SunCoke Energy Inc (SXC) 2011 Q4 法說會逐字稿

Welcome to SunCoke Energy's Fourth Quarter 2011 Earnings Conference Call. My name is Christine and I will be your operator for today's conference. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note today's conference is being recorded. I will now turn the call over to Ryan Osterholm. You may begin.

Thank you, Christine. Good afternoon, everyone. Thank you for joining us on our Fourth Quarter 2011 Earnings Conference Call. With me on the call are Fritz Henderson, our Chairman and Chief Executive Officer, and Mark Newman, our Senior Vice President and Chief Financial Officer.

Following the remarks made by management, the call will be open for analysts' and investor questions. This conference call is being Webcast live on the Investor Relations section of our Website at www.suncoke.com. There will be a replay available on our Website. If we don't get to your question during the call, please call our Investor Relations Department at 630-824-1907.

Now, before I turn the call over to Fritz, let me remind you that the forward-looking statements in our release, 8K and SEC filings apply to remarks on our call today. These documents are available on our Website as are reconciliations of any non-GAAP measures discussed on this call. Now, I'll turn the call over to Fritz.

Thanks, Ryan. Good afternoon. Thank you for joining us. Page two is an overview of the fourth-quarter release -- I say, as I look at both the fourth quarter and the full year, it missed our expectations due to the unfavorable impact -- which was about $12 million -- associated with accounting adjustments we made at Indiana Harbor. I'm going to come back to that on the very next chart. We'll deal with it right up front.

The fourth-quarter net income attributable to shareholders is $8 million, at $0.12 a share; for the full year, $60 million -- $0.87 a share. Our fourth-quarter adjusted EBITDA -- a key operating measure we use as Management -- $31.4 million. And the calendar year was $140.5 million.

And as we look out beyond the numbers, what happened in the fourth quarter -- we've executed what we think is a successful startup of our Middletown plant in late October. Our domestic coke-plant performance was strong, actually -- [certainly] the year-over-year production, which Mark will talk about. Our full-year 2011 mining adjusted EBITDA actually increased $28 million over 2010. We'll go through that in detail later.

We finished the year with a liquidity balance -- cash balance -- of $128 million and an undrawn revolver. And then, finally, we completed the separation from Sunoco on January 17, which -- process included the election of three new Independent Directors of the Board, two of which joined us on January 17 and one of which will join us on April 1.

Page three -- let me talk about Indiana Harbor -- it specifically -- what we identified and dealt with late in January. There were two issues. One is resolution of some billing matters at our Indiana Harbor plant. And second had to do with some inventory adjustments that we needed to record.

In late January of this year -- ArcelorMittal is the customer in Indiana Harbor -- asked some questions about our 2011 invoicing and, specifically our late-2011 invoicing. Refresh your memory -- in January of last year -- January of 2011 -- we settled arbitration with ArcelorMittal at our Indiana Harbor plant. That agreement, which settled all disputes between the companies, dealt with a lot of different items. There were four or five different items, and some smaller items.

One of the smaller items had to do with the treatment of what's called coal spillage, which is basically the amount of coal that doesn't reach the coke ovens when you're charging the oven. So there's always a certain small amount that -- whether it's in the conveyors or prior to its inclusion in the oven -- is spillage. The question that was dealt with at the time was how to reuse and rebuild that coal spillage.

Subsequent to that -- the arbitration -- we administered the contract through 2011. We administered it consistent with how we felt the arbitration agreement had handled it. It was consistent with how it had been handled in the past -- consistent with how we had handled it at our other plants. And that's what happened through 2011.

As I said, late this month, actually, the customer asked some questions. We went back. We researched it extensively -- went back to the beginning of the year, researched it, looked at the documentation. We put together some materials. We met with the customer, reviewed our findings; explained our position and received their feedback.

As we listened to them and they explained their views clearly, our conclusion was their interpretation was correct. We accepted their interpretation based upon the facts and circumstances that we saw sitting here late in December -- late in January -- excuse me -- 2012; and agreed to adjust our 2011 billings and our go-forward billings.

The impact of this was about $7 million unfavorable to our 2011 results -- $6 million net of non-controlling interest; and the measures that we take -- and there are measures that we can take to mitigate this impact from '12 and '13 -- which principally involves SunCoke Energy reusing and reselling this distilled coal away from the Indiana Harbor facility.

We can do that. We've already begun taking measures to do that this month, in February. So there are clear measures we can take to mitigate this impact going forward. But nonetheless, we needed to address what we did in 2011 -- [sled feels] with the contract billing and the resolution of the contract billing.

It's not a -- as we looked at it -- we don't look at this as a customer issue. This is how we felt we were administering the contract correctly. But after listening to the customer, getting their feedback, and going back and doing the research, our conclusion was their interpretation -- that we would accept their interpretation.

On the inventory side, we did have to also report a adjustment for coal and coke inventory. This is also at Indiana Harbor. We made systems changes across SunCoke Energy this summer. And we did a lot of people training. We did a lot or parallel processing. This was all done as getting -- as part of getting ready to be a separate public company. We did -- again -- a significant amount of training. It changed how we closed our books.

And when we go back -- we went back and looked at the situation -- in late last month -- actually, late January of last month -- as we were closing the books and looking at inventory balances, the inventory balances that were existing at Indiana Harbor for both coal and coke were higher than we expected. We did a physical inventory in late November. We rolled that physical inventory forward to the end of December. And we were applying our own analytical procedures to determine both the inventory -- the quantity of coal -- and the value of that coal -- largely coal, a little bit coke.

And based upon our own procedures, we began to -- we went back and looked at how inventory had been accounted for since the system change. We also went back to every one of our plants to see how the plants had -- how every plant had handled their inventory post the system conversion. And our conclusion from our -- again, internal investigation was that beginning in about August -- that at our Indiana Harbor facility, we had been overstated inventory and understating cost of goods sold -- the impact about $7.3 million unfavorable; $6.2 million net of controlling interest, of which about $3.6 million was attributable to the third quarter of '11.

We are instituting -- we have instituted and are instituting corrective actions. In effect, what was happening was the yields that we were looking at internally were higher than actual yields. We were -- in other words, we were underreporting costs of goods sold. We've now got that corrected.

