Slide 65: Pathway to Shareholder Value
Pathway to Shareholder Value TM Deliver Operations Excellence Leverage Technology to Drive Results Pursue Growth Pillars Restructure & Allocate Capital Enhance Shareholder Value Investor Day 2014 65
Slide 66: Critical Early 2014 Priorities
Critical Early 2014 Priorities TM • Operations Excellence – Recover from winter across U.S. coke plants to improve results and sustain strong safety performance – Execute Indiana Harbor revitalization and re-commission plant – Drive mining cash cost productivity and safety excellence • Growth Strate
Slide 67: Appendix
APPENDIX Investor Day 2014 67
Slide 68: Definitions
Definitions TM • Adjusted EBITDA represents earnings before interest, taxes, depreciation, depletion and amortization (“EBITDA”) adjusted for sales discounts and the interest, taxes, depreciation, depletion and amortization attributable to our equity method investment. EBITDA reflects sales discount
Slide 69: Consolidated SXC Guidance Summary
Consolidated SXC Guidance Summary Metric 2014 Guidance* Adjusted EBITDA (1) Consolidated $230 – $255 million Attributable to SXC $183 – $203 million EPS Attributable to SXC Shareholders (diluted) $0.35 – $0.60 Cash Flow from Operations ~$170 million Capital Expenditures ~$117 million Investments n/a
Slide 70: Expected SXC 2014 EBITDA Reconciliation
Expected SXC 2014 EBITDA Reconciliation TM 2014E 2014E (in millions) Low High Net Income $53 $71 Depreciation, depletion and amortization 105 100 Interest expense, net 55 53 Income tax expense 13 24 EBITDA $226 $248 Sales discounts – – Adjustment to unconsolidated affiliate earnings (1) 4 7 Adjusted
Slide 71: SXCP Adjusted EBITDA and Distributable Cash Flow Reconciliations
SXCP Adjusted EBITDA and Distributable Cash Flow Reconciliations FY 2014 Guidance* ($ in Millions) Low High Net income $ 94 $ 107 Add: Depreciation 43 41 Interest expense, net 18 17 Income tax expense - 1 Sales discounts - - Adjusted EBITDA $ 155 $ 166 Adjusted EBITDA attributable to NCI (50) (54) A
Slide 72: Capital Expenditures & Investments
Capital Expenditures & Investments 2014E Capex ($ in millions) SXC SXCP Consolidated On-Going $39 $17 $56 Environmental Project $5 $36 $41 Indiana Harbor $20 n/a $20 Refurbishment Total CapEx $64 $53 $117 Investments - - - Total CapEx & $64(1) $53 $117 Investments (1) Does not include spending to in