We have been taking a lot of measures, actually, in the second half of 2011 to improve yields at Indiana Harbor, and been seeing results. And we've got a number of other measures that we're -- that we can take -- that we are taking in the future to improve yield. But nonetheless, as we look at it, these were errors that began in August. And we've corrected them through our own oversight and our own control systems, if you will, that -- the actions that we took late last month, as we were closing up the books.

A couple other points -- one, we felt that we could -- and we have reaffirmed our guidance for 2012 for two reasons. One, on the spilled coal or the [pad] coal -- it's sometimes referred to -- we certainly feel we have mitigating actions we can take. We've already begun taking those actions. And then finally, on yield or inventory adjustments -- again, we feel like the actions we've taken and are taking to improve yield at Indiana Harbor are bearing results. So that's a critical reason why we felt very comfortable affirming our 2012 guidance.

Second -- again, we looked at all the rest of our plants as -- looking at the controls that were affecting Indiana Harbor. We have corrected the situation at Indiana Harbor. We have not -- we do not have this problem at other plants.

And then, finally, I would just say we're fully responsible for this, as a management team -- myself, principally. And we've taken the actions to fix it. It's not a customer issue. And these aren't customer issues. These were issues -- we accept responsibility for it and we believe like we've -- we believe that we've fixed the problems.

Net of the reduction we needed to -- when we pulled these through, we reduced the annual incentive accrual by $1.1 million. That's in the corporate segment. So the consolidated pre-tax impact of the items was $11.1 million. We reported that amount in the fourth-quarter results. Mark?

Thanks, Fritz. If you turn to chart four -- there's a lot of numbers on this chart, but I'd like to just focus on the adjusted EBITDA. In the quarter, on a year-over-year basis, we decreased by $3.3 million. On the favorable side, we have the impact of the ArcelorMittal settlement. Q4 of 2010 was a particularly heavy quarter in terms of legal and settlement costs. On the favorable side, we also have coal mining up year over year. And I will talk about these more in detail later.

And then, on the unfavorable side in the quarter, first we have the Indiana Harbor that -- adjustments that Fritz just covered. We also recorded a black-lung adjustment -- an adjustment to our black-lung liability -- of about $6 million in the quarter. And, of course, we had higher corporate costs; which has been part of our stand-alone activity and relocation, which we have talked about all year.

On a full-year basis on adjusted EBITDA, we're down $86.8 million. And, again, the primary factors there are the ArcelorMittal settlement -- the impact it has had on our fees -- primarily at Jewell Coke; and then, stand-alone corporate and relocation costs being higher, offset by a very favorable year in terms of Coal Mining profitability.

Turning to chart five -- this provides a walk on our adjusted EBITDA -- again, for the quarter, on a year-over-year basis. Again, the Indiana Harbor adjustments of $12.2 million are reflected here. The corporate and other relocation costs of $6.5 million -- again, that's a combination of higher stand-alone costs and relocation costs in the quarter.

The black-lung adjustment of $6 million is approximately $2.6 million recorded in the corporate sector, and $3.4 million is reflected in our coal segment. Our -- the rest of our coke segments are relatively flat. We had the main variant here of approximately -- down $1.7 million year over year -- relates to a higher allocation of costs to our international segment -- of corporate costs to our international segment.

Again, on the favorable side in the quarter, the net impact of the ArcelorMittal settlement is favorable by $10.2 million. And coal mining is up -- again, if you take out the $3.6 million of black-lung, coal mining would be up roughly $9.3 million on a year-over-year basis in the quarter.

Coal is benefiting from higher volumes primarily related to the Harold Keene acquisition. We also had a good quarter at Jewell in terms of production. The year-over-year improvement in price -- and that is partially offset by higher cash costs, which we'll talk about later.

On chart six -- we've been providing for the full year, the walk from the prior quarter. And we'll probably not do this on a go-forward basis, but I thought it was important to complete the practice that we've done this year.

So if you look -- in Q3 of this year, we reported $44.8 million in adjusted EBITDA. And this quarter, we reported $31.4 million. Again, we've covered the Indiana Harbor adjustments and the black-lung liability change.

Maybe if I could just focus on a couple of the others here -- coal mining was negative $3.8 million. We had roughly $1.8 million of an [OPEB] allocation adjustment to our Coal Mining segment, and then higher cash costs in the quarter. Jewell Coke -- while we had a good quarter in terms of production, our sales were actually down by about $25,000 quarter over quarter. And that really has to do with the timing of trains that are received by ArcelorMittal.

Our other domestic coke is relatively flat. Again, this excludes Middletown, which was in a startup mode in the quarter. And we call out, in the footnotes, the impact of Middletown. And then, finally, Corporate and our International Coke were favorable in the quarter. Corporate is really a combination of lower relocation costs -- Q3 was particularly heavy for us. And, secondly, you'll recall that all of the Middletown startup costs that we incurred in Q3 were in the corporate segment. Starting in October or late October, when the plant became operational, those costs were moved to the other domestic coke segment.

And then, finally, on our International, we had the $9.5 million accrual for the preferred dividend. And then our results were about $1 million lower over Q3, based on lower volumes at our Brazilian operations.

Turning to chart seven -- again, this is the full-year 2010 to 2011 adjusted EBITDA bridge. This -- the main story here should be very familiar to all of you -- and that impact of the ArcelorMittal settlement on a year-over-year basis being the primary driver; higher Corporate stand-alone and relocation costs. The third item that we show here is the Jewell Coke segment being down. If you exclude the impact of transfer pricing, Jewell Coke, year over year, is down approximately $12.5 million.

And most of that has to do with lower sales on a year-over-year basis. We also had a number of spot sales in 2010, which were at higher margins. And so that accounts for the majority of the $12.5 million unfavorable variants.

Again, on the positive side, we have coal mining up roughly $31 million. Again, if you exclude -- if you include the impact of the $3.6 million of black-lung adjustment that's attributable to coal, our Coal Mining business would be up approximately $28 million on a year-over-year basis.

Okay, chart number eight -- this, again, is a -- should be a familiar chart. On the left-hand side of the chart, we show the production at our facilities. Again, we had a very strong quarter in terms of production. And what we're showing is the beginning of the ramp-up of our Middletown facility. On the right-hand side of the chart, for purposes of consistency, we have excluded Middletown from this analysis. And as you'll see, in Q4 of -- in this quarter, we were -- our EBITDA per ton decreased from the prior quarter to $34 a ton. And you'll recall that this includes the impact of the Indiana Harbor adjustment, which we have spoken to before. And, as I said earlier, it excludes Middletown.

Turning to chart nine, just to focus on coal -- again, we had a very strong quarter in terms of production. It's, in fact, our highest production level this year; however, coal-cash costs continue to increase in the quarter. Down -- the chart at the bottom of the page shows our Coal Mining cash costs and our Jewell cash costs. And what this shows, if we focus on Jewell, is that our cash costs increased from $138 a ton to $152 a ton. And that was really driven by a number of factors that impacted us in Q4.

We had additional staffing, which was part of our plan to ramp up staffing ahead of our increased mining production at our own mines in 2012. We had higher contract-mining incentives, which really is helping to increase our production in our contract mines. And then, finally, we had a true-up in our royalty and we had some royalty -- employee-retention costs, which were part of our plan to really hold on to our experienced miners. For the full year, we reported cash costs at Jewell of $138 a ton.

Turning to chart ten -- again, this outlines our Coal Mining profitability -- as you'll see, in the quarter, we had an improvement in pricing on our coal mining. This is primarily related to better price realization at Harold Keene -- on our Harold Keene coal -- sorry. And then, on a year-over-year basis, we improved $9 million if you exclude the impact of black-lung and the OPEB expense allocation.

So what we've tried to show on this chart is had we not had OPEB -- the OPEB adjustment and the black-lung adjustment in the quarter -- we'd be at roughly $7 million EBITDA on a pro forma basis. Again, I'd like to remind everyone that our mid-vol coal volumes next year -- about 88% are committed at approximately $177 a ton. And we've also set our guidance based on our Jewell cash costs at $135 a ton.

Obviously, we're continuing to do work on our Jewell cash costs. Q4 was impacted by a number of items in the quarter that we would expect, with higher production levels, we'll be able to mitigate. I want to turn your attention to chart 11. This is a new chart. And a number of you have asked that we show the return on capital from our various businesses. And so what this chart attempts to do is to lay out our pre-tax return on invested capital for our domestic coke, which is inclusive of Jewell and other domestic coke; our International Coke business and our Coal Mining business.

This chart, in the numerator, is based on our pro forma adjusted EBITDA. So it will exclude the impact, for example, of the ArcelorMittal settlements in prior periods. Obviously, it's less depreciation. And we add back the minority interest. And the denominator is based on average allocated invested capital for each of our respective businesses. And for invested capital, we're effectively using our long-term debt plus equity, less cash.

Again, the chart excludes Middletown in all periods, and is inclusive of the Indiana Harbor adjustments that we've spoken to previously. For the full year, we're showing a 13% pre-tax return on investment in our Domestic Coke business. Again, this includes the Indiana Harbor adjustments. It also includes a fairly weak Q1 at Indiana Harbor, with the operational issues we had there. I would also indicate that we have fairly good returns on our Coal Mining business. Obviously, Q4 was impacted by black-lung and OPEB -- but very respectable pre-tax returns on our Coal business.

And then, finally, at the bottom of the chart, we include the impact of all unallocated corporate costs. And what this shows is for the full year, we achieved a return on invested capital of around 10%. We decided to do this chart on a pre-tax basis. Quite frankly, it's a lot simpler to do it this way, so we don't have to worry about taxes at a segment level. And I hope all of you will find this very useful.

I'd just like to cover quickly our corporate costs. Again, stand-alone costs are up roughly $14.9 million on a year-over-year basis. As you recall, we've indicated we expect our stand-alone costs to be roughly $15 million to $20 million. And we'll have a full year of those in 2012. Our relocation costs of $7.2 million exclude our lease-exit costs of roughly $2 million from our Knoxville facility. And then, finally, we've recorded the black-lung and the Middletown startup costs.

As we look to 2012, when you look at the relocation costs, the black-lung, and the Middletown startup, which are non-repeatable, we feel very comfortable with the $30 million to $35 million target for unallocated corporate costs in 2012.

On the liquidity-update chart on chart 13, we achieved negative free-cash flow of roughly $12 million in the quarter. As you know, we completed the construction and the startup of Middletown. So it's was a quarter in which we had roughly $54 million of CapEx. You'll recall that for 2012, we're expecting $150 million for the full year, which will be approximately $17 million per quarter lower than what we saw in this quarter. And, obviously, we have the ramp-up of Middletown, which will add to our cash-flow generation in 2012.

We do expect cash-flow to be back-end weighted in 2012, with the ramp-up of Middletown. And as we also indicated in the chart, we expect to unwind some of the coke inventory that we're holding from the coke [cover] that we purchased in 2011. And that has actually started to occur here in Q1.

Additionally, I'd just point out, on this chart, that we incurred incremental borrowing of $30 million under our existing term-loan facility in the quarter. We think this provides us with additional flexibility as we go forward in the year. We're still working, as you know, on our entry into India, which will be approximately $30 million in total investment. And we thought we'd be ready for that if it happened early in the year.

Finally, I would like to cover the tax overview chart on chart 14. A number of you, as we've met with you, have asked a lot of questions about taxes. And we filed a tax-sharing agreement as part of our prospectus. I would strongly encourage that all of you read that agreement. But what we thought would be constructive is if we summarized the key points on the agreement.

So on the left side of the chart, we've summarized the key points of the agreement. And then, on the right side of the chart, we've tried to lay out the implications for what the agreement means to us. So if I start, again, with the elements of the tax-sharing agreement -- it basically provides Sunoco with the right to use SunCoke NOLs while they're consolidated. And they were consolidated with us through January '17. It provides Sunoco the right to elect the Middletown bonus depreciation rate. And it limits our ability to do corporate restructuring within two years of the distribution. And, finally, we indemnify Sunoco for any tax-related liabilities related to the separation.

In terms of the implications for SunCoke, we will, in Q4, recognize an additional reduction of $100 million in our deferred-tax assets. You will recall that, at the time of separation, in Q3, we recognized a $98 million reduction in our deferred-tax assets. So this is incremental to that, and is really reflective of better information with respect to the tax attributes that Sunoco will be able to use.

We will retain, in our future NOLs and tax credits -- and our effective tax rate, based on the tax credits we have today, will be 20% to 24% for 2012; migrating to a higher rate as these tax credits roll of in '12 and '13.

In terms of the cash-tax impact, we do expect Sunoco to use a portion of our Middletown tax depreciation. And on that basis today, we're expecting our cash-tax rate to be approximately 10% to 15% in 2012.

And then, finally, on the restructuring -- we have, I would say, a very limited ability to restructure our Coal Mining business based on the provisions in the tax-sharing agreement. We do have some potential for limited Coke-business restructuring. And then a number of you have inquired about share repurchases. This is also limited by the provisions of the tax-sharing agreement. So I just, again, thought it would be good to remind our investors of the tax-sharing agreement and the key provisions. With that, I'll turn it over to Fritz.

Thanks, Mark. To wrap up -- page 15 -- 2012 priorities -- our first, most important priority -- there's a lot of priorities in the business of ramping up Middletown, where we expect to reach full production by the second quarter of 2012. So we're -- we feel very good about the startup of that plant.

Achieving targeted coke-production volumes of 4 million to 4.2 million tons -- Mark and I were on the road show, talking to a number of you in January. We talked about -- we set these volumes, we thought, at a suitably conservative level given the feeling we were getting from our customers in the fourth quarter of last year -- we basically set that at their targeted volumes.

What we've certainly seen in late December and in January and even very recently is -- I would say we still feel like having a conservative approach here is constructive. Nonetheless, the tone certainly that our customers have conveyed in their orders have been -- we've not seen any reduction in coke levels. We've seen good demand in the start to the year that -- for January, for example -- we were pleased to see. So I would say that we set our coke productions conservatively, but we feel like the tone, at least, from our customers, is better today than when we saw it perhaps even 60 days ago.

We're continuing the permitting work for a potential new US plant in anticipation of market recovery; implementing our India strategy -- we need to complete the due diligence at Global Coke and negotiate definitive agreements. And I've made clear to other people in the past -- investors in the past -- that our objective is to enter India. Our preferred approach is to do so in the structure that we have negotiated with Global Coke. But we have other options to, and -- because we think it's a very attractive market for us to enter.

And then, finally, driving improved productivity in our mining business at our existing mines -- our plan is to mine approximately 1.8 million tons in 2012 and position the segment for future expansion in '13. But we're mindful of what's happening in the coal markets today. Remind people who were on the road show -- or those of you who, perhaps, weren't -- of the million -- 1.85 million tons that we expect to sell in coal in 2012, 1.55 million of that is mid-vol. And of the mid-vol, 77% of it is already committed. So it's actually -- 88% is committed at $177. So it's $77 in my mind -- but it's 88% is committed at $177.

The rest of our production, whether it's high-vol, whether it's the amount of steam that we do -- our focus in their mine business today is to improve our productivity, focus our attention and our resources on mid-vol and really, given what's happened with steam -- is take steam only to the extent that since -- the [devil's] actually mining the mid-vol.

So we are working to make sure our resources are deployed and our mine plans are developed accordingly. We don't have a lot of thermal in the plan. Of the $1.850 million, [$150,000] was expected to be thermal and the other [$150,000] was high-vol. We're pretty much sold through the first quarter, which gives us some time to plan our activities. But, again, we're really focusing our attention on mining -- where we're committed and where we get the best price, which is the mid-vol.

Page 16 is a summary, again, of the 2012 outlook. There has been no changes here from what we reviewed in the past. The adjusted EBITDA number -- the key measure we use for management purposes -- $250 million and $280 million; a CapEx at $150 million. You might recall when you look back at the 2011 actual spending -- in Mark's cash-flow chart -- the capital spending was about $238 million. And then, on top of that, we had about $38 million for Harold Keene that we spent in 2011.

So our capital spending would be significantly down year to year, which results in us being free-cash-flow positive to at least -- to the extent of at least $50 million. The rest of the items in here are pretty much consistent with what we reviewed in the past.

Finally, summing it up in terms of creating shareholder value -- our vision -- the leadership team's vision -- for how do we create value for SunCoke's shareholders? -- it starts with operational excellence, rigorous execution in our existing operations, maintaining a focus on safety in the environment, because it is our -- it's been our experience, and I would say it's the experience of any manufacturing business that I've ever been involved with -- is that manufacturing operations that run productively, safely and in compliance with environmental permits, almost without exception are also operating effectively from a cost perspective. So it's maintaining our focus on safety and the environment; delivering returns through strong consistent coke earnings; and optimizing our coal operations.

In terms of growing the business domestically -- we do see an opportunity to grow in the future. In today's environment, we're focusing our attention on securing a permit for another US plant. But we're not out actively seeking customer commitments. Now, we don't think it's a suitable time for us to be doing that.

But we are -- we still face an environment where we have -- many of our customers' coke batteries are aging, and the domestic capacity, in general, is aging. We do see the potential for some limited primary demand growth, and continued opportunities for import substitution. So we do see an opportunity for us to continue to grow in the US and, certainly, outside the US Internationally -- India being our first opportunity -- we are continuing to evaluate opportunities for us to grow and enter, actually, China.

And finally, in terms of structuring the business -- lots of discussions on coke MLPs or master limited partnerships -- let me be as clear as I can. Based upon our preliminary work, we feel like our domestic assets are well suited and expected to qualify as assets that would qualify as MLPs. Our work is in front of us in 2012 and we plan to do the work in 2012 to assess how it's structured, when -- all the details. I've been asked many questions about this, and I think -- and the only answer I can give you is that our commitment -- we're going to do the work in 2012 because we think it's very important for us.

And then, on the coal side of our business, it's about aggressively managing the business -- optimizing the business for productivity, managing costs, managing mine plans to try to make sure that we've got our resources focused on our highest-value coals -- in this case, obviously, the mid-vol coal, where we're 88% committed -- and maintaining our strategy flexibility going forward. Thanks very much for your time. Let's open it up for questions.

Thank you. We will now take questions.

(Operator Instructions)

The first question comes from Andre Benjamin from Goldman Sachs. Please go ahead.

Good evening, guys.

Hi, Andre.

First question -- I will just try again to best understand what's driving the variance in the coal costs, and what pressures are one-time versus recurring to better see how we're going to actually get down to cash costs of $125 million to $130 million.

It seems to me like things like the additional staffing levels and contract-mining incentives could have been kind of a recurring item where I'm -- if you could just lay out maybe the magnitude of what's actually recurring and which is not recurring so we could see clearly how you get there?

Yes, I'll have Mark do that. But let me start out with -- our mine plan is for 100 more tons of mid-vol in 2012. That's an important driver of getting to the $135 million. But let me have Mark take you through the impact of the costs in the fourth quarter.

Right. Hi, Andre. Yes. So the additional staffing really is red hats who were hired in Q4 that will be productive in 2012. In terms of some of the more lumpy costs, we had our royalty true-up that was approximately $1 million in the quarter. And then we had higher contract-mining incentives. That was about $1.5 million.

When you look at all of these factors together, it equates to approximately $4 million. And I would say definitely the royalty true-up and some of the bonuses are periodic. They wouldn't be reflected on a month-to-month basis. And, obviously, as Fritz said, a big part of our plan for next year is to get higher production with the employment base that we have today.

Great, thanks. And I guess, on the [met] coal volumes -- you've contracted, I believe, about 88%. Most of your sales are domestic. Typically the domestic customers have already locked up all of their coal by this point. Is this part of your strategy -- to leave some tons open for spot going forward? Or is there something else that's going on there, maybe in terms of demand or anything else that would keep you from signing the rest of that up?

Well, I don't think there's anything that would stop us from signing the rest of it up. I mean, at 88%, we feel good about our coverage, actually. We need to -- if you look at what's underlying that, Andre, it's basically -- our production plan is 100,000 more tons coming in at Jewell, and then Revelation -- our Revelation Coal venture -- ramping up to about 350,000 tons.

So as we look at those two -- particularly Revelation -- it's brand-new. We just started mining in January. So I mean I really wouldn't want to be 100% committed because I do think particularly, in Revelation, we'd like to see how we hit the acceleration curve. So I actually -- the way I look at it is we're quite well committed. I think, as I look in the second half of the year, if Revelation hits -- if we hear volumes at Revelation, then obviously we've got to go to work on selling another 12% of our production.

We would, I think, really go to work on that in the summer. I don't think at this point we need to do anything differently. And I really wouldn't, actually, today, want to be at 100%, just given the -- I just -- I won't say I have concerns, but this is a brand-new venture. We have geology. We've gotten started. We like where we've started. But it's still early.

The next question comes from Richard Garchitorena from Credit Suisse. Please go ahead.

Great, thanks. Good afternoon.

Hey, Richard.

First question -- you look at the range of 4 million tons to 4.2 million tons -- what's the delta there, really? Is it just really the ramp-up in Middletown?

Our ramp-up in Middletown -- and then, there are -- in several of our plants, actually -- we set our volumes based upon what we have understood our customers' targets were. And those targets were less than what we're -- they're more than the minimums but less than what we're capable of producing and less than what we've produced on an annual basis in 2011.

So that's how -- and when we set the 4 million tons to 4.2 million tons, we put a band around where the customer targets were. I would say they're conservative because if you looked at Middletown at full acceleration and our plants at the levels they produced at in 2011, you could get to a number closer to -- that number could be closer to 4.3 tons; but hopefully that gives you some sense. We certainly think it's a conservative number. And, again, we -- I am -- I personally am encouraged by what we've seen in the last 30 to 60 days in terms of the tone of the market.

Great, thanks. And just turning back to the Coal business -- you do say that your cash-cost guidance is based on higher volumes. What's the chance that you leave those tons in the ground that are un-priced? And then what's the impact on the cash cost at that point?

Interestingly, as I look at it, it's more likely if we fall short, we'd fall short on the volumes at Revelation. In other words, we feel like we have a very good plan for Jewell. The 100,000 is achievable. We've got the resources to do it. So I mean I don't necessarily see the issue at Jewell, which is obviously driving the cash cost.

Great. Okay. And then just to touch on the topic on the terms for restructuring on the MLP opportunity -- what -- I mean that's going to be a full-year, I guess, analysis. What's your thoughts in terms of the, I guess -- what you're -- what would come into play in terms of your decision making and when that comes to fruition?

Well, first, I'll start out with -- we don't have a plan today. We've got a lot -- we have a lot of work in front of us. We've just done enough preliminary work to determine we think our assets qualify. But as we look at structuring, Richard, I think we need to look at -- one, we need to confirm what -- our preliminary work on the eligibility of our assets.

Two, we need to do work on how we might structure an MLP consistent with our obligations and responsibilities under our tax-sharing agreement. Three, we need to make sure we do work such that we're working consistently with the terms and conditions of our bond indentures. And four, we need to do work on the exact tax basis of the assets that might be contributed, much of which requires understanding what the tax basis is after Sunoco uses our tax attributes. So I guess those would be the four major ones. And then, obviously, we've got a fair amount of work beyond it. But those would be the four major ones. Mark, would you add anything to that?

No, that's the list. And that's the work ahead of us in 2012.

Great. Thank you.

You're welcome.

The next question comes from Ian Zaffino from Oppenheimer.

Please go ahead.

Great. Thank you very much. The question would be on the CapEx side. After India, what are the other potential opportunities out there? Are you looking at anything, or is just really this one $30 million investment, and then digesting for a while? Thanks.

I think -- good question, Ian. I mean just for the benefit of the group, we have about $150 million in our capital plan for next year. 40%, or $60 million, is in coal; 60%, or $90 million, is in coke. So of that $90 million, $30 million of it is the India investment. We have a certain amount in our total ongoing capital -- is between $50 million and $60 million, which includes about $20 million in coal; and then about $30 million to $40 million in coke. And then we have a number of smaller projects in the coke side of the business.

But I -- we feel like we've got the resources necessary. And, to be honest, if we were to do something else -- I actually think, for example, on something like China, we're going to spend 2012 working on China -- not necessarily doing a deal.

I would say if we -- if things move more quickly on US permitting and US contracts, you won't see any substantial capital in 2012. You just wouldn't spend the capital. And if I think about -- I guess the other -- we, obviously, in 2011, repurchased GE's interest in Indiana Harbor. We don't have any plan today to -- there's still a 15% minority interest, but they have not indicated any interest in selling and we're perfectly fine with the way things are.

So we feel like we have our capital plan pretty much squared away for the coke side of the business. And on the coal side of the business, I think we've got new load-out facility. We have some changes we want to make in our prep plant to add, basically, a circuit capacity in order to improve our sort capabilities and our screening capabilities. And then we're still finishing the expansion program and getting ready to mine two new mines in '13. We've got our hands full to spend that. So I certainly think $150 million -- we have a plan to spend it, but I don't think we've got anything that would drive us significantly above that.

Okay. Thank you very much.

You're welcome.

Your next question comes from Sam Dubinsky from Wells Fargo.

Please go ahead.

Hey, guys -- just a couple of quick ones.

I know we already touched on the MLP question, but just to be clear -- because there are some tax issues -- is it safe to assume you'll evaluate in 2012, but implementation is probably more of a 2014 phenomenon just because the tax issues have to be settled with Sunoco?

Well, Sam, I would say a couple things. First, we don't have a plan, so I can't really tell you what the timing is. Second, you skipped over '13. You said '14.

I just -- we just don't have a -- I don't have enough specificity to give you a game plan on timing. And that game plan -- I just can't say whether it'd be '12 or '13 or '14 -- not at this point.

Okay. And then can you provide an update on where we stand on the Indiana Harbor contract renewal with [McCowell]? What are the major talking points? Or have discussions started yet?

Yes, discussions started in the fourth quarter of last year.

Okay.

And our customers put a team together. We have our team put together. We've been meeting with the customers, sharing information on capital; sharing information on the assets' capabilities. It's a tripartite negotiation in as much as it includes Coke Energy, which is the third party that provides the back end of the process. They provide the boilers, the [FTD] and the turbine.

And they have an -- they have a separate agreement with ArcelorMittal at that facility, where we're not a party to that agreement. So it's a tripartite agreement. But they also have their team working on it. So I'm encouraged. I mean I'm actually encouraged that we're working on the discussion of a renewal of agreement that expires in October of '13, not October of '12.

Yes.

So -- and I think things have gotten started. And we feel good about the environment. We just need to -- we need do work. If you think about what's ahead of us -- in terms of capital, we think we know our capital plan. The facility -- we do have an NLV at the facility, so we need to make sure that we've put our arms around what we need to do from an environmental perspective.

A lot of that actually involves Coke Energy. So they need to know what they need -- what they need to do in order to remediate the NLV. And then, obviously, ArcelorMittal needs to make sure that their plans are well understood and communicated. So it's just -- it's a complicated negotiation, but I feel good about where we started.

Okay. And this is my last question -- just housekeeping. What's maintenance CapEx on domestic facilities again?

So, our total ongoing maintenance CapEx would be between $50 million and $60 million -- $20 million in coal, $30 million to $40 million in coke.

Okay, great. Thanks.

You're welcome.

The next question comes from Mark Parr from KeyBanc. Please go ahead.

Well, thanks very much.

Hi, Mark.

Hey, Fritz. Hey, could you give us some help in trying to understand how the EBITDA will unfold over the course of the year? Is there any seasonality? Or do you look at -- what's the difference in Middletown in the second half versus the first half?

So, kind of step by step -- there's always a little seasonality in our business -- our coke plants generally like summer; and, generally, don't like winter as much, although what we've been experiencing -- I'm not sure I would classify as winter.

But so you generally have a little bit better yield, for example, in the third quarter just because the coal is drier. In the fourth quarter we have -- we historically report the Brazilian dividends. So the Brazilian dividend would land in the fourth quarter.

With respect to Middletown, given how the startup is going, we expect by the time we get to the second quarter that we'll be running a full production. So there will be an impact, obviously, in the first quarter. We'll be well below what the running rate would be as we get to the second, third and fourth quarter. It's not a business that's, per say, cyclical. You do have some yield issues. We do have the Brazilian dividend. And we'll be -- our first quarter will be our lowest, just given the Middletown startup.

Okay, terrific. Thanks for the color. And good luck. Congratulations.

Thank you.

The next question comes from [Tinda O'Tanner] from Bank of America. Please go ahead.

Hi. Good afternoon.

Hi, Tinda.

So, I'm sorry. I just got a little bit confused. I thought the reason that the prior question was asking about a 2014 implementation at early MLP was because of the two-year restructuring restrictions that you talked about earlier. Is that something different? Does that not (inaudible)?

Oh, okay. I got it. I thought we just missed one of the Chinese years. I think there are -- as Mark showed in his tax-sharing -- and I'll suggest he picks it up. We have some limited ability to do things, we think, in our coke side of our business in terms of the tax-sharing agreement.

Mark, you want to touch on that?

Yes. So there is a specific prohibition on what we can do with our coal business for a period of two years. And that's an actual provision in the tax-sharing agreement.

In the coke business -- we may be able to do something within the two-year period. However, we would have to do everything possible to ensure that, in no way, we would trigger the tax indemnification of this provision. So, in short, we would have to assure ourselves -- and we would have to have an appropriate tax opinion -- that whatever we did with our coke business within the two-year period -- would not affect the tax-free nature of the separation from Sunoco.

That's one of the three things we need to structure -- the tax-sharing agreement; the indenture; and actually those are the first two -- those are the key ones.

Yes.

Got you. Okay. So it may or may not be a restriction as part of -- then that decision will let you know whether or not to go ahead within the --?

Right, yes. As we don't have a plan, we can't say definitively that we can't do anything for two years. We know, on coal, it's clear.

Right.

Got you. Okay. And then sorry if there was a discussion on this. I got interrupted earlier. It just seems like one of your customers -- you have three -- is talking a lot about using natural gas instead of coke. And I know you've talked about this before, and [this is seen]. But are you seeing, across the board, a lot of substitution with natural gas for coke? Or do you think there's a big phenomenon? When you think ahead to your Greenfield project or the next project that you're going to do, do you think this is a structural issue for coke going forward, or do you think this is a small phenomenon?

No, I don't think it's small. Certainly, you've seen. We have three customers. You cover them. But the -- I would say certainly US Steel -- John has been very vocal about talking about natural gas. ArcelorMittal, AK -- I think it's exactly what they should be doing. I don't run their business. But they're doing the right thing given where natural gas is.

And all of our plans, Tinda, are assuming that natural gas continues to be injected in the blast furnace at higher and higher degrees. And therefore they'll use less and less coke. For example, we've done projections -- in 2010, I think the average consumption was 894 pounds per ton of hot metal. All of our projections through '15, for example -- we're basing it on 800 pounds per ton of hot metal, which is a pretty significant further reduction.

So, yes, we are -- we believe that natural gas will be increasingly used. We think natural gas could very well be used as a substitute for PCI. Certainly, all of the efforts to reduce coke intensity, I think, will continue. But each time that happens, it puts more and more emphasis on the quality of coke that is used because natural gas can't provide structure in the blast furnace, obviously, and the coke has three reasons for its existence -- one of which is -- one key one is the structure of the blast furnace.

So, as our customers use less and less coke, we haven't seen the impact in our business. What we have seen is the quality of our coke actually -- it performs well in their blast furnaces, and we've been fully utilized.

I would say the other part of the natural-gas phenomenon -- which I look at the other side of the coin -- so, matter of fact, I think, yes, there will be a reduction in coke demand. But we don't necessarily see it impinging us -- not so far. And, actually, I think, from the standpoint of the steelmaker, all of our three customers have old coke batteries they have to deal with. And so the question is, "Does it affect what kind of investments they might want to make in their coke batteries?"

And in that regard is -- the last point I want to make -- cheap natural gas -- low-cost natural gas changes the calculus of whether or not you make investments in your own internal coke battery. Because one of the principle reasons our customers invest in their own coke batteries is for the coke-oven gas -- to make sure they maintain our energy balance within their steel mill, within their site.

With the low-cost natural gas, suddenly the value of that coke-oven gas is much less because you can substitute natural gas for coke-oven gas. If you're not making an investment, you're not going to necessarily do that because you get the coke-oven gas for free, if you will.

But at the point when you have to make an investment, suddenly, the mathematics look differently. And we could very well be a more attractive phenomenon relative to the electricity we provide. So we'll have to see over time, but I certainly think that customers are going to continue to use more natural gas.

Okay, great. Thanks for the explanation.

Thank you.

The next question comes from Paul Cheng from Barclays Capital. Please go ahead.

Hi. Thank you.

Hi, Paul.

Good evening. Hey, how are you doing?

Good.

Two quick questions for you -- one, Middletown -- what's the startup costs in the fourth quarter? And do we expect that to continue into the first quarter?

Startup costs in the fourth quarter, Paul?

Yes.

Yes, and whether that we should assume a reasonable large startup cost spillover into the first quarter also.

So our loss in the fourth quarter was $1.4 million.

$1.4 million. Yes.

That's (inaudible).

It was included in our [walk] for the quarter. Just give me a second, Paul.

Yes, so then let me talk about the first quarter. We've -- all right. So in the first quarter what you're going to have is the full amount of production. The startup costs we have, Paul, is -- you think about in our Middletown plant, we have about 85 people. And at one point -- the peak of the site -- we had about 800 contractors. So startup costs are really all about getting the contractors out of the site as the commissioning is done, the training is done, and our people are capable of operating the plant. And we are going through that process today.

So we're ramping the plant up in the first quarter. Our production won't be at full volume. And our costs will be higher than they would be on an ongoing basis because we don't have all the contractors out. We haven't -- certainly, when we go through the first-quarter results, we'll quantify what that is. But I would expect not only will our tons be below standard in the first quarter, but our costs will be higher because we're still getting some of the contractors out of the site.

Sure. And any rough idea that -- how much is -- that may be -- $1 million, $0.5 million? And then the second quarter should be zero? I mean, how should we assume? And also that -- as you're ramping up -- the ongoing costs -- I presume that is a pretty fixed-cost business. So whether you are running at, say, 50% or 99% may not be that much different. Is that a reasonable assumption?

Well, not really because -- so let's just go through how we -- when we start a plant up, we generally, for example, as part of contracts, we negotiate a budgeting of O&M costs. Generally, in the first year of a plant, we fix that amount. So we haven't negotiated a budget. So therefore the startup costs really come from our account because we haven't started the plan up. We don't have the volume. And, therefore, we're generally having under-absorbed costs which hit our account, number one.

And, two, you hit full volume, there's an under-absorption. Number two, you have the contractors which are on the site, which you need to get out. Obviously, we've got some of them out in the fourth quarter. We'll get another slug of them out in the first quarter. The business really is more of a variable-cost business, with coal being 75%.

So I wouldn't say -- as I look at it, I'm just trying to make sure I answer your question the right way. I think certainly our EBITDA per ton, as we look at the first and the second quarter, are going to be less than what the plant's capability is because of under-absorbed O&M; because of the startup costs of the contractors. By the time we get to the third quarter, it's my view that certainly we would be running at our EBITDA per ton what you would expect from the plant.

Right. And that -- what was the actual production from Middletown in the fourth quarter?

$68,000. So, Paul, Middleton recorded a loss of $400,000 in Q4, with the benefit of $68,000 production in the same period.

Yes, I'm just trying to see whether we can back in and calculate what is the gross margin that you are earning in the Middletown?

I'm going to suggest maybe you take that offline with Ryan in terms of cost in the quarter, because this is a combined number.

Okay, will do. The second question -- I mean if we look at the Indiana Harbor last-minute adjustment and all that -- when you go through your internal investigation, did you find that this is a cost [set] issue, or just they -- some people just make a mistake -- or that you just don't have enough of the expertise and the manpower, given all of the restructuring and all that?

Yes. So let's go back. There were two issues at Indiana Harbor. On the contract, we were proceeding in good faith according to how we interpreted the contract through the years. When the customer raised some questions late last month, we did the research. We went back to the original arbitration agreement. We went through what we did every month. And we sat down and reviewed -- we had a meeting with them very promptly -- reviewed our results, our views of things, listened very carefully to what they had to say.

And in the end of that meeting, our conclusion was we would accept their interpretation of the contract. And so I -- to be honest, I wish I would have known this earlier in the year because I probably would have taken the mitigating actions early in '11 rather than early in '12.

But nonetheless I think we proceeded in good faith. We did so. We heard the customer. We researched it. And we resolved it. On the inventory, I think there were -- there was -- I think -- we did a lot of training. And the rest of our plants -- we haven't had the issues there. But we had people issues. We had process issues. We had a lot of things going on in Indiana Harbor in 2011, to be honest. And we think -- we've made the changes that we needed to, both from a process, as well as actually -- mainly from a process perspective.

And the other thing I'd point out is the -- with the new system changes, the -- our judgment -- we've finished the work, actually -- is that the errors began in August, and we detected them as part of our year-end closing process -- our own processes -- we detected them. So it's -- I didn't want them to happen. None of us wanted them to happen. But I think, in this case, we understand why. We've corrected it. And we're not going to have this problem in 2012.

And that -- you said that you already looked at both issues for the rest of your operation and that you think that you are pretty okay -- none of them actually surfaced -- or that have a similar situation?

Actually, they have -- the Indiana Harbor treatment of this spilled coal is different from our other sites. And we don't have the same issue at all. And then on inventory, what we were doing is -- we went through the year-end closes and looked at all the inventory balances. Again, we looked at Indiana Harbor's inventory balance. It looked high. We did the research, dug into it. We found what they did wrong. We've corrected it. And we went back to each plant to make sure they didn't have the same problem in each other plant, and they didn't.

All right. Thank you.

You're welcome. I think we have time for two more.

Thank you.

The next question comes from [David Ocholvetsky] from Jefferies & Company. Please go ahead.

Hi, Fred. Hey, Mark.

Hi, David.

Hi.

Thanks for answering the questions. The first relates to your coal business -- for mid-vol, specifically. Have you sold anything forward for 2013 yet, or have you got any commitments or any commitments in pricing for '13?

No, no and no.

Okay, got it. And then, I guess, to follow up on that, what would be the current or market-selling price, I guess, for that mid-vol that you're seeing now?

I would say our view of mid-vol today, if we were going to be in the market today, would be about $160 (inaudible).

$160 -- so not that much, it sounds like?

It's -- we're just getting this review this morning. Obviously, it's -- our mid-vol is generally viewed as somewhere between the mid-vol benchmark from Australia, but not as -- obviously not the hard coking-coal benchmark. So it's not a perfect science. But our judgment is when we did it -- we basically did at $177 -- a range I'd put around it is like $150 to $165 -- the point estimate today -- about $160. But I think we'd be in the range of between $150 and $165.

And when did you book that $177 business?

Oh, that would have been done late October and in November.

And that's a combination of our carryover tons at $165 -- roughly $200,000 tons. So the incremental tons would have been closer to $181, if I recall.

Yes.

Got you.

And then last question -- what are you seeing in terms of imports of coke from China? I guess on the second half, what are you thinking in terms of 2012?

We haven't seen any significant changes in imported coke. Obviously the WTO action went forward. We've shown -- and happy to share with you -- we've shown what we think the impact is of the tariff. And it's just -- even if it were to go to zero, it's still not a real great business to be importing coke from China. But we haven't seen any significant changes to date in imports from China.

Okay, great. Thanks very much.

Thank you.

Thanks.

One more.

Thank you. Today's final question comes from Matt Vittorioso from Barclays Capital.

Please go ahead.

Good evening. Thanks for taking my question. Just a couple quick modeling questions -- as I look at your other domestic coke business -- if I think about it in terms of EBITDA per ton -- I think I've seen some old presentations that suggested that that was kind of mid-to-high 30s. What impact does Middletown Coke -- I know you said that's more profitable business -- how should we think about EBITDA per ton for the other domestic coke segment in 2012?

So, if you look --

It's on chart eight.

Yes, go to chart eight. You can see what it's been each quarter, including the fourth quarter, when we included the Indiana Harbor charges; and the first quarter, actually, when we had the operational issues at Indiana Harbor, for that matter. Middletown would be solidly accretive to -- I mean the $50 that we had in the third quarter -- Middletown would be solidly accretive to that number. In other words, we'll go up as a result of Middletown. The reason we don't give the exact number is because we don't talk about specific numbers in each individual contract. But the Middletown investment, given its investment level of about [$40 million], and just the return on capital you expected, it will be solidly accretive to the $50.

Okay, great. And then another modeling question -- and forgive me if I'm just missing something here. But you talked throughout 2011 about having contracted, I believe, most of your coal at that $165 level. That was the number thrown out consistently. And when you report your results, we see revenue per ton over the last couple of quarters more in the $155-ish area. What's the difference there? And as you talk about your 2012 tonnage and where it's booked -- understanding that it's not all booked at $177 -- what's the right number to be putting into the model for revenue per ton?

Right. So the small difference -- there were two differences. Earlier in the year, you would have had some carryover tons in 2011, which would have been done, I think, at about $130 a ton, with a -- there was a small amount of carryover. And then we acquired Harold Keene, which has some high-vol, some thermal. And that -- when you looked at the second half of the year, the difference between the $159 and the $165 was entirely attributable to Harold Keene.

As we look at 2012, again, our mid-vol -- 88% of it's contracted -- the average price at $177, which includes 300,000 tons -- excuse me, 200,000 tons at $165. Our high-vol range today -- somewhere between $105 to $125. I was just looking at this this morning. The estimate that I got this morning was $110 for the high-vol. And thermal's obviously had the biggest change. We have a small amount of thermal -- $150,000. If we were to do that today -- probably closer to $60 or maybe less; and, again, what we're trying to do is developing our mining and plants such that the extent we're taking thermal -- we're only doing it incidentally to taking met. And, to be honest, the vast majority of the thermal we have is done at Harold Keene.

So we can make some decisions as to whether we want to mine it or not. And we've got -- we're sold out through the end of the first quarter, and then we'll make whatever adjustments we need to take as we go into the second quarter.

Okay, great. Thank you.

Thank you very much. I appreciate everybody's time today. Thank you very much for your interest in SunCoke, and look forward to future calls. Thanks.

Thank you for participating in SunCoke Energy's Fourth Quarter 2011 Earnings Conference Call. This concludes the conference for today. You may now all disconnect at this time.